The fastest-growing business model in the U.S., franchising provides great investment opportunities for entrepreneurial spirits.
When Tom Carlson went to work at a McDonald's restaurant in the early 1990s, he viewed it as little more than a way to earn some spending money while attending high school. Although Carlson's father owned two McDonald's franchises, "I thought that my career at McDonald's would end when I graduated. I wanted to work in the sports-marketing field," he explains. Later, while attending University of Colorado at Boulder, Carlson became a swing manager at his father's McDonald's. "I began to see the benefits and challenges of working in a franchised business," he says. After graduating with a bachelor's degree in marketing�and then earning an MBA from University of Phoenix in 2002�Carlson found himself more and more drawn to franchising in general, and to McDonald's in particular. "I began to understand what McDonald's was all about and how successful the business is," he says. Today, Carlson co-owns three McDonald's franchises in Denver. It's a decision he has never regretted. He says, "A franchisee must be exceptionally skilled in every aspect of the business model�including finance, accounting, management, marketing, sales, human resources, training and advertising. Each day brings new and exciting challenges. I thrive on solving problems and developing a proactive approach to eliminate barriers that might cause problems." Carlson isn't the only person sold on franchising. According to consulting firm PricewaterhouseCoopers, 767,483 franchised businesses existed in the U.S. in 2001, and their total economic output totaled $624.6 billion. The total number of jobs created by these operations totaled nearly 10 million. "Franchising is the fastest-growing business format in the U.S. economy," observes Steve Fritzenkotter, professional development manager and area chair for undergraduate marketing at University of Phoenix. "Most people are not aware of just how many businesses operate as franchises." These days, the list includes Marriott Hotels, Fantastic Sams, Ace Hardware, Mail Boxes Etc., Curves, H&R Block, Merry Maids, Meineke Car Care Centers, Ruth's Chris Steak House and RadioShack. All together, "there are more than 75 lines of business within franchising," says John R. Reynolds, president of the Washington, D.C.�based International Franchise Association's Educational Foundation. Formula for Success The idea for creating a franchised business model dates back to the 1940s. That's when Singer Sewing Machine Company began licensing dealers who would travel around the country and sell its machines. The dealers pocketed part of the gross sales and sent royalties back to Singer. The model worked so well that, by the 1950s, other companies began flocking to franchising�including industry leader McDonald's, which began opening restaurants across the U.S. under the leadership of Ray Kroc. Fueling this trend: the emergence of dual-income households and a busy, on-the-go lifestyle. "This created a need for fast, convenient, consistent products and services," Reynolds explains. "Businesses that could maintain the same quality, service and convenience from location to location became household names, and many of these were franchises." As the business model matured, more sophisticated and educated investors entered the franchising picture. Carlson is among the new breed of individuals attracted to the industry. He applied for a franchise in 2001, and, once accepted by McDonald's, attended management training at Hamburger University in Oak Brook, Ill. Completing the training took two years, he had to prove his financial ability to open a restaurant, and then he had to wait for an available franchise. Even an MBA did not completely prepare him for today's franchising environment, he says. Yet Carlson has found the experience rewarding. He believes that franchising offers freedom with less risk than an independent company, while the business model provides strong support�for marketing, procurement, services and best practices. "I thrive on solving problems and feel challenged every day," he explains. Aaron Torgerson also found himself drawn to franchising. After obtaining a BSB/E from University of Phoenix, he began researching business opportunities in 2004. The financial knowledge he obtained while in school helped him understand the opportunities and risks of various franchising businesses. He purchased a LeaderBoard Tournament Systems franchise in Corona, Calif., in August 2004. Torgerson, who spent less than $60,000 for the business, hasn't looked back. The LeaderBoard Tournament Systems franchise, which organizes golf tournament play for amateurs, allowed him to keep a day job, work out of his home and, most important, pursue a passion. "As an avid golfer, I dreamed of being in the golf business for years, and I have finally made that happen," he says. Putting Franchising to Work Operating a franchise can prove both exhilarating and harrowing. It can generate enormous opportunities but also present risk. The upside is that most franchisors offer a "turnkey" business template that provides for a net profit of anywhere from $25,000 to millions of dollars a year. "Statistics show that franchises enjoy a higher success rate than independent businesses," Fritzenkotter observes. A primary reason that many franchises thrive is that they offer "a proven formula" that has been perfected over time, notes Jim Crossen, a University of Phoenix law instructor who teaches courses in franchising. In fact, the tight controls that franchisers impose and the support they provide frequently lead to a best-practice business model. As Crossen puts it: "There's no reinventing the wheel." Yet a franchise isn't an automatic ticket to fortune. The cost of obtaining a franchise can range from a few thousand dollars to millions of dollars for hotels and restaurants. Getting started also can require up-front training�often at the applicant's time and expense. Then there's the fact that a franchisee must pay a steep price for the brand name and support that a company provides. Most pay a 3 percent to 8 percent royalty (though McDonald's charges more than 12 percent). Some also require an additional 1 percent or 2 percent for marketing and advertising. For some franchisees, the end result is razor-thin profit margins. What's more, a company can revoke a license if a franchisee fails to comply with the contract, or after it runs out�usually in five years. If the parent company goes bankrupt, franchisees may find their business and livelihood at risk. Finally, there's the issue of time and commitment. Many franchise businesses require long hours and the right temperament. "Not everyone is suited to work in such a structured environment," Crossen says. "Some entrepreneurial types feel stifled and frustrated because there is almost no room for innovation and experimentation." Nevertheless, the appeal of franchising continues to grow. Crossen says that with the right business at the right location, the sky's the limit. Today, some franchisees have acquired dozens of stores or restaurants and earn millions of dollars a year. He says, "It's a business format that allows a person to buy themselves a job with a lucrative income." Tips for Getting Started 1. Look for a line of business you're interested in and that fits your aptitude. 2. Thoroughly investigate the business and franchisor you're considering. Evaluate the brand name, demand, competition, support you will receive and the financial costs and rewards. Also scrutinize the company's financial standing and examine franchise termination clauses and renewals. 3. Talk to other franchisees to see how they're performing and whether they have a good relationship with the franchisor. Tap into industry resources, such as the International Franchising Association (franchise.org). The Federal Trade Commission offers a pamphlet, "A Consumer Guide to Buying a Franchise," which provides detailed information. ( ftc.gov/bcp/conline/pubs/invest/buyfran.htm). Hire consultants, including an accountant and an attorney, who can help mesh the opportunity with a business plan and review documents and contracts. Use your banker, the Better Business Bureau and local chamber of commerce as additional resources.
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