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Is Your Future in Franchising? Assess the Opportunity and Risk

June 03, 1998|S.J. KELLY

Franchising is one of the hottest retail trends in small business today. Consider these statistics:

* Franchised businesses take in $1 of every $3 spent by Americans for goods and services.

* One of every 12 businesses in the United States is a franchise operation.

* Franchising accounts for about 40% of all U.S. retail sales.

That's according to the latest statistics from the International Franchise Assn., a 32,000-member trade organization of franchisers, franchisees and suppliers.

Don J. DeBolt, president of the IFA, explains the basics about franchising, how to get started, why it's so popular and how to determine if it's a small-business opportunity for you. He was interviewed by freelance writer S.J. Kelly.

Question: What exactly is franchising?

Answer: It's a business strategy or method of distribution that solves the two major problems for business expansion--people and money. The first franchiser was the Catholic Church. The way the Pope awarded various territories: Money was collected and forwarded to Rome, and part of it remained back in the particular area that the church operated. Today there are about 2,000 different kinds of franchises in 70 different industries.

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Q: Why is franchising so popular?

A: We have a very entrepreneurial culture. Many people want to be their own boss. Franchising truly gives them an opportunity to be in business for themselves and not by themselves. People are willing to invest in a franchise because they acquire a known and recognized trademark. They acquire an operating system that has already reached a level of perfection and they also receive ongoing training and support plus marketing and advertising support.

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Q: What is the biggest industry for franchising?

A: The hottest franchise industry and the fastest-growing today is food service. Upscale dining is an area that's getting a lot of attraction. And you have emerging franchise concepts now that are serving needs in the home health-care area.

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Q: How can a person looking at various small-business opportunities know if franchising is right for them?

A: We like to say there is a franchise for everybody, but in truth, not everybody is appropriate to be in a franchise.

In a broad sense, attributes of a franchisee must include a strong commitment and desire to succeed, with an appropriate work ethic to back it up. They must have adequate capital and financing to make the needed investment.

Some people come into franchising with unrealistic expectations and think they can open the front door and there will be a pot of gold at the back door. But in between, there is a lot of blood, sweat and tears.

We use the caveat: Investigate before you invest. There are many types of franchises and varying commitments of financial resources with varying levels of risk.

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Q: What kind of financial commitment does a franchise require?

A: Financing commitments will vary from franchise concept to franchise concept. Take a service-area franchise--a maid or cleaning service. It initially could be started out of the home with little need for a huge investment or overhead. At the other end of the spectrum is an investment in the hotel field that takes $1 million or more. So there is something for every pocketbook.

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Q: With so many big players like McDonald's and Einstein/Noah Bagel Corp., can the owner of a small franchise compete?

A: Most people think of franchising as a big-business activity. But 80% of all franchises have less than 100 units. A typical franchise unit might be a Midas Muffler shop or gift store with $300,000 to $600,000 in annual revenue.

The small franchise unit is in a niche market and it can compete if it's in the right location at the right time. These people may not become rich, but the small-franchise owners are probably going to take home more money than if he or she was in an average job--say for the telephone company.

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Q: Is it difficult for the average person to get financing to open a franchise?

A: Financing for the average person can be a challenge in acquiring any business, including a franchise. If you talk to bankers who are involved in making franchise loans, you'll typically find that most find prospective franchisees [are] a preferred risk. They have dealt with people in the particular franchise system. They find it a preferred risk over making a business loan to an independent businessperson.

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Q: What are the sources of financing out there?

A: Personal savings are your first source; family and friends is the second source; the third source is banks. You've got to be turned down by the banks before you can qualify for Small Business Administration loans. Some franchisers even offer financing.

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Q: There has been a lot negative written about franchises--from corporate restrictions on franchisees to unfair expenses and higher failure rates compared with other small businesses. What's your response?

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