Franchises have rewards but also pitfalls

August 05, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Working extended hours under a binding long-term agreement. Paying to follow someone else's game plan. Shelling out fees on your success. Worrying about territorial encroachment.

Becoming owner of one of the 2,500 franchise businesses is often considered a romantic flight from the corporate world. Yet the adventure is also a tough business arrangement requiring a legal commitment of 10 or more years.

Average initial investment is $148,000, and you'd better be ready emotionally and organizationally. Do your homework on a prospective franchise, first by talking to owners about rewards and pitfalls. Weary franchisees are increasingly standing up for their rights against the chains.

"They say 85 percent of franchisees succeed, compared to 30 percent of independent businesses, but that doesn't point out the many just managing to stay in business, barely making a living," warned Mary Tomzak, author of the book "Tips and Traps When Buying a Franchise" (McGraw-Hill, New York: 1994, $14.95) and owner of two franchises herself.

A few years ago, I interviewed the young owner of a fried chicken franchise. He explained he often spent 20 hours a day at the store, ate most meals there and sometimes slept overnight on a cot in the back room. I asked what his goals were.

"Well, sometime I'd like to get married and share all this," he said.

TC I pondered the prospects of two cots in that back room.

"When buying a franchise, you're actually buying a job in a business in which you'll be working day in and day out," said Alison Reindl, vice president of client services for franchise consulting firm Francorp Inc. "If you don't like to exercise, flip burgers or do cleaning, stay out of those franchises."

Ambition, hard work and long hours have always been requirements. These days, however, familiar franchises such as fast-food restaurants are too expensive, triggering a trend toward businesses run from the home. Many new entrepreneurs come from "downsizing" corporations that gave them money to leave voluntarily or involuntarily.

Sample initial costs of less-expensive franchises include:

* Kinder-Dance International, Melbourne, Fla., whose 44-franchise company brings to schools a dance and motor development program for children ages 2 through 8. It typically requires a franchise fee of $8,000 and another $1,500 in start-up costs.

* Gymboree Corp., Burlingame, Calif., whose 365-franchise developmental play program for children through age 5 requires a cash investment of at least $14,000 per site, $10,500 for equipment and additional start-up expenses of about $8,000.

* Money Mailer Inc., Garden Grove, Calif., a 500-franchise direct mail advertising business that requires start-up investment of $15,000.

* Merry Maids, Omaha, Neb., a 700-franchise residential house cleaning service that requires a cash investment of $11,500, plus $7,500 to cover operational start-up including purchase of a computer.

Most franchises require an initial franchise or license fee, training cost, on-site start-up aid and promotional charges, periodic royalties or services fees and an advertising contribution. Location and exclusive territory are important considerations. The Federal Trade Commission requires a disclosure document, referred to as the Uniform Franchise Offering Circular, that answers pertinent questions about the business arrangement. It should be studied by you and your advisers.

Fourteen states have laws increasing government overview of franchises, but franchisees are lobbying for more federal regulation of concerns such as geographic rights to an area, transfers, sales and treatment of owners from minority groups.

"Lack of enforcement at the federal level is finally being addressed (through upcoming congressional hearings) because a lot of people have gotten hurt," explained Susan Kezios, president of the American Franchisee Association, which represents 6,407 franchisees.

The industry is stressing self-regulation. "It polices as best it can and has a code of ethics, with third-party mediation to handle disputes," said Andy Trincia, an executive with the Washington, D.C.-based International Franchise Association, which represents 800 franchisers.

The IFA's "Franchise Opportunities Guide" costs $15, plus $6 shipping, from IFA Publications, P.O. Box 1060, Evans City, Pa. 16033. For a complimentary copy of the Chicago-based American Franchisee Association's newsletter and list of services, phone 800-334-4232. For training programs for potential franchisees, contact Francorp of Olympia Fields, Ill., at 800-372-6267.

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