Posted on November 17, 2008

Franchises: Beware the Risks


Since the mid-1990s, an ever increasing number of baby boomers have found themselves downsized, outsourced, or otherwise out of a job. The trend is expected to accelerate as the economy slips into recession.

Many of those affected are in middle management. They’re built their lives—from their kids’ educations to their mortgages to the cars they drive—around the comfortable salaries they’ve grown accustomed to. Now, they’re finding that the very kinds of jobs they know how to do are being eliminated. In other words, ever more elephants are looking for ever fewer watering holes.

Such individuals typically aren’t penniless when they first lose their jobs. They have at least some savings, and perhaps a substantial sum tucked away in a 401(k) plan. When they realize that their chances on the job market are slim, they consider going into business for themselves. They know that most business startups require some initial investment, and they’re willing to make it if they have a reasonable chance of success.

These are precisely the kind of people that franchise organizations target. This isn’t always a bad thing. At its best, franchising lets new entrepreneurs “piggyback” onto the experience of thousands. When you open a McDonalds (or a Subway, or a Jiffy Lube), the franchiser will teach you (and often, force you) to lay out your store, price your products, advertise, and otherwise operate your business in a very specific way: the way that has proven to work. But no formula is foolproof; and some are even intentionally misleading. At its worst, franchising can be a way to waste your life savings and perhaps even mire yourself with debt, leaving you only with shattered dreams.

Dave Taylor (an Internet guru whom I met and had breakfast with at Blog World Expo 2008) has posted a cautionary tale about a Subway owner who lost his store because he couldn’t afford a tax payment of less than $3,000. In other words, he ran out of cash, and that was the end of his business.

The moral of the story: if you’re thinking of investing in a franchise, do your homework, and be very, very sure (1) that the numbers make sense; (2) that the numbers you’ve been presented with are realistic; and (3) that you have enough cash to survive in the event of a miscalculation. Going into business for yourself can be very rewarding, but it also entails considerable risk—even if it involves a “tried and true” franchise opportunity.

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