Working for the chain gang

Steve Tripoli Dec 19, 2006

American Franchisee Association
National organization representing franchisees.

Blue Mau Mau
Blog and forums where franchisees share news and air their grievances.

International Franchise Assn.
For franchisors and franchisees.

Zicklin School of Business, CUNY
Offers a four-session seminar each semester for prospective franchisees.

KAI RYSSDAL: You often hear small businesses are the cornerstone of the American economy. And in a lot of ways they are. But sometimes what seems small isn’t. We could be talking about the local sandwich shop, or the muffler man down on the corner. Franchises rake in a trillion dollars in retail spending every year. One out of every 16 Americans works in one. Franchise owners get name recognition and marketing clout from the home office. And that’s not all. Steve Tripoli from the Marketplace Entrepreneurship Desk has the story.

STEVE TRIPOLI: Let’s puncture one misconception about owning a franchise business right away. In crucial ways you are not your own boss.

Susan Kezios of the American Franchisee Association says you’re really not much of an owner either.

SUSAN KEZIOS: Understanding from the outset that you are investing your money and your energy to grow someone else’s business is key. That will take off many sets of rose-colored glasses.

Kezios says most of her association’s 10,000 members tell her they’re playing against their parent company’s stacked deck. She says the small print in many franchise agreements can go way beyond up-front costs.

KEZIOS: Am I required to buy products and services from the franchise corporation? If so, do they disclose the mark-ups that I’m going to be paying?

Kezios says those costs might be called licensing fees, referral fees or sourcing fees. Call ’em what you want but they can add up.

Still, there’s got to be a reason why 650,000 franchise stores exist. Many franchisees think they can do better than they might in regular jobs and don’t seem to mind the costs.

Rich Valarioti’s in the garage of the Midas Muffler shop he’s owned for 13 years. It’s near Boston. There are seven more years on his franchising deal and he has no doubt about what he’ll do when it ends.

RICH VALARIOTI: I’ll renew. I’ll renew, yeah.

Valarioti sends a big chunk of gross sales money to his parent company. There’s 10 percent of gross for royalties and advertising. He also has to buy many of his auto parts through Midas at a good mark-up. And Midas owns his building so there’s a monthly lease. Valarioti wishes his agreement would let him buy the building.

But overall he thinks it’s a fair exchange.

VALARIOTI: Their products that they offer are top of the line products, but they also offer, with that money they make, they offer training to us, we have a website that they develop. So, it’s almost like you’re goin’ in business for yourself but you have some backing.

David Weiss of East Brunswick, New Jersey, owns a coffee-and-smoothies franchise business called Maui Wowie.

Weiss isn’t sure he’d do it again. He says the business has taught him a lot about franchising. And he wanted to start out with some of the support a franchise brings. But there have been surprises in his contract.

DAVID WEISS: There’s a clause basically saying “I will keep up to standards.” But the broader interpretation is, “Anything we decide to charge later franchise operators on, you have to pay up too, even though it’s not in your contract.”

Franchisee Association head Susan Kezios says that kind of add-on after an agreement’s signed is widespread. She calls it “signing a moving target,” and says it’s one of the biggest dangers for franchise buyers.

KEZIOS: Basically they find out, that they are a captive marketplace for the sale of goods and services. I mean this is where franchising is no longer free enterprise. It’s more akin to indentured servitude at that point.

Professor Robert Foskey teaches a seminar for prospective franchise store owners at the Zicklin School of Business in New York.

ROBERT FOSKEY: You know 99 percent of the time that franchise contract is going to be written in favor of the franchisor.

Foskey says he pounds home to his students that they have to look beyond the franchisor’s earnings claims, cost projections and territorial promises.

FOSKEY: They also have to do their own industry analysis.

That means tracking trends and especially talking to current franchisees. Because there’s plenty of unrest across the franchising world right now including lots of franchisee lawsuits against parent companies.

But there are also signs things are improving. Franchising is moving toward multi-store operators, a more well-heeled group. They’re bringing lawyers and a louder voice for franchisees than mom-and-pop shops. And the International Franchise Association, once a franchisor-only group, now includes franchisees in its membership.

I’m Steve Tripoli for Marketplace.

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