Alternative to investing in stocks - Franchising
By Eric Gemelli
Boomer readers routinely were raised by dads who made pithy comments like, “You never have to break a habit you don’t start” and “It’s who you know, not what you know.” The first quote applying to vices and the second quote to business.
In business, that’s the definition of franchising.
In a 2005, study commissioned by the International Franchise Association, American franchises operated more than 909,000 establishments, provided 11 million jobs — more than 8% of private sector employment. Including other factors, such as revenue produced from capital expenditures, franchising created $2.3 trillion of economic activity.
Franchising let’s you buy into a proven business model. You get access to business systems created by brilliant, industrious minds that have collaborated together in order to perfect a revenue producing organization. You get access to the people you need to know.
Ray Kroc of McDonald’s hamburger fame said it well: “None of us are as good as all of us.” You may be a brilliant manager, but are you also a good lawyer, marketer, web developer, financier, salesperson and purchasing agent? Franchising lets you build off others’ success…for a price.
With the capital markets down more than 10% off the year’s high and financial pundits calling for new lows, some investors aren’t content to merely put their assets in cash. They want the prospect of growth and are willing to invest in themselves.
Unemployed workers may be over qualified or even under qualified for the positions they seek. Franchising allows those with capital to invest in a business system and training with a proven track record. Industry veteran Rick Robinson says after 5 years, 80% of new franchises are still in business vs. 80% of entrepreneurs who strike out on their own and fail.
“Lots of people are good workers, but not good marketers or sales people. So buying into a system that takes care of that makes sense,” says Robinson. People get into trouble because they’re not good at finance. Franchisors show them what equipment to buy and that keeps errant capital expenditures down. Franchisors offer savings through economies of scale.
With banks even turning down people with government guaranteed SBA loans, a source of available capital is your 401k, IRA or annuity. BeneTrends (http://www.benetrends.com/home/index.php) claims to helps franchisees use their qualified savings to start a business while preserving the tax deferred status of those funds.
Robinson was a Master Franchise with Jani-King International in Arizona and New Mexico which included 230 active franchises, serving more than 1,000 customers each month. He is currently the Vice President of Franchise Development for Colors on Parade, a mobile auto body scratch and dent repair service company. Robinson says service businesses tend to have higher profit margins because of lower overhead and startup costs. Consequently royalties paid back to the master franchisor are higher – as much as 30% in extreme cases.
Retail franchises have higher overhead due to equipment purchases, property costs and space build out. They have a lower royalty fee; often only 3-5% of revenues.
“In 1980’s there were abuses,” admits Robinson. Franchisors got arrogant and took advantage of an uneducated public. Some of the transgressions were “downright illegal,” in Robinson’s words. Franchises are now regulated by the Federal Trade Commission and 14 states have their own franchise departments (Illinois and California among them).
The franchising industry has done a better job of self-policing recently, according to Robinson. Through the International Franchise Association, the industry promotes transparency and arbitration when a dispute occurs.
Buying a franchise is not a good option for everyone. “Franchising is about team play” says Robinson, adding, “Owners who are too independent won’t work.” Some companies even use personality tests to determine if the fit is a good one. Franchises are successful because they follow a proven formula, and while innovation is encouraged, it has to be within guidelines. One of those guidelines is most franchisors require a portion of franchisee profits be used for advertising: local coupons and direct mail as well as contributing to a national advertising budget.
“You’ve got to keep finding new customers because of attrition and changing trends,” said Robinson. For example, the mobile car body repair business reported reduced revenues in 2008, along with the failing economy. “They had to reinvent their business in order to keep thriving”, he said. Evolving new products and services is part of the franchisor’s responsibility.
Author Eric Gemelli founded Cornerstone Financial Services LLC in 1997 and as the managing member has worked in mortgages, life and health insurance, raised venture capital, and trading commodities averaging 30% a month doing so. He offers market forecasting services, and is “sure enough of [his] ability that 80% of [his] fee is based on performance.”
