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"Starting up a Franchise Business" Safe bet or buyer beware

"Starting up a Franchise Business" Safe bet or buyer beware

When I left my job as a Manager for a well known restaurant in Las Vegas for our move to Denver, my dream was to open my own restaurant. We were lucky and cashed in on the housing market before it collapsed and I was eager to be my own boss. I started to research all possible scenarios for the right business opportunity. The possibilities seemed endless and our optimism was high that we could finally realize the dream of future financial freedom.

Franchise or Alternatives to Franchising?

My research began in earnest on what was the best fit to get up and running. I had been in the hospitality industry long enough to know that restaurants usually faced an uphill battle to survive. However, I had over 10 years in the industry and knew a thing or two, or so I thought.

My research went from should I buy an existing stand-alone enterprise to starting from scratch or the "safer bet" exploring franchise business opportunities. While I knew how to run an existing restaurant I did not have the experience of starting from the beginning. I had no knowledge of negotiating a lease, hiring a contractor, locating funding, etc. I quickly began educating myself and found out that there was a world of knowledege that needed to be obtained.

After several months my attention turned to opening a Franchise. There was a well known sandwich chain that had fairly low buy in costs. The initial fee was $25,000 and the total dollars in depended upon whether you bought an existing store or built your own. We opted to go for it and built our own. Wow, now things were going to be good. Our own store and a location we picked (from a list of sites provided by the Franchisor). The Franchisor took much of the guess work out of the process. They provided a list of contractors they trusted and had used before. Information was provided on obtaining permits, who to use for payroll, food distributor and on and on. As promised, the Franchisor took the guess work out of it and showed you how to get up and running.

The Rubber hits the road

Normal problems arose during construction, we opened six months later than anticipated, but we knew there would be bumps in the road. Our opening was a disaster, bad weather, road construction and slow customer recognition. Costs were high: rent, opening costs, loan costs, abnormally high food costs (the Franchisor owned part of the food distributor) and last but not least Franchise Fees. When we opened our Franchise Fees were fairly high at 9%. This is huge in a very tight margin business. However, the Franchisor raised the fees to 11% not long after we opened. They had this right in the Franchise agreement and the reason was to increase advertising!

Beginning of the end

We quickly found out that we were not the real owners. We were at the mercy of the Franchisor and we were hemorrhaging cash. I tried to sell after the first year of operation; however we could not get any takers at any price. We had to close the doors and realize a loss of approximately $250,000. The Franchisor had a "program" to help struggling Franchises, however any requests for help, temporary reduction of franchise fees or help finding a buyer, fell on deaf ears.

In conclusion, we may have picked the wrong concept, location or time to open our restaurant. I believe Franchises can be a viable choice, but as always, buyer beware.

Christopher Benoit

"Starting up a Franchise Business" Safe bet or buyer beware

By: Christopher
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