Starting a Franchised Business

Submitted by: John Herdzina, Jennifer Rattner, and Katie Glissman

At AK&C we get excited about our clients and our clients’ investments in businesses. We get especially excited about the number of younger folks desiring to start their own businesses. It seems that Millennials are a generation of hard working, humble, inquisitive and incredibly entrepreneurial folks.

One question we are often asked is, "Which has the better chance of success: starting a franchised business or starting an independent small business?" Our typical response is that there is no guarantee of success in either one. Generally, franchisors champion that their particular system is unique, that it has taken years of experience and a significant investment of capital to develop, and that if the franchisee follows the system, the franchisee will be successful. After all, franchisors say, there is no sense reinventing the wheel. But, as we’ve seen, any successful franchise system depends on both the franchisor and the franchisees working together to create an environment that helps everyone achieve success.

You may have read that a six-store McDonald’s Corp. franchisee (BCDG, LP) based in Iowa recently filed for bankruptcy, claiming a significant drop in business and increasing competition as a couple of the reasons. Bankruptcy among franchisees is not uncommon. However, bankruptcy of a McDonald’s franchisee is uncommon.

If a six-store McDonald’s franchisee, with locations in populated areas, can go bankrupt, it shows that even franchisees in one of the historically most successful franchise systems are not immune to failure. The bottom line is, just because a person invests in a franchise system does not mean the investor will be successful, or, even if successful at first, that it cannot then reverse course. There is a myriad of reasons for lack of success among franchisees, including increased competition, too much debt and poor management, to name a few.

On the other hand, there are also many incentives to investing in a franchise system. The franchisor funds development of the initial concept and often has gained name recognition and a loyal following before a franchisee decides to invest. The point is that an investor must be cautious to not be trapped by a franchisor’s claims of unique systems and concepts and inherent success, but to fully evaluate the potential risks and rewards that accompany investment in a franchise system.

Before you decide to buy a franchise, do your homework: study the franchisor’s history, examine its paper work (called the Franchise Disclosure Document), ask questions, talk to existing franchisees and discuss your potential investment with your franchise lawyer, accountant, banker, and insurance advisor.