Should You Purchase a Construction Franchise?

I read an article about franchises, titled “Does it Make Sense to Join a Franchise?“

Interesting word choice. Joining is positive, it’s about connecting with others. But you can’t join a franchise, you purchase a franchise. Franchises are sold by franchisors; if you buy one, you’re a franchisee. You might have joined a club of franchisees, but you had to pay to join.

As more people move into remodeling, franchisors are ready to grow. If you’re considering purchasing a franchise, or if you’ve been contacted by a franchisor because of your success, put your emotions on hold and evaluate it carefully.

Back in 1984, Inc. Magazine published an article about a popular new remodeling franchise called Mr. Build. It began like this:

“Security. Ego. Love. Fear. Greed. That’s just what they had hit him with, Skip Kelley thought, staring at the slide on the wall of the rented motel conference room.

‘People don’t buy on logic,’ the teacher said. ‘Psychological tests have shown that they buy on emotion 75% of the time.’

Kelley knew that first hand. Last spring he had been independent, free to run Kustom House Co., his $324,000-a-year remodeling business located north of Boston, however he chose. Thomas Tyska, the regional director who sold him his new Mr. Build franchise, had touched four of the five emotions in his pitch.”

The article was published in 1984; Mr. Build failed a few years later.

Franchises generally work well for a commodity-based business. They tell you how to make hamburgers, sell real estate, or sell clothing, with instructions on how to build your building, manage your staff, and what equipment to buy. Franchises that work well are almost 100% commodity related businesses where control can be exercised over every aspect of that business.

That’s because when you sell a commodity, like hamburgers, it’s easy to standardize the system and have all franchisees operate the same. When you are selling a service, like remodeling, it’s almost impossible.

That’s why franchises often don’t work well in construction. Think about the people you know in this business. How often do two of them to do the same thing the same way? Think about the jobs you’ve built. How many have been identical?

I taught a one-day estimating class in Massachusetts in 1988, with over 150 contractors in attendance. During that class we built an estimate for a room addition. We preselected some 38 to 40 line items from an estimating book we used for the takeoff, trying to give the students a guideline to follow to make estimating easier and more systematized. By the time we had taken off 8 items on that room addition, no two people in the room had filled out their estimate sheet the same way. I taught that estimating class in over 80 cities around the US and Canada for over 10,000 contractors. It happened in every city, in every class – everyone estimated differently.

Field Reps

Although it’s seldom talked about, one of the driving forces behind many construction business owners is the strong need to “Do It My Way.” That’s why they start their own business. And that’s where, all too often, problems begin with a franchise.

When you purchase a franchise, you’ll receive a lot of information on how to run your business; things you need to learn and abide by. Then you’re turned loose to do your thing and you’re assigned to a field rep. The field rep’s job is to be the liaison between you and the franchisor. Their job is to make sure you’re following the guidelines as laid out by the franchisor. To fit you into their system.

There’s a good side to that: they’ll come by the office to answer questions and solve problems like difficult clients or employees. If the field rep is available, and if they have the knowledge and ability to help, they can be very valuable to your business.

But all too often, the field rep isn’t able to stay current with the franchisee because they are spread too thin, or they do not see or understand the problem. And unfortunately, they often don’t know how to fix the financial problems

If the franchisor keeps the ratio of field people at no more than one to every four franchisees they sign into their program and the field person is helpful and knowledgeable, this can work. The minute that ratio grows above 1 to 4, field reps quickly become too busy to do their job well. You won’t have contact with the field rep two or three times a week, it’ll be once a week or twice a month. Problems go unsolved, customer complaints go unresolved, and field procedures are ignored.

For example, the franchisee doesn’t write a good payment schedule into the contract, the owner doesn’t pay as they should and boom, cash flow problems. Field person might say, “Go to the bank and get a line of credit so you can pay your bills, and by the way, you’re two months late on your franchise fee.” Not exactly helpful.

You might think you’ll be happier if you don’t see a field rep for months. You know what you’re doing and you can do it well. Don’t forget, you have the same name as the franchisee two counties over, and the field rep isn’t as available to help them, either. The other franchisee might not be as competent as you are. When they have problems that aren’t resolved, your name gets tarnished. The mistakes made by any franchisee can land on you. It’s guilt by association.

Franchise Fees

Another problem with franchises is the cost because, in remodeling, there isn’t anything a franchise offers that you can’t do yourself.

What do they offer? The first thing you’ll hear is marketing. They’ll make your name (which is really their name) a household word. You’ll be the company people look to when it’s time to get a project built. You’ll also receive business management assistance, software to help you manage your business, and discounts on materials and supplies for your jobs.

What will it cost you? The upfront investment begins at $35,000 and goes up from there, depending on the franchisor. You’ll also give them a percent of your sales, usually in the five to six percent range. Sometimes there is an additional fixed monthly fee.

You might be promised an increase in revenues, but that won’t matter unless you also see an increase in profitability. That could be difficult when you also have to raise your markup to cover the franchise fee and recover your investment.

Alternative to Franchise Fees

You can get the same advantages for far less money without a franchise. For $35,000 or more, you can buy a lot of business management assistance and software.

If you’re currently spending five to six percent of your revenue on advertising, you don’t need the marketing assistance. You don’t even need to spend that much because thanks to the internet, your company name doesn’t need to become a household word. When you become one of the top three contractors to appear in a web search in your area, you’ll get all the leads you need.

Who Wins

Franchisors are looking for successful contractors to convert to their name. It gives them a chance to expand their territory at no risk. Even better, they’ll gain your upfront investment along with a percent of your sales over the years. It’s a no-lose proposition for them, especially if you’re good at what you do.

In return, you’ll usually be asked to give up your company name, and in some cases, sign a non-compete agreement in case you change your mind and decide you don’t want to be a franchisee any longer. That non-compete agreement will prevent you from owning a construction-related business for a year or longer, a high price to pay after all the money you’ve invested in the venture.

Big Picture

Franchises might be okay if you’re dealing with a single-trade specialty that’s cut and dried, and clearly defined, like closet installs, garage door repair, or gutter replacement. In construction, anything beyond that is a mistake; the benefit is to the franchisor, not to you.

When you’re approached by a franchiser about joining their ranks, start with the question, “Do you have field people that we can call on for help and if so, how many other franchisees do I have to share this person with?” That will tell you all you need to know before going any further with that company.

Remember the article in Inc. Magazine that I discussed earlier? If you’re considering a franchise, or if you’ve been contacted by a franchisor, take a minute and read the whole article (behind a paywall) now that you know how the story ended. Because, with the exception of technology, remodeling hasn’t changed.

“Kites rise highest against the wind – not with it.” — Winston Churchill