Franchise or concept?

Filed under: Focus |

Franchised businesses in the United States employed more than 9 million people in 2001 (the last figures available), according to the International Franchise Association Educational Foundation. In the same year, a total of 767,483 franchises, from retail food operations to automobile dealers, spent $229.1 billion in U.S. payroll.

The foundation released its findings in March, and included a state-by-state breakdown of the financial and economic impacts of franchising. In 2001 in Colorado, the foundation reported that 15,500 franchises in Colorado employed 181,415 people and met a payroll of more than $4 million.

The franchise educational foundation is a 501 c (3) organization and an offshoot of the International Franchise Association, established in 1960 to “safeguard the business environment for franchising worldwide,” according to the foundation final report.

The franchise association advocates for franchisees and franchisors through lobbying efforts and providing educational programs and services, advertising and marketing assistance, financial and legal information, and programs for hiring and retaining employees, said Matt Shay, executive vice-president of the franchise association.

“Franchising isn’t for everyone,” Shay said. “It depends on your risk tolerance, the need to be independent and your personality type. The highly independent, highly entrepreneurial person who wants to do things his or her own way is probably not a good candidate to own a franchise.

“In a franchise situation, you have to maintain certain standards, and you can’t make major modifications or deviate from the business plan. That’s a caveat that needs to be considered.”

Shay said the advantage of franchising is that it allows someone to get into business under an operating plan that has been previously developed and tested. “It’s a proven system, and even though there are no guarantees in franchising, you have a roadmap for the operation,” he said. “You are operating as the steward of the brand, and you don’t have to create something out of the whole cloth. Training, education, support, advertising and marketing assistance are all advantages you don’t enjoy as an independent business operator.”

Investing in a franchise is much safer than going it alone. Each year, less than 5 percent of franchises fail or discontinue, compared to a five-year 80 percent failure rate for independent businesses, said Pat Beck, an accredited SCORE representative. Beck said that figure goes up to 90 percent for restaurants.

Beck knows all about franchising. She owned a Manpower franchise for 38 years in Lincoln, Neb. “I started as a temporary for Manpower in Racine, Wis., and then started selling for the owner,” Beck said. In 1958, her boss bought another Manpower franchise in Waukegon, Ill., and asked Beck to run it. However, she had her sights set on moving back to her hometown in Lincoln. Her boss called the Manpower decision makers and asked if they wanted to open a franchise in Lincoln. They said yes, and in 1959 Beck, her husband and two children moved to Nebraska to build the franchise.

And that she did. Beck’s Manpower franchise was the first temporary service in Lincoln, and she remained the lone agency for eight years, until Kelly Services moved in. Today, the community is home to 23 temporary employment agencies.

It wasn’t easy for a woman in business in 1960. As the first-ever woman to seek a membership in the Lincoln Personnel Managers Association, she had to be voted in by the exclusively male members. But Beck earned the town’s respect and established a solid reputation. She became an esteemed entrepreneur when she extended her franchise territories to the neighboring Nebraska towns of Beatrice, Kearney, Grand Island and Hastings.

“I’m sold on franchises,” Beck said. “I guess it depends on the type of business, but I enjoyed the support and the benefits of name recognition. And the support helped when we could just pick up the phone for advice about legal issues, insurance and workmen’s compensation.” And Beck was happy that she didn’t have to create marketing and advertising materials.

She bought her original Manpower franchise for about $2,000, and said she sold all of them a few years ago for “an offer I couldn’t refuse.”

Franchising is a seamless business, Beck said. Each franchisee must run the business under the same production and operating rules as all other franchises of the same. “And if you don’t, you’re out,” she said. “And a contract states if you are not profitable, the business can be taken away.”

Some budding entrepreneurs may opt to spawn their own business idea because they are not interested in paying ongoing franchise fees. Beck said the fee percentages subsidize the support each franchise receives from the corporate headquarters. “One mistake that franchisees make is not paying their fees upfront,” she said. “I always paid my franchise royalties first and myself last.”

Beck said that it doesn’t matter if someone is researching a franchise or looking at an independent start up. “It’s all about being passionate about what you do,” she said. And her passion grew out of being in the right place at the right time. “I didn’t make a decision one way or another, I fell into this business,” she said.

Beck said Manpower has been great for her. But others interested in a Manpower franchise will not have the opportunity. Manpower spokesperson Margaret Gerstenkorn said the Milwaukee, Wis.-based company is buying up the franchises and bringing them back into the fold as branches. “We’ve been in business for more than 50 years, and many of our franchisees are celebrating long years in the business,” Gerstenkorn said. “Many of the owners are retiring, and we are buying their franchises. We feel our franchise group has fully matured, so we are now growing the company organically by owning our offices. It’s just a different direction.”

There are still plenty of franchise opportunities available. And SCORE offers some helpful pointers to potential franchisees. SCORE counselors hand out a franchising information sheet that helps their clients investigate, plan and analyze their options. What are the skills needed for a particular franchise? Who is responsible for warranties and guarantees? What is the reputation of the franchise? Are suppliers available in the area?

SCORE also recommends that potential franchisees research chamber of commerce and Better Business Bureau records on a certain franchise. Check the franchise’s background – legal histories, criminal or civil actions and pending litigation.

What is the current financial condition of the franchise? Compare sales and verify earnings claims.

In the end, Beck and her fellow SCORE counselors say that the most important step in evaluating a franchise could be examining one’s personal skills and experience. According to SCORE materials, “The ideal franchisee is creative, outgoing and eager to succeed, but not so independent that he or she resents other people’s advice. The entrepreneurial initiative must be balanced with a willingness to comply with the franchiser’s business formulas.”

And Shay said franchise opportunities are as varied and diverse as each individual entrepreneur. Investing in a franchise depends on who you are and what resources you have. Much the same as any business venture.

- Marylou.Doehrman@csbj.com