NEW YORK (AP) — In 2020, Kelly Jackson and Davina Arceneaux wanted to leave their company jobs and become business owners. They were looking for something both COVID-proof and recession-resistant.
Instead of completely stepping out from under a corporate umbrella, they looked at franchising. The two worried about the notoriously tight margins for restaurants. They looked at a drug testing franchise, but the initial investment was too steep.
A franchising mentor told them about Motto Mortgage Home Services, and Jackson and Arceneaux opened one in Oakbrook Terrace, Illinois, in July of 2020 with an initial investment of $35,000.
“People always need new places to live and are always buying and selling houses,” Jackson said. He takes rising interest rates in stride. “Interest rates move up and down, that’s what they do, that’s part of the industry.”
Jackson and Arceneaux, who had been a senior IT program and project manager and an assistant director of catering, respectively, had no experience with mortgages, but Motto Mortgage provided training and support.
“You don’t necessarily need experience in that industry in order to go into that category, the brand will train you,” said Matt Haller, president and CEO of the International Franchise Association.
In the months after the pandemic hit, many people with corporate jobs decided to strike out on their own, in what’s referred to as the “Great Resignation." They looked for alternatives, including opening up a franchise with an established brand.
The “quasi-preneurs” opening franchises say they like the ability to buy into a proven brand name and the access to tools and operations that you wouldn’t get if you started your own small business. But franchising has plenty of challenges, too. There are a lot of rules and regulations to abide by. Contracts are lengthy and can be difficult to terminate.
The number of U.S. franchises grew an estimated 3% in 2021 to 774,965 after a dip in 2020, according to IFA. Those include big franchises like McDonald’s or 7-Eleven, but all types of businesses can be franchised, from pool cleaners to barbershops.
There are about 3,000 franchisor brands in the U.S. The IFA predicts franchises in the U.S. will grow 2% to 792,014 this year. That’s still just a fraction of the 32.5 million total small businesses in the U.S.
Franchise owners buy in with an initial fee – anywhere from tens of thousands to hundreds of thousands of dollars -- to get their business, and then pay a monthly royalty percentage. In return, they get use of the brand name and marketing, and other support.
As a classically trained pastry chef, Helen Kim often dreamed of owning her own bakery. But when she decided to strike out on her own, Kim thought building a business from scratch would be “too big of a mountain for me to climb.”
While working at the Aria Resort & Casino in Las Vegas, Kim was a frequent customer at Paris Baguette. She was impressed, and last year bought a Paris Baguette franchise in the city with her sister.
While the financial requirements are strict -- according to the company website, franchisees need a net worth of $1.5 million and $500,000 in liquid assets – Kim said it was worth it. While the money invested in a franchise is still at risk if the business fails, brand name recognition and franchisor support offer more of a safety net than establishing an unknown brand.
However, getting used to a franchise structure can be an adjustment. When Chris Dordell and his husband Jason Fenske decided to leave their jobs at Wells Fargo and Salesforce and open two Club Pilates in 2018 and a YogaSix studio in 2020, in and around Palm Springs, they appreciated the playbook provided by the franchisor, Xponential.
“It was appealing at this stage after being in corporate jobs for 20-plus years that we could plug into an existing model,” Dordell said.
But Dordell said following the corporate rule book took some adjusting to. There were some costs incurred while building the franchises that could have been cut, but “in keeping the consistency across the company, we were required to follow the model.”
If a franchisor changes corporate management or gets sold, a franchisee can be left in the lurch.
Tom Lee and his wife opened a home health care franchise, Home Care Assistance, in Burlington, Vermont, at the end of 2016, after Lee decided to leave his career in sales management for a large company. After initially investing $300,000 and spending three years living on savings and not taking a salary, the business began to take off.
Lee currently employs 65 caregivers and had double-digit profit increases in 2020 and 2021. But the franchisor changed ownership and starting buying back franchisees to operate them privately. In 2022 it rebranded to The Key, leaving the remaining 20 or so franchisees, still known as Home Care Assistance, in limbo.
Lee said he’s still paying a 5% monthly royalty fee, but is not getting the same support. The Key made one offer to buy the business back, but it was well below market value, Lee said.
The Key did not respond to a request for comment.
“They don’t have the personnel to support us anymore,” he said. “They’ve really abandoned the brand.”
As with any business venture, franchisees need to be aware of what they’re getting themselves into.
Mario Herman, a lawyer based in Washington that focuses on franchise litigation, said it’s important for potential franchisees to go over the contracts carefully to make sure nothing is being obscured like previous bankruptcies or a lack of profitability.
Earlier this year the Federal Trade Commission sued Burgerim, a Calabasas, California, burger chain franchisor that it claims lured 1,500 people into paying $50,000 to $70,000 in fees to open franchises without giving them enough information about risks. Burgerim promised a refund if franchisees couldn't open a restaurant, but did not deliver, according to the complaint. Burgerim didn’t respond to a request for comment.
“If done properly, (a franchise is) great, but you have to be extraordinarily careful,” Herman said. “There is a lot of fraud out there.”