Franchise players: Becoming franchisee requires lots of research, capital

In 2017, when Krispy Kreme Doughnuts franchisee Eric Schneider announced he was opening up in Cape Girardeau, the generated buzz was palpable. Facebook posts earned dozens of comments, wanting to know when and where the glazed goods would be available.

The location is set to open Tuesday in Town Plaza in Cape Girardeau, and will join dozens more franchises across Cape Girardeau.

Franchising is a major economic driver in the local and regional economy, and residents and visitors patronize franchises every day. Everything from fast-food restaurants to automotive and cleaning franchises offer opportunities for goods and services to shoppers, and for owners, a business model with a proven track record.

Franchises vary widely in size, scope and sector. Some require expensive buy-ins and are more profitable; others less so on both ends. The process of matching franchisee to the franchiser is delicate, and requires a lot of research on both ends of the arrangement.

One franchise looking to locate in Cape Girardeau is a Two Men and a Truck mini market. It's a model more suited to markets like Cape Girardeau, with a smaller population than a major city, but with certain demographics and other considerations that are attractive to companies, said Pam Batten, compliance director with the company.

Franchise development specialist Cheryl Ackley with the company said typically, when a potential franchisee reaches out about an opportunity, the company will conduct phone interviews, "them looking at us, us looking at them," she said. Once it looks like the franchiser and franchisee are a good fit, Ackley said, there's a process: paperwork, background and credit checks, minimum requirements for liquid assets and net worth.

Two types

But before that stage is ever reached, it's important for a potential franchisee to do some research and to have some important pieces in place, said Scott Thorne, instructor in the Marketing Department at Southeast Missouri State University and owner of Castle Perilous Games & Books in Carbondale, Illinois.

Thorne said there are two types of franchises: product and business format.

A product franchise could include a gas station or car dealership, Thorne said. "You buy the rights to sell a particular brand of gas or model of car within a particular geographic area," Thorne said.

But a business format franchise is what people typically think of when they think of a franchise, Thorne said.

"You buy the rights to not only sell a product or service in an area, but agree to sell it in a way that the franchiser has developed to be successful," Thorne said.

FranNet franchise consultant Ben Terrill said in America, there are approximately 4,000 franchisers, and a lot of those are food, retail, automotive or cleaning services.

"That's very much a part of franchising. It's not even the biggest part, just the most visible," Terrill said.

But a lot of franchise opportunities don't have anything to do with having a storefront and having the population walk in, he said.

"In an area like Cape Girardeau, there are people who might be forgiven for thinking there are limited opportunities because of the population, but that's absolutely not the case," Terrill said.

Franchise opportunities can go unfilled, he said, because potential franchisees don't know the opportunities exist.

Terrill said not all franchises are created equal. At the top end of the scale, he said, for example, would be McDonald's.

"It's been tried and true. There are tens of thousands of locations, and they have this down to what color the walls can be painted, where supplies can be ordered. That's great, that formula works, and people buy in," Terrill said.

On the other end are newer franchises, where the franchisee might have more leverage but the concept is less proven.

'Playbook'

Regardless, typically, a franchise will have a "playbook," and it will lay out anything from hiring practices to supply chains to requirements of the building containing the franchise location.

Thorne said there's also a contract between franchiser and franchisee.

"Generally, a franchisee pays a fee for the rights to become a franchise," Thorne said. Typically, a franchisee also pays a percentage of sales each month, he added.

"It's to the benefit of a franchiser to make sure a franchisee is successful," Thorne said. "At the same time, they have a very strict regiment of rules franchisees are supposed to follow."

But, Thorne said, a franchisee agrees to stocking certain items and selling them at particular prices, during certain hours, keeping the books open for the franchiser to review upon request, in return, "franchisees are sold what should be a successful business."

But what does a potential franchisee look like?

Thorne said a business format franchise is an excellent way for someone to run a business where they might not have expertise, but they have the money to start and operate the business.

Terrill agreed.

"The average franchisee is somebody who has been in business, not necessarily a CEO, but has an understanding of things like marketing and finance," Terrill said.

Often people who buy into a franchise are midcareer, have worked his or her way up in a company but don't see a path to becoming president, for example, Terrill said.

That picture is changing a bit, Terrill said, but in terms of what needs to be brought to the table, a solid understanding of business is important.

But Terrill said not to let limited experience in a field limit options.

"If you buy an auto body repair franchise, you'll hire the mechanic, the expert," Terrill said. "You're there to guide the business."

And to be the money behind it. "A franchiser is going to want to see that the franchisee has some capital, some skin in the game," Terrill said. "Because you're not going to make money in the first year. Ownership is a long ramp up."

Finding the right fit

Thorne said success rates for first-year franchises are slightly higher than a non-franchise business, but businesses can still fail.

"You're not buying guaranteed success," Thorne noted.

But the advantage of buying a franchise is, a franchisee is buying a tried concept and won't have to reinvent the wheel, Terrill said.

Of course, there are pros and cons to everything, Terrill said, and there is no right or wrong answer to the question of how to start a business -- it's all about finding the right fit.

Terrill recommended doing research and a lot of it.

Thorne noted trade shows for franchisers exist, and potential franchisees can walk the showroom floor and consider different ideas.

Online research has its perils, Terrill said, since if a franchisee doesn't have a basic understanding of franchising, it can be difficult to determine how good of a fit a franchise might be with the particular individual's goals and circumstances.

But, he said, a franchise disclosure document, or FDD, will lay out many items, including company financials, contact information for franchisees, and general information that would be of help for someone looking to understand more about a company before buying in.

It's a big document, typically more than 100 pages, but, he said, "Anyone looking for a franchise needs to have that FDD well in advance of any decision they make."

Ultimately, Terrill said, the name of the game is, any franchiser wants franchisees to be successful.

And if the owner of a successful business wants to franchise out? Thorne said, typically, that's done when a company owner wants to expand but doesn't have the capital or infrastructure on hand to carry out that expansion.

It's a good arrangement if the potential franchisee finds an investor who wants in, Thorne said.

mniederkorn@semissourian.com

(573) 388-3630