Franchising: A Recipe For Your Second Career?

Carol Stearns, a Decorating Den franchisee, says she couldn't have done it alone. In the 11 years she has owned her decorating business in Fort Walton Beach, Fla., she has often turned to her franchisor for help. This was especially true when Stearns, a U.S. Air Force Reserve officer, was called to active duty in 1991 during Operation Desert Storm and had to be away for three months. During her absence, the franchisor kept in constant touch with her two employees to offer assistance. "In addition to the name recognition you have with a franchise, you have so many people on the same team to help you when you really need it," Stearns says.

That access to a support network, along with a ready-made blueprint for building a business, is what has attracted so many corporate downsizing or burnout victims to franchising. From 1989 to 1994, the estimated number of franchisee-owned businesses in the U.S. increased by more than one-third, from 404,269 to 540,342, according to the International Franchise Assn. At any one time, there are 3,000 to 5,000 franchisors. Whereas the industry was once fueled by entrepreneurs in their 20s and 30s, "now we're seeing more white-collar workers in their 40s and 50s taking on these operations," says Michael Seid, managing director at Strategic Advisory Group, a franchise consultancy and finance firm in Sag Harbor, N.Y.

Now may be one of the better times to embark on such a venture. New opportunities in computer software, environmentally safe products, and even bagel making have been emerging. What's more, years of hard-fought battles to ease the imbalance of power between franchisors and licensees have had some effect. While inequities still exist, the pendulum has begun to swing somewhat in the direction of franchise owners. "Franchise agreements have become less of a dictatorship," says Michael Leven, chief executive officer of US Franchise Systems, an Atlanta-based lodging company.

Some franchisors, for example, are offering more attractive contracts, with stock options, automatic contract renewals, and empowerment through franchisee advisory boards. Take Bruegger's, a franchisor of 200 bagel bakeries. Its licensees pay a $1,000 franchise fee per store and buy $35,000 of preferred stock, which will convert to common shares if the company goes public in the next few years, says CEO Steve Finn. Franchisees can prosper through the success of an individual store and the growth of the parent company.

LEARNING TO SHARE. Other companies are beefing up their encroachment policies so that franchisees are guaranteed more territorial protection. Choice Hotels International, which owns seven lodging chains including Comfort Inns and Econo Lodge, recently strengthened its competition provision. If a hotel is in an area that has 10,000 or fewer guest rooms, the property gets one mile of protection from the same brand for every 30 rooms, up to a five-mile maximum. If the area contains more than 10,000 rooms, there is one mile of protection for every 75 rooms, to a limit of three miles.

As a way to help entice licensees, some franchisors are offering the option to share one space with other brands. Franchisees can lease or buy smaller sites, giving them lower overhead costs. Two years ago, Baskin-Robbins started opening 150- to 600-square-foot areas inside convenience stores and alongside other well-known food companies. Traditional stand-alone outlets require 1,000 square feet. Multibranding increases consumer traffic and lowers rental costs, says Bill Grimm, Baskin-Robbins' director of national sales and franchising.

The type of industries that embrace franchising also have become more varied. One new category, health care, is growing because independent operators of medical-supply stores, home-health-care agencies, and other related businesses often can't keep up with the rapid changes in the field. Vicki Jones seized an opportunity when she founded Women's Health Boutique Franchise System in 1993. The six-store chain sells items such as breast prostheses, wigs, and turbans, as well as books on a host of women's health issues.

For people who want to get into the franchise game, federal and state disclosure requirements have eased the path of entry. In 1994, the Federal Trade Commission adopted changes to the Uniform Franchise Offering Circular. They mandate that this commonly used disclosure document be written in plain English and include more complete details about past litigation against the franchisor, supplier rebates, computer systems, revenues, training programs, and advertising funds.

SAFETY FIRST. But the laws alone won't protect you. Susan Kezios, president of the American Franchise Assn., a Chicago-based franchisee advocacy group, stresses the importance of having a skilled attorney scrutinize the franchise contract before you sign it. "If you don't understand an industry, you don't know how [the franchisor] can get you," she says. For example, you would want reassurance that once you open your business, the franchisor won't place a competing unit across the street. You also want to make sure the company will pump ad dollars into your market.

Fraudulent franchisors with unfair rules do exist. "Practice safe franchising," says Robert Purvin Jr., chairman of the American Association of Franchisees & Dealers. The issue of earnings claims remains a big problem. You should try to get them in writing, but don't be surprised if you can't. Only 20% of franchisors provide this information. If a company doesn't have a Uniform Franchise Offering Circular, end all discussions immediately. Avoid hastily closed deals and high-pressure tactics.

A franchise can cost from several thousand to hundreds of millions of dollars, including the expense of buying or leasing the site. Along with the right to use a brand name, you get a network of services, such as training, marketing, advertising, and volume discounts. The Women's Health Boutique company charges $99,300 to $176,500, depending on the location. That includes a one-time franchise fee of $25,000 to $35,000.

Financing can come from a variety of sources, including banks, the Small Business Administration, and the franchisor. While industry experience is not mandatory, financial institutions prefer to lend money to people with a proven track record. In addition to the purchase cost, the franchisee pays weekly or monthly royalties, which range from 3% to 10% of gross sales, as well as advertising and marketing fees of 0.5% to 2%. There may also be charges for contract renewals, grand openings, and site selection. The average contract runs 10 years.

BEER AND MUFFLERS. Buying a brand name does not guarantee automatic success. A study released in December, 1993, by the Entrepreneurial Growth & Investment Institute in Washington revealed that 35% of franchised businesses less than four years old failed, compared to 28% of independent operations. Travel agencies and yogurt shops are currently having a hard time achieving success, says Purvin. High-profit businesses include breweries, bottling distributors, and muffler and transmission centers.

Of course, franchising is not for everyone. "You lose some autonomy. The name on the store is not yours," says Kenneth Franklin, president of Franchise Developments Inc., a consulting firm. Indeed, since franchising requires adherence to certain standards, it's a way of doing business best suited to team players. And though companies today are more open to input from franchisees, the main source of new ideas is the franchisor. Still, for people making the transition from the corporate world to entrepreneurship, it offers an attractive middle ground.

Before it's here, it's on the Bloomberg Terminal.