Thinking of franchising? Advice from the trenches
Franchising can be an attractive way to extend a successful brand - but entrepreneurs should beware high costs and management challenges.
FARMINGDALE, N.Y. (CNNMoney.com) -- If you're the owner of a successful business, is now the time to franchise it?
Paul Sperry, CEO of IDP Consulting, posed that question to a group of fellow business owners gathered last month in a conference room in Farmingdale, N.Y. As members of peer advisory group The Alternative Board (TAB), Sperry and his colleagues gather monthly, like dozens of other TAB groups across the country, to confidentially discuss business issues.
IDP, a 47-person IT firm based in Jericho, N.Y., provides technology management services to businesses of less than 300 employees. Sperry founded the company in 1986, and has a personal goal to leave the business in about six years. One of his employees has been talking to him recently about expanding IDP in a franchise model. Sperry is seriously entertaining the idea, but he's wary about the problems it could bring.
"Franchises work for companies like Geek Squad when they don't care who they're selling services to," Sperry says. "Franchises that saturate the market like that lose quality. I think they lose commitments from staff, and that won't work for me."
All of the discussion participants own businesses with $1 million or more in annual revenue. The first question they pose to Sperry: Why would franchising be a better expansion model than buying other companies or hiring more employees?
"I think you really need to ask yourself what a franchise will bring to the table for you," says James Buonfiglio, president of C&B Consulting Group, a Syosset, N.Y. firm that provides employee benefit programs to mid-sized companies.
Sperry thinks about this for a minute. One of his firm's assets is that it already has solid systems for managing sales, invoicing and workflows. IDP Consulting has a working system that franchises could replicate. Growing by buying other companies would be tricky - Sperry has had little luck in the past when he's approached other business owners about buying their company.
"They typically make decision based on emotions and not logic," he says. "The thought of changing their company name is the most devastating decision they ever considered. We already have the back office work, sales and invoicing. So franchising seems easier, in some ways, for us to find the right service levels in the radius of our own offices as we move to other areas of New York and into New Jersey."
Jay Shulman, president of accounting firm JT Shulman & Co. in Carle Place, N.Y., warns that although opening more IDT-branded offices would eliminate those acquisition problems, franchises will bring their own sets of challenges - and a hefty price tag.
"I have clients who franchise," he says. "You want regionality, but as a franchisor you are responsible for each office. You have to have operating manuals for each office, you have to file documents and set everything up legally, and there is an expense to all that. It could cost $100,000."
At the other end of the table, attorney Jack Schwartz, managing partner of Jacobson and Schwartz in Rockville Centre, N.Y,, leans in with another thought. "You also have to invest money to make your company enticing so that everyone wants to be in your franchise," he says. "This could be a great time to start the franchise, because this recession will produce a wave of people who will want to be self-employed. Many who have been laid off will never go back to corporate structure. But it'll take time and effort to sell them on your company."
Sperry agrees, but he's still conflicted about the idea of franchising. He doesn't want to rush into anything, because he's frightened of losing quality control.
"It's a legitimate concern," says Dennis Labriola, CEO of Impact, a software developer that makes public safety and court management applications. "Keep in mind these franchises will carry your name. Right now if you don't like how things are going, with an employee or operations, you can just pull the plug. But it's more complicated when you have a franchise."