Popular Option for Starting a New Business: Franchising

One of the more popular ways for starting a new business is to buy and operate a franchise. While most people are familiar with the big competitors in this market such as McDonald’s, franchises are available in a wide range of businesses.

In addition to restaurants, automobile dealerships and other more visible retailers, franchising opportunities exist in many service industries, including home repair, business services, and real estate. The Quick Serve Restaurants category is the largest in the franchise industry, while aging Baby Boomers have created one of the newer and faster growing categories — healthcare. Urgent care centers, testing centers, dental offices and chiropractors are just a few health-related franchises that have recently become popular.

Franchises are growing at about the same rate as the U.S. economy. The International Franchise Association Educational Foundation anticipates the number of franchise establishments in the U.S. to increase by 1.7% in 2014, just ahead of the 2013 pace. It also expects employment in franchised establishments to increase 2.3% in 2014, about the same as last year. Overall franchise sales account for about 3.5% of the U.S. economy.

How It Works

In concept, a local entrepreneur (franchisee) buys the rights to sell the franchisor’s (i.e., parent company’s) product or service in a designated location or territory. In exchange for representing the parent company, the franchisor pays an initial franchise fee and continues to pay a percentage of sales and a royalty to the franchisor for as long as the business operates.

Lori Yeager owns the Sports Clips franchise in Rocky River, “My husband and I were hoping to find something that would not only provide jobs and a service to the community, but also allow me the opportunity to run the business mostly from home so I can still be there for my kids. When we came across the franchise, Sport Clips Haircuts, we just knew it was going to work for us.”

Brand recognition is a big plus for franchisees. The entrepreneur starting from scratch has to build that reputation, but part of what the franchisee buys is the brand loyalty that has already been established by the parent firm. Franchises also provide initial training and on-going management advice. Although the level of training and support can vary greatly, the franchisors have a vested interest in seeing their franchisees succeed.

“One of the advantages of owning a franchise is the help that is given to you on a corporate level concerning marketing collateral, branding, point of sale system, networking, webinars, etc. The years of experience that they have building their model and brand give an owner a certain comfort level as well,” according to John Lescher. He and his partner Sean Getty own the Jersey Mike’s Subs franchise in Rocky River.

Before going into the sandwich business, Lescher and Getty both worked in the corporate world. “Sean and I talked through various options, not only franchise systems but also starting something from scratch. We decided that franchising was our best opportunity at this time. There are still risks associated with franchising, but we felt it would be less risky than building something from the ground up,” Lescher said.

Success rates for franchises vary greatly between the different companies selling them. Generally, the better the franchise’s track record of succeeding, the higher the front start-up franchise fee will be.

The Control Issue

Unlike independent business owners, franchisees are limited in their decision-making by the franchise contract. The franchisor makes decisions about product lines, services and many other operating issues.

“Although you own your business, there is still a degree of answering to the franchise. While it doesn’t necessarily feel like you are working for the franchise, everybody answers to somebody. Our creativity is also somewhat stifled as we need to get approval for many things related to advertising, promotion or even new food ideas,” Getty stated.

Yeager agreed, “If corporate wants to change something, I have to comply even if it is at my own cost. I don’t like the significant fees or trying to balance what I am trying to accomplish with what corporate is restricting me from doing.”

In the end, franchisees are trading off some of the risk of starting a new business. Entrepreneurs have to decide whether they want to take on the risk of ownership all by themselves or to buy into a franchise that helps reduce some of that risk.

For more information, Dr. Haan can be contacted at 419-618-2867 or haanpc@tiffin.edu.

Perry Haan

Dr. Perry Haan is Professor of Marketing and Entrepreneurship, and former Dean of the Business School at Tiffin University. He resides in Rocky River.

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Volume 1, Issue 10, Posted 5:37 PM, 04.02.2014