Minding their Business

The promise and perils of running a franchise

David Walters has successfully owned and operated franchises from two of the best-known names in fast food: Domino's Pizza Inc. and Subway Sandwiches & Salads.

Today he manages a family-owned metal-fabrication company in St. Louis and insists being an independent is the only way to own a business.

Scott Stringham gave up his partnership in a family-owned independent restaurant to become a franchisee with Sign*A*Rama Inc., a sign-making outfit in Portsmouth, N.H.

Being part of a franchise organization provides him with benefits that simply aren't available to independent-business owners, he claims.

So who's got it right? Actually, they both do.

Franchising has been responsible for putting hundreds of thousands of people on the path to successful business ownership over the past 20 years, says Betsy Green, founder and publisher of The Franchise Handbook, a quarterly directory and self-help tool for prospective franchisees.

But even Don DeBolt, president of the International Franchise Association, franchising's largest trade group, is quick to point out that franchising is not for everybody.

"With franchising embracing more than 70 industries, there is a franchise for everybody, in terms of budget, infrastructure, etc., but not everyone is well suited to be a franchisee," Mr. DeBolt explains.

Ms. Green agrees: "You need a certain amount of entrepreneurial spirit to succeed in a franchise business, just as you do with an independent business. However, you also must be willing to follow the system the franchiser has created." Inability or unwillingness to do that, she warns, can result in an unhappy franchisee.

The concept behind franchising is relatively straightforward. In return for financial consideration - most often an up-front franchise fee and an ongoing cut of revenues - the franchise company provides a business model that has been market-tested and proven to be successful.

The franchisee gets a prepackaged business, generally with site selection assistance, training, and ongoing support.

Franchising works because it provides small-business owners with access to efficiencies of scale they could never achieve on their own. The larger franchise systems have national name-brand recognition and run extensive advertising campaigns.

At most companies, however, franchisees pay an additional percentage of revenues - above and beyond the regular royalties - to support that advertising effort. Franchisees may also benefit from the buying power of a larger organization.

In Mr. Walters's eyes, however, the benefits he received did not justify the amount he was paying in fees to the franchiser.

"I was moderately successful in both my franchise ventures, but the franchiser gets paid first, second, third, and fourth," he says.

Employees and vendors were next up at the pay window, leaving little more than a subsistence income for the owner in his case, Walters says. "It's a tough way to make a living. You're basically buying yourself a job."

While Walters acknowledges that the ideas and concepts his franchisers provided were valuable, he was troubled by the lack of correlation between their success and that of the franchisees. "Franchisers get paid whether you're making a profit or not. They don't feel the pain when you're taking a hit," he says.

Walters feels that if you have what it takes to run a business, "You're probably better off doing it without a substantial amount of your revenue just being sucked off the top."

It's not hard to find franchisees who disagree with that point of view. One is Bob Wisner, a Maid to Perfection franchisee with a territory in Baltimore, Md., and the surrounding counties.

Mr. Wisner says he booked $1.8 million in revenues last year, and he's adamant that being part of a franchise system is a major factor in his success.

His endorsement carries some weight: Before launching his cleaning franchise five years ago, he ran a successful business, consulting with high-tech start-ups.

"Name recognition and customer knowledge that I have the support of a franchiser behind me have landed me several large, prestigious accounts," he says. "You might look at this industry and think 'why do you need a franchise to clean houses?' But what I get is knowledge, training, and the ability to stay current with trends in the industry."

Gloria Goldstraw, Maid to Perfection's vice president of marketing, says the added level of recognition that comes with a name-brand franchise is essential in her work.

"The trust issue is particularly important in an industry like cleaning," she says, "where your customers are giving you the key to their home."

Other franchisees single out other advantages. Mr. Stringham, the Sign*A*Rama franchisee, is financially successful in his business, but being part of a team is at least as important to him.

"One of the things I learned about myself when I was in the restaurant business is that I need to be part of a team. That's my personality, it's just the kind of person I am," he says.

The support that comes with being a member of a franchise organization is what makes this type of business ownership right for him, he adds.

Franchising currently accounts for almost 50 percent of all retail sales in the US, and with the emergence of a new generation of business-to-business franchises there are more opportunities than ever before, DeBolt points out.

Whether or not franchising or a specific franchise is right for any one individual, however, is still a personal question.

"In the end, a franchisee is still a business owner," Green says. "A good franchise system can provide a tremendous amount of support. Ultimately, though, success or failure is in the franchisee's hands."

(c) Copyright 2000. The Christian Science Publishing Society