NEW YORK (TBEN) — In 2020, Kelly Jackson and Davina Arceneaux wanted to quit their jobs at the company and become business owners. They were looking for something that was both COVID-proof and recession-proof.
Instead of going completely out of a corporate umbrella, they looked to franchising. The two were concerned about the notoriously tight margins for restaurants. They looked into 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 July 2020 in Oakbrook Terrace, Illinois with an initial investment of $35,000.
“People are always in need of new housing, and they are always buying and selling homes,” Jackson says. He takes into account rising interest rates. “Interests go up and down. That’s what they do, that’s part of the industry.”
Jackson and Arceneaux, who had been senior IT program and project manager and deputy director of catering respectively, had no mortgage experience, but Motto Mortgage provided training and support.
“You don’t necessarily have to have experience in that industry to get into that category, the brand will educate you,” said Matt Haller, president and CEO of the International Franchise Association.
In the months after the pandemic hit, many people with corporate jobs decided to start their own business in what has been referred to as the “Great Layoff.” They looked for alternatives, including opening a franchise with an established brand.
The “quasi-preneurs” opening franchises say they enjoy buying into a proven brand name and the access to tools and operations you wouldn’t get if you started your own small business. But franchising also presents many challenges. There are many rules and regulations that you must adhere to. Contracts are long and difficult to cancel.
The number of U.S. franchises grew by an estimated 3% in 2021 to 774,965 after a dip in 2020, according to IFA. That includes large franchises such as McDonald’s or 7-Eleven, but all types of businesses can be franchised, from pool cleaners to barber shops.
There are about 3,000 franchisors in the US The IFA predicts that franchises in the US will grow 2% this year to 792,014. That’s still a fraction of the 32.5 million small businesses in the US
Franchise owners buy in with an initial fee — from tens of thousands to hundreds of thousands of dollars — to get their business and then pay a monthly royalty percentage. In return, they get use of the brand name and marketing and other support.
As a classically trained pastry chef, Helen Kim often dreamed of owning her own bakery. But when she decided to start on her own, Kim thought that building 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 regular at Paris Baguette. She was impressed and bought a Paris Baguette franchise in the city with her sister last year.
While the financial requirements are strict — according to the company’s website, franchisees need a $1.5 million net worth and $500,000 in cash — 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 franchisor support provide more of a safety net than establishing an unknown brand.
However, getting used to a franchise structure can be an adjustment. When Chris Dordell and husband Jason Fenske decided to quit their jobs at Wells Fargo and Salesforce and open two Club Pilates in 2018 and a YogaSix studio in and around Palm Springs in 2020, they appreciated the franchisor’s playbook, Xponential.
“It was attractive at this stage, after more than 20 years in business, that we could plug into an existing model,” Dordell said.
But Dordell said following the corporate rulebook took some adjustment. There was some cost involved in building the franchises that could have been reduced, but “to maintain consistency across the business, we had to follow the model.”
If a franchisor changes business or is sold, a franchisee may be abandoned.
Tom Lee and his wife opened a home care franchise, Home Care Assistance, in Burlington, Vermont, in late 2016 after Lee decided to leave his career in sales management for a major company. After initially investing $300,000 and living on savings for three years and receiving no salary, the company took off.
Lee currently employs 65 caregivers and had double-digit earnings in 2020 and 2021. But the franchisor changed hands and started buying back franchisees to operate them 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 5% monthly royalties, but doesn’t get the same support. The Key made one offer to buy the company back, but it was well below market value, Lee said.
De Key did not respond to a request for comment.
“They no longer have the staff to support us,” he said. “They really let the brand down.”
As with any business venture, franchisees need to be aware of what they are getting into.
Mario Herman, a Washington-based attorney who focuses on franchise disputes, said it’s important for potential franchisees to carefully review contracts to ensure nothing is glossed over such as past bankruptcies or a lack of profitability.
Earlier this year, the Federal Trade Commission sued Burgerim, a burger chain franchisor in Calabasas, California, who it claims lured 1,500 people into paying $50,000 to $70,000 in fees to open franchises without giving them enough information about risks. to give. Burgerim promised a refund if franchisees were unable to open a restaurant, but failed to deliver, the complaint said. Burgerim did not respond to a request for comment.
“When done right, (a franchise) is great, but you have to be extremely careful,” Herman said. “There is a lot of fraud.”