Overcoming the Fear of Buying a Franchise : If you are looking for the safest way to expand or diversify your business, this is the franchise.
Well, if that’s true, why are so many people afraid of franchising?
Since its inception in the late 1800s, and with post-World War II expansion primarily in the United States, the franchise has developed one of the greatest business success stories of all time. Main Street America is populated by franchise outlets. From restaurants to specialty food stores, bookstores to clothing stores, beauty stores to postal centers, and a plethora of service providers, including carpet cleaners, auto shops, and home remodelers, franchises are everywhere. Franchise businesses take up 40 percent of all retail sales in the United States.
There are approximately 2,000+ franchise companies that support more than 900,000 franchised outlets in America. Countless people have become rich through franchising, and there are no financial or educational barriers to prevent anyone from using this concept successfully. Governments around the world, and especially in the United States, have allowed the average person to investigate franchises and predict returns on franchise investments. University studies, government statistics, and even a poll by the Gallop Organization support the success of the franchise.
So what’s there to be afraid of franchising?
Critics say there’s a lot to scare you from the concept. Listen to the critics – some of whom failed in the franchise and therefore believe they have the “credentials” to be critics – and they will tell you all the horror stories about the franchise. Of course, there are horror stories about any type of business, but only a misinformed person would say that owning a business is bad. Anyone willing to trust franchise critics, without doing their own homework, is probably better off fearing franchises. They would also be better off not owning any business!
Fear is common among business owners. Few people succeed without at least some fear. People like a little fear—they find it motivating. The bigger the fear, the harder they work! Fear only becomes a problem when it stops you dying in your tracks. If you’re so afraid of a franchise that you can’t make up your mind to buy it, it could be a mistake. However, that doesn’t mean franchising is for everyone. Not this one. In fact, it may not be for you. But how will you know unless you move beyond your fear?
Let’s take a look at some of the objections raised by franchise critics. Their information is not all wrong. It’s just not completely accurate. And most denounce simple common sense. They want people to believe that franchising is evil when, in fact, many people will tell you that franchising helps them rise to greater levels of satisfaction and profit through their business. Franchising in America has helped tens of thousands of business owners become more successful.
Of all the franchise companies operating in the United States, some are better than others, but not all are bad. Of all the franchisees in the United States, some are more profitable than others, but they aren’t all struggling to survive or even at odds with their franchisors, as some critics believe. A little investigation will show anyone interested that there is more good than evil in the franchise.
Franchising critics – including some misinformed legislators, educators, lawyers, accountants, reporters, and others who may have personal agendas – often miss the point about franchise success. Here are the first complaints of many of them:
“The franchisor will make you pay a fee – upfront.”
Correctly. And let me quickly point out that these costs can sometimes be quite large, up to $50,000 (though many cost less than $20,000). Critics say these costs are inflated and often unnecessary. They will make you think that you can start an independent business from a franchisor without paying any upfront fees. And maybe you can.
So why do franchisors charge franchise fees? If they don’t have to, they won’t! It would be much easier to sell a franchise without any upfront costs. But franchise fees are necessary for several good reasons.
First, franchise fees help the franchisor recover the money invested in starting and maintaining a franchise network. A startup franchise can easily cost millions of dollars, and the ongoing legal, administrative, and operational costs can be staggering. Wise franchisors understand that breakeven may be years away, requiring a number of franchises to sell and support. There is a fee for franchising, as with any product or service sold. Of course it is easy to understand that the franchisor has the right to get this money back.
Ah, but does it have to be paid in advance? That is a problem for many critics, as well as for many potential investors. Yes, it has to be paid for in advance, and for other good reasons. Let’s say you are asked to disclose all your trade secrets plus train someone how to run your business. Are you willing to do it without financial guarantees? Before you spill your beans, you will want money upfront. Likewise with a franchisor.
Think for a moment about the value of paying a franchise fee up front. What’s in it if the franchisor provides you with an established business system, which you can use to make a profit year after year? You don’t have to find the system, or even test it. It’s been proven, the system works! How much did it cost you to build this system, assuming you can? What’s the point if the franchisor not only gives you the system, but also spends a few weeks or more training you to use it?
Now, if you already know how to build and grow a business, you probably don’t need a franchisor. But what if you don’t know? Do you have the franchisor’s experience in site selection, personnel recruitment and development, training, sales and production, marketing, advertising, operations and all other factors associated with a growing business?
Do you benefit from group purchasing power and name recognition? If not, then the franchisor’s business system alone—without training and support—may justify the upfront cost of the franchise. Go out and ask people who have failed as independent business owners if they don’t want to buy the expertise and guidance of the franchisor. Ask someone who has spent 60 to 80 hours a week in the same business for 25 years, struggling most of the time, if not in vain—the previous year—to pay franchisors to show them how to achieve faster and greater success. . What will be done for their quality of life?
Yes, success does come with a price called the franchise fee, and that will be asked first. Keep in mind, not all franchises are created equal. Some are better than others. Some have raised their franchise fees and they are not delivering on what they promised. But with a few homework questions from existing franchisees, for example—you can easily determine which franchise is worth the upfront cost.
Critics say: “You have to pay franchisor royalties. Forever!”
Yes, you will. Not forever, but as long as you remain a franchisee. The franchisor generally collects a weekly or monthly percentage of the franchisee’s gross sales. That’s their royalty. Percentages will range from a few points to double digits. Generally, royalties are higher than 5% and less than 10%.
While franchise fees help the franchisor recover the dollars invested in the business system, royalties complement the franchisor’s ongoing operating costs, and provide a profit. Accountants and lawyers, who are not always critical of franchising, have advised clients not to buy franchises because they thought royalty fees were unnecessary, or too high, or would prevent clients from making a profit. Let’s look at the facts.
Support is the main reason for the success of a franchise business. Why are so many non-franchise businesses out of business? Not because of lack of capital, although lack of capital is often a problem. However, there are many instances where the business owner has a lot of money. But he ran out of money trying to find a way to make a profit. Franchisees usually don’t face that problem.
First, they are licensed to use proven business systems. Second, they get ongoing support from their coach-franchisor. Just as athletes benefit from coaches who give them encouragement and help them improve their style and performance, business owners can also benefit from ongoing coaching. You may already be pretty good at running your business, but imagine what might happen if you had someone who could help you improve just a level or two! That’s what a good franchisor gives franchisees.
Of course, good franchisors have good staff. Operating a franchisor’s headquarters is a huge financial undertaking. Making payroll for 30, 50 or more than 100 people requires cash flow. Where do franchisors get their money from? Royalties! Successful franchisees recognize the value of training franchisors and field operations staff.
They have come to appreciate the research and development people, technical, financial, legal and media experts employed by the franchisor. Successful franchisees don’t quibble about paying franchisors a percentage of their gross sales because they know it’s a good investment in their business. Again, not all franchisors are created equal. Some provide more value than others. Before you invest in a franchise, find out if the franchisor of your choice provides what you need to be successful.
Critics say: “Owning a franchise is like having a job. You have to take orders from the franchisor. You’re not really doing business for yourself. You’re like a contract servant.”
Entrepreneurial people are difficult to train as franchisees. We respect our right to make decisions. We value freedom. We don’t like following orders. We want the right to do things our way, even if it’s the wrong way. If you don’t want to follow the franchisor’s drum beat, do yourself a favor and the franchisee and don’t buy a franchise. You may never be as successful as you hoped, but buying a franchise won’t get you there either.
Believe it or not, like it or not, consumers prefer the old one over the old. Think for a moment. If you’ve used a particular business in the past—restaurants, beauty shops, home decorators, auto repair shops—and you were satisfied with the results, would you return to the same business again and again? Of course.
If you moved to another state and needed a particular service or product, would you support a business you’ve never heard of, or seek out a business you know? Again, this is an easy answer. You want to know what you’re getting before you buy it. You love familiarity, and franchisors and franchisees know that familiarity leads to more business.
Familiarity is one of the reasons a franchise business is successful. Each one who managed to follow the system. The system is created to meet the needs of consumers and ultimately generate profits for the people who implement the system. It’s called a franchise. When franchisees refuse or fail to implement the system, their business does not do well and can eventually fail. Requiring franchisees to follow the system makes sense!
Most small business owners, including franchisees, have little expertise in running a business. They may have perfected a skill or expertise, but that is not the same as running a business. To succeed in business, an operator needs systems—even more than money—to survive and succeed. The system is one of the main reasons to invest in a franchise. You may not like the franchisor’s system, or parts of it.
You may not like the way a franchisor advertises, markets, and sells its products and services. You may not like the franchisor’s dress code, or decor scheme, or hours of operation. But you must not minimize or ignore the franchisor’s system, and you are required to apply it to the T. If you do not follow the system, the franchisor reserves the right to revoke you, and for the sake of the franchise network, the sooner the better. A disobedient franchisee can destroy an entire company. Franchise businesses work because they are systematic.
If you don’t like it, or you don’t like the system, or you don’t want to follow someone else’s system, don’t invest in a franchise! It’s not for you.
Don’t believe the argument that in every case a franchise buys you a job. Do you know someone who sold their job after quitting, or retiring? You can’t sell jobs, but you can certainly sell your franchise business. And imagine how valuable that would be. With the brand name and goodwill of the franchisor, operating systems and marketing and sales systems, plus ongoing research and development and training and coaching, your business is likely to attract an enviable selling price. With a good franchise, you will have more assets than many people might want to buy.
And one more thing about the job of buying crap. The franchisor does not make all decisions for the franchisee. A franchisor does not show up at the franchisee’s office or store every morning to motivate staff, or even to hire and train staff. Personnel decisions almost always belong to the franchisee. Customer and vendor relationships also remain the franchisee’s domain. The franchisor provides instruction and coaching, but they don’t do the franchisor’s job. In the end, it’s your hard work that builds a successful business. Even so, a good franchisor provides many opportunities for franchisees to voice their opinions and help shape the franchise business.
So, if you’ve lost some of the fears you might have about franchising, how are you going to find a good franchise opportunity? There are many online resources you can consult, starting with the International Franchise Association (IFA) website at Franchise.org. There are seminars produced by the International Franchise Expo–see FranchiseExpo.com–and there is a lot of good reading material.
Perhaps the best source is the franchisor’s disclosure documents, which are required by federal law. The franchisor must give it to you for free before you can invest in their franchise. Be sure to ask for it! It’s critical reading. Disclosure documents are written in layman’s language so that it is quite easy to understand. Almost everything you need to evaluate a franchise opportunity can be found in the disclosure documents.
The document includes a description of the franchisee, a list of all necessary fees, the franchisor’s obligations, the franchisor’s obligations, information on territories, restrictions on what the franchisor can sell, financial statements for the franchisor and even the franchisor’s litigation. and history of bankruptcy, if any. However, the single most important part of the disclosure document is probably the list of franchised outlets. There you will find contact information for existing and former franchisees.
Armed with this information, get in touch and start doing research. Contact as many franchisees as you can – there are no limits. Ask them anything you want. For example, “Would you buy another franchise, knowing what you know now?” . . . “Did the franchisor keep his word?” . . . “How can a franchisor system help you advance the growth and profitability of your business?”
Critics will tell you that existing franchisees will lie to you because the franchisor paid them. But you should know that if the franchisor pays them to help sell the franchise, that information must be disclosed. If you call a dozen to 20 or more franchisees, you are likely to hear a number of positives and negatives about the business and the franchisor. Contact enough franchisees to get a fair sample. Stop calling when you feel you have enough information to evaluate a franchise opportunity.
Along with this research, you should also consult with franchise attorneys and accountants who understand franchising. Rely on IFA to point you to good sources. You may need to research several franchises before finding a good one, and the right one for you.
Ray Kroc, founder of McDonald’s, coined the phrase: Franchising is doing business for yourself, but not for yourself. That says it all. When you accept a franchise for what it is, you receive the world’s most powerful system for building and growing a business. If you explore what franchising has to offer, and thoroughly investigate the franchise opportunity of your choice before investing, you can expect to be successful as a franchisor.
Will you succeed without fear? No. You will be afraid from time to time. But you have to be scared to death to get into a business without a franchise!