YOU'LL FIND MANY ROUTES TO OWNING a small business and several intriguing paths to participating in a franchise business. It's not "one size fits all"--not even close. If you think of franchising in one dimension, you'll limit your opportunities. There are so many ways to get into franchising beyond building and operating a new pizza restaurant. Keep your ears open for opportunity, and prepare to be flexible. With the right approach to franchising, you'll quickly find your self on the road to career satisfaction and financial success.
Here are the five most common ways you can participate in a franchise program:
1. GO THE CLASSIC ROUTE. This is how most people think of franchise opportunities: You buy a new franchise, find the location and build it out yourself. It's all new, and it's all yours. You roll up your sleeves and plunge into your new business as an owner/ operator.
This is the classic route because it is precisely how so many thousands of franchisees built their multiunit empires, and it describes how much of the franchise world still operates. Newer (and hotter) franchise offerings usually provide the classic route to business ownership.
"We're a young franchise program, and we're opening new markets all over the country. Most of our owners have no experience in publishing a fashion magazine," says Tyler Allen, CEO and franchisor of a new publishing venture, Industry magazine, based in Orlando, Florida. "Opening a new market and starting from scratch is currently the only way someone can own an Industry magazine franchise."
Among the advantages of this approach is the full new term of the franchise agreement, allowing you the maximum time you need over the term of the agreement to recoup your investment. You also have the opportunity to build your business from scratch. When you open the location, it's brand-new and ready for business; any mistakes made in the establishment of the business will be your own. You don't inherit anyone else's problems or hiring mistakes. You hire your entire team, and your direct involvement will make you the owner, manager, boss and unquestioned captain of the ship.
The best upside: The new concept could take off and become a smash success--and you got on the elevator at the lobby level.
There is always a downside, of course (business imitating life?). With the classic route, the biggest possible downside is the untried location. It can make or break a retail business, and you may have a substantial sum of money riding on that outcome. Second, your team is untried, so the training and opening support had better be solid. The startup phase of the franchise at a new location will drain your cash until the operation's growing revenue begins to carry the payroll, inventory and other expenses; so plan carefully, and never go into a startup franchise undercapitalized.
2. BUY AN EXISTING FRANCHISE. The strongest advantage of buying an existing franchised business is that you have a chance to examine its performance numbers. You know what the sales and expenses were in the past year--and even earlier, assuming the records are accurate (ask the franchisor to provide a royalty payment record so that you can cross-check the key sales numbers). You have an opportunity to discuss the business with the owner, interview key employees and observe the operation. You can research the industry and gain an understanding of objective valuations in that business sector. In an important sense, you also lower your investment's uncertainty ... and your own risk.
Where will you make your money? Maybe you can identify a struggling franchise that needs a new shot of leadership and enthusiasm for the business. If you're successful, you'll build a strong business out of a weak one, and reap the financial benefits.
Buying an existing franchised business means that you're subject to the transfer provisions of the existing franchise agreement, which can be very restrictive. Many franchisors reserve the right of first refusal on all proposed transfers, so it's possible that you can end up putting a big effort into a formal purchase offer only to have the franchisor match it and take you out of the picture.
The franchise agreement might also impose a hefty transfer fee, often expressed as a percentage (5 to 15 percent) of the purchase price. This will, of course, fall on your shoulders, so include it in your calculations and your price negotiations. You might also negotiate with the franchisor on the transfer fee, especially if you're buying a troubled franchise. A new, enthusiastic owner may be the answer to the franchisor's prayers; the company may be more than willing to lower or eliminate the transfer fee altogether just to help you take over the ailing franchise.
Your major risk: hidden problems of the previous owner's making. No one likes surprises in a new venture, and these hidden problems will cost you money you didn't plan on spending. They range from unhappy supply vendors to dishonest employees to defective equipment--and they simply come with the territory. Add an "unexpected problems" line to your opening budget, and plan for the unexpected.
3. BUY MASTER FRANCHISE RIGHTS. If you're looking for a more aggressive role in the franchise system, you could check into becoming a master franchisee. The details of the master franchisee concept differ from one system to the next, but the basics are the same: A master franchisee is appointed to serve as a local or regional representative of the franchisor, providing training and field support, and is compensated for those services, often by receiving a percentage of the royalty revenue generated in the assigned territory. The master franchisee may also have recruiting responsibilities, generating commissions on franchise sales made from his or her efforts.
The appointment as a master franchisee is usually extended to existing franchise owners who prove successful in their operations and are interested in expanding their involvement in the system. If you enjoy teaching and want to super-size the return on your franchise investment, inquire about master franchise programs.
It's the involvement in franchise sales that draws many investors to master franchise programs, and it is there that the law imposes the most restrictions. As a third party participating in a franchise sale, the master franchisee will be considered a "franchise broker" and, as such, must be included in the company's Uniform Franchise Offering Circular, disclosing business experience and litigation history. The franchisor must submit a "salesman disclosure" form to most registration states. In a few states, a broker must independently register with state authorities.
A master franchise is often confused with a subfranchising program, but there's one important distinction: A subfranchisor offers and sells franchises directly, for its own account; and, of course, a master franchisee does not sell franchises directly. A master franchisee typically generates leads, meets with and qualifies prospective franchisees, and sends them on to the franchisor for closing.
A master franchisee is the utility infielder of franchising. Success is measured by the ability to manage, teach and recruit, while continuing to operate your own franchised business successfully.
4. BE AN ABSENTEE INVESTOR. For the right kind of business, with the right employees running that business, it is entirely possible--though rare--to own a franchise business and not be directly involved in its management. Rare, I think, because it is hard enough to own and operate a successful small business even when you're on the floor every day.
What type of business lends itself to absentee ownership? First, it must be a business that doesn't have valuable inventory. I once had a senior executive of a muffler franchisor tell me his shops couldn't be run by employee managers because too much of the inventory would leave at the end of the workday. Only an owner on the premises is sufficiently motivated to prevent that from happening.
Second, the business must have sufficient margins to be profitable after the expense of having a reliable manager. So many franchise businesses have razor-thin margins that allow for the owner to take out not much more than a modest salary. So the key question then becomes: What drops to the bottom line for the owner?
Service businesses with training programs that can support an employee manager may meet these qualifications. It would be a mistake to assume that any franchise can prosper with an uninvolved owner, but with the right program and a handpicked management team, it can work.
