White Paper

Ten Reasons
NOT
to Buy a Franchise

© 1999, 2005 Stuart M. Altschuler and Prestige Framing Academy, LLC. All rights reserved. No part of this publication may be reproduced in any form or by any means or stored in a text retrieval system without the written
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 Why Buy A Franchise?
“A primary reason for purchasing a franchise is the right to associate with
the company’s name. The more widely recognized the name, the more likely
it will draw customers who know its products or services.”1. Brands like
McDonald’s, Dunkin’ Donuts, Holiday Inn, etc. are valuable franchises because
of the name recognition. Customers know what to expect when they purchase
from franchises with well-known names. Unfortunately, many prospective
franchisees think of these brands when considering the purchase of a franchise
rather than the reputation of the specific franchisor. Name recognition is
negligible for many service-oriented or non-mall retail businesses and that is
what the buyer (franchisee) is purchasing.

Many factors are involved in the decision to purchase a franchise. Most

potential buyers are interested in having their own business. Many want
freedom from a corporate environment or are looking for a new career. Some
want to pursue an avocation as a profession. But all need to consider the
investment involved, the reputation and experience of the seller (franchisor), the
time frame to starting business, and many other issues.

While the most significant contribution to success of a franchise in any industry

is the brand image, real customers usually buy because they value the product
or service and appreciate the quality of service -- rather than the name of the
establishment. Ongoing business is frequently based on development of a
rapport between the customer and the merchant, not because of the brand.

In his SBA study2 of franchised small businesses compared to independent

small businesses in existence for four or five years, Dr. Timothy Bates found the
following:
• “..young independent small firms had a better chance
of surviving than small, non-corporate franchises.
• While franchise firms were better capitalized than
non-franchise firms, about 62 percent of the franchise
firms survived, versus 68 percent of the non-franchise
or independent firms.
• Average profit was much higher for the independent
businesses; profits were negative, on average, for the
franchise firms.
• Only 49 percent of the franchises started by women
in 1987 were in existence in 1991, compared with 67
percent of the independent firms started by wom-
en…”

This paper is designed to help the prospective buyer consider the negatives of
becoming a franchisee.

© 2006, Prestige Framing Academy, LLC 2 White Paper

 1. Upfront Franchise Costs – There are high upfront costs just for
the initial franchise fee. With many franchises, a large investment is necessary
to start in business (ex: $25K – 45K for a golf training business3, $30K for a
picture framing business4, $20 – 30K for a candy business5). For most franchises
these fees are due at agreement signing – a large out-of-pocket expenditure long
before opening for business. In addition many franchisors charge for initial
accounting fees, insurance, etc.

2. Ongoing Royalty Fees to the Franchisor – In a franchise

arrangement, the franchisee continues to pay the franchisor for a long period of
time – generally ten years for the initial agreement6. Typical ongoing franchise
fees are a set percentage based on gross weekly or monthly sales – NOT profit.
While fees generally range from 3-6 % of gross sales7, percentages as high as
10% are not uncommon. Even if the franchised business is losing money, the
franchise fees are due each time period. There is a contractual obligation to pay
these fees as long as the business exists. This can severely impact the bottom
line. For failing franchises, often the last check written is for
royalty fees to the franchisor.
“Too many
franchise 3. One-Size Fits All Training for a New
owners prepare Franchisee – For many people considering a franchise, the
training provided is considered an important positive. Many
only for the view it as a way to learn a new skill and become proficient in
their new business. But, in fact, it is frequently a negative. The
initial outlay of franchisor has set training packages that may not fit everyone’s
money but do learning style. In many cases that initial package is all the
training that is received. Because of the franchisor’s agreements
not adequately with various vendors, training may not present an unbiased
view of vendor relationships, products, methods, and materials.
plan for the In addition, training may not consider the individual franchise
ongoing locality. Customers are different in various areas of the country
– what is considered polite in New York City may be considered
financial rude in rural Iowa. One-Size Fits All Training does not allow
for local proclivities. A lack of ongoing training can result in
needs.” obsolete techniques or outdated product offerings.

4. Fixed Equipment Costs – Most franchisors

have set packages from set vendors (that generally include a
markup for the franchisor). The equipment may be priced too high and may
not be appropriate for individual operations. The franchisee typically has to
buy certain equipment that may not “work” for their establishment. There are
no options presented and no alternatives allowed. Frequently the equipment
is geared to a sales volume that may not be attained until several years in the
business. Nonetheless the franchisee has had a larger capital outlay during
startup.

5. Franchise Advertising Packages – Franchisors generally

require co-operative advertising. It is frequently geared to a national market
Ten Reasons NOT to Buy a Franchise 3 © 2006, Prestige Framing Academy, LLC
 and may not reach potential customers in the franchisee’s market. These
mandatory advertising dollars are not self-directed so the franchisee has no say
in ad design or placement. While many franchisors brag about their advertising,
in fact it may not be effective in many local markets. In addition, the
franchisor generally charges a substantial fee for “grand opening
advertising” (ex: $22,5K3, $24K-48K4), even if such advertising is
“Name unnecessary or inappropriate for the particular market.

recognition is 6. Restrictions on Trade – The franchisee is frequently

negligible for granted a limited “territory” for doing business. Expansion is
not permitted without the purchase of an additional franchise.
many service- Also the type of merchandise or service that can be offered is
frequently limited by the franchise agreement. New offerings
oriented aren’t allowed because they are not part of the franchisor’s
or non- package.

mall retail 7. Name Recognition – As mentioned above, the most

businesses” significant part of the franchise purchase is the brand name,
as a franchisee is granted the use of the franchisor’s name. In
many cases, this name is meaningless to the potential customer
and may even have a negative connotation in some markets.
Franchises with names like “economy”, “save”, and “discount” may discourage
the higher-end customers who shop value rather than price. Those considering
purchase of a franchise should determine the value of the franchise name in
their locale -- whether it is truly a familiar brand that represents quality or an
unknown commodity to anyone but the franchisor.

8. Franchise Agreements – While The International Franchise

Association lists the average length of a franchise contract at 10 years6, the FTC
estimates the average to be 15-20 years1. Renewing the agreement may result
in a smaller territory or higher royalty fees. There may be difficult terms for
ending the relationship. Some franchisees have not renewed and found the
franchisor opening another shop down the street with a sign “we’ve moved” in
the window. Others have not been renewed because they don’t generate enough
royalty dollars.

9. Support – Ongoing support of the franchisee does not always fit his/her
needs. Questions or problems have “generic” solutions rather than individual
responses. One size does not fit all for difficult problems or customer requests.

10. Pricing Model –The franchise generally has a national pricing model
that may not be appropriate to each local market. Pricing for a product or
service may be very different from the urban environment to the small town or
from one area of the country to another. The franchisee may find himself priced
too high for the local market or too low to make a profit.

© 2006, Prestige Framing Academy, LLC 4 White Paper

 Final Thoughts
“Too many franchise owners prepare only for the initial outlay of money but
do not adequately plan for the ongoing financial needs.”8, says the Dunn &
Bradstreet “Allbusiness” website. Total estimated startup costs range from
$274,430 - $2,537,712 for a golf training center3, $156,825 - $233,400 for a frame
shop4, and $150,500 - $284,350 for a candy shop5. While these include the
franchise purchase fee, many of these items may not be necessary at the outset
(or ever).

Each potential franchisee should consider carefully all aspects of franchising

and whether it is right for their situation. Existing franchisees should be
interviewed and questioned about the ten items listed above. All franchise
agreements should be read in great detail and reviewed by an attorney before
being signed.

Additional sources of information about franchising:

“A Consumer Guide to Buying a Franchise”, Federal Trade Commission

http://www.ftc.gov/bcp/conline/pubs/invest/buyfran.htm

“Top 10 Franchising Mistakes”, Dunn & Bradstreet

http://www.allbusiness.com/buying-exiting-businesses/franchising-
franchises/3989-1.html

“Franchising Still Fraught with Pitfalls Despite New FTC Rule”, Keith
Girard
http://www.allbusiness.com/government/4968853-1.html

“Getting Out of a Franchise”, Dunn & Bradstreet

http://www.allbusiness.com/buying-selling-businesses/franchising-
franchise-agreement/2180-1.html

“How Franchising Works”, Lee Ann Obringer

http://money.howstuffworks.com/franchising.htm

Endnotes
1. “A Consumer Guide to Buying a Franchise”, Federal Trade Commission http://
www.ftc.gov/bcp/conline/pubs/invest/buyfran.htm
2. Survival Patterns Among Franchise and Nonfranchise Firms Started in 1986
and 1987 by Dr. Timothy Bates, 1996. 75 p. Wayne State University, Detroit,
Michigan under contract no. SBA-8121-OA-94
3. http://www.parmastersfranchise.com/start-up-budget_centers.html
4. http://www.dtwfraninfo.com – Investment Page
5. http://fuzziwigcandyfactory.com/requirements.php
6. Source: The International Franchise Association (www.franchise.org)
7. ibid.
8. http://www.allbusiness.com/buying-exiting-businesses/franchising-
franchises/3989-1.html - “Top 10 Franchising Mistakes”
Ten Reasons NOT to Buy a Franchise 5 © 2006, Prestige Framing Academy, LLC
 Prestige Framing Academy, LLC
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Saugus, MA 01906
(617) 285-0855 *ÀiÃ̈}i
(866) 615-2429 fax À>“ˆ˜}
Academy
Consulting www.framingacadmy.com
info@framingacademy.com
Prestige Framing Academy, LLC is a full service business consulting firm specializing in the picture framing
industry. Major efforts include both new shop start-up as well as new departments within existing business, shop
operations planning and implementation, systems work, and marketing. Prestige also works with industry vendors
providing market strategy, new product development, and sales training. Consulting services are provided on a
project basis, with pricing determined by assignment magnitude. The principal of Prestige Framing Academy, LLC
is Stuart M. Altschuler, CPF®, GCF a third generation framer.