Beyond Burgers: Franchises Can Either Sizzle - or Sink
Most of us have heard the story about Uncle Harry or a grandmother down the block who took their retirement dollars and bought a snazzy hamburger franchise.
Now they're living the good life - basking on the beach at Waikiki.
There may still be gold in cheeseburgers. But with near saturation in the fast-food industry and scores of new chains popping up almost weekly, it's more important than ever to do your homework before plunking the proceeds from your retirement plan or corporate buyout into the latest franchise fad.
Case-in-point: McDonald's. It's still the king-of-the hill for fast food chains. But even the golden arches have been tarnished by competition - enough to prod the burger giant into price-cutting.
"It's starting to get very crowded in the fast-food area," says Ted Dixon, editor of the Info Franchise Newsletter.
"No one used to talk about having to go overseas to gain sales. Now, just about all the chains are having to do it," Mr. Dixon says.
Fast food is not the only case of overcrowding. Retail, which includes convenience stores, office-supply outlets, and communications equipment chains "is not as good an area for success as in some past years," Dixon says.
Still, scores of franchise outlets open up monthly in the US and Canada, spurred by the eagerness of modern consumers to get someone else to do the cooking, clean the house, or walk the dog.
And with more middle-age executives than ever walking away from corporate reorganizations with tidy cash settlements, there's a new eagerness to find low-cost franchises.
"A franchise can be surprisingly affordable," notes Terry Hill, of the International Franchise Association (IFA), a Washington-based trade group. A Subway fast food outlet goes for between $65,000 and about $150,000, he says; a Wendy's may require $200,000 to $300,000 in start-up costs, though total expenses may reach $1.3 million; and while costs will vary, you may even be able to join the McDonald's bandwagon for about $650,000, Hill says.
Some newer franchises can be operated out of your home for under $5,000.
Franchise operations now account for roughly one-third of US retail sales annually, or about $800 billion, Hill says. He expects sales to exceed $1 trillion by 2000.
The past few years have brought a number of new computer-related, business-service firms and home-office franchises.
Environmentally friendly companies are also in demand, including firms that detect leaks (such as natural gas) in private homes, and dry-cleaning outlets using nonhazardous chemicals.
Do Your Homework
If you see a franchise in your future, do lots of homework. Experts suggest a few key steps:
1. Look for companies that will do well in the future, not just now. Study the trends.
2. Don't sign a contract until you get a disclosure form from the franchiser.
3. Check out the franchiser's balance sheet.
4. Study the restrictions to the franchiser. Could the firm put another outlet in your immediate area without your permission or without giving you first crack at buying it?
5. Is the franchiser selling its product in local stores? Does that undercut your own business?
6. You will have to pay an initial sign up fee. Annual royalties to the franchise company can range between 5 and 10 percent. If they're higher, find out why.
How to Be Sure It's Not a Scam
eware of business "opportunities" that sound too good to be true.
Investors lose hundreds of millions of dollars a year to franchise scams. A few tips:
* Make sure a firm meets all state and local registration laws. Show disclosure statements to a lawyer or accountant.
* If you suspect fraud, call your state attorney general's office or securities office. You can also check with the fraud unit of your local FBI field office.
* For a list of more than 5,000 established North American franchisers, request "The Franchise Opportunities Guide" from the International Franchise Association for $21 (includes shipping and handling): 800-543-1038.
* Another directory is the "Franchise Annual Handbook and Directory," for $39.95 at (716) 754-4669. The same firm publishes the monthly Info Franchise Newsletter for $96 a year.
* A useful free publication is available from the North American Securities Administrators Association. Write to NASAA at One Massachusetts Avenue, Suite 310, Washington, DC, 20001. Ask for "Business Opportunity and Franchise Frauds."
* To reach a franchise broker, contact International Business Brokers & Consultants Ltd.: (617) 696-5800.