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In the aftermath of the Great Recession, many millennials found themselves with a college degree and no job prospects. Simultaneously, many of their boomer generation parents found themselves forced into early retirement or long-term unemployment. According to a recent article in the Franchise Times, some families are purchasing franchises with the hopes of creating employment and long term financial stability for Junior and Senior. While purchasing a franchise may create employment for both parents and children, it also poses significant risks, risks that are magnified when two generations make the leap together. What do you need to know before you invest in a “family” franchise?
First, take a hard look at the real statistics on franchises. Although an unscrupulous franchise broker may tell you that 90% percent of franchises “succeed”, decades of research from the Small Business Administration and academics shows that franchises succeed or fail at roughly the same rate as other small business with roughly 85% of all small businesses failing in the first five years. A family franchise investment necessarily means that the partners are at very different places in their lives and have a very different approach to economic risk. A 25 year old franchise investor can “start over” if the franchise fails (and will likely have gained real world business experience) but his 55 or even 65 year old parent, who may have invested retirement savings or cashed out a 401k to purchase the franchise, cannot.
Second, take a hard look at the qualifications and experience of your new “business partner.” The Franchise Times article showcases two families that are operating “successful” two generation franchises. Each family had unique circumstances that likely contributed to their success. In one family, the father already owned a string of successful franchises before his son joined him. In both families, the younger partner had majored in business or a business related field in college. Given both families’ prior business and franchise experience, it is fair to apply the old warning: “Results Not Typical.” Although many franchisors tout the near universal success of their “system” and entice prospective franchisees with promises of support and training, franchisees without significant real world experience running a small business are likely in for rude awakening.
Third, take a hard look at exactly what sort of job owning and operating your own franchise is. The romantic ideal of the “family business” obscures the long hours and unpaid efforts of family member employees. The article noted that in one “successful” family owned franchise, not only do the two father and son owners spend long hours at the restaurant but both of their wives “pitch in” after working a full shift at other jobs. While long hours and minimal benefits may work in the short term, it probably won’t work in the long term, especially as the younger partner considers starting a family and the senior partner starts contemplating retirement.
Finally, prospective family franchisees need to consider and address the unique aspects of their situation. Most recent college grads are unlikely to have the significant financial resources to purchase a franchise but may be more willing to contribute “sweat equity.” And having a baby boomer aged partner, means that the franchise is more likely than most to face the sudden incapacitation or loss of a partner. An experienced franchise attorney can help families identify and address these issues. Most importantly, while a business can fail and partnerships can dissolve, in a family franchise, the owners are linked and a messy failure can be devastating. Families must explore the “worst case” scenario before purchasing a franchise.
We don’t intend to be “down” on family businesses and are not implying that purchasing a franchise with your children or parents is guaranteed financial disaster. But it is an enormous investment with significant risk. And like all investments, purchasing a franchise is a choice best made after careful consideration and consultation with an experienced franchise attorney. Investments that are based on limited prospects or even desperation are rarely successful.