Business View Magazine
5
Franchising
Octob r – Business View
1
ask the franchisor and current franchisees about the
company’s cost-cutting initiatives that directly relate to
franchisees and what efforts they’ve made to ensure
franchisees are well-capitalized for start-up and
economic ups and downs. Franchise executives told
us that franchisees in the low-cost franchise sector are
more likely to be undercapitalized. This is why we urge
you to carefully consider the financial documents within
the franchise disclosure documents (FDD) and talk to
existing franchisees about what you should realistically
expect in terms of how long it takes to be profitable.
Item 7 in the FDD can help prospective franchisees
make sure their franchisor is realistic and upfront about
expenses involved in the business, but all Item 7s are
not equal. Some franchises outline the necessary
working capital, but others—who might want to keep
the stated investment level as low as possible—don’t.
Any investor should understand and plan for the fact
that it might cost three to four times more to actually
run the franchise business, as compared to the financial
estimates listed in the Item 7 of the franchise company’s
FDD.
Where possible, all potential franchisees should also
thoroughly review and understand a company’s Item
19, if included, so they have a better idea of what to
expect in the way of gross revenues and profitability.
Not all franchise companies provide an Item 19 as part
of their FDD because it’s not required, and, like the
Item 7, every Item 19 is different. It is critical that you
truly understand what you’re looking at within the Item
19. It’s up to the franchisor how detailed they get or
which franchisees’ financial information they include, so
you want to make sure that you’re looking at a good
representation of all the franchisees and what they earn
and spend.
In general, low-cost franchise opportunities mean
lower risk, and for most franchisees, that’s the biggest
pro of starting a low-cost franchise. Depending on the
investment, franchisees who buy a lower-cost franchise
will be able to recoup their investment pretty quickly
and, in general, don’t risk losing their assets or retirement
savings if the business fails. Many low-cost franchises can
be financed out-of-pocket or through savings, eliminating
the need for bank financing all together.
“Not having a large investment hanging over a
franchisee’s head leaves them free to worry about
making their business a success,” said Money Mailer
CEO Gary Mulloy. “It allows them to do the right things
to build their franchise business for the long term rather
than being overly concerned about the burdens of large
loans and re-payments.”
The costs associated with running a low-investment
franchise tend to be lower than some of the higher-
cost concepts like restaurants or retail stores. Most of
the franchise businesses within the low-cost space don’t
require a big physical space, lots of inventory, or dozens
of employees, so it’s easier for franchisees to manage
their expenses.
“You can start your new franchise business as soon
as you make your initial investment because you don’t
need to hire staff, purchase equipment, research and
lease storefront locations …All you need is a computer,
a phone line, and internet access,” said CruiseOne’s
Fiorino.
Because low-cost franchises are so often owner-
operated, it’s more likely that franchisees in some fields
will actually get todowhat theyenjoy—personal training,
work with children, photography, for example—rather
than just managing a bunch of employees. This is a
great attribute if you’re someone who wants to be very
involved in your business, doing something you are
passionate about, but it can also be a detriment if the
business grows to demand more of your operational
oversight.
Along with the pros of a lower-cost investment, there
are many pros to franchising. Franchisees that invest in
a top franchise get the benefits of an established brand
with a larger consumer presence/awareness, a proven
operational system, and the expertise, training, and
support of an experienced corporate office.
This kind of franchise support is particularly important
in businesses like senior care, which require very
specialized skills to coordinate caregivers,manage elderly
care, and follow any state and national regulations.
HomeWell Senior Care, for example, provides 4 weeks
of training to franchisees before opening, 8 weeks post-
opening, and then weekly calls with the home office
to keep franchise owners up-to-date. CEO Lori Yount
