Franchising Is Elusive Pot of Gold

Ask entrepreneurs if they’ve thought of franchising their businesses and watch the gleam in their eyes. With 2,400 franchise companies and 500,000 franchises in operation across the country, cloning a successful business is tempting.

But it’s not as easy as you might think, according to Mark Frydman and Robert (Goody) Goodman, principals in Box Bros., a Canoga Park packing and shipping company that is struggling to launch its franchise program.

Although their seven Southern California company-owned stores are successful and the company is registered to sell franchises in California, the state with the toughest regulations, Box Bros. has only one franchise deal pending.

In struggling to make their efforts pay off, the two entrepreneurs have learned some lessons that might apply to other would-be franchisers. For example, if yours is a good idea, the field is probably already crowded with competitors. Also, banks may balk at loaning money to people who want to buy your franchises, particularly if the franchise operation is new. Moreover, time you spend on your franchising plans is time taken away from your original business.

In two years, Frydman and Goodman have spent $50,000 and expect to spend another $50,000 before their franchising program is running smoothly.

“We have gone through two sets of consultants who said they could help us,” said Goodman. “We spent $2,000 with one company that treated us like we were stupid.”

Another firm offered its services for $10,000 a month with no guarantee of success. Unwilling to spend more at the expense of the core business, Box Bros. is now regrouping.

Franchise consultants said Box Bros. may be having trouble because 25 other packing and shipping franchises are glutting the market. Although Box Bros. deliberately set its franchise fee below the others, beginning at $27,900, it is still competing with larger, established companies such as Bekins Boxstore, Mail Boxes Etc., Box Works and the Packaging Store.

Goodman, who was working for a local mover before quitting to start Box Bros., said he got the idea after realizing that a large percentage of moves are coordinated by women who don’t like to go into industrial areas to buy boxes. So he opened his stores on busy streets in retail shopping districts, where both men and women feel comfortable shopping for boxes and everything else.

“No matter how attractive your idea is, we have learned that franchises do not sell themselves,” said Frydman.

Without a fat advertising budget, the company relies on trade show exhibits and local advertising to get the word out. But even when it collects leads, the company, with 22 employees, lacks a full-time sales and marketing staff to follow up.

Then another obstacle surfaced: Frydman and Goodman learned that there are very few financing alternatives for potential buyers of new, unproven franchises. Even bankers who prepare Small Business Administration loan guarantee applications told Goodman and Frydman it would be difficult to qualify prospective buyers for financing.

Stephen Raines, founder of National Franchise Associates in Atlanta, said problems such as these prompt him to advise about 80% of the business owners he counsels not to franchise their business.

“Thou shalt not franchise what . . . hasn’t proven successful on its own,” said Raines.

To crack the competitive franchise market, Raines said your business must have a profitable track record, be easily taught to someone else, have potential to work in cities and towns across the country and fill a specific niche in the market.

Just because your business is very successful, doesn’t mean it should be franchised, said Raines, who recently discouraged a very successful Atlanta printer from franchising because there are 40 other printing franchises doing the same thing.

If you decide to move ahead, Raines reminds small-business owners that franchising carries a moral obligation to protect your franchisees from financial disaster. Because most franchises are purchased by families who invest their life savings, Raines said franchisers must realize “they are toying with somebody’s economic present and future.”

John Campbell, president of Minneapolis-based Franchise Masters, said you must also be prepared to devote time teaching others how to run the business. “And be aware that if you start devoting time to franchising, your business could completely collapse.”

Despite the challenges, franchising is more popular than ever. Last year, a new franchise opened somewhere in the U.S. every 17 minutes, according to the Washington-based International Franchise Assn. The association also said that about half a million franchised businesses employ more than eight million workers and that annual franchise sales grew 10.4% between 1988 and 1989.

FRANCHISING CHECKLIST

Cloning a successful business is not as easy as you think, experts say. Among the things to consider:

Is your business at least two years old and profitable?

Have you worked all the bugs out of your daily operations?

Do you serve a specific market niche?

Can your business concept be as successful in Des Moines as it is in Los Angeles?

Can you teach the basics of your business to anybody?

Are you patient and willing to train people?

Do you have enough money set aside to pay for legal fees, marketing, advertising and training?