clock menu more-arrow no yes

Filed under:


The sale of goods and services through franchise operations is booming a 91 percent increase in sales from the beginning of the decade and sales are expected to reach $640 billion this year.

A proven trade name, along with the training, advertising and marketing support that parent companies, or franchisors, offer their franchisees, can make franchising an attractive alternative to braving the risks of going into business on one's own."Have you ever seen a McDonald's with cobwebs and broken windows? Of course not . . . It is the system itself that provides protection to eliminate a lot of failures," says Andrew Kostecka, franchising expert for the U.S. Department of Commerce.

Although business analysts say a franchise can greatly reduce the hazards of entering business, it is not a guarantee of success.

According to Kostecka, 7,934 franchisee-owned establishments were discontinued in 1986 for a discontinuance rate of 3.2 percent. "That is very low," Kostecka said.

Franchise discontinuances may come about for a variety of reasons, not just outright business failure. For example, Holiday Inn has recently taken action to terminate its franchise with the Holiday Inn Plaza and Holiday Inn East in Wichita, Kan., in a dispute over renovations.

The hotels have been dropped from the company's national reservation system since December. National officials said the Wichita operations were told to remove their signs; however, they have not been removed and telephones are still answered using the Holiday Inn name.

Petter Johanson, manager at the Holiday Inn Plaza, said, "We are a Holiday Inn, we still have our name up and we have not been asked to take our name down."

Rent-A-Center, a national chain of furniture, appliance and electronics rental stores, has never had one of its franchised stores go under. "We have some that are struggling now. We are dedicating a good amount of time to them," said Dick Klein, vice president of franchising.

"If anybody is in trouble . . . if we see any signs of a down market, we will go in there with people from marketing, real estate operations and the franchise department. And we will look at anything, from is the person in the correct location, to what competitive intrusion has come into the market, to the economy in the area, to the advertising they are using. And then we will put a plan together to turn it around . . . That is part of the package," Klein said. "We are doing it to protect our name. We don't want a business to go under."

Franchisees and franchising experts say adequate financing is one of the essential ingredients for success.

"You need to find a person with the resources and the background," to run a franchise, said Klein. Rent-A-Center wants its prospective franchisees to have a credit line of at least $400,000 to open their first store.

In addition, Rent-A-Center prefers its franchisees to have "multi-unit experience, only because in our particular situation, we don't have very many territories that are one- and two-store operations. They are usually six stores and on up," he said.

Finding a franchisor with a track record is another key to success, franchisees say.

"If a great deal of the franchise owners have opened more than one store, and if you talk to them and they are continuing to open stores, that is a good sign," said Paul Hoover, who, with his father, V. Richard Hoover, has the T.J. Cinnamons franchise in Wichita.

Hoover, who now operates three T.J. Cinnamons stores in Wichita and is getting ready to open a fourth store in Topeka this summer, said, "a lot of people get into a franchise, open one store and are not happy with the results. And so they have a great many franchisees with only one store."

Hoover advises talking to any existing franchisees. "If you are going to be the first person in a new franchise, you better be able to lose the money" Hoover said.

Even when a company has a proven track record, problems can arise.

In 1984 and 1985, some Computerland franchisees were upset with the parent company about royalty fees.

Marc Campbell, who owns two Computerland stores in Wichita and is a part-owner in stores in other Kansas towns, said that as the market became increasingly competitive and profit margins dropped, Computerland was nevertheless reluctant to lower the royalties it expected its franchisees to pay.

Campbell, who was not involved in the dispute, said about 50 franchisees threatened to leave the organization. "Even then I wasn't all that concerned ... while that would be a blow, they were large enough to handle that," Campbell said.

As it is, the company lowered royalties. Franchisees are now paying 5 percent on sales and a half a percentage point for advertising, Campbell said.

Good communication between the franchisor and franchisee is also important.

Joy Gamble, who with her husband, William, owns a Merry Maid franchise, said that at first she did not call upon the franchisor enough to get answers to her questions.

"You feel like you'd just be bothering them with dinky things that really don't matter. But it's not true. Everything is important to you," she said. Gamble added that it is important a franchisee feel he or she can ask any question of the franchisor, and get a response.

Gamble, who routinely put in 12-hour days when she was new to the franchise business, said she knows of two Merry Maids franchises that have failed, but the main problem was absentee ownership.

"The only person that is really interested in succeeding is the owner," said Gamble. "And they want to succeed so that their money will come back to them."

John Kinch is a direct-mail and greeting cards franchisor based in Delaware and author of a book, "Franchising: The Inside Story." He likens franchising to a marriage. "You've got to have both sides working together for the common good. If it is one-sided, then it is not going to work," he said.

But some franchises will fail simply because they "think that sales will come to them, the business will come to them now that they have the franchise name out there. For whatever reason, they don't get up early in the morning," Kinch said.

For those who do get up early in the morning but wonder if franchising is for them, Campbell, the Computerland franchisee, said "if you think the franchisor can provide you with help that more than offsets the amount of money you have to pay the franchisor, then it is beneficial to become a franchisee."

T.J. Cinnamons' Hoover recommends that potential franchisees "look for something with mass appeal, something with a not-too-limited customer base" and suggests that franchisees "make sure that the numbers can work on the customer base that you are targeting yourself on."

According to the Commerce Department's Kostecka, among the fast-growing areas in franchising whose sales now account for 34 percent of all retail sales in the United States are service businesses and the expansion of U.S. franchisors to foreign markets.

"The world is getting smaller. The computer is bringing everybody together. There's a lot of tourism and travel," Kostecka said. "People are traveling to the United States and seeing the franchises and bringing the ideas back to their home countries."