5/1/2013 8:00 PM ET|
Considering a franchise? Be wary
Off-the-shelf concepts make it easy to start your own business, but you can easily lose your shirt. And many chafe under the rules and restrictions.
Mary Pelach had a pretty good idea of the risks when she invested $175,000 in her first Batteries Plus franchise in Sioux Falls, S.D., 20 years ago. She and her husband, Gary, used savings, money gifted by his mother and a $100,000 Small Business Administration loan.
"Your hands are just shaking when you're signing document after document," Mary Pelach recalled. "It's worse than getting a mortgage."
Buying a franchise means buying a concept, along with training, marketing, support and often supplies. Instead of starting from scratch, franchisees can get a head start. Some people make a decent living. Some even get rich.
Then again, plenty of people fail.
Those who come out on the short end buy into an idea that's lousy or dated. They're hamstrung by company policies over which they have no control. Rather than get rich, they lose their investment and then some. Some failed franchise owners have even been sued by the companies that sold them their businesses for "liquidated damages" -- a percentage of all the revenue they were supposed to earn, but didn't.
"People lose their money, they lose their houses," said franchise marketer Sean Kelly, a former marketing director for the Auntie Anne's pretzel chain who publishes the FranBest and Unhappy Franchisee websites. "There's been this myth . . . that franchises are a safe route in business, and it's just not true."
Mary Pelach was 41 and ready to leave a corporate telecommunications job after her department suffered through three brutal rounds of layoffs. If keeping a job was this uncertain, she reasoned, maybe she'd be better off employing herself.
But she didn't want to go it alone. She liked the idea of someone else "inventing the wheel" and offering her support.
The couple investigated various franchise options, quickly ruling out fast food. "You have to throw out your inventory every 11 or 12 minutes!" Pelach said. She liked the idea of a one-stop shop for batteries, but Gary, then a 47-year-old airline pilot, initially dismissed the idea.
"My husband thought it was absolute hooey," Mary recalled. "I said, 'Think for a minute: How many battery-operated gadgets do we have in our home?'"
The couple took the plunge. Gary continued working as a pilot while Mary set up and ran the business. Within six months, she was able to pay herself a salary.
Two decades later, the couple owns four Batteries Plus stores in two states, and Gary has long since retired. Their son and daughter-in-law are working with Mary to learn the business. They'll take over when Mary's ready to retire.
"They will run it," Mary said. "We will continue to draw a check off it."
Franchises worked out well for her, but Mary warned that the model wouldn't be a good fit for someone who wants to call all the shots. You need to be entrepreneurial enough to take the risk, she said, but not so independent-minded that you would chafe under the franchisor's many restrictions.
"Make sure a franchise is what you want to do," Mary said. "With a franchise, you do have to follow their rules and their processes."
Franchises make up 10% of all employer businesses, according to the Census Bureau, employing 7.9 million people and accounting for one out of every six dollars spent at a business.
The possibilities go well beyond fast-food outlets, gas stations and convenience stores. Franchisees offer massages, scoop dog poop, inspect for bed bugs, sell sex toys, tutor kids and clean houses.
Investing in a franchise isn't cheap. The total initial investment, including the franchise fee, location expenses, supplies and equipment, typically runs $200,000 to $300,000, said Alisa Harrison, a spokeswoman for the International Franchise Association, a trade group. Creditworthy applicants can get SBA loans, but franchisees are typically required to contribute a chunk of their own capital -- often 20% to 25% of the total amount required.
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This stupid Jeep commercial background is placed so you can't read the story.
she needed to find a franchise to simply sell batteries?
she's such a part of the article that it almost sounds like a sales pitch to sell the particular battery franchise than franchises in general!
Yeah, I agree with dw9seattle, why do all the interesting msn money articles have partially blocked out text. I really wanted to read this one, and gave up on the retirement article because 1/4 of the text was block by an add.
Any wonder why Microsoft is rapidly losing market share.... good gawd...
How these hacks can sell out so blatantly is beyond my understanding.
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