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Buying a franchise

I know of only two people who own franchises and their experiences are polar opposite: one became quite wealthy owning two well-known coffee franchises; the other went broke trying to make a fast-food franchise into the career solution for an adult son who was floundering.

What made the difference forms a cautionary tale in whether your franchise investment is a success or a chapter in your life you'd rather soon forget.

Lessons learned
In the coffee franchise scenario, there were several advantages right from the start:

  • A gold standard, proven franchise
  • Financing from banks available at good interest rates and terms
  • Busy urban locations with high car and foot traffic
  • Profits significant to enable hiring sufficient staffing

For the fast-food family, here's what militated against them:

  • Using family savings and inheritance for financing
  • Poor remote location
  • Insufficient ability to hire staff so family working long hours seven days a week

"The reasons why franchises don't work are as varied as the franchises themselves," says Roger Noble, president of Franmax Inc., a business brokerage in Cambridge, Ont. Trained originally as a lawyer, Noble says the relationship between those who buy into a franchise (franchisee) and the corporate owner (franchisor) is "like a marriage where day-to-day realities can lead to divorce. In many cases, there were unrealistic expectations on the part of the franchisee."

If a franchise divorce does occur, you can be left with outstanding costs such as payments on a lease until its expiration.

Restrictions apply
For an independent-minded entrepreneur, a franchise can be too restrictive, he adds. People dream of owning their own business and "that's not what a franchise is," says Noble. In fact, it's more like a rental lease for a specific sum, period of time, and much fine print outlining what you're allowed to do and what you're not.

The franchisor will establish conditions for how the business must operate; for example, location requirements, what types of products will be offered and who can supply these products, and what types of marketing and advertising is allowed.

One of the greatest appeals of franchise over other business opportunities is the ready-to-go business model. If you follow the steps as outlined, you're guaranteed success, correct?

The costs
Not so fast. Franchising isn't cheap with upfront costs of anywhere from $25,000 to over a million, and other ongoing fees and costs, such as contributions to head office marketing and royalties. And we've all heard about franchise failures and lawsuits by disappointed and angry franchisees against their corporate masters.

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-- Posted December 7, 2012
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