Franchising: Hitching your dreams to a known brand

When creating a new business, some budding entrepreneurs look to established Franchises as a way to get started.

Consider McDonald's, Jenny Craig, Blockbuster. These are just a few of the well-known Franchise brands. But gaining access to sell for such big names will cost you: Initial franchise fees in the tens of thousands and annual royalties are just a few of the things you'll pay in exchange for tested business plans, marketing muscle and the right to sell already recognized products.

So how do you know if Franchising is right for you and if it will appeal to your entrepreneurial creativity? 

Evaluating a franchise

• Buying a franchise requires ample capital. Consider how much you have and how much you want to invest. You may have to seek financial assistance from banks and other sources.
• Get a copy of the franchise disclosure document, which provides vital information about the franchise, litigation and terms of the franchise agreement. Companies are required to present this document to prospective franchisees 14 calendar days before any signing or payment can happen.
• Consider seeking professional help such as a franchise attorney or accountant to help evaluate the franchise disclosure document.
• Talk to current and former franchisees. The franchise disclosure document provides contact information for current franchise owners and some who are no longer with the company.
• Do a self-evaluation of whether franchising is the best fit for your entrepreneurial interests.[Source: International Franchise Association, interviews with experts]

For some, franchising represents an opportunity to own a business with a proven track record, brand recognition and training, and sales support.

But it's not for everyone. A franchise owner loses some independence and creativity in running a business that has a set way of operating. Besides the upfront investment, franchisees pay the parent company for national advertising campaigns and annual royalty fees, on average 6.7 percent of gross sales but varying by industry.

"If you're someone who's strongly entrepreneurial and want to start your own business, that's fine," said Terry Hill, a spokesman for the International Franchise Association.

"Franchise is a system and removes a lot of that for you. Some people aren't interested in working for others who already have a system and taking directions from a parent company. They want to do their own thing."

Operating a franchise also requires the same amount of commitment and hard work as any independent business. Franchise companies want potential owners who are management-savvy.

And profit is not guaranteed, though plenty of franchise owners have found success following an established business model.

Another downside: The symbiotic relationship between a franchisor and the franchisee can sour.

For instance, several owner associations representing Dairy Queen franchisees are suing the parent company, alleging that they are being forced to convert to new Restaurant lines. Franchisee associations involved in the suit include members in Maryland.

Dairy Queen says it's not forcing franchisees to do anything new, noting that 70 percent of franchisees are required to modernize their restaurants periodically under franchise agreements.

"Overall, it's a wonderful way to make a living if you're familiar with what you're doing and you have experience," said Stephen Rosenstein, co-chairman of the Greater Baltimore SCORE chapter, who counsels entrepreneurs and small business owners. (Rosenstein writes a column on small business for The Sun.)

With those general principles in mind, consider investigating numerous franchise options before deciding whether it's the right choice for you, business consultants say.

There are about 3,000 franchise systems and 900,000 franchised businesses in the United States, according to the International Franchise Association.

The franchise industry grew at a faster pace than other sectors in the U.S. economy between 2001 and 2005, generating 11 million jobs and $800 billion in sales, goods and services, according to a PricewaterhouseCoopers study commissioned by the association.

Myriad industries, brands, services and products exist to fit many different interests, skills and experience. Franchise concepts include everything from restaurants to health and beauty shops to real estate to various types of services, including automotive, maintenance and tax preparation.

Maryland, for example, is the home of a well-recognized education franchise: Sylvan Learning Inc., which is seeking to expand its tutoring franchise business.

Upfront investments can be as low as $20,000 to several millions for, say, a hotel brand. The average franchise agreement is 10 years.

Most importantly, prospective franchisees need to understand the franchise system of a particular brand or service.

One way to do that is to obtain a copy of the franchise disclosure document, which the parent company must provide by law before any money or agreement is exchanged.

This document includes information on the franchiser, the company's key management staff, its bankruptcy and litigation history, fees involved in opening and running a franchise, investment requirements, the franchise agreement and contact information for current franchisees.

"If a franchise would not provide the document until late in the process, that's a red flag," said Britt Schroeter, a consultant with the highly-regarded franchise consulting firm, FranChoice. "It should be something that good franchises are willing to give you early on."

Schroeter, who previously worked as Sylvan's director of franchise development, helps entrepreneurs identify their interests as well as business and personality characteristics to match them with various franchise options.

She puts clients through an extensive self-evaluation: How much money do you want to spend? How much return do you want? What about hours? How much involvement do you want as an owner and operator? Do you want a home-based operation or a retail storefront? Do you like interacting with customers or do you prefer behind-the-scenes work?

In her experience, one in every two people considering a franchise move forward with buying one, Schroeter said.

"People have a tendency to make emotional decisions," she said. "I help people take the emotions out of it ... collect the facts and be realistic about earnings, hours and efforts to make the business a success."

Julie Sullivan, 50, of Clarksville, wanted a business for herself to generate enough savings for retirement. Franchising was an option because, "I was afraid to start my own business from scratch because I know the statistics are bad with new startups," she said.

In fact, about half of small businesses fail within the first five years, according to the U.S. Small Business Administration.

Sullivan, a retired teacher, enlisted the help of Schroeter. Sullivan looked into several options, including a fast-food restaurant and a photography studio. She talked to numerous franchise operators, asking about their operations and financials.

She passed on those choices because they required retail space, thereby increasing costs. Sullivan picked CertaPro Painters, a residential and commercial painting franchiser. Her franchise, which opened in September, serves western Baltimore County.

CertaPro has more than 300 franchisees and requires initial investments of $90,000 to $140,000, which includes marketing and other startup-related costs.

Sullivan said the business gives her flexibility and variety. She can work at home or travel to different sites for job estimates. Besides working with customers, Sullivan hires the painters.

"The reason I'm attracted to franchising is that I'm never going to do just one thing in my life," said Sullivan, who spent 10 years as a technical writer.

"The fact that this franchise is something I could grow really fast and make profitable, and if I choose in the long term, I could sell it. It's an investment for me as well as a new career."

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