When career turns down, franchising is option

Ready-made business can pay off but requires hard work, money, caution

By Eve Tahmincioglu
msnbc.com contributor
updated 8:02 a.m. ET, Thurs., March. 26, 2009

Taso Louloudis knew the construction industry he and his wife Kim worked in was suffering, but neither expected they’d both lose their jobs in the same year.

Kim was laid off from her job at Engineered Homes in Orlando in May, and Taso lost his job as construction manager for Rey Homes on Nov. 7, his birthday.

“I’ve been doing construction my entire life, working my way up from subcontractor to a point where I was the boss that did hiring and firing,” Taso said.

At age 50, with only a high school diploma, he realized his career choices were limited.

So Louloudis and his wife turned to franchising.

More and more laid off workers are considering franchising as an alternative to working for someone else, according to experts in the industry.

Some see franchising as an easy way to entrepreneurship and economic independence. But becoming a successful franchisee takes a lot of hard work and money. It could take years before you’re able to replace your income.

Because the Louloudises love pets — they have four dogs and five cats at home, many of whom are rescue animals — they embarked on finding a pet-related business.

They considered a host of options, including doggie daycare and pet sitting, but decided against starting their own company from the ground up due to the intense competition for such services in their area.

They now own a Fetch! Pet Care, a franchise that offers in-home pet sitting services.

The Louloudises bought the franchise for $13,000, plus the cost of a flight to Fetch’s headquarters in Walnut Creek, Calif., for training. They expect to bring in sales of about $50,000 by the end of this year.

Should you open a franchise?
If you really have the heart of an entrepreneur, franchising is probably not for you. First off, it’s not your business idea that you nurture and grow. You’ll have to follow a strict playbook of operating the franchise. Often agreements are written so you can’t even sell the franchise operation without the approval from the franchise company, said Walter Zweifler of Zweifler Financial Research, which analyzes franchising opportunities for investors.

The industry also falls prey to scammers who try to get money upfront for a business model that never delivers on sales promises.

Even if you find a legitimate franchise, keep in mind that franchising isn’t recession-proof. The number of franchisees defaulting on Small Business Administration-based loans jumped 24 percent in fiscal year 2008, according to the federal agency.

That said, franchising might be something out-of-work individuals with money to risk and a desire to run their own business may want to consider. But it requires a lot of research and intense due diligence before signing on the franchisee line.

One big challenge is getting the money to pay for the upfront fees franchise companies typically need, between $15,000 and $60,000 for most franchises, said Rieva Lesonsky, franchise adviser for AllBusiness.com. In today’s economy, getting a loan from a bank is going to be tough, so some applicants are use their own savings or severance pay to start a business.

In addition, an increasing number of individuals are tapping into their retirement funds, many of which have been battered by the sinking stock market, to foot the bill.

In some cases, people are choosing to roll over their 401(k) and IRA plans from their former employers into a new franchise and then use those funds for operations, a fairly new practice that may run afoul of tax laws.

The Internal Revenue Service would not comment on the issue, but a spokesman for the agency directed me to an IRS document from October investigating the practice. When the IRS looked at a number of these rollovers into business startups, the document says, the agency found problems with most. This means some individuals may still be liable for hefty taxes and penalties for early withdrawals.

Even if you find a way to roll over the funds legally, investing retirement funds “is too risky because you have all your eggs in one basket,” said Jennifer Thomas, a certified financial planner with Henssler Financial Group,

She had a client who invested his IRA in a business, against her recommendations, and his business failed. “He lost all his retirement money.”

Controlling your own destiny
Jim Symington, who was laid off in September, doesn’t mind risking his 401(k) for a shot at franchise ownership. After working for someone else for 30 years, most recently as a director of information technology for a manufacturing company, he was ready to control his own destiny.

“I was angry. I was starting to think it was gold watch time I had been there so long,” he said. “My first thought was never again am I going to be in this situation, be at the mercy of someone else’s greed or needs.”

He decided to go to a franchise broker in Atlanta and get some direction on what franchise would be best for him. (Franchise brokers get paid a commission by the franchise operators, so keep that in mind when they’re making recommendations.)

After researching a host of franchise concepts, Symington chose Mr. Handyman, a home maintenance and repair firm, on encouragement from the broker.

“Oddly enough, I found a fit I wouldn’t have dreamed of,” he said. “I used to have a team of IT guys, and I would send them out on projects to fix things. But now instead of taking laptops, they’d be taking hammers.”

Even though the broker recommended the franchisor, Symington did extensive research on his own, which included talking to other Mr. Handyman franchisees and also franchisees that were unable to make the business work.

It’s key to ask a franchisor for a list of franchisees, both past and present, to find out what you can expect.

Run the other way if the company does not readily give you franchisee information, or the Franchise Disclosure Document, which includes everything you’ll need to know about the franchise, including financials, failure rates and any litigation against the franchisor. Read it carefully, said Joel Libava, president of Franchise Selection Specialists Inc.

‘It’s a ton of work’
Symington paid a $68,000 franchising fee and upfront costs, and the franchisor required at least six months of working capital, a total of $40,000, to start the business. In return, he got a wealth of marketing materials, online resources from the franchisor and a 90,000-home territory.

While the business could be run out of his home, he opted to get office space in Suwanee, Ga., and officially launched his franchise March 2.

In his job as an IT director, he was making about $100,000, but he doesn’t plan on drawing a salary from the franchise for at least the first year. With his wife Tracy doing administrative work at a hospital — where she has health insurance coverage — and some severance money from his former employer, he says they’ll be able to afford basic expenses until the firm ramps up.

For those who think it’s a cakewalk to run a franchise, Symington offers a reality check.

“It’s a ton of work,” he said.

He’s not just working 40 hours a week. He also toils in the evenings and sometimes on weekends, and recently found himself working even though he had the flu. If he were still an employee, he said he would have taken the day off to recuperate.

But he doesn’t seem to mind it at all.

“Having been in the corporate world, no matter how hard you pedal, your paycheck is the same,” he said. “Now, if I pedal hard, I can go faster, make more money. It’s kind of exciting.”