NEW YORK (AP) – In In 2020, Kelly Jackson and Davina Arseneau left their corporate jobs to become business owners. They were looking for something both covid-proof and crash-resistant.
They were looking at franchising rather than completely exiting the corporate umbrella. The two worried about restaurants’ tight margins. They looked into a drug testing franchise, but the initial investment was steep.
A franchising consultant told them about Motto Mortgage Home Services, and Jackson and Arseneau opened one in Oakbrook Terrace, Illinois in July 2020 with an initial investment of $35,000.
“People are always looking for a new place to live and they’re always buying and selling houses,” Jackson said. It charges gradually increasing interest rates. “Interest rates move up and down, that’s what they do, that’s part of the industry.”
Jackson and Arseneux, a senior IT program and project manager and assistant director of catering, had no experience with mortgage lending, but Motto Mortgage provided training and support.
“You don’t necessarily need experience in that industry to get into that category,” said Matt Haller, president and CEO of the International Franchise Association.
In the months since the pandemic hit, many people with corporate jobs have decided to strike out on their own in what is being called the “Great Layoff.” They explored options, including opening a franchise with an established brand.
“quasi-preneurs” say opening franchisees likes the ability to buy from an established brand and access to tools and operations that you wouldn’t get if you started your own small business. But franchising also has many challenges. There are many rules and regulations to follow. Contracts are long and can be difficult to break.
The number of US franchises will grow approximately 3% by 2021. It has grown to 774,965 in 2020, according to the IFA. These include large franchises such as McDonald’s or 7-Eleven, but all types of businesses can be franchised, from pool cleaners to hair salons.
There are approximately 3,000 franchise brands in the U.S. IFA predicts that franchises in the U.S. will grow 2% to 792,014 this year. That’s still only a fraction of the 32.5 million total small businesses in America.
Franchise owners make an initial payment — tens of thousands to hundreds of thousands of dollars — to acquire their business and pay a percentage of monthly royalties. In return, they benefit from branding and marketing and other support.
As a classically trained pastry chef, Helen Kim has long dreamed of owning her own bakery. But when she decided to strike out on her own, Kim thought that building a business from scratch was “too big of a mountain for me to climb.”
While working at the Aria Resort and Casino in Las Vegas, Kim was a frequent customer at Paris Baguette. She was impressed and bought a Paris Baguette franchise in the city last year with her sister.
While the financial requirements are strict — franchisees need a net worth of $1.5 million and $500,000 in liquid assets, according to the company’s website — Kim says it’s worth it. Although the money invested in the franchise is still at risk if the business fails, brand recognition and franchisor support provide a greater safety net than establishing an unknown brand.
However, getting used to the franchise structure can be an adjustment. When Chris Dordell and his husband, Jason Fenske, left their jobs at Wells Fargo and Salesforce, decided in 2018 to open two club Pilates and yoga studios in Palm Springs and the surrounding area in 2020, they appreciated the playbook provided by franchisor Exponential.
“After being in corporate jobs for 20-plus years, it was attractive at this level, we could enter the current model,” Dordel said.
But Dordel has taken some adjustments following the corporate rule book. There were some costs when building franchises that could be cut, but “to maintain consistency in the company, we have to follow the model.”
If a franchisor changes corporate management or is sold, the franchisee may be left in a lurch.
Tom Lee and his wife opened a home health care franchise in Burlington, Vermont, in late 2016, after Lee decided to leave his job in sales management for a larger company. With an initial investment of $300,000 and three years of living frugally without taking a salary, the business began to take off.
Lee currently employs 65 caregivers and expects to grow double-digit profits in 2020 and 2021. But the franchisor changed ownership and began buying franchisees to manage privately. In the year In 2022, it turned key, leaving the remaining 20 or so franchises, still known as Home Care Assistance, in limbo.
Lee says he’s still paying 5% monthly royalties, but he’s not getting the same support. Key made one offer to buy back the business, but it was below market value, Lee said.
Key did not respond to a request for comment.
“They don’t have the staff to support us anymore,” he said. “They really left the brand behind.”
As with any business, franchisees need to know what they are getting into.
Mario Herrmann, a Washington-based attorney who specializes in franchise litigation, says it’s important for potential franchisees to carefully review potential contracts to ensure nothing is clouded by past losses or lack of profitability.
Earlier this year, the Federal Trade Commission sued a Calabasas, Calif.-based burger chain franchisor that misled 1,500 people into paying $50,000 to $70,000 to open a franchise without providing them with adequate information about the risks. Burgerme also promises refunds if franchisees fail to open a restaurant, but don’t deliver. Berger did not respond to a request for comment.
“If it’s done right,[franchising]is great, but you have to be very careful,” Herman said. “There’s a lot of fraud out there.”