Anecdotes tell peril of starting a brand, yet statistics don’t exist
Kidokinetics’ founder Terri Braun had to re-do her disclosure documents, at great cost.
It’s hard to know who’s at fault when a franchise concept fails to gain traction, and impossible to learn from data how common that fate is. Here, advisers say how to increase the odds for success.
Exactly how unusual is it for new franchise systems to never gain traction? No statistics are available to answer the question.
Franchise research firm FRANdata keeps a tally of new franchises that file documents in the 13 states that require registrations, but franchisors can appear and disappear in the other 37 states without being counted.
Attorney Joel Buckberg, of Baker Donelson Bearman Caldwell & Berkowitz in Nashville, said one indicator is the number of franchises that don’t renew their registrations in Florida, where registration is easy and costs only $100. According to that state’s website, only 2,065 of the 3,375 franchises registered for 2012 renewed their licenses for 2013, a 38 percent drop-off.
A long road
Many new franchisors, like Terri Braun of Weston, Florida, spend large sums of money with franchise development firms and still struggle. After her family moved to South Florida, Braun, a karate champion in her native South Africa, began teaching fitness to children enrolled in local schools and preschools in 2000. She called her program Kidokinetics, “A Fun Way to Fitness,” and began thinking of franchising. “I spent several years going to seminars and meeting with consultants before selecting Francorp,” Braun said.
In 2006, she and her businessman father flew to Chicago, where a limo picked them up at the airport and drove them to Francorp’s offices, in Olympia Fields, Illinois. “They took me through everything, from concept review through site analysis and convinced me it would be cheaper to do everything out of one office,” Braun said.
She paid Francorp $86,400 and “ran with everything they suggested,” but was ultimately “very disappointed in their services and advice.” Per their advice, Braun rented a space and built a booth for the 2007 Franchise Expo in Miami, before she had even attended one, and failed to find a single lead.
At the Expo, Braun met Theresa Huszka, who then led franchise development for TSS Photography, and Braun promised to update Huszka on her progress. When she finally found a prospective franchisee in 2008, Huszka advised her to have her franchise documents rewritten, at a cost of $10,000, and continued as her informal mentor.
Last year, Huszka left TSS and formed a consulting firm with a partner to offer sales, marketing and support to new franchisors and signed on Braun as an early client. Braun now has five franchises running, in Texas, Florida and North Carolina, with more in the works, but she still resents the $150,000 she “wasted” paying Francorp and following their advice.
Francorp founder and President Don Boroian said he “stands behind” the services and advice he provided Braun and still uses her video testimonial on his website, along with dozens of others, including a handful of large franchisor clients.
A random sampling of those from smaller concepts revealed that many, like Leland Nelson, owner of Dirty Dog Hauling (junk, not animals) in central Pennsylvania, have sold only one franchise. Kevin Nierman, a sculptor who started Kids N Clay in Berkeley, California, said he sold six franchises, then lost them all during the recession. Maui Play Care “doesn’t exist anymore,” said someone running what was originally a franchise as an independent business. And Sandy Cox, who bought one of two franchises that a concept named Bark N Bubbles sold in Virginia before closing down, said, “I’m doing great and could care less whether I’m a franchisee or not.”
Some franchise too early
Some businesses should never franchise, while others attempt it too early, said attorney Buckberg, who prepares legal documents for new franchisors. “A business must first be viable, with the proven ability to travel, a strong infrastructure, a coherent marketing strategy, a solid training program and strong unit economics, so it can deliver an adequate return to franchisees,” Buckberg said.
Unfortunately, some franchise development firms, who are also struggling in this economy, tend to overlook deficiencies in potential clients and agree to take on weak players.
Robert Stidham, president of Franchise Dynamics, an outsourced franchise sales firm in Homewood, Illinois, said he’s amazed at the number of wannabe franchisors “who don’t do good due diligence” on franchise developers.
Fees can exceed $100,000
“They are excited at the prospect of franchising and, at the end of the day, don’t do the kind of due diligence most franchisees perform.” Stidham suggests calling former clients, being skeptical about press releases and at least presenting your concept to established development firms, because they are more likely to be honest about your chances.
Huszka said fees with development firms can reach $100,000 or more, but prospective franchisors can reduce that sum by replicating their concept first, with additional corporate units, and producing their own training classes and operations manuals.
Then find a consultant who will refer you to attorneys, marketing companies and other suppliers when you are ready to use them. “Don’t fall for a franchise developer who is all flash and no substance,” Huszka said.