Semi-entrepreneurs see opportunities and challenges in franchising

In 2020, Kelly Jackson and Davina Arceneaux both wanted to quit their jobs at the company and become business owners. They were looking for something that was resistant to coronavirus and resistant to stagnation.

Instead of coming out from under the entire corporate umbrella, think about franchising. Both were concerned about the skinny margins known in restaurants. They were considered a drug testing franchise, but the initial investment was too high.

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

“People always need new places to live and they are always buying and selling homes,” Jackson said. The increase in interest rates is taken step by step. “Interest rates go up and down, that’s what they’re doing, and that’s part of the industry.”

Jackson and Arsenault, who were director of IT projects and program and deputy director of supply, respectively, had no experience with mortgages, but Motto Mortgage provided training and support.

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

In the months following the pandemic, many people with corporate jobs decided to strike on their own, in what is known as the “Great Compromise.” They searched for alternatives, including opening a franchise with an established brand.

Franchise-opening “semi-entrepreneurs” say they love the ability to buy from a proven brand and access to tools and processes that you wouldn’t get if you started your small business. But the franchise also has many challenges. There are many rules and regulations that must be adhered to. Contracts are long and can be difficult to terminate.

The number of franchises in the United States grew about 3% in 2021 to 774,965 after a decline in 2020, according to the IFA. These include big franchises like McDonald’s or 7-Eleven, but all kinds of businesses can be franchised, from pool cleaners to barbershops.

There are about 3,000 brands with franchises in the United States and IFA expects franchises in the United States to grow 2% to 792,014 this year. That’s still just a fraction of the total of 32.5 million small businesses in the United States.

Franchise owners buy an upfront fee, anywhere from tens of thousands to hundreds of thousands of dollars, to get their business there and then pay a monthly royalty percentage. In return, they benefit from branding, marketing, and other forms of support.

As a classically trained pastry chef, Helen Kim has often dreamed of owning her own bakery. But when he decided to go it alone, Kim thought building a company from scratch would be “a mountain too big to climb.”

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

While the financial requirements are stringent (according to the company’s website, franchisees need a net worth of $1.5 million and $500,000 in liquid assets), Kim said it’s worth it. While the money invested in a franchise is still at risk if the business fails, brand recognition and support from the franchisor provide a greater safety net than creating an unknown brand.

However, getting used to the franchise structure can be an adjustment. When Chris Dordell and her husband Jason Finsky decided to quit their Wells Fargo and Salesforce jobs and open Pilates clubs in 2018 and a YogaSix studio in 2020, in and around Palm Springs, they appreciated the franchisor’s playbook, Xponential.

“It was attractive at this point after we’ve worked in corporate functions for over 20 years that we could catch up on an existing model,” Dordell said.

But Dordell said following the company’s rulebook took some time to adjust. There were some costs incurred in building the franchises that could have been cut, but “in order to maintain consistency across the company, we had to follow the model.”

If the franchisor changes the company’s address or is sold off, the franchisor may be left in limbo.

Tom Lee and his wife opened a home health care franchise, Home Care Assistance, in Burlington, Vermont, in late 2016 after Lee decided to leave his career in sales management for a large corporation. After investing $300,000 initially and spending three years living on savings and taking no salary, the company started to take off.

Lee currently employs 65 caregivers and has doubled profits in 2020 and 2021. But the franchisor changed ownership and began buying franchisees to operate them privately. In 2022, it changed its name to The Key, leaving the roughly 20 remaining franchisees, still known as Home Care Assistance, in limbo.

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

Key did not respond to a request for comment.

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

As with any business venture, franchisees need to be aware of what they’re getting into.

Mario Hermann, a Washington-based attorney who focuses on franchise litigation, said it’s important for potential franchisees to review contracts carefully to make sure nothing like past bankruptcies or nonprofits are hidden.

Earlier this year, the Federal Trade Commission sued Burgerim, a franchisee of a hamburger chain in Calabasas, California, alleging that it required 1,500 people to pay between $50,000 and $70,000 in fees to open franchises without giving them enough information about the risks. Bergram promised a refund if the franchisees couldn’t open a restaurant, but they didn’t deliver, according to the complaint. Bergrim did not respond to a request for comment.

“If it’s done right,[franchise]is great, but you have to be very careful,” Hermann said. “There is a lot of fraud out there.”

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