Franchises: Powerful help or expensive drain?

Some owners say the expertise they get from their franchise is invaluable; others feel they are paying too much to get too little.

Stacy Bloch, owner of Eagles Games, Models, and Miniatures, was a franchisee of a Seattle-based hobby chain when he first opened his store — but it didn’t take him long to realize he was paying too much and getting too little from the arrangement, and quickly dissolved his partnership with the franchiser.

   Becoming a franchisee is one commonly taken path to business ownership. A franchise can provide name recognition in today’s marketplace of neon signs, and a corporate crutch for support — at a price.
   Franchises vary greatly. Some owners pay the franchisers very little and have few imposed corporate regulations, while others must adhere closely to the business model and the related fees they’ve been dealt.
   The added structure is something certain franchisees gladly pay for, because they believe it gives them an edge. In contrast, other business owners see a franchise as a narrowing of their freedoms and a needless expense. In the end, the right choice depends on an owner’s needs and their vision for the future.
   Starting a business can be scary; unanswered questions abound in the marketplace. Aysa Saadat, owner of IHOP in Bellingham, wanted some answers before going into business, and used franchise ownership as the means to provide them.
   As a prospective business owner, Saadat said he was looking for security and financial stability in the restaurant industry. He said becoming an IHOP franchisee offered extra blankets of security he wouldn’t have had going into business on his own.
   “The way things are going with the increases in cost of living you can’t keep raising prices and expect to stay in business,” said Saadat, who has owned the business for eight years. Having ties with IHOP corporate helps guarantee price stability when buying from suppliers, said Saadat.
   According to Saadat, he buys his food from suppliers who have a contract with IHOP. Because the suppliers are selling in bulk quantities, price is negotiated and guaranteed prior to the sale, offering a competitive and stable price.
   “Everyone wants to be your supplier,” said Saadat. He said being a franchisee has given him added clout in the market.
   Another constant is the food that Saadat sells. IHOP corporate develops standard menus for their restaurants, he said. Having little control over his menu doesn’t bother Saadat, however, because he knows he’s selling a proven product, which has already been tested in other markets.
   There’s also the IHOP name, which customers recognize and have expectations for, said Saadat. To use the name, Saadat said he pays a 4.5 percent royalty on his gross every week; in addition, he also pays 4 percent of his gross per week to IHOP corporate for local and national advertising and marketing.
   Another requirement of being an IHOP franchisee is that Saadat must keep his restaurant up to IHOP corporate standards. Every five years, Saadat said, he is required to remodel his restaurant. Although IHOP corporate provides him with a remodeling plan, sets him up with contractors, and provides him with a project consultant, he has to pay for the job.
   Saadat, a 30-year veteran of the restaurant business, said he feels the benefits of being a franchisee certainly outweigh the costs for him.
   To qualify as a franchisee with IHOP corporate you must be financially stable, said Saadat. He also said the investment when buying the franchise is likely more than if you were to start a business independently. Additionally, a new owner must go through training, working at an IHOP restaurant in another state for about three months, he said. Tom Dorr, director of Western Washington University’s Small Business Development Center, said franchisees tend to gravitate toward the restaurant and service industries, where, for example, small plumbing or carpet cleaning businesses can rely on corporate expertise for marketing and financial services.
   According to Dorr, franchise ownership is not on the rise locally, and more independent businesses are opening. He said franchise businesses across Washington state are struggling right now, because they haven’t taken into account higher state wage rates in their business models. Additionally, Whatcom County has a lower number than the national average of franchise businesses, he said.
   When Greg Carslay, owner of Minuteman Press in Bellingham, was looking to buy a new business, he wasn’t looking for a franchise. He had business experience from prior ventures, and said he didn’t need help or want a portion of his profits taken away. When he bought the Minuteman Press location, however, the franchise came along with it.
   Regardless, Carslay said he is satisfied with his business, because Minuteman corporate doesn’t exert any control over him. In the beginning, he said he used some offered corporate training to learn about the printing industry, but stopped after a few months. Now he pays 6 percent of his monthly gross to Minuteman Press corporate for using its name.
   Minuteman Press does offer marketing, advertising and some negotiated pricing for supplies, but they don’t require franchisees to use the services, Carslay said. Carslay does his own advertising. He also sometimes buys supplies through Minuteman Press corporate, but said he can often get just as competitive prices on his own.
   According to Dorr, the investment level in starting an independent business versus buying a franchise comes out about the same when everything is tallied. He said that business owners are basically weighing the cost of navigating a new business learning curve against paying for a proven business model.
   Dorr said a common thread in franchise owners is that they usually come from out of the area, are new to an industry, or are starting their first business.
   At age 27, Stacy Bloch, owner of Eagles Games, Models and Miniatures, was in that position. In 1987, he decided to become a franchisee of American Eagles Hobbies, which is based in Seattle.
   Although American Eagles Hobbies was a smaller local operation with only one other franchisee, Bloch accepted a deal to get help learning the business, find furnishings for the store and negotiate a lease for a Bellingham location.
   The owner of American Eagles Hobbies also gave him a plan for recommended merchandise and sales projections, said Bloch. According to Bloch, the franchise arrangement was sort of loose, as he was a long-time acquaintance of the company’s owner.
   As part of the deal, Bloch said, he had to pay a 5 percent markup on the merchandise he bought through American Eagles Hobbies, which was said to be competitively priced.
   After a few months, the deal wasn’t what it appeared to be. According to Bloch, he received little help learning to run the business. The sales projections were not very realistic, and the merchandise recommendations were things Bloch, a longtime hobby-store shopper, already knew about.
   The real backbreaker for Bloch, however, became the added cost of purchasing merchandise, which ended up being about a 10 percent markup, instead of the promised 5 percent. “Customers know what something should cost in this industry, and if you raise prices, you’ll lose customers,” he said.
   After a year and a half, Bloch chose to break his franchise arrangement. He said if he was to continue with the franchise agreement— for which he was not penalized for discontinuing, although he did need to change the name of his business — his profit margin would not have been high enough to stay in business.
   Bloch has continued business independently ever since. He said he was forced to learn a lot in his first year, such as dealing with suppliers, learning how to do payroll and balancing the books, all with little help.
nbsp;In the end, Bloch said, breaking away and becoming an independent business owner has been a satisfying endeavor. The whole experience landed him in the hobby industry, where he can have a lot of fun running his business, he said.
   “It’s exciting, but it will also keep you up at night.”


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