Guest column: Franchising is another avenue for entrepreneurs

James Cross

Sunday, July 5, 2015 | 2 a.m.

Many people forget that franchising is classic entrepreneurship.

The basic idea is that franchise system sponsors, or franchisers, share their knowledge about running a business. Of course, that is not free. The the franchisee agrees to pay a one-time fee and ongoing royalties, and contribute to umbrella marketing programs. In return, they get to use the franchiser’s established brand and business model.

Anyone interested in buying a franchise needs to do the homework. A good starting point is the International Franchising Association website (IFA.org). Keep in mind, though: It is a trade association, so its view on the industry will be overwhelmingly positive. IFA also sponsors franchising shows around the world and takes positions on legislation that affects franchising.

A great investment for potential franchisees is attending an IFA show to meet with companies and gather information.

Franchise systems make extensive use of contracts, which govern all aspects of the business relationship. Historically, contracts have addressed mainly the rights of the franchiser. Recently, some systems (e.g. Taco Bell) have introduced more balanced and shorter contracts. Studies have shown that franchisees often sign contracts without legal representation and end up regretting it.

There are several useful websites for people considering franchising. UnhappyFranchisee.com presents a skeptical look at the industry. There are links on the site to franchise attorneys and a message board. Bluemaumau.com (named after a fish) has a variety of content, including lists of franchisee failure rates.

Recently, the industry has been trying to lure franchisees with incentives such as fee waivers or programs such as IFA’s VetFran, which focuses on military veterans because of their strong work ethic, problem-solving skills, ability to take charge and lead, and willingness to follow orders. If veterans stick to the franchiser’s proven methods, they have a good chance to be successful. Anytime Fitness currently has a program for veterans.

IFA also has an initiative called NextGen, aimed at young franchisees.

Another issue in franchising is failure rates. The industry often quotes 5 percent, which is low compared with small business in general. Franchisee screening and training contribute to the lower rate. However, many academic studies poke holes in the 5 percent figure. The industry normally does not count “turnover” as failure, and many locations do turn over.

Overall, franchising is a good compromise between the corporate world and independent business. A franchisee really is a “semi-independent” businessperson.

James Cross is a marketing professor at Lee Business School at UNLV. He has a doctorate from the University of Minnesota and has taught franchising courses in Southeast Asia.