Finding the right franchise - includes related article on evaluating franchises

Nation's Business, Feb, 1988 by Nancy L. Croft, Meg Whittemore

Finding The Right Franchise

We're going to be the next McDonald's." Buoyed by promises such as that from confident franchisors, many prospective franchisees have considered buying a piece of the "burger"-- even if it was a janitorial service or some enterprise less familiar than the golden arches.

Buying an established franchise is usually a safer bet than starting an independent business, but it depends on the franchise and on the homework a potential buyer does before investing. For those risk takers looking for the next McDonald's, buying into a newly franchised business can either earn big returns or produce another statistic on the Commerce Department's business-failure list. A new franchise is like a start-up, so the risk is higher.

"You have to look at new franchises like stocks," says Patrick Boroian, president of Francorp, a franchise development and consulting firm in Olympia Fields, Ill. "You have the blue chips-- the 7-Elevens, the McDonald's, the Holiday Inns,--which cost a lot of money to buy today, and you can hardly get one. Or you could buy one of the new franchises. Like over-the-counter stocks, if you stay with them over the long haul, they could be worth a fortune."

But very few new franchises will become the equivalent of a Domino's Pizza. "That's why you look at the management, their experience, their financial capabilities, the market for their product or service," says Boroian. "It's very similar to the way you would analyze a stock."

There are advantages to buying a new franchise if you've done your detective work, says Harold Nedell, who owns a Houston franchise financing firm, M&N Franchise Development Company. "You get the personal attention of the principals, who are going to put all the time and effort necessary into seeing that you're successful, because they can't afford a failure at this point," he says. "You also get the best locations, as well as a greater opportunity for growth. If you wait until there are a lot of these things around before you invest your money to be sure you're getting into something that works, the best territories are already sold out."

But Nedell says that before you make a commitment, you should ask very specific questions of new franchisors --especially those that have not been in business more than two years before franchising. (See box on Page 58.) It is also wise to check with the Better Business Bureau to make sure the company is legitimate.

Traditionally, the new franchises that fare the best are those that are first in a market with a product or concept, that obtain a trademark if possible and that provide marketing support. Those that do best also appear to be the ones that capitalize on trends, such as consumers' preferences for convenience and for spending more time at home. Most emerging new franchises are even further segmenting product and service niches that have already proven successful.

Video's 1st, based in Albany, N.Y., is one example. Using 48-square-foot, freestanding kiosks strategically located in high-traffic areas such as shopping center parking lots, Video's 1st rents only the top 30 newly released videocassette films.

The procedure is like that of a fast-food drive-through window. The customer drives up, chooses a film, picks it up from one of the kiosk's two windows and drives off in a few minutes. Videos rent for about $3 a day.

The first company-owned store entered the crowded video-rental field nearly two years ago, and the parent company, Associated Video Hut, Inc., started selling franchises last May. So far it has sold 80 franchises, which began opening in January. A Video's 1st franchise can be purchased for about $100,000. In addition to the initial franchise fee of $18,500 for training, the price includes site selection, the heated and air-conditioned kiosk and an inventory of 750 cassettes.

Before they became franchisors, Video's 1st founders Todd LeRoy and Michael Atkinson were with Shearson Lehman Brothers. After researching business opportunities, they realized that nobody was franchising drive-through video stores. They invested $500,000 of their own money to franchise the concept.

Though the video rental business is competitive, "research shows that consumers want convenience in obtaining video rental tapes. They look at selection and depth of new titles and price, in that order," says LeRoy. By conveniently offering only the most-sought-after tapes, he says, "we will satisfy 80 percent of the consumers almost 100 percent of the time."

Another franchise found in parking lots is Park America. According to founder James Jennings, it is the only franchised valet parking service in the country. Based in Red Bank, N.J., the company was founded in 1985 as a sideline money-maker for Jennings, who was an executive with Warner Communications in New York. He hired family members to help park cars, and within two years he was servicing 60 accounts in New Jersey.

Jennings hired several experts, including a franchise director, to help him expand the business, and the company sold its first franchise last June. By year-end Jennings had sold six in New Jersey and one in Florida.