Would-be entrepreneurs eyeing franchises

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When people find themselves without a job (read, laid off because of the economy), it opens new chapters in their lives.

But the declines on Wall Street and Main Street have led to increases in entrepreneurship.

Nationally, new business activity increased in all regions (except the Midwest) during 2008, according to the Kauffman Index of Entrepreneurial Activity.

And two of the top 10 franchise sectors are expected to increase this year — quick service restaurant and table/full service sectors, according to PricewaterhouseCoopers.

While often the easiest way to start a business is to purchase a franchise because the concept and procedures are already in place, prospective franchisees need to do a lot of research and seek professional advice.

The first step is deciding what type of franchise to purchase. The business needs to fit the owner, not vice versa.

“You can go out and buy a franchise, but if you don’t love what you’re doing, you won’t be successful,” said Ruth Garcia, co-owner and managing partner of RG2 Consulting LLC in Denver. “When someone says ‘I want a food franchise,’ my first question is ‘why?’ Have they worked in the food industry? Did they think it was fun? I focus on their personality and ability to actually run that business successfully.”

Matthew Barrett, executive director of the Small Business Development Center, said determining which franchise fits best is a lifestyle choice.

“If you don’t like four in the morning, don’t open a coffee or donut shop,” Barrett said. “Make sure this is something you can live with for the rest of your life (even though it probably won’t be for that long).”

And franchising is much more than “French fries and sandwiches.” Opportunities are available in construction, sales, childcare, elderly care, residential and commercial cleaning and automobile repair, to name a few.

Then comes the second step — money.

“Cash up front for the initial purchase can be as cheap as $40,000 or as much as nearly a million,” Barrett said. “It’s all over the board.”

And after a franchisee has determined which concept is correct – and affordable, the time commitment kicks in almost immediately.

Newly minted franchisees must participate in away-from-home training to learn how to manage and operate the business. Training time varies from as little as a week to a month or six weeks.

They also will likely need to bid their friends and family adieu for a few days and review the Uniform Franchise Offering Circular.

“It’s a document that you should read to learn about the financial status of the company,” Barrett said. “There’s nothing worse than investing $150,000 in a company that goes broke.”

The document also details what the franchisor offers the franchisee.

While the success rate is much higher for franchises than for independent startup businesses, budding entrepreneurs still should have a development plan, said Tad Goodenbour, a certified public accountant and a partner at BKD LLP.

Not having such a plan would be akin to “throwing $70,000 to the wind.”

“Find out the history of the franchise and talk to owners in other areas,” he said. “Find out what kind of support they get from the franchisor.”

And don’t forget the payments which will have to be made to the franchisor.

“What are the royalties the franchisor makes each month? Franchisors take their percentage off the top — your gross sales or net sales, not your bottom line,” Goodenbour said. “Whether you’re losing money or not, their incentive is to drive your sales, but your incentive (as a franchisee) is to drive your bottom line, your profit.”

It’s also a good idea to determine what a franchisor can “bring to the table that you don’t already have.”

“Brand recognition? Nationwide network of support?” he said. “There’s tons of value with a Wendy’s franchise, but some of these franchises you’ve never even heard of. You really have to do your research, and quite frankly, you need to find a good attorney who specializes in the franchise process. The franchise agreement is a fairly thick document, and it’s going to be overwhelming.”

That’s when people like Mark Meyer, an attorney at Rothgerber Johnson & Lyons LLP, come in.

In addition to “researching the system and individuals behind the system,” he said, it’s imperative to contact “current and terminated franchisees. What went wrong for them, or did they just leave? You can’t rely on the system alone to be successful. Create a business plan with an accountant.”

And don’t underestimate the need for determination, planning and hard work.

“You’d be surprised the number of people who think they can buy the franchise system and it will run on its own,” Meyer said.