Is Buying A Franchise Safer Than Starting Your Own Business?

Investor interest in the franchise industry has been waning for the past three years as the U.S. struggles to emerge from a national debt crisis while attempting to …

Investor interest in the franchise industry has been waning for the past three years as the U.S. struggles to emerge from a national debt crisis while attempting to stave off the impact of a wider global financial crisis, but now the International Franchise Association is predicting growth in 2012. Prospective franchisees are attracted by the benefit of owning a business with national brand cachet, suggesting an easier transition into profit; however, buyers should do their homework before investing in any franchise. Things are getting better for franchisees as they move toward more equal rights in contracting with franchisors, but there are never any guarantees and “caveat emptor” continues to be sound advice. For more on this continue reading the following article from TheStreet.

In an uncertain business climate, the risks of starting a business from scratch are daunting. That’s why the lure of a franchise business can be so enticing: You get the challenge and excitement of a start-up, along with the advantage of brand-name familiarity and (hopefully) national marketing.

Although the number of franchises in the U.S. fell over the past three years — as did the number of new businesses overall — things seem to be looking up this year. According to the International Franchise Association, the franchise industry as a whole is expected to grow 2% during 2012, creating more than 160,000 jobs. Nearly 85% of franchisors surveyed said they planned to increase the number of establishments during the year.

Does that mean taking on a franchise business is a safer bet than starting up on your own? It’s hard to say. There has been no single, comprehensive study comparing the fate of independent businesses compared with franchise businesses over the past five or 10 years, but various studies in the 1980s and 1990s did not find that franchises had a clear advantage. There are no guarantees either way.

But that hasn’t stopped various franchise brokers from selling the dream of easy money. Web sites tout franchise opportunities in the language of get-rich-quick schemes, and those promises are a tempting draw for unemployed would-be entrepreneurs. The good news is that potential franchisees have more resources than ever to decide if they’re making the right choice.

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After all, signing on as a franchisee means taking on a sizable financial risk. Subway, for example, charges a $15,000 franchise fee to get started, with an additional $100,000 to $250,000 investment to get a store up and running. A Supercuts salon has a $27,000 franchise fee, with a total investment of $100,000 to $200,000. Think bigger, like a Hampton Inn hotel franchise, and you could be looking at an investment of more than $10 million. And stricter bank standards have made loans harder to come by.

Yet despite that financial outlay, franchisees are still beholden to a higher power: the company that grants the franchise and therefore can change the franchise agreement. That uneven power balance has led to a growing franchisee-rights movement. Recent lawsuits against companies such as Cold Stone Creamery and Edible Arrangements have claimed that franchisors changed their agreements to unfairly limit individual store owners’ autonomy.

For almost every large franchise-based company, there is a corresponding franchisee association, which gives store owners a chance to vent, share advice and present a united front to the parent company when disputes arise. Organizations such as the North American Association of Subway Franchisees and Dunkin’ Donuts Independent Franchise Owners are a valuable resource for potential franchisees, a place to get a realistic, ground-view perspective on how the business operates. The online community Blue Maumau is a forum for franchise-related news and opinions, including first-person stories from people working in all aspects of the franchise world. There are also any number of blogs that purport to tell the "real story" of how franchisees are treated (although, as with all Internet tirades, you must always consider the source).

As they band together, franchisees have begun to demand that all franchise agreements share certain standard protections. The Coalition of Franchisee Associations (yes — an association of associations) has put forth a "Universal Franchisee Bill of Rights," which highlights the ways franchisees are often at the mercy of the system they have bought into. Demands include the right of franchisees to price services or goods as they see fit; the right to transfer ownership to a qualified buyer without unreasonable costs or penalties; protection from encroachment (nearby locations of the same franchise that will lure away customers); and full disclosure of all fees collected from franchisees.

The document can be read as a warning to all potential franchisees, listing all the potential pitfalls of ownership. It makes for useful reading alongside the cheery franchising brochures that so many companies produce: Does the franchisor give any guarantees that yours will be the only location within a given area? Are they upfront about what marketing costs you’ll have to pay? What are the financial consequences of failure?

Franchises will always be an appealing option for people who want to work for themselves. Now, thanks to growing networks of outspoken franchise owners, the newest franchisees will have a better idea of exactly what they’re getting into before they sign on.

This article was republished with permission from TheStreet.


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