Benefits to franchising outweigh most pitfalls

Friday, August 16, 2019, Vol. 43, No. 33
By Joe Morris

The dream of owning a business is a common one.

Being your own boss, controlling when you work, mentoring young employees in the ways of business … there are a lot of lofty goals lumped under the heading of “entrepreneur.”

There are also a lot of pitfalls. It’s not easy to start a business, especially in crowded sectors like food and retail.

According to the U.S. Small Business Administration, 30% of new businesses fail within the first two years of being open. That ramps up to 50% during their first five years, and then up to 66% during the first decade of operation. All told, the SBA says that only 25% of small businesses make it to 15 years or more.

The reasons for small business failures aren’t overly complicated. Jumping in too fast without investigating the market, a poor (or no) business plan, not enough financing, a poor web presence and or a lack of marketing, and attempting too much growth too quickly all can take down a novice business before it ever really gets started.

Enter franchising. For boosters, owning a franchise allows that new business owner to avoid many roadblocks. Franchising is fast-track entrepreneurialism and can allow for easier entry into first-time business ownership.

Simply defined, a franchise allows the venture’s owner to begin a business by legally using someone else’s concept, research, expertise and operational processes. It’s a concept and business model that dates back centuries, but in modern times most point to the late 1920s, when Howard Deering Johnson began franchising his restaurant concept, and then to the midcentury mark, when now-global brands such as McDonald’s took off.

“You can’t do much in American life without touching a franchise system,” says Thomas Scott, chief executive officer of Brand Journalists, a Nashville-based, franchise lead-generation firm he launched more than a decade ago.

Scott has worked with more than 140 brands, is a franchise owner himself, and is a frequent presenter and speaker at franchise-oriented events and conferences.

“Think of McDonald’s or Hilton, but it’s much bigger than French fries and hospitality. There are hundreds, if not thousands, of different franchise brands in North America alone, and there are new ones starting every day. It’s almost tripled in the last 10 to 15 years, and that kind of growth is still occurring.”

Scott says that from the franchisor side, it’s another method for business expansion, and one that’s been proven to work.

“It’s a really simple way for a business to grow,” he adds. “You can grow by corporate investment, through an equity investor, through raising funds and selling stock, or through franchising. It’s a legitimate, proven business model.

“You attract owners who are investing in your business and are using our standards and guides. It’s a way to grow much faster and achieve a higher performance level for your brand, and those franchise owners have skin in the game – as an owner, they are going to work harder to make that business perform at a higher level.”

It’s important to note that franchisors can suffer from the same fate as independent small business owners if they leap before they look. Careful planning is required for a successful launch, and the devil is often in the details, says Alan Thompson, chief executive officer of Franchise Opportunity Consultants, a Nashville-based company that helps young businesses grow their brand through franchising.

“If they have a viable business model, with some legs for growth, we can look at getting them into franchising,” Thompson says. “We’re going to ask for a few things in particular: first and foremost, unit economics. Is there volume enough at the unit level to support long-term viability? And is it profitable — are they making money?

“And finally, we need to see if they have the infrastructure and capital to build the brand. It takes a considerable amount of money to grow a franchise brand, and most young businesses don’t have that.”

Franchise Opportunity Consultants was engaged in the launch of the Gigi’s Cupcakes franchise, and Thompson says that brand found success because sales were strong and profit was significant.

The firm also has been engaged in the spinout of Just Love Coffee’s franchise operations, and in that case it was as much the brand’s story as anything.

“We were able to raise equity for Gigi’s, but the driver there really was unit economics,” he explains. “For Just Love, people are so taken with the brand’s story and Rob’s [Webb] passion, and that philanthropic angle is both unusual and compelling.’’

Webb’s coffee roasting enterprise also helps people who are looking to adopt meet the financial and other challenges they face.

“In both cases, the founders had a very strong business acumen, and were able to leverage other assets in order to become franchisors.”

The cost to launch a business into franchise operations can range from $300,000 to more than $1 million, Thompson says, so it’s not a decision to be taken lightly. There’s also a lot of work involved before those first agreements are signed.

“And what we bring to the table is the ability to see them [franchise owners] through all the legal documentation, securing real estate, construction management, trademarking logos and so many other pieces,” he says. “We have someone in construction management who works with our brands, and he has expertise that a brand might not be able to afford if it was expanding into franchising all on its own.

“It’s the same concept for the new franchisor as it is for the eventual franchisee – work with an experienced partner who can help you get to market properly and more easily. We help them build that operational framework so they are ready when their sales people bring in potential franchise owners.”

New brand or old, franchise growth is likely to continue, and Nashville will most likely see a lot of that activity.

Scott says he is working with at least one well-known local barbecue restaurant that has an eye on expansion, for instance. And another healthy sign of the overall franchising sector’s continued evolution is the entry of younger buyers.

In the past most franchise owners skewed older, people who were looking toward owning their own business in retirement or leaving longtime positions and branching out on their own, now it’s Millennials and the generation coming up behind them who are intrigued by the opportunity, Scott points out.

“I see a lot more younger buyers, probably because franchising is the social network of the business world,” he says. “When you are out on your own, it’s really lonely. There’s nobody to talk to, nobody to commiserate with on days that are far from awesome. In a franchise system you have other owners who are there to talk about tips and tricks, to support you.

“That’s a huge thing. And for people in a hurry, it’s a less risky and faster path than starting with your own concept.”

Also, he says, franchising is a very tightly controlled environment. At the federal level there’s the Franchise Disclosure Document, or FDD, a lengthy snapshot of the business’ history, earning potential, startup costs, litigation issues and more that’s required by the Federal Trade Commission.

States have their own requirements, usually involving when the potential franchise owner must be given the FDD, as well as filing that document as part of its public record in that state.

“In the early days franchising was like the Wild West, and it’s not that way anymore,” Scott says. “The consumer protections are there. And franchise companies are oriented to have good business practices, because they want to get good people to sell their products and concept.

“The last thing they, or their reputations, need is someone who’s going to close in six months. They are making money if that franchise owner is making money.”