Your Money; Franchises Offer Profits and Risks
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By LEONARD SLOANE
Published: January 16, 1988
LEAD: JAMES Goodman, executive vice president of the Morehouse School of Medicine in Atlanta, recently decided to leave his position and go into franchising. So he bought the Seattle-area rights to open franchises of Jiffy Lube International Inc., a fast oil-change and lubrication system for automobiles.
JAMES Goodman, executive vice president of the Morehouse School of Medicine in Atlanta, recently decided to leave his position and go into franchising. So he bought the Seattle-area rights to open franchises of Jiffy Lube International Inc., a fast oil-change and lubrication system for automobiles.
''I've put in a lot of effort and energy for other people,'' Mr. Goodman said. ''I'm at a stage now where I want control over my own destiny.''
Rocky Paolini bought a franchise three years ago and now has a thriving printing and copying center under the Sir Speedy name in Wakefield, Mass. Before going into business on his own, he had worked at the Monsanto Company in sales and marketing for 14 years.
''I love it,'' he said. ''You'll never see me going back to corporate life.''
Mr. Goodman and Mr. Paolini are among the hundreds of thousands of Americans who have started their own businesses through franchising. Government statistics indicate that franchises stand a better chance of success than other independently owned small businesses. Nevertheless, prospective franchisees should understand the many pitfalls - indeed, some people have lost their entire investment rather quickly. Before opening an establishment and paying $1,000 to $500,000 for the franchise, investors should carefully study the business.
''Treat this as an extremely serious business investment,'' said Stanley L. Williams, director of education at the International Franchise Association. He urged investors to examine the entire situation carefully before they put up any money.
Franchising is a method of distributing brand-name products or services under license. A franchiser provides the business system and trademark and a franchisee operates the business under the franchiser's name.
There are two major franchising arrangements. In the business format, the franchiser establishes a fully integrated, continuing relationship with the franchise owner. In a product trade-name arrangement, the supplier and dealer establish an independent sales relationship, like those found in such industries as automobiles, soft drinks and petroleum products.
The business format has been responsible for much of the franchising growth in the last three decades.
Total sales of franchising companies amounted to approximately $591 billion in 1987, up about 6 percent over the previous year and representing one-third of all retail sales in the United States. Approximately a half-million franchised establishments exist, with business-format arrangements proliferating in such industries as real estate, rental service, cleaning and maintenance and, of course, the ubiquitous fast-food restaurant.
''You're buying someone else's experience,'' said Ray Bard, an Austin, Tex., management consultant and co-author of the book ''Own Your Own Franchise.'' ''You're getting their systems, their product development, their image in the marketplace and their supportive services.''
In addition to having the opportunity to participate in a tried-and-true business model and to receive both start-up assistance and follow-up support, franchisees may obtain other benefits. These potential advantages include sharing in the good will built up by other outlets bearing the same name, obtaining location analysis, getting continuing advice and training from the franchiser and receiving counsel in organizing, leasing, merchandising and advertising.
But franchising does have its drawbacks. A franchisee must comply with the franchiser's controls, standards and procedures or risk losing a valuable franchise. Also, a franchisee must usually spend more money to go into business than would be required without the trade name.
''The relationship between franchiser and franchisee is the key element to the present and future success,'' said Andrew Kostecka, a franchise specialist for the Commerce Department. ''A franchiser can develop superior procedures and programs, but they are meaningless unless franchisees put them into operation in the marketplace.''
