Business in a Box
Starting a new venture can be daunting. But with an established business model and a strong support network, you can improve your odds for success -- even in today’s economy. Here’s why franchising is hotter than ever. By Mark Henricks
 About the time Duncan Macdonald decided to move back home to Burlington, Vermont, he learned of a franchise business that sold pre-owned sporting goods. “I felt this would be a great idea for the Burlington area because it’s so sports-oriented,” says Macdonald. With several years of experience working in Colorado ski areas and at sporting goods retailers, Macdonald felt his own background also fit.
In 1993, as the U.S. economy was emerging from an earlier recession, Macdonald opened Play It Again Sports in South Burlington, and that’s what he’s done for a living ever since. “For the most part, I enjoy what I do, and there’s a lot to be said for that,” he says. “And you’re working for yourself. You’re not going to get a pink slip unless you sink the ship.”
More than 900,000 franchised establishments run by people like Macdonald dot the American landscape, according to the Washington, D.C.-based International Franchise Association. And, while many other fields anticipate retrenchment in a tumultuous economy, franchising looks for its numbers to swell as laid-off, downsized, and burned-out ex-employees sign on. “We’re expecting a huge flood of those types of franchisees coming into the marketplace,” says Michael Seid, a franchise consultant in West Hartford, Connecticut.
Besides the prospect of independence, most new franchisees come in search of proven business models, training, marketing support, cooperative buying power, and the ability to tap into a community of other owners. By and large, most franchises deliver those benefits, to varying degrees. The retail system behind Play It Again Sports, for instance, has been honed since the first one opened in Minneapolis in 1983, and today operates in about 365 locations around the country, according to Steve Murphy, president of franchising for parent company Winmark Corp. of Minneapolis.
To open a Play It Again Sports franchise, new franchisees must have demonstrated the ability to come up with $275,000 to $350,000 for startup and initial working capital, and they must take a two-week training course. Winmark supplies proprietary retail management software, discounts on purchases of new equipment from manufacturers, and access to logos and other marketing elements typically far more sophisticated than an independent business can muster.
“You can look back and say I could have done some of this stuff myself,” says Macdonald. “But there are some advantages to franchising. It takes some of the unknown out of starting your business. It’s still a big challenge, but some of the risks are mitigated.”
 Estimates of risks faced by franchisees vary widely. Many franchisers quote 1980s-era research that found fewer than 4 percent of franchised operations fail each year, considerably below the rate of other businesses. Other studies have found, however, that franchises offer little advantage compared to independent businesses, and may impose some penalty because of the burden of royalties and other fees paid to the parent franchiser, plus other factors.
The independence factor is also somewhat compromised. Franchisees typically must adhere to strict requirements for everything from signage and employee uniforms to products and pricing. The aforementioned royalties consist of percentages of total sales that must come out of every year’s profits, and are imposed in addition to upfront fees that may total tens or even hundreds of thousands of dollars.
All told, the required investment for some well-known franchises tops $1 million. While banks and other lenders have historically provided the majority of the investment required to get into a franchise, today’s tighter credit means franchisees are going to have to come up with more of their own money, Seid says. And, in any event, few lenders will grant loans to entrepreneurs unwilling to personally guarantee them, often with liens against the family home.
Broken promises, unsubstantiated claims, and outright fraud also dot franchising’s history, prompting organizations such as the Federal Trade Commission to warn would-be franchisees to research any offer carefully before committing.
If you’re considering looking into a franchise, start with your heart. Ask yourself: What would I like to do for a living? Macdonald, for example, had a long connection with sports as a participant before he made it a business. He says most new Play It Again Sports franchisees similarly are attracted by the opportunity to work in the world of sports. And that’s good, according to Seid: “People need to be satisfied with their lives. To get into a business you hate, even though it’s profitable, is not something you want to do.”
Still, don’t just listen to your inner longings. Obtain the official document describing the franchise -- known as the Franchise Disclosure Document -- and scrutinize it carefully. Run it by professional advisors such as accountants and attorneys. Talk to other franchisees. If possible, work for a period in a franchise of the type you are considering.
And realize that being an owner isn’t like being an employee. Hours, especially for retail, are long. If the computer won’t compute or the oven won’t light, you’re responsible for getting it fixed. While some franchises are suitable for absentee owners, many, such as Winmark, require heavy day-to-day involvement from the franchisee. Says Winmark’s Murphy, “We are very much a hands-on franchise. We’re not an investment strategy.”
 With franchises available in scores of industries, from AAMCO Transmissions to Zyng Asian Grill, almost any would-be business owner can find a franchise that suits. Some franchises emphasize low cost, others are designed to be home-based, while others are intended for well-heeled empire-builders who envision owning multiple units spread across the country or even the globe.
In addition to the typical sort of franchise, called a business format franchise, many other companies offer dealerships, which give some of the advantages without some of the restrictions. Segway Inc., for example, has just more than 100 authorized dealers who sell its innovative two-wheeled transporters. Carlsbad, California-based Terry Moore, western sales manager for the New Hampshire-headquartered company, says Segway provides territorial exclusivity, marketing support, and customer management software.
Dealers must show they have a physical store location and can purchase a set amount of startup inventory. That, and a lot of enthusiasm for the Segway Personal Transporters, technologically revolutionary gadgets that have yet to penetrate the mainstream. “This is a product that requires a tremendous amount of passion,” says Moore. “We’re still in that early adopter phase.” To that end, Segway dealerships not only sell the transporters, some also offer Segway sightseeing tours, a fun and unique way for tourists and residents to see a city.
With all its pluses and minuses, franchising can provide security and a good income for those who choose carefully and work hard. Macdonald says, for instance, that it would be difficult for him to find a job in his hometown that pays as well as owning a franchise. “That’s something my wife reminds me of every time I start to grouse,” he says.
WHAT’S HOT IN FRANCHISING
One of the main reasons franchises fail, according to experts, is that they enter fields with well-established competitors. With that in mind, we asked Sara Wilson, a staff writer at Entrepreneur magazine who reports on trends within the franchising industry, what’s new and what’s hot. Using a system that looks at factors such as financial strength, stability, growth rate, and size of the system, this year Entrepreneur ranked highly such familiar names as Subway, McDonald’s, Liberty Tax Service, Sonic, and InterContinental Hotels Group.
If you want to be trendy, the Entrepreneur staff identified eight categories that present good opportunities now: senior care, frozen yogurt, pets, children’s services, party and event services, fitness, personal care, and, of course, green businesses of all kinds. “Frozen yogurt franchises have recently taken the franchising scene by storm with new brands like Céfiore and Red Mango joining the mix,” Wilson says, adding, “Pizza Fusion and Clean Air Lawn Care are two examples of franchises that have really embraced the green aspect in their business models.”
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