Business

‘Quasi-entrepreneurs’ see opportunities and challenges in franchising

In 2020, Kelly Jackson and Davina Arceneaux wanted to quit their jobs at the company and become business owners. They were looking for something COVID-proof and recession-resistant.

Instead of coming out from under a corporate umbrella entirely, they considered franchising. Both were concerned about the notoriously razor-thin margins in restaurants. They considered a drug testing franchise, but the initial investment was too high.

A franchise mentor told them about Motto Mortgage Home Services, and Jackson and Arceneaux opened one in Oakbrook Terrace, Illinois, in July 2020 with an initial investment of $35,000.

“People are always in need of new places to live and are always buying and selling houses,” Jackson said. The increase in interest rates is taken in stride. “Interest rates go up and down, that’s what they do, that’s part of the industry.”

Jackson and Arceneaux, who had been senior IT project and program manager and deputy director of catering, respectively, had no experience with mortgages, but Motto Mortgage provided training and support.

“You don’t necessarily need experience in that industry to get into that category, the brand will train you,” said Matt Haller, president and CEO of the International Franchise Association.

In the months after the pandemic hit, many people with corporate jobs decided to strike out on their own, in what’s known as the “Great Renunciation.” They looked for alternatives, including opening a franchise with an established brand.

“Quasi-entrepreneurs” who open franchises say they like the ability to buy from a proven brand and access to tools and operations that you wouldn’t get if you started your own small business. But the franchise also has many challenges. There are many rules and regulations to comply with. Contracts are long and can be difficult to terminate.

The number of franchises in the US grew about 3% in 2021 to 774,965 after a drop in 2020, according to IFA. Those include big franchises like McDonald’s or 7-Eleven, but all kinds of businesses can be franchised, from pool cleaners to barbershops.

There are about 3,000 franchise brands in the US The IFA predicts that franchises in the US will grow 2% to 792,014 this year. That’s still just a fraction of the total 32.5 million small businesses in the US.

Franchise owners buy an upfront fee, anywhere from tens of thousands to hundreds of thousands of dollars, to get their business out there and then pay a monthly royalty percentage. In return, they get use of the brand and marketing, and other support.

As a classically trained pastry chef, Helen Kim often dreamed of owning her own bakery. But when she decided to go it alone, Ella Kim thought that building a business from scratch would be “too big a mountain to climb.”

While working at Aria Resort & Casino in Las Vegas, Kim was a frequent customer at Paris Baguette. She was impressed and last year she bought a Paris Baguette franchise in town with her sister.

While the financial requirements are strict (according to the company’s website, franchisees need a net worth of $1.5 million and $500,000 in liquid assets), Kim said it was worth it. While the money invested in a franchise is still at risk if the business fails, brand recognition and support from the franchisor offer a greater safety net than establishing an unknown brand.

However, getting used to a franchise structure can be an adjustment. When Chris Dordell and her husband Jason Fenske decided to quit their jobs at Wells Fargo and Salesforce and open two Pilates Clubs in 2018 and a YogaSix studio in 2020, in and around Palm Springs, they appreciated the playbook provided by the franchisor, Xponential.

“It was appealing at this stage after being in corporate jobs for over 20 years that we could plug into an existing model,” Dordell said.

But Dordell said following the corporate rulebook took some adjusting time. There were some costs incurred in building the franchises that could have been cut, but “in order to maintain consistency across the company, we had to follow the model.”

If a franchisor changes corporate address or is sold, the franchisee may be left in the lurch.

Tom Lee and his wife opened a home health care franchise, Home Care Assistance, in Burlington, Vermont, in late 2016 after Lee decided to leave his career in sales management for a large company. After initially investing $300,000 and spending three years living off savings and taking no salary, the business began to take off.

Lee currently employs 65 caregivers and had double-digit profit increases in 2020 and 2021. But the franchisor changed ownership and began buying franchisees to operate them privately. In 2022 it changed its name to The Key, leaving the approximately 20 remaining franchisees, still known as Home Care Assistance, in limbo.

Lee said he’s still paying a 5% monthly royalty fee, but he’s not getting the same support. The Key made an offer to buy back the business, but it was well below market value, Lee said.

The Key did not respond to a request for comment.

“They no longer have the staff to support us,” he said. “They have really dropped the mark.”

As with any business venture, franchisees need to be aware of what they are getting into.

Mario Herman, a Washington-based attorney who focuses on franchise litigation, said it’s important for prospective franchisees to review contracts carefully to make sure nothing like past bankruptcies or unprofitability is obscured.

Earlier this year, the Federal Trade Commission sued Burgerim, a Calabasas, California, hamburger chain franchisor that claims it lured 1,500 people into paying between $50,000 and $70,000 in fees to open franchises without giving them enough information about the risks. Burgerim promised a refund if franchisees couldn’t open a restaurant, but they didn’t deliver, according to the complaint. Burgerim did not respond to a request for comment.

“If done correctly, (a franchise is) great, but you have to be extraordinarily careful,” Herman said. “There is a lot of fraud out there.”

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