When a south suburban businessman, who prefers to remain anonymous, decided to franchise his successful retail clothing stores in 1987, he was sure he had made the right choice. He had read extensively on the subject, received professional counsel and hired a nationally known franchising consultant to develop his franchise program. He invested more than $150,000 to make sure the franchise program would be successful, but it was not until he began franchising that he discovered the problem that would ultimately be his undoing-his own franchisees.
“I thought someone who bought a franchise would put his or her heart and soul into the business,” he said, “but either they didn’t follow the program or they did nothing at all. Although one franchisee claimed he made $40,000 in capital improvements to the store, I later learned that those expenditures were for new kitchen cabinets for his home.”
After trying to reconcile the problems over the course of two years, he eventually bought back more than half of the franchises he had sold: “Buying them back was cheaper than litigating, even though I knew I was in the right.”
Recently there has been a pervasive public relations campaign touting franchising, including advertisements, early-morning TV “infomercials,” seminars and print and electronic media stories. These stories imply that franchising is the salvation of every displaced worker or executive, that franchisers are the most astute businessmen and women in the world and that investing in a franchise almost guarantees success.
But in April, the House Small Business Committee conducted hearings into some of the problems in franchising, focusing on abuses by franchisers such as unfair termination of franchises and unreasonable product purchase requirements. Faced with such conflicting information, how can an investor make a sound decision?
Business format franchising (McDonald’s is one of the best-known examples) is when a buyer, the franchisee, buys a proven business system from a successful businessperson, the franchiser. In exchange for money and an agreement to follow certain stipulations, the franchisee receives the right to replicate the franchiser’s entire business concept and is given the necessities to do so, including proprietary trade secrets, training, operations manuals, signage and advertising, etc.
It seems like the perfect match, and indeed the phenomenal growth of business format franchising has been one of the biggest stories in 20th Century business. In theory, franchising offers a win-win situation for all parties: Entrepreneurs get risk-free capital and motivated owner-managers to expand their businesses and develop new channels of distribution; would-be business owners get proven business systems and support to weather the vagaries of independent business ownership; and the consumer gets standardized products and services at competitive prices.
In practice, things don’t always work out so well.
Hidden in the data on franchising is the fact that many franchisers buy back franchised units from unsuccessful franchisees and keep them open as company-owned units or sell them to new franchisees. The apparent success rate of franchised businesses does not reflect the true failure rate of individual franchisees.
Although no statistics are available regarding the number of franchisers who stop franchising each year, Andy Trincia of the International Franchise Association (IFA) in Washington, D.C., points to the NutriSystem collapse, in which the franchiser went bankrupt, as a warning that there are no guarantees, even in a franchise system.
Trincia also says the rosy statistics regularly provided by the IFA may not be as meaningful as they seem. The commonly quoted statistic that 77 percent of new businesses fail within the first five years of operation, compared with 8 percent of franchises, are “pre-1987 statistics provided by the Department of Commerce (DOC),” according to Trincia, who says the IFA always advises people that such information is dated.
Reasons for franchising a business are as varied as the people who go into business for themselves; however, one universal reason is financial feasibility.
Franchiser Al Levine of Baby’s Room USA, a juvenile furniture franchise headquartered in Elmhurst with a store in Matteson among its nationwide franchises, explained that a franchiser can make more money in royalties paid by the franchises he sells than he can in profits from owning a second or third store. “And you don’t have the everyday headaches of running your own business,” he said.
Levine is quick to point out that it also makes sense from a franchisee’s point of view. “Approximately 40 percent of our 47 franchisees are people who operated independent baby furniture stores first. They chose to become franchisees because with our bulk purchasing power nationwide and the advantages of cooperative advertising, franchisees save more by becoming franchisees than they spend on royalty payments.”
Many franchisers agree that the most difficult thing about franchising is the franchisees. Says John Amico, president of We Care Hair Development Inc., based in Bridgeview: “I discovered in my early years that there are three types: The dependent-dependent person buys a franchise because the development is completed and then wants (the franchiser) to come in and run it for him. The independent-independent person buys a franchise, then wants to do everything his way. Only the dependent-independent person makes a good franchisee, because he or she recognizes that the system has already been developed and his or her responsibility is to implement it.”
While the franchiser has assumed risk in developing the concept, there is also risk to the franchisee. The range of investment for franchisees can be from $10,000 to more than $1 million, depending on the type of operation. According to the IFA, a prospective franchisee should find a franchiser who is financially solid, possesses a good management track record and is supportive. He should look at the quality of management and collateral material and services offered and ask other franchisees about their experiences. Working in a unit beforehand is advisable.
“I loved the product myself and saw the line waiting to buy at all hours and thought this was for us,” says Royce Angus of Joliet, who with husband Ken is scheduled to open the Chicago area’s first Auntie Anne’s fresh-baked pretzel franchise in the Orland Square shopping center on Aug. 1. Angus spent time working in a unit as part of her two-week training. “The franchise reflects the ethics and Amish/Mennonite values of its founder, Anne Beiler,” she says, “and we thought it was important that those values were incorporated in the franchise organization.”
Cass Piorkowski of Homer Township has a different story. “I wouldn’t buy a franchise if I had it to do over again,” says the Pizzas by Marchelloni franchisee. Formerly a chemical salesman for Amoco, Piorkowski viewed franchising as an investment when he took an early retirement and was unprepared for the challenges he encountered when he opened his store in his affluent area.
“Labor is my main problem,” complains Piorkowski, who has trouble attracting motivated employees and must assume more active management of his unit than he had anticipated. “I am getting less of a return on the franchise than on my passive investments, for a lot more work,” he says.
Despite the disappointing return, Piorkowski is optimistic about long-term growth and plans to keep the franchise open. He will not, however, purchase a second unit as originally planned.
While franchising may not be the panacea of the ’90s, for those who do their homework, investigate the opportunity carefully, understand the responsibilities and work harder than they ever have before, it can be a satisfying and rewarding experience. As with any large purchase, let the buyer beware.
