YOUR FORMULA FOR FRANCHISING by Stephen Spinelli, Jr.
The Center for Entrepreneurial Studies Babson College
Imagine you could open a business tomorrow with an instantly established brand name as your calling card. Someone else has already come up with a winning concept, worked out a viable system, and built a successful trademark. The risks of investment in launching the venture would be radically lower than usual and the rate of return proportionate.
Sound farfetched?
Not at all. These kinds of promising advantages are available to New England entrepreneurs through franchising. Franchising offers built-in characteristics, chiefly by enabling you to share in the success and sense of security of a known entity that prides itself on widespread uniformity of product and service. You'll work virtually shoulder to shoulder, at least in theory, with fellow franchisees working to solve many of the same problems you will face every day, and thereby improve the overall system.
More than 42,000 franchised units will start up nationwide this year, joining the 570,000 already out there, according to Inc. magazine. But fresh opportunities to be an innovative, profitable franchisee still abound. Just think about a place called MacDonald's, now a worldwide phenomenon.
Of course, you'll need to be extremely cautious. If you think a franchise is guaranteed big bucks without any heavy lifting, you'd better think again. You'll work long and hard, maybe more so than with a freestanding enterprise. You'll run into regulations aplenty and potential conflicts with your franchiser. Accordingly, you should research intensively the particular franchises that interest you. Accept nothing you're told at face value. Here, then, is a thumbnail guide to breaking into the business.
*CHECK FOR FTC DISCLOSURE: Any company selling franchises in the United States is required to file what is called a "uniform franchise offering circular," or UFOC, with the Federal Trade Commission. Ask franchisers to give you this document, which has much of the information you need to decide on purchasing a franchise. Franchisers must give you, as a prospective franchisee, a copy of the UFOC at your first meeting or ten days before accepting any money.
*WEIGH YOUR RISKS: Find out how many outlets are operating, how long they have been open, and where they are located. The more stores a franchise has opened, the longer they've been operating, and the wider the geographic distribution, the more your risk is reduced.
*DOUBLECHECK THE CONCEPT: Make sure, as a baseline criterion, that the franchise has operated at least two stores for at least a year. Ideally, a franchise will have successfully weathered a full cycle of recession and expansion. In New England, this yardstick would mean five or six years of operating multiple outlets both inside and outside of the region. On the flip side, the younger and smaller the franchiser, the higher the return you should expect to be yielded to you.
*REVIEW THE SYSTEM: You should take a good long look at the service and product delivery system. Every franchise of merit bundles all the details of its business tasks to create a sustainable competitive advantage. See if the franchiser has an operations manual. Talk to both the franchiser and current franchisees about this document -- whether it's comprehensive enough to adequately convey to franchisees the knowledge necessary to survive and flourish. The franchiser should have a process including ways for franchisees to explore how to become more efficient and adapt to the dynamics of the marketplace. Explore, too, the training system available before -- and after -- you open an outlet.
*PICK THE RIGHT SIZE: With most franchises retail in nature, you'll want a location customized for the buying habits of your target customer. Sometimes franchisers have a handle on which locations have the highest probability of translating into success at the point of sale. Invariably they possess information and personnel useful for site selection -- as well as with the construction phase, including blueprints and in-progress reviews. But most often you will have to identify where to situate your unit, which the franchiser then must approve.
*SIZE UP THE SUPPLIES: Look at the arrangement for purchasing supplies. First question: are you required to purchase supplies from the franchiser? Contrary to popular belief, few franchisers so stipulate -- and, in the event they do, must demonstrate that such a purchase is essential to maintaining the effectiveness of the trademark. Typically, a franchiser sets forth a list of specifications and approved suppliers.
*NEGOTIATE VOLUME DISCOUNTS: Has the franchiser bargained with national or regional suppliers for the kind of prices available only to companies with significant purchasing clout? Most of the benefits of these economies of scale should accrue to the franchisee operator. When bringing a U.S.-based franchise to an international marketplace, make sure economies of scale are available in that country.
*SECURE MARKETING BACKUP: Every franchiser should have an ongoing market research program, marketing and advertising materials, a development program, and cooperative media buying arrangements. Determine whether this backup is sufficient for your purposes.
In the end, nothing will better determine your success -- or failure -- than your relationship with your franchiser. This highly complex partnership calls for an exquisite balance of autonomy from the parent company and an almost childlike dependence. On the one hand, you will go more or less by the book, with its procedures and bylaws. On the other, you will have to be more creative than ever before. A recent study showed that only two-thirds of roughly 1200 franchised units surveyed in 1987 survived under the same owner four years later. If you're confident that you can parlay a trademark into personal profits -- by developing new techniques in sales and marketing, grasping new technology, and coming up with new service concepts and products -- then franchising just may be for you.
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Stephen Spinelli, Jr., an assistant professor of entrepreneurship at Babson College, Wellesley, Mass., was a founding shareholder of Jiffy Lube International. He began as a franchiser, then developed 47 stores in eight years as a franchisee. He holds a Ph.D. in economics from the University of London, writing his dissertation on the franchisee-franchiser relationship.
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