Weighing the pros, cons of buying a franchise

By Janet Rorholm

Over the last 24 years, Mary Sundblad, owner of Stuff Etc., has perfected the sale of consignment items. This month, she’ll take another step and will sell her consignment store concept as part of a franchise operation.

“We’ve had so much interest. Every week we get calls,” Sundblad said.

She said she plans on focusing on selling franchises in Iowa first and then branching out from there. She’s had interest from people from Washington to Arkansas and everywhere in between. It doesn’t hurt that Stuff Etc. is having its best year ever thanks largely to the recession, which also should help sell the business. But just jumping into the consignment store business isn’t easy.

“It’s very labor intensive,” Sundblad said. “If you don’t have systems in place or they are not working, you will drown.”

Like any franchise, those systems are part of the package people buy when they buy into a franchise system, as well as name recognition and a support system.

Franchises are everywhere, but is buying a franchise right for you? Being part of a franchise system comes with pros and cons and business consultants and even those already in the franchise business urge people to weigh those options closely before making a decision either way.

Lisa Ogle has owned the Marion Curves franchise, 1119 Seventh Ave., for nearly three years. Before she started working at Curves five years ago, she hadn’t even heard of the company, but the women-only fitness facility now has 10,000 stores across the world. And when the previous owners decided to sell the store, they asked Ogle if she wanted to buy it. Ogle, who had managed the store for about two years, said she wasn’t sure about buying it since most of her prior experience was in the restaurant and hotel industries. Turns out she didn’t have to worry because the franchise offered plenty of support.

“We’re like one big huge family,” she said.

She said the systems work well and the company does national advertising for business owners, but if she or other local owners want to do something different, they must first get permission.

“You can get creative to a limit, but you have to go through legal and advertising first and then they’re usually cool with it,” Ogle said. “There are constraints.”

She said she pays 5 percent of her gross royalties to Curves and 3 percent of gross sales for advertising fees, which Ogle considers reasonable.

“I prefer the franchise because I prefer the structure,” Ogle said.

That structure is one of the biggest benefits of owning a franchise business, said David Drewelow, business consultant for ActionCOACH in Cedar Rapids. ActionCOACH is also a franchise system and Drewelow, who owns the territory rights to ActionCOACH franchises in Nebraska and Iowa, sells ActionCOACH franchises.

“We’ve found that about 80 percent of people aren’t crazy about looking at a franchise, but when you look at what they are better suited to, it often comes down to a 50-50 split,” Drewelow said. “For some people, they totally need some kind of system to be successful.”

But not everyone is cut out to buy into a franchise, he said. The No. 1 reason why people should not buy into a franchise is if they are highly independent and don’t want to follow someone else’s guidelines or systems.

The failure rate for people who start independent business ranges from 60 percent to 70 percent within the first three to five years. That compares with a 20 percent failure rate for people who buy into a franchise, Drewelow said. That’s because franchise businesses typically have a proven track record and support system already in place, he said.

When considering a franchise, Drewelow said it is imperative to get a copy of the company’s Federal Disclosure Document. Franchises are highly regulated and the Federal Trade Commission’s Franchise and Business Opportunity Rule requires franchise sellers to give you specific information to make an informed decision, including:

• Names, addresses and telephone numbers of at least 10 previous purchasers who live closest to you.
• A fully audited financial statement of the seller.
• Background and experience of the business’s key executives.
• Cost of starting and maintaining the business, including what fees you’ll have to pay.
• The responsibilities you and the seller will have to each other once you’ve invested in the opportunity.

Franchise operations will do their homework as well, said Rodney Anderson, president of Panchero’s Franchise Corp. in Coralville, which got its start in Iowa City 16 years ago. It’s been a franchise for the last six and now has 54 stores in 18 states.

“We are looking for their experience,” he said. “We’ve found people do much better if they have restaurant experience. We also will look at a person’s finances and get to know them and their attitude. We want to make sure they have an understanding of what the business is about and what it will take to be successful. We have turned down people.”

Anderson encourages people to look at a franchise’s history, opting for one that has a proven track record.

“They know how to make it work,” he said.

He said studying the franchise and its structure can also pay off. For some franchises, it’s less about running your business and more about buying your job because fees are so high. In some cases, the franchise will dictate where you can get your supplies, which could further cut into your profit. He urges people to contact others in the franchise before making any decisions.

A person can buy into a Panchero’s franchise for $30,000, which covers training, support and assistance in getting the business up and running. It costs about $400,000 to open the business. The franchise owner then pays 5 percent of its revenue to the franchise. There are no advertising fees because the company doesn’t do national advertising.

Mickey Akers said she’s found the franchise system makes it easy to grow. Akers and her husband, Jerry, own six Great Clips stores, three in Cedar Rapids and three more in the Waterloo-Cedar Falls area, and are looking to expand.

While both of them have run independent businesses, neither knew anything about cutting hair — and still don’t, which Mickey Akers said makes things easier because she can’t be called upon to help cut hair.

“I want to run the business and I spend all of my time trying to figure out better ways to run the business. So far we’ve been very successful. We’ll definitely be expanding,” she said.

Akers attributes her success to her employees and their focus on customer service, which keeps customers coming back. She also takes advantage of corporate training opportunities, soaking up as much knowledge as she can.

“I figure I bought into a franchise, I might as well take advantage of what they have to offer. But the biggest benefit I’ve found is meeting with other franchise owners and learning from them,” she said.

Her best advice to people considering buying into a franchise? Look closely at its philosophy.

“Find a franchise that fits you and your personal beliefs. We felt comfortable with Great Clips. It just seemed right,” she said.