Is being a franchisee better than being independent?
Rita Garry asks the question every time: Can you make more money investing in your own business rather than in a franchise? “Nine out of 10 choose the franchise model,” Garry says. “They believe they will have a higher degree of success early on.”
Even so, Garry’s question is interesting. A Chicago office partner at SmithAmundsen LLC, a law firm with offices in St. Charles and Woodstock — plus Rockford, St. Louis and Milwaukee — Garry is a franchise veteran.
So is Doris Adkins Carter, partner in the Wheaton law firm of Carter & Tani. She tells potential franchisees to “do your due diligence. Hone in on the industry, look at the different systems, and get the franchise disclosure documents.”
The disclosure documents, which franchisers (the company) are required to provide, include a list of franchisees — and, Carter adds, a list of former franchisees who left the system in the prior fiscal year.
“It’s exceeding important to talk to franchisees,” Carter says. In a separate conversation, Garry agrees. “Call at least 50 (franchisees) and discuss their experiences,” she says.
Whether you opt for a franchise or choose to be an independent operator, there are two areas where issues are similar: Finances and marketing. “The big reason franchisees fail is insufficient capital,” says Carter. You need startup money, she continues, plus dollars to meet ongoing operating expenses.
“More and more people are borrowing from their 401(k)s,” Carter says. “On a personal level, I think that’s pretty scary.” SBA loans may be the “best bet,” especially if the franchiser is registered with the Small Business Administration.
In addition, Carter says, “You have to be comfortable with marketing. The franchiser may have pooled funds, but you have to get out and promote your business.”
There’s also the issue of who really is in charge. “You’re buying a franchise because you want to own and manage your own business,” Garry says. “But you’re not 100 percent in control. (For example), You can’t sell your business without the franchiser’s permission. You must submit a request to transfer (the ownership), and the buyer must be approved.
“It’s not easy to exit a franchise agreement.”
Whether you’re starting on your own or exploring franchises, you’ll need help: An experienced CPA would be nice, as would an attorney who, if not a franchise specialist, at least understands business contracts. The lawyer who did your estate plan probably isn’t the one.
There are additional resources. Garry suggests three online sites where my visits turned up what seems to be useful information: The North American Securities Administrators Association, www.nasaa.org/2657/franchises, where “10 Considerations Before Investing in a Franchise” makes good reading; the Federal Trade Commission, www.ftc.gov/bcp/franchise/netfran.shtm; and the Illinois Attorney General’s office, www.illinoisattorneygeneral.gov/consumers/franchise.html.
In addition, Franchise Business Review (www.franchisebusinessreview.com) publishes a guide to what it has determined are the best franchises.
Ÿ Jim Kendall welcomes comments at JKendall@121MarketingResources.com ©2012 121 Marketing Resources Inc.