NEW YORK (CNNMoney.com) -- Facing bankruptcy can be a terrifying experience for a franchisee or small business owner. But it's not uncommon - and it's not hopeless either.
Many entrepreneurs discover, after venturing out on their own, that it's very difficult to be profitable, in part because of the constraints of a franchise agreement or simply due to their inexperience.
"Many, many franchisees call here on the verge of bankruptcy or after they have received default notices," said Susan Kezios, president of the American Franchisee Association.
Not everyone comes back from the brink, but Jeff McKeown is one entrepreneur who did. After four years in the staffing industry, he decided to open his own Express Personnel franchise in Racine, Wis. in 2000 at the age of 26.
In order to put the required $28,000 down, McKeown and his wife borrowed $15,000 and cashed out their 401(k)s and combined savings accounts to come up with the difference.
Eager to get his business off the ground, McKeown said he accepted any and all clients, even those with bad credit and iffy documentation. He also felt that to compete, he needed to have the lowest price in town so he kept very small margins.
"Many clients did not pay their bills and several declared bankruptcy with huge payments to me outstanding," McKeown explained.
He soon found his own business on the brink of bankruptcy as well.
By 2003 he owed the franchisor $120,000 and had maxed out all of his credit cards. Express Personnel's corporate office even sent McKeown a 10-day letter that said the company planned take back the franchise.
That's when he realized he was in trouble, McKeown said.
So with the help of a consultant, he fired 30 percent of his customers, raised prices, and established minimum gross margins and strict credit terms.
The business began to grow and by July 2006 he had paid off the majority of his debt. Last year, McKeown says he earned about $160,000 to $170,000 and is expecting to net $400,000 to $500,000 in 2007.
With a little help and a lot of effort, he managed to turn the franchise around - now he has plans to open six more offices.
Climbing out of debt
If a franchisee or small business owner is nearing bankruptcy then "either their revenue is short or their expenses are too darn high, but usually it's both," according to Jeff Elgin, CEO of Minn.-based FranChoice, a franchise consulting firm.
Elgin suggests taking a good hard look at the expenses for starters, and making sure that all of them are absolutely necessary. "Take away the credit cards," he said.
For franchisees, "usually, the fundamental issue is that they're not executing the system," Elgin said. And if it's a good franchise company, then it has a proven and reliable system. "If you execute it, you will succeed," he says. People just need to get "back to the basics of blocking and tackling."
Indeed, many franchisors have consultants on staff tasked with helping franchisees grow their businesses.
"I thought I knew it all," McKeown said. He now advises other young entrepreneurs to find a mentor or expert who can offer support and business advice.
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