As a business coach and owner of an AdviCoach franchise, Jerry Baltus of Plymouth often advises entrepreneurs on franchises. He has seen the successes and failures and believes that franchises provide the best opportunity. “We know that systematized businesses like franchises tend to have greater revenues and greater success,” he commented.
About 12% of all business units in the United States are franchised, yet they produce 44% of revenue. Baltus believes it’s because franchises offer a proven system, and that allows for fewer mistakes and earlier profitability. He noted, “Although many of us come through successful business experiences, we are often specific in one area. Coming into business ownership requires a broader base of knowledge. We talk about the fact that owning a business requires you to wear a lot of hats, often all the hats. The benefit of franchising is that you have a system.”
But that doesn’t mean that a person shouldn’t be cautious. Baltus said there have been numerous examples of bad franchises where owners got greedy and hurt franchisees. Part of the problem is getting so excited about a concept that the opportunity is not properly investigated. He advised, “Check your passion at the door. You might get excited about a concept and get carried away, but this is the time to do your homework. Take a step back and say, ‘I need to do this the right way.’”
Research a company online and check out forums. Consider using a franchise coach, a person who will help you look at a company’s culture, market, and trends. Look at a variety of business types and compare the pluses and minuses. Talk to existing franchisees, and once you have selected a franchise, hire an attorney to review the documents.
The attorney should help you understand store design and build-out responsibilities, the process of transferring the franchise and cost, the penalties for closing before the end of the licensing agreement, the term of the agreement and how much it will cost to renew the license, and the ability of the company to change fees.
The franchisor will provide a franchise agreement that binds franchisor and franchisee together, and a franchise disclosure document. Baltus admits that it is difficult to negotiate changes to either document. “In general, they don’t want to make changes that affect their brand,” he noted. “It’s also more difficult to administer if there are all kinds of different agreements. Younger franchises might be more flexible, because they’re trying to build the company.”
Once the agreement is signed, there is little that a franchisee can do if the company evolves in a way that causes an adverse effect on business. No matter how cautious a person is, there are franchisors that will not operate in the best interests of their franchisees. Cookies by Design, a company featured in this column a few weeks ago, is one of those. “The smart franchisors don’t want to hurt you, because poor performing stores hurt them as well. But there are always exceptions, and unfortunately, opening any business carries a risk,” he concluded.
Tina Dettman-Bielefeldt is co-owner of DB Commercial Real Estate in Green Bay and District Director for SCORE, Wisconsin.