If you're thinking of buying a franchise, Jim Kauffman has some friendly advice: Spend time in the trenches, learning the business from an employee's perspective, before making any hasty decisions.
"If you haven't actually worked in the business, you really don't know what it's all about," said Kauffman, who spent several years working for corporate stores owned by the Detroit-based franchisor Pro Golf Discounts, before opening his own shop.
When Kauffman relocated from Michigan 15 years ago and opened his store on Wehrle Drive, there were 65 Pro Golf Discount outlets across the nation. Today, there are are about 165, a growth spurt that is hardly surprising when one looks at the larger franchising picture.
The International Franchise Association estimates that the sector is growing at 11 percent to 12 percent a year: A new franchise opens its doors every eight minutes of each business day. Consumers spend $800 million a year in franchised businesses that employ about 8 million people.
Buying into a franchise typically gives owners instant advantages, including a proven method of doing business, a brand name and marketing support. One need only glance at the names of the nation's three largest franchises -- McDonald's, 7-Eleven Inc. and Subway Sandwiches & Salads -- to appreciate the marketing muscle that entrepreneurs gain when they buy into well-entrenched companies.
But before you shell out fees or sign royalty agreements, understand two things: Despite many built-in benefits, some franchises can be bad business deals. While more than 200 new companies are likely to enter the franchise arena this year, experts predict that three-quarters of them will be extinct within 12 years.
The second reality to consider: Franchises aren't for everyone. That's why the communications chief for the world's largest franchisor trade group thinks prospective buyers should perform a simple exercise long before they start looking at specific businesses.
The International Franchise Association's Terry Hill calls it a "personal inventory" -- a candid assessment of an individual's strengths and weaknesses, likes and dislikes.
"For example, if you hate the smell of doughnuts cooking at 3 in the morning, a doughnut franchise isn't for you," said Hill.
Here's another reality that might surprise some: Aggressive entrepreneurs don't always make the best franchise owners. By its definition, franchising means following an established formula. Not exactly an oasis for individuals who enjoy building enterprises from the ground up.
"Sometimes, really aggressive entrepreneurs would be better off starting their own businesses where they have more flexibility," said Hill.
That's not to imply that franchise owners lack opportunities to make their own creative contributions. Hill was quick to point out that the ubiquitous Big Mac was actually created by a McDonald's franchisee.
Many prospective franchise owners also underestimate the amount of work that is required to achieve success. Hill said it's usually unwise to think of a franchise as a passive investment that will become an instant cash cow simply by purchasing the business, then hiring a few people to run it.
Kauffman agreed, noting that it's unrealistic for fledgling franchisees to expect 9-to-5 workdays.
"I worked 70-to-80 hours a week for the first decade," said Kauffman. "You don't just hang up a sign and expect your business to take off."
Kauffman should know. In addition to amassing two decades of experience in franchising, he has an undergraduate degree in accounting and a master's in marketing.
Kauffman said several key factors should be considered when evaluating franchising opportunities, including growth projections for specific sectors, business location, marketplace trends and demographics.
"I strongly urge people to do their own demographic research and not rely solely on franchisors," said Kauffman. "You have to remember that some franchisors are in the business of selling franchises."
Kauffman, whose Pro Golf Discounts sells about 20,000 items in a 7,500 square-foot shop, said it's also important for prospective buyers to talk with existing franchise owners and learn first-hand whether they are satisfied with the level of advertising and marketing support and whether the franchisor lives up to all terms of the agreement. Keep in mind most contracts run eight to 20 years, with the median length about 10 years, according to International Franchise Association data.
Here are some other tips from experts:
Scrutinize a document called the Uniform Franchise Offering Circular. Federal laws require every franchiser to provide this disclosure document which contains 20 categories of information, including investment costs, background on key executives and a list of current and former franchisees.
Joseph Vogelberger, of VR Business Brokers in Amherst, also noted that New York is a "registration state" and requires that certain financial reporting requirements be met before a franchise can be sold. Prospective buyers should work closely with an attorney who has experience in franchising before inking a deal.
Investigate and compare all associated costs, including royalty payments (franchisees typically pay 3 percent to 6 percent of their monthly gross sales into funds that pay for things like national advertising campaigns and training). There are also franchise fees -- up-front payments that are made to the franchisor. In addition, some companies charge additional fees for bookkeeping and other support services.
Start-up costs (building or leasing expenses, equipment, inventory, etc.) can range from under $25,000 to more than $1 million for some new fast-food outlets.
Building and equipment leases are key factors. If a building is owned by a third party, the franchisor may hold the master lease. Review the document to ensure that there is sufficient time on the lease to cover the terms of any note to the seller. Some leases stipulate that all equipment is leased from the franchisor. Make sure you know what is being bought and sold -- make sure it is reflected in the price.
Finally, pay close attention to buying trends. New franchising opportunities are popping up each day and while there is inherent risk in buying a fledgling franchise, there can also be enormous benefits to getting in on the ground floor.
"We're seeing a lot of new franchises that cater to Internet technology and other computer sectors," said Hill. "You have to watch market trends, because you never know what the next franchise is going to be."