Could a Franchise Be the Right Model for Your Business?

I’m Melinda Emerson and each week as the Small Biz Lady (AKA @SmallBizLady on Twitter), I conduct interviews with small business experts on my weekly Twitter talk show #SmallBizChat. This is excerpted from my interview with Mary Tomzack (AKA @FranchiseHelp on Twitter), Mary is author of “Tips & Traps When Buying a Franchise,” and one of the industry’s most respected franchising experts and speakers.  A former writer for the Economist Intelligence Unit, Mary has been cited by The New York Times, Entrepreneur Magazine, and Franchise World, and has spoken on the topic of franchising at such institutions as Harvard Business School. If you are interested in knowing more about Mary, see http://www.franchisehelp.com/

Smallbizlady: What is the distinction between buying into a franchise and starting one’s a business from scratch?

FranchiseHelp: There are a number of important distinctions between buying into a franchise (i.e., becoming a franchisee within a franchise system) and starting one’s own, independent business from scratch.  The root difference, however, is that an independent small business founder ordinarily takes sole strategic and operational responsibility for all aspects of their business, whereas a franchise investor buys into an established system that directs all dimensions of their business strategy and operation.  In essence, the independent business owner must craft, finance, and then execute the best possible plan, whereas the franchise owner must find, invest in, and then execute the best possible system.

Smallbizlady: So what are advantages of franchising vs. going it alone in business

FranchiseHelp: An independent business owner must dedicate significant time and effort to planning, building, testing, and adjusting every component of the business: composing a business plan, developing a service / product offering, establishing a business model, choosing a store location, setting accounting practices, evaluating and selecting IT systems and software, finding and negotiating with vendors, suppliers, defining employee policies, creating and executing a marketing strategy, delivering the business’s service / product and out and put enormous pressure on the independent business owner.

The franchise buyer is primarily tasked with learning, executing, and maximizing the franchise system. Good franchise offerings provide extensive training and support, bringing a new owner up to speed on all aspects of the system, from high-level brand and marketing strategy to site selection and build-out, legal policies, accounting practices, IT systems, employment policies, day-to-day operation of the business, and everything in between.

Smallbizlady: What are the disadvantages of franchising?

FranchiseHelp: Most quality franchise systems require some manner of initial franchise fee which goes to the franchise HQ, an ongoing marketing budget pay-in (to fund regional or national advertising campaigns), and ongoing royalty payments (typically some percentage of the franchise owner’s revenue or profit) in exchange for all the training, structure, support, and brand recognition the franchise system is meant to provide.

Smallbizlady: Does franchising limit one’s options and freedom?
FranchiseHelp: There are thousands of franchise concepts to choose from, spanning most major business segments, so it’s hard to imagine how one’s options could be limited by going the franchise route.   As to the question of whether franchising could limit one’s freedom, that can certainly be true in the sense that a franchise owner is expected to operate within the parameters of the franchise system.  There are always exceptions to this rule (famously, the Filet-O-Fish was created by an enterprising McDonald’s owner in Cincinnati, OH, initially irking McDonald’s HQ), but generally speaking it wouldn’t make much sense – nor make the franchise’s HQ staff very happy – for a franchise owner to buy into a system and then fail to run the business in line with that system.

Smallbizlady: What are the characteristics of the ideal franchise owner?

FranchiseHelp: Like any business, each franchise system has unique qualities and challenges that determine the attributes of the ideal owner.  That said, there are several characteristics that seem nearly universal among the most successful franchise owners: discipline (to carefully research potential franchise opportunities, make informed investment decisions, and execute a system with precision and regularity); drive (a combination of intense hunger to succeed and above-average willpower to push through the inevitable challenges); and a nearly all-consuming desire to control their own destiny (in this case, by working for themselves).  Not every effective franchise owner has all these characteristics, but few of the most successful seem to lack any of the three.

Smallbizlady: Who would be wrong for franchising?

FranchiseHelp: There are fatal shortcomings like laziness and poor judgment, which would sink any business.  There are certain positive traits which may make for outstanding business founders that can make for terrible franchise owners. Franchising is not about building the next Google or Facebook (or Apple, for that matter): one can be incredibly successful as a franchise owner, but success in this space comes from learning, execution, and optimization rather than invention, speculation, and industry-rocking innovation.  Those who would rather invent the next hot business model than blow the doors off in an established business model are probably going to hate (and ultimately fail) in franchising: in short, Steve Jobs would be a horrible franchisee!

Smallbizlady: You mentioned there are thousands of franchise concepts out there.  How big is franchising and what are its biggest categories?

FranchiseHelp: Franchising is a huge space – much larger than most people realize.  According to PricewaterhouseCoopers’ “2010 Franchise Business Economic Outlook” report, some 900,000 franchise establishments employ over 9.5 million people and generate roughly $850 billion in direct economic output in the U.S. alone.  The three largest macro business segments in franchising (by economic output) are: 1) Quick Service Restaurants (featuring carry-out or delivery service with limited in-restaurant seating), 2) Business Services (printing and packaging services, administrative services, employment / payroll services, tax preparation, accounting, IT services, etc.) and 3) Personal Services (health care, education, entertainment/recreation, etc.).

Smallbizlady: Which segments of franchising are growing fastest?

FranchiseHelp: According to the same PwC report, Quick Service Restaurants, Real Estate (property managers, agents and brokers, self-storage units, etc.), and Retail Food (convenience stores, food and beverage stores, caterers, etc.) are the fastest growers in terms of expansion of establishments.  From an economic output perspective, the fastest growers are Personal Services, Quick Service Restaurants, and Business Services.

Smallbizlady: What are the biggest mistakes a prospective franchise owner can make in choosing a franchise?

FranchiseHelp: There are a couple errors we see all the time.  First, people constantly choose franchises they are personally familiar with over franchises that, while not as glamorous, may make more sense from a financial and lifestyle perspective.  The other critical mistake prospective franchise owners make it failing to match their franchise choice with their personal strengths and skills, thinking that the franchise’s training program will compensate for a poor personal fit; for example, if you despise loud children and fussy parents, no amount of training will make you a great fit for a daycare franchise.

Smallbizlady: What other mistakes do prospective franchise owners make when evaluating a franchise opportunity?

FranchiseHelp: A huge mistake is failing to read and carefully analyze the Franchise Disclosure Document (FDD), previously known as the Uniform Franchise Offering Circular (UFOC).

Smallbizlady: Why is analyzing the FDD so critical?

FranchiseHelp: The Franchise Disclosure Document (FDD) is like a combined annual report and investor prospectus for each franchise system.  Would you put your life’s savings into a stock without at least reading that company’s annual report?

The FDD is essentially a blueprint for the proposed investment, covering everything from information on the officers of the franchise corporate headquarters, to a list of existing franchise owners and their contact information, the number of recent unit openings and closings, t required fees and expenses, financing arrangements offered to new owners, a summary of the training and support provided, and the actual franchise agreement (the contract a new franchise owner will sign to join the system.

Although these are technically publicly available documents, they can be very difficult to locate, and franchises often avoid providing them to potential investors before they are confident a prospect is serious about the opportunity.  We provide thousands of FDDs, as well as guidance on how to read and interpret them, at FranchiseHelp.com.

Smallbizlady: Will I find financial details for every franchise’s unit performance in their FDD?

FranchiseHelp: Because any franchise that discloses earnings claims of franchise units in Item 19 of their FDD must describe the method by which they have made the claim, only about a third of franchises provide this data.  However, all franchises are required to disclose their corporate financial statements – income statement, balance sheet, and statement of cash flows – in Item 21 of the FDD.  Furthermore, outside of a few exception cases, Item 21 financials must be audited and GAAP (Generally Accepted Accounting Principles) compliant.

Smallbizlady: Are there any programs specifically designed for minorities or other affinity groups interested in franchising?

FranchiseHelp: There are a number of programs available for affinity groups.  VetFran, MinorityFran, and the Women’s Franchise Committee (WFC), for example, were created to promote franchising among their respective constituencies by offering guidance and, in some cases, financial assistance.

If you found this interview helpful, join us on Wednesdays 8-9pm ET follow @SmallBizChat on Twitter.

For more tips on how start or grow your small business subscribe to Melinda Emerson’s blog http://www.succeedasyourownboss.com.

Melinda F. Emerson, known to many as “Small Biz Lady” is one of America’s leading small business experts. As a seasoned entrepreneur, professional speaker, and small business coach, she develops audio, video and written content to fulfill her mission to end small business failure.  As CEO of MFE Consulting LLC, Melinda educates entrepreneurs and Fortune 500 companies on subjects including small business start-up, business development and social media marketing. Forbes Magazine recently named her one of the Top 20 women for entrepreneurs to follow on Twitter. She hosts #SmallBizChat Wednesdays on Twitter 8-9pm ET for emerging entrepreneurs. She also publishes a resource blog www.succeedasyourownboss.com Melinda is also the author of the national bestseller Become Your Own Boss in 12 months; A Month-by-Month Guide to a Business That Works. (Adams Media 2010).

Comments

  1. Steven Bradford says

    Just came across this Q&A while doing a search on how to choose a franchise. Great questions and great responses! I’m going to check out more of the interviews on succeedasyourownboss.com and also this franchisehelp.com site to see what other advice they provide.

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