SmallBizResource Blog -- SmallBizResource

Q&A With Franchise King Joel Libava

Posted by Gayle Kesten Tuesday, Apr 7, 2009, 09:00 AM ET

You know the saying, "If the shoe fits, wear it"? Well, make it a crown, and Joel Libava wears it well.

Libava, president of Cleveland-based franchise consulting firm Franchise Selection Specialists, says he didn't aspire to be his own boss, but at a certain point during his career, he knew what he didn't want: to work for other people. In 2001, when Libava was canned (his words) from a management position at an automobile franchise, his father, Jerry, encouraged him to join (and eventually take over) the franchise consultancy, which he had founded in the late '80s to help match franchisors with franchisees. Libava has been there ever since. "Even though business is tough, and there's a lot of nervousness and caution out there, I love what I do," he says.

About the nickname: Libava was appointed the Franchise King title at a chamber of commerce event about six years ago. "The director, who knew me, looked across the room and said, 'Hey, it's the Franchise King!' It just kind of stuck," he told me. "It's not an ego thing -- it's more of a branding thing to separate myself from others."

Libava, whose blog is the only one tax expert Barbara Weltman regularly follows, has one of those (Internet) radio-type voices that commands attention, too. In addition, last year he wrote an e-book, "The Essential Steps To Researching A Franchise Opportunity," plus he's a featured blogger on American Express' OPEN Forum and Anita's Campbell's Small Business Trends Website.

Libava and I had what you'd call a Franchising 101 conversation, during which he shed light on what it costs to buy into a franchise, where people go wrong in choosing one, and why it's an excellent opportunity for someone who doesn't want to reinvent the business wheel.

SBR: How would one first go about learning about franchising?
JL: Most people start by going to one of the numerous franchise directories. They see a handsome tile ad, and they click on it and think it might be interesting to own a chicken wing joint. I was taught to do the reverse. One has to start with himself: What do I bring to the table? What am I good at? What am I not good at? Can I sell? Do I have the ability and desire to call on people, kind of a business-to-business type opportunity, or am I more of an operations, back-of-the-house person? That's how a lot of people really blow it.

SBR: What do you mean?
JL: For instance, there are a lot of coaching franchises out there now where for $60,000 or $70,000 total investment you can become a business coach. Most people realize they might be good at coaching because they might have some corporate experience, but unfortunately sometimes the franchisor doesn't really explain to them what it really involves. And what it involves is sales. You have to go out and find clients. If someone says that they're average at sales, that's a problem.

SBR: What if they were to open a McDonald's? Then they could just put out a shingle.
JL: Right. People come in and see you. Then what becomes more important is the marketing and advertising, but the franchisor helps you with that anyway...You get a marketing plan and an operations manual. You also get a whole network of other franchise owners to talk with, who have made the same investment and took the same risk you're about to take. I think that's the best part of it.

SBR: How much does it cost to start a franchise?
JL: I tell people they should have a minimum of a $200,000 net worth. They should be able to write a check for $40,000 or $50,000 of their own money, and they should have the ability to go to a lender for the rest.

SBR: These days, that's easier said than done.
JL: I'm hearing mixed things about getting loans now. What the lenders are telling me is that great credit and collateral are the answers, but you need to have both. It can't be any kind of franchise that's too weird or has just started. It doesn't have to be a brand name, but it has to be something that makes sense. The average total investment of the people I've helped has been around $170,000 -- that's everything from inventory to working capital and franchise fees.

SBR: What other costs are involved?
JL: There's an up-front franchise fee, anywhere from $20,000 on up but average about $35,000. That's the license fee -- here, you just purchased the system. Then there are royalties, which are a percentage of your gross sales -- anywhere from 4 percent to 12 percent of gross sales per month. That's where the franchisor creates wealth. You're talking maybe $20,000 or $30,000 a year. But I tell people bluntly, it's not your idea, so pay. If you want to invest $300,000, take the risk and start your own franchise. Then you get to charge royalties.

SBR: Given the economy, do you think now is the right time to go into franchising?
JL: I don't know if it's the best time or not. But I always tell people it has to be the best time for them. I believe in lower investment opportunities -- the ones that don't cost a half million to get into and [represent] a need, not a want, like haircuts. No fads.

SBR: Why buy into a franchise instead of just starting your own business?
JL: If the franchise is the right match, then they can get to market a lot faster because there are things in place to do that. They don't have to make the mistakes that are made when one starts his own business from scratch. The Internet has changed everything -- a business can be old in three or four months. So I think it's important to get to market quickly.

SBR: So clearly the biggest mistake people make is not picking the right franchises.
JL: Absolutely. For example, someone will say, "I think I will open a submarine sandwich shop because they're always busy." And? "Well, I'm sure I can make money." How do you know? They're not working the whole thing through in their minds. Do you realize the work is seven days a week, 16 hours a day? That the help is hard to find and keep? Do you know the history of the location you're interested in?

SBR: What should a person be thinking in terms of ROI?
JL: The first year is brutal. You might not make any money. If it's a franchise resale -- one that's already established -- it's still not a sure thing. Hopefully there's going to be cash flow, but with a start-up franchise, the first year they're going to have to be really lucky. It might be a little faster in a smaller, home-based B2B franchises. But home-based doesn't mean you're at home stuffing envelopes or doing medical transcription. In B2B, you're out most of the time shaking hands and meeting clients.

SBR: What are the red flags when researching franchises?
JL: An unusual amount of litigation in the Franchise Disclosure Document, or FDD (PDF). This is a document that the franchisor will give you that lists items about the franchisor, the franchise obligations, and your obligations. It has a lot of good stuff in it, and they're obligated to list the litigation. Another red flag: If all of a sudden in one year a 100-unit chain loses 20 franchises, what's going on?

SBR: What question are you asked most often?
JL: "What's the hottest franchise, Joel?" And I say, "You might not like my answer, but it's the one that's best for you at the best time for you." The "hot franchise" is something you might want to avoid because what comes up must come down.

SBR: What kind of background is helpful for a potential franchisee to have?
JL: Operations, or marketing, or sales -- something that has the word "management" with it because you're going to be managing people and processes.

SBR: Who is not right for franchising?
JL: People who are too entrepreneurial. They want to go in and find ways to do everything better -- reinvent the wheel. That's not why you would invest in a franchise. The wheel has already been invented. Franchising [is a good fit for] someone from corporate America who is used to working a corporate system, who doesn't really fight it, and who just doesn't want to do it for somebody else anymore.

SmallBizResource