Top ten myths about buying a franchise – Part 2

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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

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