If you’re like me, you’ve probably stood in line at a fast-food joint and pondered the economics of owning a franchise – all those dollars flocking to a ready-made business.
I got a peek inside that world last month when I attended the Gray Classic Business Roundtable, which focused this year on franchising. I followed up with calls to some of the panelists.
The roundtable included a representative from Yum! Brands, which owns KFC, Taco Bell and Pizza Hut. Also present were local owners who hold franchises issued by Chevrolet, Ruth’s Chris Steak House, Subway and the Entrepreneur’s Source. (The latter is a franchise that helps prospective business owners identify, research and buy franchises.)
Since this column is about business and business is about money, let’s get straight to the point: Yes, owning a franchise can be lucrative, the panelists agreed. But it also demands a great deal of work, commitment and, in many cases, a boatload of cash upfront.
Figures were bandied about ranging from $700,000 (Yum! Brands) to $15,000 (Subway). And in the case of Subway, that figure did not include the cost of securing a building or buying equipment, which can add another $200,000 or more, said James Waters, who holds a franchise to five Subway stores in North Carolina.
The panelists also noted the so-called “unexpected costs” – insurance, permits, professional fees, training and grand openings.
Once in business, they said, a franchise holder can expect to pay a set percentage of gross receipts back to the corporate parent. (Ten percent seemed to be the figure.) Part of that goes to pay royalties, and part goes to support advertising and promotions, and it’s all taken off the top before a franchisee even sees a nickel.
So why buy a franchise?
Start-up costs aside, it’s by far the easiest and safest route to owning a successful business, the panelists agreed. Because franchises tend to have name recognition and a proven business model, the odds of failure are greatly diminished, though not eliminated. (Footnote: A franchise with the best name recognition may not yield the best return on investment.)
The panel also agreed that passion is no substitute for basic business knowledge.
Lauren Cantor, who holds a franchise from the Entrepreneur’s Source, said one of the first things she does with new clients is work to determine their motivations and personalities.
Charles Winton, a Charlotte resident who owns a Chevrolet dealership near Fort Myers, Fla., said he worked as a certified public accountant with auto dealerships as clients before he bought his own. It was knowledge of their financial operations, he said, that gave him the confidence to proceed. Even then, he said, he had to show up each day to learn the nuts and bolts.
Waters, the Subway franchisee, said he spent the better part of three years “with a shirt, hat and apron on,” learning the ins and outs of the business. He now spends the bulk of his time managing inventory and looking for ways to squeeze out extra profit.
Waters said each store is different, with varying levels of profitability. And he cautioned against assuming that what works for one franchise holder will work for another.
Because franchisees have almost no leeway in terms of the basic business model, the difference between profit and loss often boils down to inventory control and managing overhead, the group said.
Waters also said one of his biggest mistakes occurred when his inattention allowed a manager to pilfer $10,000.
Because franchise sales are regulated, Cantor said, corporate owners are required to disclose extensive amounts of information to perspective buyers, including two years of financial data, any litigation by them or against them, a list of franchisees that failed or left the systems as well as contact information for those former franchise holders.
Cantor said a potential buyer should first hire a franchise lawyer.
“It’s an investment,” she said. “It’s a financial investment, it’s an emotional investment – this is a big deal.”
Glenn Burkins is editor and publisher of Qcitymetro.com, a news site for Charlotte’s African-American community. He is a former Wall Street Journal reporter and Observer business editor.
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