Franchise rights & wrongs

Questions to ask before becoming a franchise owner:

• Do you thoroughly understand the franchise business model, including how and why it works?

• Have you done a thorough self-evaluation to make sure that you’re suited for a franchise business?

• Have you thoroughly investigated the franchise opportunities that you’ve chosen to look into?

• Did you get proper legal advice before you signed your franchise agreement?

• Did you obtain the right type of small business loan for your business?

Source: Small Business Administration

Conrad Cluff had big dreams for his general contracting firm. But as he spent 12 years trying to grow his Clark County business, he kept coming back to the same basic truth: His strengths were as a contractor, not a marketing guru or a business development expert.

“I did a lot of experimenting, I read a lot of books, and I learned that to grow I was going to require investment, consultants, staff,” Cluff says. “But I could never quite break out of the mold of the guy with a trailer and a couple of toys.”

So when Texas-based Rainbow International asked Cluff if he’d like to start a north Vancouver cleaning and restoration franchise, he was intrigued. “They have a pattern that has been duplicated over and over and has been proven successful in different markets,” he says.

Franchises can be a great path to business success — if the right person invests in the right business opportunity, says Joel Libava, a franchise ownership adviser who writes about the topic for the U.S. Small Business Administration. But as Cluff and other Clark County business owners have learned, it can take months or years for a franchise investment to pay off, and investors should do their research before getting started.

Expect high costs, low salaries

McDonald’s is perhaps the best-known franchise in the country, and it’s also one of the more expensive chains to invest in. According to Entrepreneur magazine, potential owners typically must have $750,000 in available cash to invest in a new McDonald’s, and initial investment costs are typically $1 million to $2.2 million per location.

But even a smaller chain requires significant upfront costs.

Rebecca Juarez says her franchise fee to start a Great Harvest Bread bakery in Vancouver was roughly $35,000 to $40,000. She also had to spend more than $130,000 on equipment, and borrowed to cover those early costs plus rent and labor.

Juarez opened her store in August 2012. While she’s able to pay her bills and cover business costs, she hasn’t started paying herself yet for her work, she said. She’s already paying Great Harvest corporate, however, which receives 7 percent of gross sales as a royalty.

Cluff, who declined to offer financial specifics, also pays his franchise parent a percentage of gross revenue. He said he’s earning about as much as a franchise owner as he did before he invested in Rainbow International.

“In terms of business volume, I’ve tripled what I did in the past,” Cluff says. “The difference is, my overhead has tripled, too.”

That’s normal for new franchise owners, Libava says.

“Think about it. Where would your salary come from? You’ve just invested some of your own money into a brand-new business, got a small business loan to cover the total franchise costs,” he says. And when money starts coming in, it has to cover rent, inventory, payroll, utilities — and that startup loan.

“Your goal needs to be breaking even,” Libava says. “That’s the point at which your revenue pays your business expenses. Only then can you start thinking about drawing a salary.”

Read the fine print

When considering an investment in a franchise, it’s important to read the fine print, according to the Small Business Administration. Some companies require franchisees to follow exacting standards, while others give investors a lot of leeway, and there are pros and cons to each approach. There’s also a big variation in how much support a company offers to its franchise owners.

At franchise operations with strict rules about appearance and marketing, owners can run into trouble if they don’t follow the guidelines. In a worst-case scenario, a franchisor can terminate the contract when a small business doesn’t meet franchise standards, according to Nolo, the legal news and advice website.

Great Harvest offers its franchisees the freedom to run their businesses however they see fit, with a few guidelines, Juarez says.

She has to use the company’s flour, and she has access to standardized recipes shared with other franchise owners. But beyond those basics, she’s free to develop the business as she sees fit.

“It’s not like a McDonald’s or Subway,” Juarez says. “In those cases, you do everything exactly the way they say to do it, when to do it. You’re only able to sell certain products, purchase them from certain companies, and you have them for certain amounts of time. Your lobbies, your menus, everything must look the same. In our franchise, it’s about us, our family, how we want to run our business, and how we fit into our community. Our Great Harvest here in Vancouver is very different from a store in Clackamas or Hillsboro, or in Alaska or Hawaii.”

Great Harvest corporate offered some market research to help Juarez choose her store location, but her store gets less foot traffic than she’d hoped for, and she questions the value of the location help. The chain lets her use its logo in her own marketing materials, but it does not actively promote her business on its own.

By contrast, Rainbow International offers much more support — and also expects adherence to a strict set of standards, Cluff says.

He’s put Rainbow decals on his vehicles, obtained Rainbow-approved equipment for his work, and even requires his employees to wear uniforms when they are on the job.

In exchange for adopting the Rainbow way, Cluff got help with business systems that had frustrated him previously as a business owner. Rainbow International also refers a steady stream of insurance company clients his way.

With revenue streaming in, Cluff says that in about five years he hopes to have paid down enough of his startup costs to start paying himself more. “The trick is getting to the point where the volume and margins are able to provide good livings for the employees and the owner.”