“Semi-actors” see opportunity and challenges in the franchise

New York (AFP) – In 2020, Kelly Jackson and Davina Arsenox wanted to quit their company jobs and become business owners. They were looking for something that was resistant to coronavirus and resistant to stagnation.

Rather than stepping out completely from the company’s umbrella, they looked at the franchise. The two were concerned about the notoriously narrow margins for restaurants. They looked at a drug-testing franchise, but the initial investment was pretty steep.

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

“People always need new places to live and they are always buying and selling homes,” Jackson said. Takes increasing interest rates step by step. “Interest rates go up and down, that’s what they do, that’s part of the industry.”

Jackson and Arsenault, who were IT software programmers, project manager and assistant director of supply, respectively, had no mortgage experience, but Motto Mortgage provided training and support.

“You don’t necessarily need to have industry experience in order to get into this category, the brand will coach you,” said Matt Haller, President and CEO of the International Franchise Association.

In the months following the pandemic, many people with corporate jobs decided to strike on their own, in what was referred to as the “Great Resignation.” They looked for alternatives, including opening a franchise with an established brand.

Opening “semi-privileged” franchisees say they love the ability to buy into a proven brand name and access to tools and processes that you wouldn’t get if you started your small business. But franchising has many challenges, too. There are a lot of rules and regulations that must be adhered to. Contracts are long and can be difficult to terminate.

The number of US franchises grew 3% in 2021 to 774,965 after a decline in 2020, according to the IFA. This includes 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 franchisees in the US and IFA expects US franchises to grow 2% to 792,014 this year. That’s still just a fraction of the total 32.5 million small businesses in the US

Franchisees buy with an initial fee—anywhere from tens of thousands to hundreds of thousands of dollars—to get their business, then pay a monthly royalty percentage. In return, they benefit from brand name, marketing, and other forms of support.

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

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

While the financial requirements are stringent — according to the company’s website, franchisees need a net worth of $1.5 million and $500,000 in liquid assets — it’s worth it, Kim said. While the money invested in the franchise is still at risk if the company fails, brand name recognition and franchisor support provide more of a safety net than creating an unknown brand.

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

“It was attractive at this point after we’ve been in corporate functions for over 20 years that we could catch up on an existing model,” Dordell said.

But Dordell said that following the company’s rulebook took some adjustment. There were some costs incurred while building the franchises that could have been cut, but “in maintaining consistency across the company we have been asked to follow the model.”

If the franchisor changes management of the company or is sold, the franchisor can be left in a bind.

Tom Lee and his wife opened a home health care franchise, Home Care Assistance, in Burlington, Vermont, at the end of 2016, after Lee decided to leave his career in sales management for a large corporation. After investing $300,000 in the beginning and spending three years living on savings and never getting a paycheck, the company started to take off.

Lee currently employs 65 caregivers and has doubled profits in 2020 and 2021. But the franchisor changed ownership and began buying back franchisees to run privately. In 2022, it was rebranded to The Key, leaving the rest of the 20 or so franchisees, still known as Home Care Assistance, in limbo.

He told me he still pays a 5% monthly ownership fee, but he doesn’t get the same support. Lee told me that The Key made one offer to buy back the company, but it was well below market value.

Key did not respond to a request for comment.

“They don’t have the staff to support us anymore,” he said. “They really gave up on the brand.”

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

Mario Hermann, a Washington-based attorney who focuses on franchise litigation, said it’s important for potential franchisees to review contracts carefully to make sure they aren’t hiding anything like past bankruptcies or a lack of profitability.

Earlier this year, the Federal Trade Commission sued Burgerim, a franchisee of a burger chain in Calabasas, California, alleging that it lured 1,500 people to pay a fee of $50,000 to $70,000 to open franchises without giving them enough information about Risks. Bergram promised a refund if the franchisees couldn’t open a restaurant, but they didn’t deliver, according to the complaint. Burger did not respond to a request for comment.

“If it’s done right,[franchise]is great, but you have to be very careful,” Hermann said. “There is a lot of fraud out there.”

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