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Is Franchising Right for You?

Posted by Touchpoint in Starting Your Business on May 31, 2012 8:08:33 AM

Body_Franchising.jpgby Susan Caminiti.

 

John Lyons has been cooking most of his adult life, but it’s always been in someone else’s kitchen. That finally ended in 2010 when he and his wife Theresa opened their first Muscle Maker Grill in Oakland, N.J. The franchise, which has about 200 locations across the country, offers wraps, salads, and other healthier alternatives to fast food. The hours are long—an 80-hour workweek is typical—and managing a staff of inexperienced, mostly 20-somethings is a challenge, Lyons says. “It seems like it gets harder and harder, having to deal with staffing issues, and always being concerned about the food quality and customer service,” he says. But then if you ask him if it’s all worth it to be his own boss, his answer is simple. “I love it.”

 

Lyons has plenty of company. Consider these numbers from the International Franchise Association (IFA), the Washington, D.C. trade group that represents franchisors—the companies you buy a franchise from. Sales of goods and services provided by franchises now account for roughly $2.1 trillion annually. There are approximately 825,000 franchise units operating in the U.S. and those businesses employ nearly 18 million workers. The IFA’s Franchise Opportunities Guide lists over 1,100 franchise concepts, covering everything from accounting and business services, to pet care and wildlife control. “There really is a business for everyone,” says Alisa Harrison, senior vice president of marketing for the IFA.

 

PQ_Franchising.jpgThere’s a franchise for nearly every budget as well. Prices start at around $5,000 for a service business without a lot overhead and run up to nearly $2 million for an established brand such as McDonald’s. (The average total upfront investment according to the IFA is $250,000 to $300,000.)

 

Bumpy Past

Yet despite franchising’s popularity, the industry did suffer in the wake of the financial crisis. In previous recessions, laid-off workers, tired of being at the mercy of large corporations, often used hefty severance packages or home equity loans to purchase a franchise, thereby fueling the industry’s growth, explains Harrison.

 

“That all went away in 2008,” she says. “Few people were getting severance packages and with house values so depressed all over the country, not as many people were able to tap into their homes for the money.”

 

The industry is slowly seeing signs of improvement. According to data from the IFA, the number of franchise establishments is expected to increase 1.6 percent this year after falling for the past three years. The number of folks employed by franchised businesses is estimated to grow by a little over two percent in 2012.

 

Of course, that doesn’t mean that Hungry Howie’s Pizza or Camp Bow Wow (yes, those are real companies) will become the next Subway or Dunkin’ Donuts. But franchise consultants and other industry experts say that certain demographic and lifestyle trends are clues to which concepts are popular right now and therefore could be your best bet.

 

One segment attracting a fair amount of attention is elder care. Ed Kushell, president of Franchise Consulting Group in Los Angeles, says an aging population combined with government cutbacks in senior citizen services has fueled the growth in this area of franchising. Home Instead Senior Care, Comfort Keepers, and Home Helpers are some of the well-known companies in this segment.

 

A quick look at the numbers explains why these franchises could be good bets: Last year the oldest baby boomers began turning 65. By 2030, when all of them will have reached that milestone, fully 18 percent of the nation's population will be at least that age, according to Pew Research Center population projections. Says Kushell: “The number of elderly people in this country is not going to slow down anytime soon. Franchises in this segment have the demographics in their favor.”

 

Franchises that cater to health and wellness, such as gyms and so-called med-spas, are also attracting plenty of interest. Massage Envy is the largest massage therapy franchise in the country, with nearly 800 locations in 45 states. The company credits its popularity to the fact that Americans spend between $5 billion and $7 billion annually on massages. In fact, many Fortune 500 companies now offer massage as an employee benefit designed to reduce stress, according to the company.

 

Sol Glastein opened his first Massage Envy in Closter, N.J. in 2006 and says from the beginning, “the results were phenomenal.” He attributes the concept’s success to a business model that taps into the fast-paced, often stressful rhythm of modern life. “We’ve taken the massage out of the realm of something for the rich and wealthy and made it something that is both affordable and therapeutic,” he says. Customers can purchase a membership—like a gym—that entitles them to a one-hour massage each month. Glastein opened his second location in Waldwick, N.J. in 2010 and is so bullish on the concept that he recently bought the rights to become a regional developer, allowing him to sign up franchisees throughout western Pennsylvania.

 

Buyer Beware

While franchising has made many people rich, it’s not a business model without risks. According to Kushell, too few potential franchisees conduct the sort of due diligence necessary to determine the financial soundness and growth strategy of the franchisor. “We turn away 75 percent to 80 percent of the people who approach us about franchising their business because they just don’t have a business model that’s viable,” he says.

 

If a potential franchise interests you, Kushell advises asking about the company’s growth strategy and expansion plans in addition to examining its financial statements. And pay special attention to where a franchisor is looking to open new units. “If all the locations are on the East coast and you’re being offered a chance to open the first location in Texas or California, run for the hills,” Kushell advises. Why? Because one of the biggest advantages a franchised business has is the power of its brand name. If you own the only location of Mary’s Maid Service in the state, you’re getting little leverage from the name and the chance of failure escalates dramatically, he warns.

 

Keep in mind too, that part of franchising’s appeal is that you’re buying an established business concept with a particular way of operating. If your goal is to buy a franchise in the hope of using your considerable management or marketing experience to overhaul operations, a franchised business is probably not for you.

 

And finally, take the time to understand not only the franchise fee, but also the ongoing royalty and advertising costs, says Harrison. All of this information is found in a franchise’s disclosure circular, a document the Federal Trade Commission requires of all franchisors. In addition to the one-time franchise fee, you’ll pay ongoing royalty costs, typically equal to four percent to 10 percent of gross sales. You’ll also be responsible for contributing anywhere from one percent to six percent of sales for advertising expenses. The test of a well-run franchisor, says Kushell, is one that makes its money from these on-going royalties, not one-time franchise fees.

 

Running a franchise is really no different than any other business venture. It requires a lot of hard work and long hours with no guarantee of success. Yet the appeal of venturing out with an established concept and brand is clearly a business model that holds sway with many entrepreneurs. It certainly does with Lyons of Muscle Maker Grill. Despite the long hours and lack of vacation time, he and Theresa have already bought the rights to their second store.

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