McDonalds is one example of 6,000 franchise concepts offered in the United States.
Karl Dakin: In this recession, one of the long-standing approaches to becoming a business owner is to buy a franchise. The topic of franchising was presented on Monday night at the Startup Junkie program of the DaVinci Institute. With over 6,000 franchise concepts within 40 industries currently being sold in the United States, it is quite possible for an individual to find a business that matches their passion and their pocketbook.
The keynote speaker was Ruth Garcia with RG2 Consulting, a Denver-based franchise consulting company. With prior experience within the hospitality industry, Ms. Garcia started her company in 2008 where she places clients in franchise opportunities. Ms. Garcia pointed out that franchising is not a business, but a business strategy. It presents one alternative for effectively distributing a product or service.
Franchises constitute 40.9% of retail sales in the United States with over $1 trillion in revenue each year. One in twelve businesses is a franchise with a new franchise opening every 8 minutes. There are presently 8 million people working for franchises in the U.S.
Less than five percent of franchises fail each year. This contrasts with over 62% failure of startup businesses within the first 5 years of commencement of operations.
The hottest franchises today include in-home care, childcare and education, repair and maintenance, pet care, as well as health and wellness. In-home care provides support to the elderly, both independent living and assisted care. Franchising of in-home care has seen over 20 new brands enter the Denver market within the last year.
Ms. Garcia commented that the food franchises are the most difficult. Special attention is required to all costs and these types of franchises take longer to achieve break even and to pay back the investment.
A franchise is a relationship between a franchisor and a franchisee commonly set within a ten-year agreement. A franchise is a business owner. The franchisor provides a brand and an operating system: all of the details needed to do everything in the business – a highly detailed paint by number kit. The franchisor provides support that includes industry and operations knowledge. This knowledge is passed along through training programs. In many cases, the franchisor brings large business purchasing power that reduces costs of goods. Altogether, this results in a reduction of risk that accounts for the lower failure rate.
That being said, the franchisee does not have a lot of freedom to engage in creativity and innovation. The formula for success set by the franchisor is more than a guideline. Poor performance by one franchisee affects all other franchisees.
Usually, a buyer of a franchise is limited to a particular geographic location. With the location being a significant factor, selecting the location is critical when signing a franchise agreement.
A franchise fee typically runs between $15,000 and $50,000. This is the money paid to the franchisor and does not include the money needed to invest in setting up the business. This additional capital varies widely from home based businesses that may need as little as $50,000 to brick and mortar businesses that will require over $200,000.
Sources of money to start a franchise include personal savings, retirement funds, home equity loans, SBA loans and conventional loans. A relatively few franchisors provide financing to their franchisees. In current economic conditions, individuals must largely look to themselves for startup capital.
Following the keynote, a panel of franchise owners (franchisees) discussed their experiences in finding, buying and operating a franchise. Curtis and Ann Cray run Archadeck, a deck building company. Terra Hardcastle operates College Nannies and Tutors, an educational franchise. In addition, Ms. Garcia discussed her ownership of a Rooster’s franchise – hair care for men and boys.
Each panelist has always held the desire to run their own business, but was prompted to buy a franchise after they were laid off by a large company.
The most important part of buying a franchise was described as ‘making lots of calls’ – conducting due diligence to make sure that the franchisor’s story about the business opportunity hangs together when talking to existing franchisees. This creates trust in the franchisor –viewing the franchisor as a friend and ally and not just the seller of a franchise.
All of the panelists found comfort in a known business model that offered ongoing support. A franchise carries with it a degree of certainty that the panelists found similar to their large company working experience.
Ms. Garcia said that those individuals with prior small business ownership experience come at franchising with a slightly difference approach. These individuals seek to break into a new market where they see a market opportunity but they do not have experience in that industry. They are not so concerned with established systems and performance, but rather the speed of market entry.
One of the greatest values of a franchise is the ability to share problems and solutions with other franchise owners. They are running exactly the same business, simply at a different location. Therefore, they can help greatly in optimizing the launch of a new franchise, particularly if they are further down the road and can bring that experience to bear.
Photo Credit: Franchise Help