Franchising is a good choice for some out-of-work folks to get off the unemployment rolls and start earning income again. In part it is because a proven franchise can take the guesswork out of starting a business because it has an operating system in place to follow.
Even employed workers consider franchising because many have become jaded about job security and the promise of a comfortable retirement income. “Employment used to be considered safe and business ownership risky. Today, the opposite is true,” says Robert Yancy, Ph.D., a franchise consultant and professor emeritus and founding dean of the School of Management at Southern Polytechnic State University in Marietta, Ga. “Statistics confirm that franchises provide excellent survivability,” he says.
But statistics also show you have to choose wisely because not all franchises are successful. In fact, data from the U.S. Small Business Administration shows that franchises have approximately the same failure rate as small, independent businesses. Topping off its 2001 to 2010 list of failed franchises, SBA lists Wings-N-Things, Tilden for Brakes and Bear Rock Cafe at 94 percent, 93 percent and 80 percent failure rates, respectively. But there are also dozens of franchise brands without any failures. The list is posted on Blue Mau Mau’s Blog.
Keep in mind, however, that SBA’s list does not include franchises that were purchased for all cash or conventionally financed. Furthermore, experienced franchise lenders say that the agency’s list is inaccurate and they keep their own score of which ones they prefer. Also of note, most small-business lenders agree that a strong borrower weighs heavily in their underwriting, even if they buy a quality franchise.
The most prolific small business and franchise lenders are among the 2,200 who nest on BoeFly.com. That’s because they can click to see the profiles of borrowers that meet their criteria and quickly respond. Similarly, prospective borrowers that look for financing on the website appreciate the simplicity and get offers from multiple lenders. Since most don’t borrow very often, it gives them the opportunity to find out what is available and maximize the terms that are most suitable for their needs.
To research a specific franchise, a good start is at the Federal Trade Commission’s frequently- asked-questions website. The federal watchdog requires franchisors to give prospective franchisees their Federal Disclosure Document (FDD) and Franchise Agreement (FA) at least 14 days before committing to buy the franchise. It is an opportunity for you to dig deeper than the glitzy promotional brochure from the franchise salesperson.
Checking out the FDD for Kid to Kid, as an example, I learned that it is a consignment store for children. It is niche player that can make it easier to compete with more entrenched competition that sells more general second-hand clothing.
Its FDD shows $25,000 as the initial franchise fee. The company also projects total start-up costs between $196,028 and $272,718. Of course some of the same costs would be incurred for a non-franchise as well.
Ongoing charges for Kid to Kid include royalties of 5 percent of gross sales, contributions to an advertising fund, marketing fund and advisory association. There are additional operating costs that are unique to franchising but others are similar to any small retail store.
A franchisor may also require you to buy merchandise exclusively from them or its approved vendors. They may compel you to wear a uniform and charge you for use of its technology. The additional cost might eat into your personal take-home pay or require you to increase the price of your merchandise. So you should compare the added value of owning a franchise system versus starting a non-franchised business.
For paying royalties and other franchise-related fees, franchisors promise to walk you through the start-up phase and continue to hold your hand as long as you are under its franchise system. But it is up to you to contact franchisees listed in the FDD and ask if the franchisor lives up to its promises.
Lastly, you may be comfortable with the language in the FDD because it is written in plain English. But the Franchise Agreement is a legal document and you will need an experienced franchise lawyer to advise you before signing it.
Jerry Chautin is a former entrepreneur, commercial mortgage banker and business lender. He writes and blogs about business and real estate for several publications and is SBA’s 2006 national “Journalist of the Year.” Jerry is a volunteer business mentor with SCORE, “Mentors to America’s Small Business,” offering free business advice. Post your comments and ask questions on this Blog or send Jerry an e-mail.
Copyright © 2012 Jerry Chautin — All rights reserved.