Can You Profit as a Franchise Pioneer?

Buying a new, unproven franchise can be a high-risk venture. Professional advice can help minimize the gamble

by Douglas MacMillan

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In 2005, business partners and first-time franchise operators Karen McGinn and Gene Bowen bought an iSold It eBay(EBAY) drop-off franchise and opened it in a storefront on a busy street in Woodstock, Ga., about 30 miles from Atlanta. At the time, the Solana Beach (Calif.)-based franchisor, which also lists items on marketplaces such as uBid (UBHI) and Amazon (AMZN), had a novel concept, but it would soon spawn its share of imitators in pursuit of its promising, untapped market: people who want to sell their stuff but don't want to go online to do so.

For McGinn and Bowen, starting an iSold It was relatively inexpensive—about $150,000 to get a store up and running, compared with the $500,000 to $1 million price tag of the average McDonald's (MCD). Plus, the pair says company executives told them in person and in conference calls that their stores would be profitable within three months of opening. ISold It Chief Executive Officer Ken Sully denies that any iSold It representative made earnings estimates.

The pair says it never turned a profit. "The problem is, the whole concept doesn't work," says McGinn. Having to auction off a wide variety of items on eBay made it hard to compete with sellers who specialized in one category, she says. To make matters worse, each new drop-off store that opened was a new source of competition, since most buyers shop online, not locally. Instead of earning money, the pair ended up spending $1,500 to $3,000 a month to keep the business going.

Long Odds, Lots of Competition

And finally, when they replaced iSold It's software system with a new system—citing its unreliability—the franchisor terminated their franchise agreement explaining they had violated its terms. The process took less than seven months, and the pair estimates it spent between $300,000 and $350,000 in total—including fees for legal counsel.

Few franchisees fall as hard or as fast as McGinn and Bowen did, but their story could serve as a warning for prospective franchisees who assume that a new franchise is a sure bet.

There are more new franchise opportunities than there were just a few years ago, increasing the odds of picking a concept that doesn't work out as expected. According to Arlington (Va.) franchise industry researcher FRANdata, the number of businesses that submitted franchising applications more than doubled between 2003 and 2005, from 208 to 521. Last year, that number dropped to 394.

Sold in Distress

"These franchisees are basically going into an unproven, high-risk venture, yet they're also saddled with the fees and loss of autonomy and freedom associated with franchising," says Sean Kelly, a franchise consultant with Leola (Pa.)-based Idea Farm and operator of the blog Franchise Pick. ISold It, for example, had been in business only a few months before selling its first franchise. For pioneer franchisees, one question looms large: What is the potential for profit? As McGinn and Bowen found out, it's not an easy question to answer.