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BUYING A SMALL BUSINESS

Rude Awakenings May Await New Franchisees

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Before Kelly Waddell, 31, and his wife, Sandra, 35, opened their Pop-A-Lock franchise in Dayton, Ohio, they went to bed at 11 p.m., and assumed everyone else did, too. "The biggest shock," says Mr. Waddell, "was that our phone would ring as often at 3 a.m. as [it would] at three in the afternoon."

Pop-A-Lock, based in Houston, has 107 franchised locations whose operators open up locked cars, change tires, deliver gasoline and provide other types of roadside service.

"People work night shifts, or have to leave their suburbs at 5 a.m. for jobs that start at 7 a.m., and need their cars opened then," says Mr. Waddell. "My wife and I spent those first months sleeping in shifts."

Mr. Waddell's rude awakening as a new franchisee was, well, literal. But thousands of other franchisees also encounter the unexpected about the businesses they've just bought, just at more reasonable hours. In some cases, the surprises are operational. Others may concern ownership issues and franchiser support.

Mike Hannon, 49, for instance, is surprised that the fate of the Mail Boxes Etc. franchise he purchased last year, is so uncertain. The company, which was acquired by United Parcel Service of America Inc. in early 2001, is still deciding what to do with its 4,000 world-wide franchisees.

Franchise consultant Mark Siebert, president of The iFranchise Group in Chicago, says the biggest rude awakening for new franchisees typically is the nature of the business they're getting into, as was the case with Mr. Waddell.

Supervising Surly Teens

Restaurant franchisees are always amazed at two things -- lettuce rots and teenagers aren't reliable. "They think operating a restaurant will be glamorous, then find out they have to clean the toilets and supervise surly teens," Mr. Siebert says.

Doug Benham, chief financial officer of RTM Restaurant Group in Atlanta, the world's largest franchisee with 1,049 restaurants, including hundreds of Arby's and a couple of fried-chicken chains, once said, "My partners and I know our futures are tied up in whether 15,000 18-year-olds decide to show up for work."

Franchisees of Jani-King, Coverall and other commercial-cleaning outfits have to do 90% of their work at night, when offices are empty. And people who love travel buy travel-agency franchises and then discover they must spend all their time behind a desk, making sales calls and booking other people's trips.

The second most common surprise is the nature of business ownership, Mr. Siebert says.

"Some people aren't temperamentally suited to sweating out payroll every two weeks," he says, or to keeping records, paying taxes and hiring and firing employees.

Mr. Hannon has avoided the latter because he and his wife, Mary, 46, are the only workers at the Mail Boxes Etc. they bought from another franchisee in a strip center in Glenview, Ill. The former sales manager of a construction-supply company says he looked at lots of different franchises and settled on Mail Boxes because the company had been acquired by shipping giant UPS. "The new owners seemed to have a lot of good ideas and were taking the franchise in the right direction," he says.

Decisions From the Top

That direction is still uncertain, though. Richard Hallabrin, director of corporate communications at Mail Boxes in San Diego, says franchisees will have to wait a few more months. "We're conducting tests on three different models to determine whether franchises will stay as Mail Boxes/UPS sites,become UPS stores, or co-brand with yet another company," Mr. Hallabrin says. Franchisees should hear about the test results, and their own futures, some time next year.

Mr. Hannon eyes the shelves of boxes and bubble wrap in his crisp red, white and blue store and says, "If they change us over to UPS brown, I just hope the paint cost doesn't come out of my pocket."

Mr. Siebert categorizes Mr. Hannon's dilemma under "surprises about the nature of franchising." "People get into the business thinking they'll be entrepreneurs," he says. "They don't realize that their franchiser has a greater level of control and that they have little or no influence on the way decisions are made."

Just ask the 400 or so Baskin-Robbins franchisees who had a simultaneous rude awakening one day in 1999 when during a conference call from headquarters, in Randolph, Mass., officials told them their stores were "no longer in strategic markets" and that their franchise contracts wouldn't be renewed when they expired. Tommy Joyce, who'd operated a Baskin-Robbins ice-cream store in Lake Charles, La., for 13 years, is one of 40 franchisees suing the franchiser. The trial starts Nov. 12. "If what Baskin-Robbins did wasn't illegal," says Mr. Joyce, "it was one of the most immoral acts I've ever seen in my life. They don't care how much we've invested in our stores."

Baskin-Robbins is owned by Allied Domecq PLC, the United Kingdom spirits vendor of Kahlua, Courvoisier and Beefeater Gin. Debra Newton, a spokesperson for Allied Domecq's Quick Serve Restaurants group, says the company still supports about 2,000 other standalone franchisees. By phasing out the nonstrategic stores, she says, the franchiser can focus on "growing markets."

Little Hand-Holding

Franchisees are also surprised when their franchisers don't focus on them at all, says Mr. Siebert. "Many franchisees expect more support and hand-holding than they actually receive," he says.

The lack of support shouldn't have surprised Moe Sweeney, 46, because he'd worked at company headquarters, then in Los Angeles, before opening a California Closets remodeling franchise in Bloomington, Minn., in 1989. In 13 years, he says, corporate representatives have visited his location six times."If you wait around for your franchiser to help you, you'll go under," he says. "To be successful, you have to pull up your ownbootstraps."

You also must have enough cash to get started. Few businesses of any kind make money during the first year, and too many franchisees are undercapitalized, Mr. Siebert says. Mr. Sweeney can attest to this. "I never expected we'd need so much cash to start our business," he says. "It took every penny and dime we had to run an ad in the newspaper, just to get our name out there."

After five years, Mr. Sweeney was paying himself only about $25,000 a year "and the landlord was about to put a chain on our door because we couldn't pay the rent," he says. He pulled together the needed cash during a weekend selling spree, and today Mr. Sweeney has 28 employees who manufacture, sell and install four or five closet systems a day, at an average price of $2,693. Sales this year should hit $2.6 million and he and a partner will each earn $130,000.

Mr. Waddell also was surprised by his initial cash crunch. "We seemed to be working 24 hours a day," he says, "and our first month's gross was only $1,300." Within four months, however, the couple had outgrown a basement office. The franchise now employs six dispatchers and 27 technicianswho unlock cars and change tires 24/7 throughout northern Ohio. This month, gross sales will top $120,000. "But I still sleep with my Nextel on my hip," Mr. Waddell says.

When the Tables Are Turned

Have any of Pop-A-Lock's franchisees given rude awakenings to their parent firm? Daniel Slone, 32, the franchiser's vice president and director of franchise operations, laughs. Pop-A-Lock's training and special toolkit enable franchisees to pop open the locks of any model car in about 15 seconds. Prospects who apply receive background checks. This was fortuitous in the case of one applicant because, Mr. Slone says, "the report said there were pending charges against him -- for grand theft auto."

Franchisees usually don't conduct background checks on their franchisers, but more research would help them avoid many surprises, says Mr. Siebert. Before signing a franchise contract, talk to current franchisees about problems they have encountered with employees and cash flow. Read news reports about your franchiser and, if you discover pending lawsuits, talk to involved franchisees about the issues. Review the contract carefully with a franchise attorney. And most important, spend a few days in a company or franchised location, getting the feel of what the business is like and if it's something you really want to do for the next 10 years.

Such an immersion probably wouldn't have changed Mr. Waddell's mind about buying a Pop-A-Lock. But that first 3 a.m. awakening would have seemed a lot less rude.

Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved

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