Franchise businesses have long attracted the wounded and disenchanted from the corporate wars, but seldom have economic conditions produced such a crop of willing, would-be entrepreneurs.
A recent survey of franchise companies-the firms that sell what amount to startup kits for owner-operated businesses-found that more than half of all franchisers surveyed reported an increase in inquiries from laid-off workers. The newly laid off, along with an increasing number of disenchanted
”corporate dropouts,” turn to franchising as a way to start anew in the business world, but this time from the top of their own small empire.
Many discover, however, that the world of franchising is loaded with treacherous twists and turns.
Franchise fees are steep and carry no guarantees that the neophyte small- business operator will even recover his or her initial investment, much less turn a profit. Some hopefuls forget that the same recession that may have caused their exit from corporate life is still there, ready to swallow up undercapitalized startup ventures.
But still they come, severance checks in hand.
”When people are laid off, or are afraid they`re going to be, they start thinking seriously about making themselves immune to layoffs by owning their own business,” said Patrick Boroian, president of Francorp Inc., an Olympia Fields-based consulting firm that specializes in franchising and which conducted the recent survey.
About a third of the firms surveyed found their sales of franchise businesses increased in the first six months of 1990 compared with 1989, despite the recession and the problems many franchise hopefuls had obtaining financing to launch the ventures.
One franchise company, Tucson-based AlphaGraphics Printshop, advertises directly to the casualties of corporate restructurings. Its frequently run ad in the Wall Street Journal suggests: ”Golden Parachutes Land Here.”
Typical of many new franchise owners are James Griffin and Dolores Garrett, who co-own a bathtub- and tile-refurbishing service, Worldwide Refinishing Systems.
Garrett was drawn to her new business not because she was laid off, but because she wearied of her job at corporate giant AT&T: describing severance packages to laid-off AT&T employees all over the Midwest.
”I encountered the bitterness that plant-closing can bring,” she said of her former job. ”I began to become stressed out, burned out.”
Griffin, 50, earlier had accepted a buyout package from Sears, Roebuck and Co. in one of that company`s downsizing moves.
He settled on the bathtub-refinishing business-something he, like his partner, had never given a thought to previously-because a friend was running a similar business profitably.
”A lot of it has to do with freedom to act, and to be free to do the things you want to do,” he said of his venture out of the corporate world.
Across the U.S., there are more than 540,000 franchises, with a new one appearing about once every 16 minutes, according to the International Franchise Association.
Franchises will bring in about $760 billion in sales this year, about 6 percent more than 1990`s estimated $716 billion in sales.
For many people trapped in an outside lane in the corporate rat race, the prospect of owning a business is tantalizing, even though the risks are high. The franchise route involves much higher startup costs than many independent businesses, but carries a greater sense of security. That`s an important ingredient for many big-business dropouts accustomed to the enveloping comfort of a corporate structure.
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”Once you`ve worked for 39 years for a big corporation, I don`t think your mindset is really entrepreneurial anymore,” said Roger Hull, 60, who plans to join the franchising world when he opens an AlphaGrafics Printshop in Des Plaines this fall.
”You`re always looking for a precedent to follow, to see how the company has been doing this so far,” he said. A franchise-backed business definitely poses less risk, he said. ”There`s a system, and if you follow this system, you`ll do OK.”
This balance of business independence and security no doubt will be touted by many of the 800 or so franchisers expected this weekend at the franchise association`s ”World of Franchising” exposition at the Holiday Inn, 5440 N. River Road, Rosemont.
But anyone with an ounce of business sense knows the business world is more than ready to challenge any young business that stumbles in its first steps.
While the recession and years of corporate restructurings may give many skilled professionals the urge to head toward the door, these same factors also have made the business climate even tougher for new ventures.
Franchises offer training, guidance and, in many cases, a proven, well-known product to sell, as well as access to low-cost supplies and equipment needed to run the business. In exchange, franchisers charge hefty fees.
Franchisees` initial costs, which cover purchasing the rights to the company and needed equipment and supplies, are between $25,000 and $100,000 for most businesses, said consultant John Hayes of Hayes Group Inc. of Ft. Washington, Pa. Some businesses, such as AlphaGraphics, top $300,000.
Francorp found in its 1990 survey that almost three-quarters of franchisees use personal assets or their homes to secure loans to buy franchises, and about 20 percent use ”golden parachute” money. The latter category has increased, Francorp said.
After startup, most franchisers charge royalty fees of 6 to 8 percent of sales, Hayes said. Rent payments must be factored in for businesses run outside the home, and extra staff-beyond spouses and children-are often a requirement.
Before a person buys a franchise, Hayes recommends a few steps:
”The first thing a person should do is a self analysis,” he said.
”What is it that interests you about owning a business, and what kind of business would interest you?”
A second stop should be at the bank to determine just how much money a buyer has to invest in a company.
Franchise expos and directories of such businesses in libraries are good places to start the quest.
After reading about the franchiser, Hayes said a prospective owner should contact other franchisers, the International Franchise Association and the Illinois attorney general`s office. These organizations should be able to give non-prejudicial background on the company and its practices.
The most important step in purchasing a franchise, Hayes said, is to obtain the company`s disclosure document. This contains information about the franchise, the franchise owner, how much money is needed to open and operate the business and how much work it will take.
”Every detail you probably will have to know should be in that document,” Hayes said. ”Don`t buy a franchise without reading the disclosure document and taking it to a franchise attorney or an accountant,” he said.
Because franchising is regulated by the federal government, Hayes said, it is illegal for a franchiser to sell a franchise business without first releasing its disclosure statement to the buyer.
Hayes` final recommendation is to visit the franchiser`s headquarters and meet its staff, as well as the company president.
”You should know who you are making money for,” Hayes said. ”If you are buying a McDonald`s, ask to meet the president.”
Christina Saunderson, an assistant Illinois attorney general and chief of the franchise division, said if more people called her office before buying a franchise, franchisees would have fewer problems.
Saunderson`s office has handled about 40 complaints this year against franchisers, a ”slight increase” over last year, she said.
Her office this year has sought financial restitution from such franchisers as Lifecall, a medical alert company; Diet Center, the weight-loss chain; and West Coast Video, the videotape rental company.
Allen Ginsburg, of the law firm Rudnick & Wolfe, represents several franchisers and says the biggest problems lie with with the franchisees.
”You`re the boss of your own business, but you have to comply to the franchiser`s directive,” Ginsburg said. ”If you want to be the franchisee, you have to be willing to know that someone else will give you all the basics,” he said. ”That`s difficult for a lot of people to accept.”
Ginsburg said the other problem is money. Some franchisees seem to believe the franchiser is the last person to be paid. The franchiser and franchisee relationship, Ginsburg said, is ”just like landlord and tenant.”