Sunday, July 18, 1999

Do your homework when buying a franchise

Long hours, modest pay may await

Washington Post

        Think of franchising like riding a bike with training wheels. A successful franchisee is a business owner who has a strong entrepreneurial streak but doesn't want to go out totally on his own. He's looking for guidance and support in opening and operating a company.

        The first step, figuring out which franchise to buy, is enough to put off the faint of heart. There are more than 2,000 franchise systems to choose from in the United States, and choosing one requires countless hours of research and soul-searching, experts say.

        “A successful franchisee has to be a team player,” says Andrew Selden, a franchising lawyer in Minneapolis. “You're an oarsman on somebody else's ship. If a person is highly entrepreneurial, they're going to chafe under the restrictions.”

        Franchising — buying the right to operate an established brand-name business such as Burger King — is flourishing. The industry has grown almost 10 percent in the past three years as individuals have taken money out of their swelling stock portfolios, ditched their high-paying corporate jobs and invested their wealth in franchises, according to the International Franchise Association, a trade group based in Washington.

        The hours can be grueling, and the paycheck is often skimpy. Almost 65 percent of franchise owners earned less than $100,000 during 1997, according to a recent IFA survey of 1,000 franchise owners. Fewer than one-quarter of the franchisees earned more than $100,000.

        Still, people are flocking to franchises. “I've been in this business for 22 years,” said Jerome J. Thissen, president of National Franchise Sales, a California franchise brokerage company. “The activity is as great as I've ever seen it.”

        There are big risks. Some franchise systems promise owners quick riches that never materialize. Others, such as Choice Hotels Inc. and McDonald's Corp., have gotten into heated battles with their franchisees over whether the companies sell too many franchises and saturate a market.

        The biggest mistake that prospective franchisees make is failing to do research. Too many people run out to buy franchises after reading glossy magazines touting their choice as the fastest-growing concept, experts say.

        Studies have shown that the longer a franchise system has operated, the more likely it is to be successful, said Scott Shane, an associate professor of entrepreneurship at the University of Maryland's Robert H. Smith School of Business.

        “If you're buying a franchise, one thing you're buying is support and training that is guaranteed,” Mr. Shane says. “If the franchiser is dead, it's not going to be supplying anything.”

        Those interested should talk with several owners before taking the plunge, experts say. Existing franchisees can offer insight about the parent company's vision, marketing strategy and expansion plans. Prospective franchisees should steer away from systems that aren't registered in the 14 states that require them to do so.

        Buyers should closely examine the expansion plans to make sure that the franchise systems aren't selling the rights for too many properties to be built in the same area, which can siphon revenues from existing owners. Franchise systems that sell properties in a hodgepodge of cities nationwide also are more likely to fail than those that follow a strict geographical plan, Mr. Shane says. The best franchisers offer exclusive territory to franchisees, he adds.

        Franchisees also should be leery of systems that offer too much in marketing services, experts say. After all, the franchisees are paying for the services with their royalty payments, which range between 3 percent and 8 percent of their monthly gross revenue. Some franchises charge an additional marketing fee of at least 1 percent of sales.

        Experts say the worst situation is for a franchisee to be stuck with a business that he or she can't sell. “When you go into one of these things, always look for an exit,” Mr. Thissen said. “How are you going to get out and keep the money you've made?”

        The top 10 franchises by size and number of U.S. locations:

        1. McDonald's: 12,371.

        2. Subway: 11,194.

        3. Burger King: 7,414.

        4. Pizza Hut: 7,403.

        5. Radio Shack: 6,609.

        6. KFC: 5,101.

        7. Ace Hardware: 4,848.

        8. Taco Bell: 4,839.

        9. Century 21: 4,773.

        10. Wendy's: 4,593.

        Includes both franchised and company-owned establishments as of Dec. 31, 1997, for all but Burger King, which is as of Sept. 30, 1997.


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- Do your homework when buying a franchise