This is the second of my three part series looking at myths around buying, running and owning a franchise based on my own personal experience. Following some comments I received on the first article of this series, I just wanted to clarify that I am not anti-franchising. I think it can be a very profitable venture if done correctly and you go in with your eyes open. That is the aim of this series of articles - to set your expectations and to ensure you are armed with the knowledge (truth) to make the right business investment decision.

In the first article, I covered the first 3 of 10 myths of franchising which were:

Myth #1 - Buying into a brand
Myth #2 - One-sided contract
Myth #3 - Turn Key Operation

Here are the next three myths you need to be aware of:

Myth #4 – I will form a corporation to protect me – It is always a good idea to form a corporation to protect yourself from creditors if things go bad. In addition, corporate tax rates tend to be lower than personal income tax rates; therefore there are some savings involved with a incorporation. The problem is not with the corporation itself, but with specific creditors. The Small Business Administration (SBA) may back the bank loan you receive, but they are still going to require you to sign a personal guarantee. In addition, most landlords – especially those with sought after locations – will require a personal guarantee. Most commercial leases run – at a minimum – five years, therefore you are on the hook, personally, for five years worth of rent. When I sold my franchise for a massive loss to the new owner, the landlord required me to do two things:
> Agree to guarantee payment of the rent for the new owner for one year.
> Agree to pay all lawyers fees for the landlord and myself to transfer all the lease documents, etc.

This cost me about $7,000 in attorney's fees. It was well worth it, but hurt nonetheless, given the loss I took on the sale.

Myth #5 – Franchisor will guarantee me a good Location, Location, Location – Most franchisor's perform traffic/volume analysis on any location before you are allowed to begin negotiating the lease. This is supposedly for your benefit, but in reality, they are just statistics and do not guarantee a profitable volume. As Mark Twain said, "Lies, Damn Lies, and Statistics". You can "spin" data to fit your objective. A great location is probably the most important decision – period. And yet like finding a good boyfriend/girlfriend, there are only so many great ones out there. And the competition among all types of businesses is fierce for these coveted locations.

Myth #6 – I will make lots of money (while being my own boss) – Most franchisees make between 30K and 70K per year and work long hours. Sure there are a few stores that produce six-figure incomes for the owner, but this is not the norm. After all, if a franchisee is making 200K at his store at the intersection of X and Y, then the franchise company will put another location a few miles away to take advantage of that volume. Franchisors would rather have two stores making 100K each, than one store making 200K. It gives them better control. They don't like "powerful" franchisees; they are potential threats. The only way to make a lot of money with a franchise is to:

1) Buy a good franchise company - very few will be a runaway success;
2) Get in early;
3) Own multiple stores (four or more) in good locations

Look for the final edition, with Myths # 7 to 10, of this series on franchising in the next couple of weeks. As always do leave a comment and I will endeavor to get back to you as soon as possible. Thanks to Andy and Saving to Invest for publishing this series.

This was a guest post by Tony Parker, an experienced investor across various asset classes and a past franchise owner.

Here are three good books on franchising worth reading if you want more detail on buying a franchise and the pro's and con's of doing so:

1. Street Smart Franchising
2. Franchising For Dummies
3. Real Franchising Stories

Related articles and information links:
Top ten myths about buying a franchise - Part 1
Federal Trade Commission - Buying a Franchise
Small Business Association

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I work in the technology sector and so it was interesting to see the results of the 2008 US IT salary survey. Overall it looks like the median salaries for business technology professionals fell for the first time in 11 years. From 2007 to 2008, median base pay for IT staff fell to $73,000 from $74,000 and for managers it dropped from $97,000 to $96,000. This was probably due to the general economic slowdown which led to lower corporate spending and increased outsourcing thereby driving down internal labor costs. However, as the overall drops are not significant I don't think you can read too much into the numbers yet.

Some other points of note from the survey were:

1. There are still some jobs that are seeing an uptick in salary, particularly those with Web design and Enterprise wide type roles (average salary is $92,000). Help desk/IT support roles came in with the lowest pay at an average of $51,000, which is still well above the average American income.

2. Certain regions are continuing to grow their need for IT staff while others are contracting. The greater Washington DC metro area (which encompass surrounding areas in Maryland and Northern Virginia) is growing thanks to government driven IT spending and demand. Whereas New York and New Jersey are contracting due to hard hit financial institutions that are laying off large numbers of staff.

3. There is still a significant gender gap in pay. Male IT staff earn a median salary of $75,000 versus $68,000 for female staff - a 9% gap. It was 13% a year ago, so I guess there has been an improvement on a year-on-year basis.

4. 55% of respondents say that there are fewer IT jobs available now because of outsourcing. Though only 22% say that this has led to salary reductions for employees.

My salary has gone up at the rate of inflation over the last 2 years, though my bonuses have been in line with what I am due under my employment contract. So I guess I am ahead of the curve for now. I think next years survey results (for 2008 trends) will probably be worse as 2008 will likely be another bad year for job growth and salary increases due to the impending recession and cutback in corporate spending. If you work in the technology sector you should be very cautious when if comes to your job and make sure you are a valued employee. The IT department is normally one of the largest cost centers for companies and so is the first to experience lay-offs and cutbacks when the focus is on reducing costs. The full survey can be found at InformationWeek.

On a lighter note, you could classify bloggers (or more formally web site authors), as business technology professionals. I am pretty sure blogger salaries will not be appearing in national salary surveys anytime soon, but what do you think the average blogger earns? If I was to project my annualized income from blogging - it would be in the hundreds and not thousands of dollars. I imagine this would be the same for a majority of other bloggers out there, apart from the one to five percent who actually make a pretty decent living from their blog.

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This post is by Tony Parker, an experienced investor across various asset classes.

Generally most Americans are not happy working for someone else or being in the corporate rat race. So the idea of being your own boss and controlling your destiny is very appealing. Besides some of the many “get rich quick” schemes on TV, there is one type of business that seems like an easy escape from the corporate (READ: Dilbert) world. It is to buy a franchise. Now there are many franchises available in a multitude of industries, but they all have two things in common. First, they project the image of financial freedom. Second, beyond a few boilerplate legal disclaimers - “By signing this contract, the franchisor is in no way guaranteeing the franchisee a profitable enterprise” – the franchise company (like a politician) only tells you the good news. So, to shed some light on fransching for readers of this site, I have complied a list of the top ten myths associated with buying a franchise. These items come from my own real life experiences when I owned a second-tier franchise for one year before selling it for a $170,000 loss. This very expensive lesson means that I know of what I speak (write).


1. Buying into a brand - So you think that by purchasing a franchise, you are buying into a brand. And because the brand already has name recognition, you will only need to do a minimal amount of advertising. Basically – as the saying goes – “If you build it, they will come.” Well, unless you are in a fantastic location, you are competing against all the other franchisees/small shop owners in the neighborhood and people are NOT as loyal to any one brand as you think (with the exception of NASCAR fans!). So don’t get lulled into this sales pitch.

2. One-sided contract – The contract you sign with the franchisor is extremely one-sided. If anything goes wrong on your side, it is your problem. And if anything goes wrong on their side, they will take their time fixing it. Sure, they want you to succeed – more royalties for them - but you have no leverage over them if the ship starts to sink. And trust me, if you get too “agitated ” or “pushy”, their lawyers will pull out that contract and enforce it to the letter. And remember, you are losing money, so you cannot afford a decent lawyer to put up a good fight.

3. Turn Key Operation – So you think that buying a “Turn Key Operation” is going to compensate for your lack of industry experience and management skills - right? Well, like most things in life, this is a two-edged sword. The franchisor, in fact, will have policies and procedures that are documented to a shocking level of granularity, but these policies also leave very little room to maneuver when the money is NOT rolling in. Specifically, your fixed costs are in fact – fixed. And your variable costs are not as variable as you would think. For instance, with most franchises, you are required to purchase your products from the franchisor, one of its subsidiaries, or a preferred vendor. Therefore, you cannot go shopping around for the best price on the products you sell because the franchisor will not let you. Their argument is always the “quality factor”. How can they guarantee a consistent experience for all customers in all places if the franchisees are buying different products from different vendors? A reasonable assertion, but one that limits your ability to control one of your biggest costs.

Likewise, payroll is a variable cost, but most franchisors require that you have a minimum amount of staff on duty. A franchisee certainly does not want customers sitting in a long line because there is only one individual manning the store, but it is not very cost efficient if you have the same number of people on duty during busy periods as in slow periods (I am sure you have noticed this). Bottom line, “Turn Key” is great when you are making money but gives you very little flexibility when you need it the most, like when you need to cut costs.

This concludes Part one of the three part series. I will publish myths #4 through #7 next week and the final three myths the week after next. You can subscribe to this blog by clicking here to receive new posts via RSS or email.

You can find the next two parts of this series via the links below:

Top ten myths about buying a franchise - Part 2

Top ten myths about buying a franchise - Part 3 (to be published)

Here are three good books on franchising worth reading if you want more detail on buying a franchise and the pro's and con's of doing so:

1. Street Smart Franchising

2. Franchising For Dummies

3. Real Franchising Stories

Photo's courtesy Travelling Fools.

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