Franchising may be viable option

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Franchising may be viable option

Created: 11/07/2009 06:06:49 AM PST

A slow economy and scarcity of available jobs may be an encouraging time for people to satisfy their dreams of finally opening their own business.

But rather than taking the risk of starting a business from the ground up, many of these people may be looking to purchasing a franchise as a viable option.

"If you're laid off mid-career, having an opportunity to own your own business is a very attractive career option for a lot of people," said Alisa Harrison, vice president of communications and marketing for the International Franchise Association.

People who are laid off mid-career tend to be good prospects for franchises because of the expertise and experience they would bring to the company, Harrison said.

Owner Dave Wagner works the coffee bar at his shop in Rancho Cucamonga last week. Owning a franchise has been considered by some as an attractive option in the face of a faltering economy. (Thomas R. Cordova/Staff Photographer)

A franchise is an agreement that grants a person the right to sell goods or services under the franchiser's method of operations.

Purchasing a franchise may be appealing to people because the business model has already been established and proven profitable.

From January to May this year, there were 839 franchise license renewals and 194 registrations in the state. During the same months last year, there were 859 renewals and 224 registrations.

The decline in numbers could be the result of a slow economy, but since the decline isn't too significant, it could be because of new interest from people who found themselves out of work, said Mark Leyes, director of communications with the state Department of Corporations, which overseas franchising regulations.

"It's remained rather stable I think," Leyes said. "What you see is some decline from the bad economy, but some increase in interest because of that economy."

The increase in layoffs over the past couple of years has led to a "new career economy," said Dusty Callow, owner of AdviCoach in Ontario.

"Executives have been laid off, upper level management have now been downsized," Callow said.

"They're taking the responsibility of their own income in their own hands and buying businesses."

Owning a franchise during a slow economy has its advantages since the potential success of the business has already been determined by the franchise owners, he said.

"As you look around, the businesses that are surviving are usually the franchises," Callow said. "They have a very consistent business model. That's one thing consumers want. They want consistency."

The number of establishments has been steadily increasing over the past 20 years, but the rocky financial system in months past has stunted the growth somewhat, Harrison said.

"This year, the lack of access to capital has really slowed down how fast franchise businesses are sold," Harrison said. "The credit crisis has really impacted every sector of our economy and the franchise industry is no different, but at the end of the day, we expect the data will show franchises continue to outperform non-franchise business as far as economic output."

Before people decide to purchase a franchise, they need to have enough capital to invest and good enough credit to receive a loan, said Don Drummond, senior franchise consultant with MatchPoint Franchise Consulting Network.

"Some people think that you can get a loan for the entire amount and that is not true, so you have to qualify and it's tough today because of the financial mess we've been in, but financing is still out there," Drummond said. "You have to have good credit. You can't be trying to borrow if you're on your last nickel so to speak."

Qualified franchisees can typically get approved for up to 70 percent financing, Drummond said.

In the past, it was common for people to take the equity from their home to help fund their franchise, but as home equities have decreased in the past couple of years more people have started dipping into their retirement, Drummond said.

"Some figure `I would rather invest in myself that in the stock market,"' Drummond said.

Including a franchise fee, service-oriented franchises can range from $50,000 to $150,000 to start up, while retail franchises generally start around $150,000, Drummond said.

Opening a service franchise, such as an auto repair shop or cleaning service, is cheaper and can be quicker to get started because many people can operate these franchises from home or a small office, Drummond said.

The Inland Empire is a viable area to purchase a franchise, but the franchisee should shy away from products or services that are trendy and may not have staying power, he said.

Goods and services that will always be needed in the region include home repairs and improvements, tax preparation, hair cutting, shopping and mailing services, child care, tutoring services, auto repair and services to assist the aging population, Drummond said.

There are more than 900,000 franchise establishments in the United States generating more than $880 billion in goods and services, which makes up 4.4 percent of the private sector output, according to the International Franchise Association.

Franchises provide more than 11 million jobs, which makes up 8.1 percent of the private sector workforce.

The amount of time it takes a franchise to start generating profit can depend on the individual business and the franchisee, so people interested in pursuing the purchase needs to do their research, Drummond said.

"You have to be able to have a little bit of a reserve to cover your home expenses for a certain period of time," Drummond said. "We teach people how to investigate this, so if you're investing in (a company), hopefully you'll have a pretty good idea how long it should be before you starting seeing a profit."

Profitability information is sometimes provided by the franchiser to the potential buyer, Drummond said.

The state requires the franchisor to give a potential franchisee a Uniform Franchise Offering Circular, which provides information on the company, Leyes said.

The UFOC is filed by the franchisor through the state department of corporations.

"They've got to file that with us and we don't do a lot of background check per say, but there are certain requirements for that, including some financial characteristics of the business opportunity and they've got to be accurate," Leyes said. "They've got to be disclosed to anybody they're offering a franchise to."

Since people buying franchises become business owners, it should not be considered just because jobs are scarce.

"You really have to be committed to working hard and it's a whole different situation," Drummond said. It is "a whole different change from the traditional employment where you get paid every couple of weeks and corporate benefits because when you go out on your own you give that all up."

Opening a franchise still requires certain skills or the ability to acquire those skills, said Michael Stull, director of the Inland Empire Center for Entrepreneurship at Cal State San Bernardino.

"You still need to be what I call `business savvy,"' Stull said. "You need to learn their system, you need to have business skills. If you don't, you need to acquire some."

One of the biggest downfalls to operating a franchise is the lack of control. Entrepreneurs who prefer to operate their business how they see fit are not good matches for franchises.

Franchisees who do not follow the franchiser's structure may find themselves struggling.

"The bottom line is for somebody that thinks of starting a business and think `Oh man, a franchise is for me' is usually because franchises are a little less risky and the whole concept is you're buying into a proven business model," Stull said. "The framework and the structure of the business is built in, so all you really have to do is learn that and operate the business."

The ins, outs of operating a franchise

Q: What is a franchise?

A: A franchise is an agreement that grants you the right to sell goods or services under the franchiser's method of operation. It involves the use of the franchiser's trade name and the payment of a franchise fee.

Q: What are the obligations of a franchisee?

A: As a potential franchisee, you must be prepared to make a large initial investment, including the franchise fee, real estate, improvements, licenses, utilities, insurance and transportation and pay operating costs and royalty fees.

Make sure you understand the circumstances under which you and your family members may be held personally liable under the provisions of the franchise agreement.

Additionally, if there are any restrictions in the franchise agreement, make sure you understand them fully, including how restrictions affect ownership, what you can and cannot sell, employment, participation in competitive businesses as well as current and future business interests of you and your family.

Q: What are the costs associated with opening a franchise?

A: The franchise fee: The initial franchise free, which is typically paid up front and may be nonrefundable, may cost from nothing to several hundred thousand dollars. In some cases, the franchise fee is payable in installments, but the franchiser must disclose the terms of payment in the Uniform Franchise Offering Circular and franchise agreement.

Other costs or fees: You may also incur significant costs to open an outlet and to purchase your initial inventory. Specific charges should be listed on the franchiser Uniform Franchise Offering Circular.

Financing: If any financing is available through the franchiser, the amount, interest rate, required collateral, potential liabilities upon default and any other terms and conditions must be included in the Uniform Franchise Offering Circular. You do not have to use the franchiser or its lender. As with any other type of loan or lease, you should shop around and compare loan and lease services at other financial or lending institutions.

Q: What are the obligations of the franchiser?

A: The franchiser obligations lie in many different areas such as obligations before you open your business, obligations during the term of your franchise agreement, obligations relating to site location, obligations to provide a training program and an estimate of the length of time needed to open following the signing of a franchise agreement or the payment of the initial franchise fee.

If there is an operations manual, take the time to read and understand it completely. The manual contains the standards of operation the franchiser expects from you.

Oftentimes you must sign a confidentiality agreement to keep the contents of the manual confidential. When you are examining it, always ask yourself, does this manual provide for all aspects of the business?

Q: How does one end a franchise agreement?

A: Termination: The franchiser is usually allowed to terminate the agreement if there is just cause.

This usually means the franchisee failed to uphold part of the agreement. Make sure you understand each contract provision by which the franchiser can terminate your franchise agreement.

Nonrenewal: Franchisees may not be allowed to stay at the site in the event of nonrenewal. Is your contract for a fixed period with no right to renew? Can the franchiser refuse to renew your franchise when the agreed-upon contract period ends?

Transfer: Some agreements do not allow you to transfer the ownership of a franchise in any way, while others have specific rules governing it. Check your franchise agreement.

SOURCE: California Department of Corporations

Some myths

Franchising is all about restaurants

While many of the best-known are restaurants, there are actually 3,500 franchise concepts in 75 industries.

The more you spend, the more you'll make

There is no correlation between how much money a franchise costs and how much money it makes.

You must have experience in the field

Experience isn't necessary; in fact, many franchisers prefer their new franchisees to have backgrounds outside the industry.

All franchises are created equal

Some franchisers will take on every franchisee that can sign a check, which makes for a weaker organization overall. The franchises that vet prospective franchisees just as much as the franchisees vet them get the best candidates and have the strongest system.

A franchise will run itself

Just because you have the support of a larger organization and ongoing training programs, owning and operating a franchise is still a huge responsibility and takes a lot of work - especially at the beginning - to make it successful.

SOURCE: Don Drummond, senior franchise consultant, MatchPoint Franchise Consulting Network

How to spot false or misleading claims

How can you spot claims for a fraudulent business opportunity? One clue may be the type of opportunity being advertised. Fraud has most often been associated with promotions for vending machine, display rack, pay phone, medical billing and some Internet-related businesses.

Here are several other claims that should raise red flags:

"No risk, guaranteed;" "Huge Income;" "100% return on your investment"

Ads that promise a big payout with little or no risk are usually a telltale sign of a fraud. Legitimate business ventures involve risks - usually in proportion to the promised return.

"Quick and Easy;" "Start Earning Today;" "Prime locations available now"

Successful start-up businesses, including franchises, require a lot of work to get off the ground, let alone manage. Only a few are profitable from the start. If ads promise vending locations, they may not be current or high-traffic; the merchandise also may be out-of-date or of poor quality.

"Work Part-Time from Home;" "Be Your Own Boss;" "Own a Dealership Today"

Most scammers promise an ideal work situation - the ability to set your own hours, be your own boss or work from home. In fact, this rosy scenario is far from reality for most small-business owners.

"Earn $2,000 a month;" "Vending route nets $1,700/wk"

If an ad claims buyers can make a certain amount of money, the law says the promoter must give the number and percentage of previous purchasers who earned the income. If an earnings claim is there, but the additional information isn't, ask for more information; the business opportunity seller may be violating the law.

SOURCE: From the California Department of Corporations

MatchPoint Franchise Consulting Network

(866) 877-3793 Toll Free

www.matchpointnetwork.com/en/

Don Drummond, senior franchise consultant

Contact: (909) 946-3383

FranChoice Inc.

(952) 345-8400

www.franchoice.com/index.aspx

FranNet

(800)FRANNET

www.frannet.com/