Monday, February 16, 2009

Is 2009 the Year to Buy a Franchise?

"Almost every day the majority of Americans (and an increasing number of people around the world) spend money at a franchise. Whether we're buying donuts, hamburgers, or sporting goods, whether we're getting our taxes done, our carpets cleaned, or a package mailed, chances are the business owner we're doing business with is a franchisee.

So, when you're standing in line at Dunkin' Donuts or sitting in the drive-thru lane at McDonald's, do you dream about being on the other end of the action? Have you ever thought about what it would be like to own a franchise? Well, you're certainly not alone. In fact, according to the Franchised Business Economic Outlook for 2009, prepared by PricewaterhouseCoopers for the International Franchise Association (IFA), there are over 850,000 franchised outlets in the U.S. alone, earning a total of $835 billion. Franchising dominates some industries -- well over half of all quick-service (industry term for fast food) restaurants are franchises.

Buying a franchise is not for everyone, but if you're considering starting a business this year, you should at least take a look at the franchise option. There are inherent advantages and disadvantages to being a franchisee. Let's look at the positive side first. If you buy a franchise from an established company, you are essentially investing in a proven business concept. There's no experimenting with recipes or figuring out where to source products or how much cat food people buy in a month. You don't need to come up with a catchy company name or design an eye-catching logo. The franchisor has already done all that for you.

Franchisors recognize that every outlet carries their name, not yours. So with their reputation on the line, they do their best to make sure you are fully trained, equipped, and ready to run the business. In many cases, help is but a phone call away. You get to take advantage of their name recognition, the power of a bigger marketing budget, and the know-how that can take years to learn on your own.

You pay for this, of course, in the fee you pay when you purchase the franchise and the ongoing royalty fee that's collected from you, which is generally a percentage of your gross sales. Your initial investment will vary greatly depending on the industry and type of business you're interested in. These startup costs can be relatively low (less than $20,000) or fairly pricey (over $1 million). According to the IFA, the average investment is between $350,000 and $400,000.

Is it worth the money to buy a franchise? Well, that depends. Buying a franchise gives you, in most cases, instant familiarity in the market. In established industries, this can make a big difference. Say you've always wanted to own an ice cream store. Opening a Dairy Queen is going to initially bring you more instant recognition in your market than , say, a Dairy Princess.

On the other hand, if the franchise you're thinking about buying has little name value, you want to make sure what you're getting is worth what you're paying. For instance, if you want to start a business in a field you know nothing about, then buying a franchise might make more sense, since they'll show you everything you need to know to run that business.

Before you buy a franchise, you need to fully investigate the franchisor. By law, the franchisor must give you their FDD (Franchise Disclosure Document) before you sign a deal. Read it over carefully. It gives you the inside scoop on what you can expect from the franchisor in return for your fees: the level of training and ongoing support you're going to get, the background of the people who run the company, and the franchisor's financials.

Perhaps the easiest way to start researching a franchise is to find and speak with existing franchisees. Sure, a list of franchise outlets is listed in the FDD, but why wait for the document? Call franchisees in your community and across the country. Since franchisees all use the same company name, they're easy to locate. Ask the franchisee about their experiences with the franchisor. Did they get adequate training? How's the support from headquarters? Ask about their challenges and concerns. And most important, ask if they were buying into the system today, would they still do it? Why or why not? Franchisees, happy or unhappy, love to share their experiences.

Franchising is not recession proof. PricewaterhouseCoopers (PwC) is predicting the number of franchised units to decline somewhat in 2009 (except for fast-food and full-service restaurants), but franchising is a fairly resilient industry. From 2001 to 2005, PwC reports that franchising grew at a faster pace than many other sectors of the economy, expanding by more than 18 percent.

Franchisors are optimistic. According to an IFA Franchise Business Leader Survey, more than 85 percent of them expect to see unit growth in 2009. And almost half believe their companies will do better this year than last.

As I've said, franchising is not for everyone. If you yearn to be an entrepreneur because you can set your own hours, not have to follow orders, and march to the beat of your own drum, you are likely to not be a good fit, since as a franchisee you must follow the system the franchisor has set up. On the other hand, as a franchisee, you're still responsible for your own unit's success. You're likely to be responsible for hiring, local marketing and advertising, attracting customers and clients, and being involved in your community.

Buying a franchise is not a decision to be made lightly. Before you join the hundreds of thousands of happy franchisees, make sure you do your research and weigh your options carefully. In fact, we've already done some of your initial homework for you. Take a look at our new AllBusiness AllStar Franchises for 2009, a list of the 300 franchises we feel are the strongest and best opportunities out there. Happy hunting."

(Source: Rieva Lesonoski - small business blog)

More on Business Tips

No comments: