Franchise opportunities abound, but so do dangers and traps


Washington -- If you're out of a job and can't find a new one, you're probably thinking of starting your own business. Nowadays, that may mean buying a franchise.

Franchisers put on regular shows to attract new investors. Attendance at these shows rose 17 percent in the 12-month period that ended last June, the International Franchise Association (IFA) reports. But growth in business has slowed. New franchise sales are expected to rise 4 percent this year, compared with 6 percent in 1990.

Many franchise owners have big successes to show. But before you take the leap, listen to the story of a financial executive who left a Fortune-500 company and bought a franchise in Boston.

The company's figures showed he'd need $90,000 and would start making money in his second year. Now in his third year, he has invested $300,000 and isn't yet in the black.

What went wrong? As he tells it, the franchiser (1) grossly underestimated what he'd have to pay for retail space; (2) assumed he'd pay his help minimum wage, which isn't possible in his area; (3) sent out promotions that weren't suited to his customers; and (4) failed to do the national advertising it promised. His competitors regularly discount their wares by 20 percent -- something else he and the franchiser hadn't figured on.

He owes his franchiser 7 percent to 10 percent of sales. Since last year, he hasn't been able to pay.

The mortality rate among franchisees is high. At best, one-third of a typical chain's franchises do well, a third break even, and the rest are in the red, says Rupert Barkoff, chairman of the American Bar Association's committee on franchising.

Disputes have been running high between franchiser and franchisee. The American Arbitration Association (AAA) reports a percent increase this year in its franchise cases. In the AAA's New England office, the value of most claims is running from $50,000 to $75,000.

Bigger-money issues often wind up in court. A typical example is Diet Center, which laid on a lot of debt in 1988, then jacked up the fees it charged franchisees. Many of them went out of business and are now bringing a class-action suit.

A Diet Center spokesman says that the sole reason the centers (( failed was "changing demographics." Diet Center is still selling franchises, so count your demographics before you leap.

You can't even be sure that the franchise company you choose will itself be able to stay afloat. An IFA survey last month of 192 small franchise companies found that 21 percent were out of business, out of franchising or having financial problems. Weak franchisers can't give reliable support to its franchisees.

Some large franchisers, too, are stumbling. The parent company of Popeye's Famous Fried Chicken & Biscuits and Church's Fried Chicken filed for reorganization in federal bankruptcy court in April. A spokesman says outlets owned by franchisees aren't affected. The company keeps on selling new franchises to the faithful.

Before going into business, buyers usually talk to other franchisees to see how they're doing. But you don't always get the straight scoop. Franchisees have an interest in promoting new stores, because it increases the company's clout.

Your best hope of discovering the truth is to ask pointed questions. "If someone asked me if I was making a profit, I would say no," the Boston investor says. "But if they didn't ask that question, I wouldn't tell them."

Every franchiser has to disclose the company's financials in its offering circular. If an earnings claim isn't in the circular, it's not supposed to be mentioned at all, says Don Boroian, head of Francorp, a franchise consulting firm based in Olympia Fields, Ill. Franchisers also have to list lawsuits, arbitration cases and past bankruptcy filings of the company or its officers.

You should get an analysis of the offering from an accountant or lawyer who specializes in franchises. Also, call the state attorney general; some states keep track of complaints against franchisers. And question the franchiser closely to discover the assumptions beneath the figures. As the Boston investor found, the company's game plan won't always work.

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