Franchises: The Not-So-Fast Track to Entrepreneurship
Last week, news broke about Brinker International, parent company of Chili’s and Maggiano’s Little Italy, buying back 103 Chili’s outlets from a Charlotte based operator for $106.5 million, just a small slice of the $1.3 trillion in sales from franchises in the US. Numbers like that along with a seemingly cookie cutter startup process make buying a franchise seem like a fast track to entrepreneurship and riches. But, with higher startup costs and sometimes questionable brand equity, buying a franchise is not a shortcut to building a successful business.
Mention the word “franchise” and it typically conjures the image of McDonald’s Golden Arches, but there are over 2,400 franchises in the United States. Among those options there are household names like McDonald’s plus lots of not-so-familiar names like Pressed4Time. Part of selecting a franchise is selecting a company with brand recognition that exceeds what a ground-up startup could hope to achieve. Every franchisor claims to be widely recognized in their industry, but if you’ve never heard of the brand, how would potential prospects and clients have heard of it?
The franchisor is responsible for building and maintaining the brand, but franchisees subsidize it with fees. On top of an initiation fee to license the brand name and proprietary materials, a franchisee will pay a percentage of revenues back to the franchisor known as royalties, which are a whopping 12% of revenue at McDonald’s. After fees, a franchisee may be required to purchase marketing materials, supplies, and inventory direct from the franchisor, minimizing the ability to negotiate terms. As I noted in a post a few weeks ago, nearly 29% of startups fail due to running out of money, and all of these added expenses and impediments to cash flow can exacerbate money problems.
These added fees and expenses get you the brand and proprietary materials, not an instant business. While franchisees have a head start with marketing materials, products, and an overall strategy, it’s still a startup. It’s still up to the entrepreneur to build a client base and tailor the franchisor’s model to the local area. In other words, building momentum for a franchise will take much of the same work required to build a brand new company. In the case of Pressed4Time, who offers a dry cleaning delivery franchise, their $21,900.00 franchise fee gets you a brand, 3 days of training, and a wholesale dry cleaning relationship, yet you still have to buy a delivery van and find customers. Given the amount of effort to build momentum, the head start may not be worth the price.
Despite some drawbacks, a franchise can be a great way to become an entrepreneur. In fact, my very first business was a University Painters franchise. Many franchisors provide time-tested products and services and the in-depth training and support to be successful. A franchise is 27% less likely to default on an SBA loan, however, some franchises like Quiznos, default on their SBA loans nearly 30% of the time. In other words, if you choose the right partner, a proven franchise model can take some risk out of a new business. Pick a franchisor with a solid brand, high value add for its fees, and whose product or service aligns itself with your skillset, and you have a great foundation to build your business, but remember, you still have to build it.