“Quasi-preneurs” see alternatives and challenges in franchising

NEW YORK (AP) — In 2020, Kelly Jackson and Davina Arceneaux wanted to quit their corporate jobs and become business owners. They were looking for something that is both COVID-proof and recession-proof.

Instead of completely stepping out of the corporate umbrella, they turned to franchising. The two worried about the notoriously tight margins for restaurants. They looked at a drug testing franchise, but the initial investment was too high.

A franchise mentor told them about Motto Mortgage Home Services, and Jackson and Arceneaux opened one in Oakbrook Terrace, Illinois in July 2020 with an initial investment of $35,000.

“People are always looking for new places to live and are constantly buying and selling houses,” Jackson said. He takes rising interest rates calmly. “Interest rates go up and down, they do, it’s part of the industry.”

Jackson and Arceneaux, who had been a senior IT program and project manager and an assistant director of catering respectively, had no mortgage experience, but Motto Mortgage offered training and support.

The couple of Kelly Jackson (right) and Davina Arceneaux pose for a portrait at their Motto mortgage office in Oakbrook Terrace, Illinois on Thursday, July 28, 2022 (AP Photo/Charles Rex Arbogast)

Photo: ASSOCIATED PRESS/Charles Rex Arbogast

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The couple of Kelly Jackson (left) and Davina Arceneaux pose for a portrait at their Motto mortgage office in Oakbrook Terrace, Illinois on Thursday, July 28, 2022 (AP Photo/Charles Rex Arbogast)

Photo: ASSOCIATED PRESS/Charles Rex Arbogast

“You don’t necessarily need industry experience to enter this category, the brand will train you,” said Matt Haller, President and CEO of the International Franchise Association.

In the months following the outbreak of the pandemic, many people with corporate jobs decided to go into business for themselves, in what has been described as a “great resignation”. They looked for alternatives, including opening a franchise with an established brand.

The “quasi-preneurs” opening franchises say they like the ability to buy into a trusted brand name and access to tools and operations you wouldn’t get if you started your own small business. But franchising also has many challenges. There are many rules and regulations that must be followed. Contracts are long and can be difficult to cancel.

The number of US franchises grew an estimated 3% to 774,965 in 2021, according to the IFA, after a decline in 2020. This includes large franchises like McDonald’s or 7-Eleven, but all types of businesses can be franchisees, of pool cleaners to barber shops.

There are approximately 3,000 franchise brands in the United States. The IFA forecasts US franchise brands to grow 2% this year to 792,014. That’s still just a fraction of the 32.5 million small businesses in the US

Franchise owners buy in with an initial fee — anywhere from tens of thousands to hundreds of thousands of dollars — to get their business, and then pay a monthly royalty percentage. In return, they receive branding, marketing and other support.

As a classically trained pastry chef, Helen Kim often dreamed of having her own bakery. But when she decided to start her own business, Kim thought starting a business from scratch would be “too big a mountain for me to climb.”

While working at the Aria Resort & Casino in Las Vegas, Kim was a frequent customer at Paris Baguette. She was impressed and bought a Parisian baguette franchise in the city with her sister last year.

While the financial requirements are stringent — according to the company’s website, franchisees need $1.5 million in net worth and $500,000 in cash and cash equivalents — Kim said it was worth it. While the money invested in a franchise is still at risk if the business fails, brand name recognition and the support of the franchisor offer more security than establishing an unknown brand.

However, getting used to a franchise structure can be a change. When Chris Dordell and his husband Jason Fenske decided to quit their jobs at Wells Fargo and Salesforce to open two Club Pilates in 2018 and a YogaSix studio in and around Palm Springs in 2020, they treasured franchisor Xponential’s playbook.

“After more than 20 years in corporate jobs, it was attractive at this point that we could join an existing model,” said Dordell.

But Dordell said following the company’s rulebook required some adjustments. There were some costs involved in building the franchise that could have been trimmed, but “to maintain consistency across the business, we had to follow the model.”

When a franchisor changes management or is sold, a franchisee can be left in the lurch.

Tom Lee and his wife opened a home health care franchise, Home Care Assistance, in Burlington, Vermont, in late 2016 after Lee decided to give up his sales management career for a large corporation. After initially investing $300,000 and living off savings for three years with no salary, the business began to thrive.

Lee currently employs 65 nurses and has seen double-digit profit increases in 2020 and 2021. However, the franchisor changed ownership and began buying back franchisees to operate privately. In 2022, it was renamed The Key, leaving the remaining 20 or so franchisees, still known as Home Care Assistance, in limbo.

Lee said he still pays a 5% monthly license fee but doesn’t get the same support. The Key made an offer to buy back the company, but it was well below market value, Lee said.

The Key did not respond to a request for comment.

“They no longer have the staff to support us,” he said. “They really abandoned the brand.”

As with any business, franchisees need to know what they are getting themselves into.

Mario Herman, a Washington-based attorney who focuses on franchise litigation, said it’s important that prospective franchisees go through contracts carefully to make sure nothing is obscured, such as previous bankruptcies or lack of profitability.

Earlier this year, the Federal Trade Commission sued Burgerim, a burger chain franchisor in Calabasas, California, which alleges it tricked 1,500 people into paying between $50,000 and $70,000 in fees to open franchises without give them enough information about risks. Burgerim promised a refund if franchisees couldn’t open a restaurant but didn’t deliver, according to the complaint. Burgerim did not respond to a request for comment.

“When done right, (a franchise) is great, but you have to be extraordinarily careful,” Herman said. “There’s a lot of scams out there.”

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