Long-time friend of MANA Bob Reiss has graciously allowed Agency Sales magazine to serialize his book Bootstrapping 101: Tips to Build Your Business with Limited Cash and Free Outside Help, available now on Amazon.com. The book looks at surprisingly effective low-cost and no-cost ways to acquire the resources you need to run your company. Whether your company is an existing enterprise or a start up, a manufacturers’ representative company or a manufacturer, this book will introduce you to innovative ways to cut your costs and drive more of your income into bottom line profits.

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Franchising is a type of business arrangement that lies somewhere between buying a business and starting your own. It involves an agreement between a Franchisor (Burger King, Subway, Mail Boxes, etc,) and you, the individual business person, called the Franchisee.

The Franchisor offers their established corporate brand name, experience, expertise, training, support, and proven methodology to the Franchisee. In return, the Franchisee pays an upfront fee and continuing royalties.

I bring up Franchising in the Bootstrapping context as it almost completely solves the experience/know-how part of the limited resources equation. As to the cost part, many Franchises will be clearly out of most start-ups’ reach. However, the franchising industry is so big and diverse that many have a relatively low initial cost. Recently Entrepreneur magazine had an article on 80+ Franchises that required an initial cost of $25,000 or less. (Entrepreneur.com)

There are more than 2,500 Franchises in the country in 90 different industries, employing 21,000,000 people. There are many and diverse categories of businesses available for Franchising. A partial list, as seen on entrepreneur.com, is Automotive, Business Services, Children’s Products and Services, Education Financial Services, Food, Health Care, Home Improvement, Hotels and Motels, Maintenance, Personal Care, Pets, Recreation, Service and Tech businesses, and more every year.

Jeffrey Tannenbaum, the former Wall Street Journal’s expert on Franchising, described Franchising as a mixed bag. He said, “For many people becoming a franchisee is the shortcut to prosperity, but for others, it is the shortcut to hell.”

Let’s look at the pros and cons of Franchising.

Advantages

• Allows you to be in your own business with a limited knowledge of the industry and of running a business. You get the advantage of the Franchisor’s proven track record of success, their training, their operating methods, their suppliers, their credibility, their ongoing support, etc.
• Some major risks of business failure are reduced.
• Quick start to get your business operational. Every facet of starting and running the business is provided to you. An entrepreneur, starting on his or her own, would take considerably longer to begin.
• Expansion: If you become successful, you can expand quite rapidly through the expertise and cooperation of the Franchisor. They are anxious to discover successful operators who have proven they have what it takes to grow. Sometimes the Franchisor will block your expansion plans, despite your proven success. If this happens, you can draw inspiration from Sam Walton, the founder of Wal-Mart. Sam’s initial entry to retailing was as a Franchisee for the Ben Franklin 5 and 10 Cent stores. He followed their formula and added his creativity and work ethic to become a leading franchisee. He started to expand in neighboring Arkansas towns. Early on, Sam spotted the advent of retail discount stores. He approached the Ben Franklin management to let him pioneer a discount store under their umbrella. They summarily dismissed him, and Wal-Mart was born. Little did the Ben Franklin management realize how profoundly they would affect retail history.
• Due Diligence: Franchising is a highly regulated business. By law, every potential Franchisee upon asking must be provided with a Franchise Disclosure Document from the Franchisor. This will give you details of the arrangement with Franchisees, financial strength of Franchisors, their list of existing Franchisees, and, in many cases, lists of past Franchisees. You want to know everything you can about your potential partner.
• Training is provided to you and to your employees. The learning curve of running a business is accelerated.
• In most cases Advertising and Marketing of the brand are provided. In some cases, you may be required to contribute to the costs of it.
• Territory: You are assigned an exclusive Franchise for a specified geographic area. No one else can use your brand in this defined area. This provision should be specifically spelled out in the contract.

Disadvantages

• Lack of Control: You don’t have the independence of an owner of a business. The Franchisor requires you to strictly follow their rules and to use their systems. Changes require approval. You also are limited in where to buy your supplies, how to advertise, which products you can and cannot offer, volume goals, etc. The arrangement can be frustrating for a creative personality.
• Costs can be high, both the initial fee and ongoing royalties. However, costs are never to be considered in a vacuum. They need to be measured against the profits you create.
• Royalties are paid on volume and not on profits in most instances. This is usually not a great arrangement as one party can lose money while the other profits. Their interests are not aligned even though it is a partnership.
• Inequality: It is an unequal partnership. The Franchisor has much more power. If the Franchisor does not deliver on their support promises, you may not have much recourse, as most contracts favor the Franchisor. Also, you may not have the money to pursue your expensive legal options.
• Selling the company may be difficult. Let’s say you’ve been successful over the years in building the franchise and want to now retire or change your lifestyle. In an independent business, you are completely free to sell to anyone at any price you desire. This is not necessarily so for a Franchisee. Some contracts won’t allow you to sell, or you can only sell back to the Franchisor. This might not allow you to get a fair price. So, you should try to address this issue in your original contract.

Where to Get Help

In determining if Franchising is for you and which ones best fit your pocketbook and passion, you can go to the following sources:

• Google: Just search for Franchising, and you will get enough sources to look at to keep you busy for a lifetime.
• Entrepreneur.com is the website of Entrepreneur magazine which puts out a yearly issue of the top 500 Franchises. They offer a list by category and by costs. You can get a brief outline of each Franchisor and their website for more information.
• FTC: The Federal Trade Commission is the government regulatory body for the Franchising industry. The FTC website is www.ftc.gov. They are located in Washington, D.C., and their phone number is (202) 326-2222.
• The American Franchising Association (AFA) is an industry association located in Washington, D.C. They have lots of information about Franchisors and the industry. Their website is www.franchise.org. Phone number is (202) 628-8000.
• www.bestfranchiseopportunities.com. This website lists a multitude of Franchising opportunities with descriptions of each. You can check up to 10 of them, and with one click, your request for more information goes out to each company. I found that I received same-day replies from all that I clicked, with phone calls from them starting the next day.
• www.Inc.com is the website for Inc. magazine, the publication for entrepreneurs. They have extensive information about Franchising and lists of questions to ask a potential Franchisor.

With a lot of due diligence, Franchising may be the low-risk, low-cost way to become your own boss.

MANA welcomes your comments on this article. Write to us at [email protected].