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The Pitfalls of Franchising

Know the challenges — or your dream business could become a nightmare

Learn the challenges of opening a franchise business.

Is opening a franchise the best option for your second career? Before deciding, know the pros and cons. — Blend Images/Alamy

En español | Many boomers eyeing a second career fancy the idea of running their own business. Yet the risk and work involved in starting a business from scratch can be daunting. One way to ease into entrepreneurship is to purchase a franchise.

Many franchises provide a full range of services, including site selection, training, product supply, marketing plans and even assistance in obtaining financing.

Evidence of their persistent popularity: The number of franchise businesses in 2014 is expected to rise by 12,915, bringing the total number to 770,368, up from 736,114 in 2011, according to the International Franchise Association.

But it can be a tricky and expensive road. An initial investment can range from $200,000 to $500,000. And it's not unusual to hear franchisees gripe about ongoing royalty and advertising fees. For example, the total investment to own a Subway franchise store can be as low as $78,600, including a $15,000 initial franchise fee. Individual costs, however, vary by location, restaurant size, build-out costs and more.

On top of that, franchisees pay fees of 12.5 percent of gross sales (minus sales tax) every week to corporate headquarters: Eight percent is for franchise royalties, and 4.5 percent goes to advertising.

That's a lot of bread.

If you are thinking about opening a franchise for your second act, here are some tips to help avoid the pitfalls from those who know the business.

Don't rush in

One of the biggest mistakes franchisees make is to hurry into business without doing enough research and soul-searching to determine if a franchise is really a good match.

Tim Sheerer got into franchising after a career with Merrill Lynch. It wasn’t a good fit for a variety of reasons both personal and financial. The truth was that he really did want to accept more risk and run his own show.

Going the franchise route initially, though, gave him the confidence he needed later to successfully jump solo, without a net, into the restaurant business. “I don’t think I would have been comfortable leaving Merrill Lynch and opening up my own ma-and-pa restaurant without that interim move,” Sheerer says. “It would have been too big of a step."

Now, Sheerer is celebrating his 10th year in business at La Cappella, an Italian bistro in Pittsburgh, he owns and operates with his wife, Colleen.

Do a self-assessment

"Many people fall in love with a concept, product or service, but don't look at what skills it takes to succeed in that business," says Jania Bailey, president of the franchise consulting firm FranNet.

What are you really good at? Time management? Customer service? Networking? If you're someone who is not able to walk into a room of 200 strangers and make 200 new friends, perhaps a heavy sales business is not for you, she says.

Franchisors are looking for people with transferable business skills such as sales, marketing, leadership, communication and customer service.

Next page: Who calls the shots for franchise business decision-making? »

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