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Franchising

February 12, 2006

Q- I want to buy a franchise but am unsure if I should do this or just start my own business. I have about 20 years experience in big corporate environment and was let go without much warning when the business downsized. I now have to find a new income source. Whatever I choose, I want it to be as little risk as possible as I am planning on investing my whole retirement in this endeavor (over $300,000).

While many people do invest everything they own in their business, this just scares me. You have to be very prudent with your money as if you blow it, there goes your retirement. While you will have to invest some money in your business, I would keep this investment as low as possible by getting other investors into your new venture. In your case, relatives, friends and acquaintances are the best source of funds for a business just starting up.

In terms of deciding on franchising vs. starting your own business I would definitely recommend a franchise as they have a very low failure rate and they do a great job in training you to run your franchise.

In order to be a good franchise candidate you must be willing to follow the rules of the franchisor. A McDonald’s franchisee would never be allowed to offer a new item on the menu without extensive testing by the parent or franchisor. If you are not willing to follow the rules (and they are good rules) then you need to consider opening your own business.

One of the things that franchisors understand is that the public wants consistency between stores. The way you get consistency is to force everyone to follow the same set of rules. However, if you feel that you do not want this much control and rigidity, then you need to avoid franchises at all costs.

Consistency is so important in any business but even more in franchises. When our kids were much younger they used to love to go into McDonald’s and get their hamburgers. While the hamburgers, in my opinion, were cruddy, they were consistently cruddy which my kids adored (I wonder what this is really saying about me as a parent).

Another important attribute of being a franchisor is being willing to let go of between 7% and 10% of every dollar coming in to go back to the franchisor as a franchising royalty. Some franchisees have a hard time in releasing these funds, even though they are legally required to pay, as they just do not see the value that is being provided. This is why when selecting a franchise; you must do your homework to insure that you are selecting a great organization to partner with.

The secret in any business (franchise or not), is to make sure you do your homework (before you start) to insure that you minimize the number of mistakes that you will make.

Good luck on your new venture.