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Franchises' Road to Entrepreneurship Can Be Bumpy

Businesses: Running a doughnut or fast-food outlet isn't easy, but it has its charms and rewards.

September 09, 1996|From Bloomberg News Service

NEW YORK — While the idea of running a Dunkin' Donuts may not conjure up entrepreneurship's most glamorous images, a franchise can offer a game plan for being your own boss.

It's true that owning a franchise isn't always a picnic. The hours are long, the work hard and relationships with employees can be tricky.

Still, franchises have their charms. "A franchise is a positive because you have the back-up and experience of people who have created a chain and can support you," said Mirek Musial, who owns five Dunkin' Donuts stores in New Jersey. "The name of a major brand helps a lot. People recognize it."

Musial's doughnut shops contribute to the more than $800 billion in sales that the country's 663,000 franchises rack up in each year, accounting for more than 40% of total U.S. retail sales, according to the U.S. Commerce Department.

The first question to ask: Do you have the time and money to build up a business? "You have to forget about vacation and rest for one or two years," said Musial, who started out on his own with a gas station and convenience store and bought his first Dunkin' Donuts with credit-card loans.

Dunkin' Donuts charges a $40,000 franchise fee and requires franchisees to have $200,000 in liquid assets and a total net worth of $400,000.

McDonald's Corp., which has more than 11,500 franchises around the world, charges an initial fee of $75,000 that can't be from a loan. A full McDonald's franchise can cost from $420,000 to $620,000, but sales average $1.8 million a year at each restaurant, the company said.

Next, make sure your chosen industry is growing and that the local market needs the service or product you're going to offer. "A good franchise provides a competitive edge in an established and hopefully growing industry," said Cliff Sirlin, co-founder of Cleaner Options in Greenwich, Conn., a four-unit franchise of home pick-up dry-cleaning services. "No set of systems or services can compensate for a fading market."

Next, look at the company selling the franchise. Is there a corporate structure, or will you be buying a franchise from a small operator that's looking to cash out as soon as possible? Visit the headquarters and meet the management.

In the quarterly magazine "The Franchise Handbook," Joseph Chvasta Jr. recommends asking both current and former franchisees what they think of the company. By law, the franchisor only has to give names from the state in which it's registered.

Ask former owners why they got out. Visit the franchises to see how operations run and poll both workers and customers about what could improve the business.

If you're still interested, review the franchise's financial and legal history. The franchisor is required by law to provide the past three years of income statements and balance sheets, Chvasta said, which should be reviewed by an accountant. The franchisor also must disclose its litigation history, which should be available through the Federal Trade Commission in Washington.

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A franchise agreement is the next step. It should be negotiated "hand in hand," Chvasta said, with a disclosure document called the Uniform Franchise Offering Circular, which includes details about the franchise, its financial statements, history, past and present franchisees, fees and obligations.

The agreement should spell out what a franchisor's relationship with a franchisee should be. In one model, you and the company are in business together; in another, the company merely collects royalties. Beware hidden costs and revenue drags. Also mind big initial franchise fees: They may signal that the company may lose interest in your success once it has your money.

The fee lets franchisees keep the rights to the company's trademark and holds the company responsible for defending it in court. The fee also covers a marketing plan, which the franchisee can often accept with or reject. As a part of the plan, the franchisee should get an exclusive territory that's large enough to be successful.

Location is the most important force determining a franchise's success, J. Michael Dady and Ann K. Grossman wrote in "The Franchise Handbook." They recommend franchisees ask: What assistance will companies provide in picking a location? How qualified will people be in location study and selection? What is their track records? What criteria are important for site choice?

If the company refuses to assist with location selection, do your own study or commission one from a consultant.

Most companies provide initial management training, Chvasta said. McDonald's part-time training typically runs 18 months to two years, including a stint at its Hamburger University at company headquarters in Oak Brook, Ill. Dunkin' Donuts has its own five-week "university."

The better company's also follow up with periodic visits, help with volume inventory purchases and update the operating manual. Sirlin, who sells Cleaner Options franchises, knows these precautions can help avoid painful mistakes down the road.

"Don't look to get rich quick," Sirlin said. "View the franchise as a baby. The more care it receives, the healthier it will be."

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