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MyBusiness Franchise Guide

Date: June 30, 2010

Pros and Cons of Buying a Franchise

Becoming your own boss sounds great. In fact, 57 percent of Americans would rather start their own business than work for someone else, according to a Gallup survey. But is franchising the right path to achieving that independence? Consider the pros and cons.

By Christina Galoozis

Pros

Unlike a traditional startup, when you open a franchise, you’re not alone. The key benefit of fran-chising is that you are in business for yourself, but not by yourself, says Marc Plaisted, president of franchise consulting firm BrandChise in Lakeland, Fla. Franchisors offer support from day one—from marketing to employee training. “The franchisees that are successful beyond anyone’s expectations tend to be the ones that relish the consulting and support offered by the franchisor,” Plaisted says.

Running a franchise also allows you to leave big-picture issues to the experts. For example, when car manufacturers began installing longer-lasting exhaust pipes in cars during the mid-1990s, the future looked bleak for shops that specialized in exhaust. But Ken Walker, CEO of Driven Brands Inc., the parent company of Meineke, Maaco and other automotive franchisors, as well as chairman of the International Franchise Association, foresaw the decreased demand and expanded his company’s services accordingly. Franchisees reaped the benefits and weren’t caught flat-footed as the market shifted.

Immediate Brand Recognition. The day you open your franchise for business, customers know what to expect. This type of brand equity and loyalty would take most other small businesses years to build. People “move around more today than they used to, so they expect the same thing everywhere. If they had a good experience [with a franchise] in Ohio, they’ll automatically go to you in North Carolina,” says Mike Greene, an NFIB member who owns three Stanley Steemer carpet cleaning franchises in North Carolina and Ohio.

Proven Business Model. Unlike independent startups, franchises don’t start from scratch—the business model is proven. “The reason [franchising] is so attractive is you leverage years worth of experience and mistakes,” says Plaisted, whose family has operated more than 200 Dairy Queen franchises over 60 years. Franchisors already have back-end systems in place for staffing, payroll, purchasing and recordkeeping, saving time and avoiding headaches for first-time business owners. They also provide the buying power of a large company, reducing inventory costs.


Cons

You’re buying into an established system, and that can mean stifled creativity. Buying a franchise means you give up independence and control. While a franchise is your business to own, operate and grow, you must work within the franchisor’s framework. Suppliers are often chosen for you, employee pay is predetermined, and so forth. This “follower” mentality can be difficult for people with a strong entrepreneurial spirit.

High Costs. Startup costs are generally high in franchising because every part of the business is built out immediately, rather than piece by piece as in a conventional startup. For example, the total initial investment for a fast-food restaurant reaches almost $3 million after the franchise fee, real estate and construction costs, according to FRANdata, an Arlington, Va. franchise research company.

You’ll continue paying big bucks to the franchisor—royalty fees range from 4.6 percent of sales in the lodging industry to 12.5 percent in personnel service firms. “Some grow resentful about sending the money, since you have to pay it if you meet sales goals or not,” Greene says—and some franchisors levy additional fees or take the money before other bills are paid.

Reputation Conundrum. One of the biggest disad-vantages, says Plaisted, is your reputation hinges on other franchisees’ performance—not just your own hard work. “If another Dairy Queen just miles down the road chooses not to properly sanitize their restaurant,” he says, his restaurant’s reputation could be destroyed.

Fastest-Growing Franchise Types

From in-home healthcare to fitness centers and sushi bars, these franchise types are expanding despite the Great Recession—and they’re not expected to slow down any time soon.

By Elizabeth Cotner

Even amid an economic downturn, some franchise types keep on growing.

“There are good, quality brands that even during tough times will continue to grow,” says Christine Friedberg, director of sales innovation at FRANdata.

The total number of franchised units increased by 24 percent between 2004 and 2009, growing at an average annual rate of 6 percent, according to FRANdata. Many sectors slowed during 2009, but a few continue to grow steadily, often because of shifting demographics and consumer preferences.

Aging Gracefully

It’s no surprise the fastest-growing franchise type between 2004 and 2009 comes from the fastest-growing demographic in the United States: the elderly.

With 76 million baby boomers approaching old age, in-home healthcare will stay strong for years, experts predict. These franchises train caregivers to help with basic tasks like cooking, laundry and personal care.  

“[The elderly] fear the loss of independence,” says Carolyn Clark, an NFIB member and owner of a Home Instead Senior Care franchise in Maryville, Tenn. “They want to stay at home, where they’re comfortable. They get one-on-one care rather than a staff that has a lot of patients.”

Jeff Huber, chief administrative officer of Home Instead Inc., the franchisor of Home Instead Senior Care, says the company—which opened in 1994 and now has 882 franchises worldwide—has continued to grow through the recession.
Home care is “a service you can’t outsource overseas,” Huber says. “It’s highly humanistic. You can supplement it with technology, but you can’t replace it.… It’s not recession-proof, but it’s recession-resilient.”

Resilient Thrift

Other franchises bucking the recession include low-cost hair care franchises, used clothing resale and ink cartridge suppliers, since they provide discounted services that people need, and aren’t generally considered discretionary.  

“[They’re services] we need no matter what,” Friedberg says. “A lot of these [franchises] have lower price points. If someone can’t go to the salon, they’ll go to [low-cost chain] Hair Cuttery down the road.”

Some Japanese food franchises are dodging the recession with a unique business model: setting up as counters in grocery stores. They have low start-up costs that allow most franchisees to finance out of their pockets, she says. And for cash-strapped consumers, grocery store sushi is generally cheaper than the restaurant variety.

Healthy Bodies, Happy Minds

The ever-increasing focus on health and fitness keeps Rose McFadden’s Oconto, Wisc., Curves fitness center, a franchise of Curves International Inc., in business, she says.

Curves’ success comes from a niche market of gym-averse, middle-aged women who “don’t want to compete with the perky ones,” says McFadden, an NFIB member. “They feel at home and comfortable here.”  

Expanding the mind is just as important as keeping a healthy body: Learning centers that teach children everything from art to computer skills are growing since education remains a priority and parents are focused on starting their children early, Friedberg says.

Regardless of the sector, the key to turning a demographic trend into a successful franchise concept is finding and reproducing a model that works, Huber says.

“What franchising does is allow a lot of economies of scale,” he says. “A franchising business model allows you to provide more services at greater efficiencies.”

Labor Issues to Keep In Mind

Buying a franchise allows you to become your own boss, but it also means you will become someone else’s. And that someone else may be a low-skill, low-paid worker who needs a job, but may not be particularly invested in your company.
Several NFIB members who own franchises say staffing is their top challenge. Hiring, firing, payroll—not to mention keeping up with labor laws—are part of your role. If you’re uncomfortable managing these issues, you may want to stay away from franchising, or at least find a franchise with minimal employee oversight, such as an insurance agency.

“Make sure you buy a franchise that is consistent with your tolerance for all the challenges employees bring with them,” warns Marc Plaisted, president of franchise consulting firm BrandChise and a past owner of several Dairy Queen franchises in Florida.

The biggest headache for many franchise owners is turnover. For example, at 32,000  McDonald’s restaurants, 44 percent of hourly employees last less than a year.

Carolyn Clark, an NFIB member who owns a Home Instead Senior Care franchise in Maryville, Tenn., says finding quality caregivers is challenging because most workers in the in-home care industry are looking for full-time work, not the part-time positions her business offers. Plus, franchisors typically regulate how much a franchisee can spend on payroll.

Donna Partin, an NFIB member who owns five Merry Maids home cleaning franchises in Pennsylvania and Florida, conducted an employee survey two years ago and discovered her workers’ No. 1 desire was not better pay, but to work with more positive people. She tweaked her interviewing process, and turnover decreased.

And while a part-time worker wouldn’t typically expect certain benefits from his or her franchise employer, the rules are changing. Under the new healthcare law, businesses with 50 or more so-called full-time-equivalent employees will be required to provide health insurance beginning in 2014. Say a busy McDonald’s has 100 part-time employees who work, on average, 20 hours a week. Using the new law’s formula, that McDonald’s is considered to have 66 full-time-equivalent employees.

Since franchise owners face these thorny labor issues and more, franchisors typically offer support, from employment manuals to worker training programs and payroll software. NFIB member Jerry Callahan, who owns three Medicine Shoppe franchises in the St. Louis area, had trouble finding high-quality pharmacists—until his franchisor paid for mailings and other recruitment materials that helped attract the right people.

Franchisors should also help with nitty-gritty (but important) legal details: laws related to wages and hours, meals and breaks, uniforms, hiring procedures and recordkeeping. “Talk to other franchisees in that system, and ask about the type of support the franchisor offers,” says Ken Walker, chairman of the International Franchise Association. “For labor issues, the most important question to ask is, ‘Is the squeeze worth the juice?’”

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