NEW YORK (AP) — In 2020, Kelly Jackson and Davina Arceneaux wanted to quit their corporate jobs and become business owners. They were looking for something that was both COVID-proof and recession-proof.
Instead of completely stepping out of the shadow of a business, they turned to franchising. Both worried about notoriously tight restaurant margins. They considered a drug testing franchise, but the initial investment was too high.
A franchise mentor told them about Motto Mortgage Home Services, and Jackson and Arceneaux opened one in Oakbrook Terrace, Illinois, in July 2020 with an initial investment of $35,000.
“People always need new places to live and always buy and sell houses,” Jackson said. It takes rising interest rates in stride. “Interest rates go up and down, that’s what they do, it’s part of the industry.”
Jackson and Arceneaux, who had served as senior IT program and project manager and assistant restaurant manager, respectively, had no mortgage experience, but Motto Mortgage provided training and support.
“You don’t necessarily need experience in this industry to fit into this category, the brand will train you,” said Matt Haller, president and CEO of the International Franchise Association.
In the months following the outbreak of the pandemic, many people in corporate jobs decided to step aside, in what is known as the “great resignation”. They looked for alternatives, including opening a franchise with an established brand.
Quasi-preneurs who open franchises say they like the opportunity to buy a proven brand and access to tools and operations you wouldn’t get if you were starting your own small business. But the franchise also comes with many challenges. There are many rules and regulations to follow. Contracts are long and can be difficult to terminate.
The number of U.S. franchises rose about 3% in 2021 to 774,965 after a decline in 2020, according to the IFA. These include large franchises like McDonald’s or 7-Eleven, but all types of businesses can be franchised, from pool cleaners to hair salons.
There are approximately 3,000 franchise brands in the United States. The IFA predicts that the number of franchises in the United States will increase by 2% to 792,014 this year. This is still only a fraction of the 32.5 million total small businesses in the United States.
Franchise owners purchase with an upfront fee – ranging from tens of thousands to hundreds of thousands of dollars – to get their business, then pay a monthly royalty percentage. In return, they get use of the brand name and marketing, as well as other media.
A classically trained pastry chef, Helen Kim has often dreamed of owning her own bakery. But when she decided to go it alone, Kim thought building a business from scratch would be “too big a mountain for me to climb.”
While working at the Aria Resort & Casino in Las Vegas, Kim was a frequent customer of Paris Baguette. She was impressed and last year bought a Paris Baguette franchise in the city with her sister.
Although the financial requirements are strict — according to the company’s website, franchisees need a net worth of $1.5 million and $500,000 in cash — Kim said it’s worth it . Although money invested in a franchise is always at risk if the business fails, brand recognition and support from the franchisor provides more of a safety net than establishing an unknown brand.
However, getting used to a franchise structure can be an adjustment. When Chris Dordell and husband Jason Fenske decided to quit their jobs at Wells Fargo and Salesforce and open two Pilates Clubs in 2018 and a YogaSix studio in 2020, in and around Palm Springs, they appreciated the playbook provided by the franchisor Xponential.
“It was interesting at this point after having been in corporate jobs for over 20 years that we could plug into an existing model,” Dordell said.
But Dordell said you have to adapt to company rules. Some costs incurred while building the franchises could have been reduced, but “to maintain consistency across the business, we needed to follow the model.”
If a franchisor changes direction or is sold, a franchisee may be left behind.
Tom Lee and his wife opened a home health care franchise, Home Care Assistance, in Burlington, Vermont, in late 2016 after Lee decided to quit his career in sales management for a large corporation. After initially investing $300,000 and spending three years living on savings without receiving a salary, the business began to take off.
Lee currently employs 65 carers and posted double-digit profit increases in 2020 and 2021. But the franchisor changed ownership and began buying out franchisees to operate them privately. In 2022 it was rebranded as The Key, leaving the approximately 20 remaining franchisees, still known as Home Care Assistance, in limbo.
Lee said he still pays a 5% monthly royalty, but doesn’t receive the same support. The Key made an offer to buy the business, but it was well below market value, Lee said.
Key did not respond to a request for comment.
“They no longer have the staff to support us,” he said. “They’ve really dropped the brand.”
As with any business venture, franchisees need to be aware of what they are getting into.
Mario Herman, a Washington-based attorney who focuses on franchise litigation, said it’s important for potential franchisees to carefully review contracts to make sure nothing is obscured like previous bankruptcies or a lack of profitability.
Earlier this year, the Federal Trade Commission sued Burgerim, a franchiser of the Calabasas, Calif., burger chain, which it said tricked 1,500 people into paying $50,000 to $70,000 in fees to open restaurants. franchises without giving them enough information about the risks. Burgerim promised a refund if franchisees couldn’t open a restaurant but didn’t deliver, according to the complaint. Burgerim did not respond to a request for comment.
“If done right, (a franchise is) great, but you have to be extremely careful,” Herman said. “There are a lot of frauds out there.”
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