Franchises Can Offer Benefits, but Charity-Enterprise Experts Advise Caution

Nonprofit groups interested in starting a business as a way to provide job training, stimulate a local

economy, or earn extra revenue are now starting to consider franchises as an attractive option. By opening a 7-Eleven, Krispy Kreme doughnuts, or Pizza Hut, for example, charities can get the benefit of a well-known brand name right from the start. But charity and business leaders caution that a franchise, like any new business, carries risks and can be a poor choice for some organizations. Among their suggestions:

Consider the motivation. While some charity-run franchises generate thousands of dollars for an organization’s social programs, nonprofit business experts caution that groups shouldn’t look to a franchise — or any other business venture — to solve short-term financial problems.

“The organization has to be reasonably stable financially,” says Nancy Carstedt, president of the Chicago Children’s Choir, which opened a Ben & Jerry’s ice-cream shop in August. “If you’re just trying to keep the doors open, I’m not so sure that’s the time you want to be starting a business.”

Do the research. J. Gregory Dees, faculty director of the Center for the Advancement of Social Entrepreneurship, at Duke University, says it’s important to conduct research on the parent company to make sure it has a history of following through on its promises of new-product development, advertising, and other assistance. “Some deliver, and some don’t,” he says. “There are people who buy a franchise, set up shop, and find that the franchiser is not providing the support that they expected.”

Mr. Dees says that nonprofit organizations are likely to be safe if they go with a well-established, name-brand franchise — “the McDonalds of the world” — but that charities should be cautious when considering companies just starting to franchise, because their financial position may not be as strong.

Talk to other franchise owners. Complex guidelines issued by the Federal Trade Commission govern what franchise companies can and cannot tell potential franchise buyers. So charities that are considering making such a purchase need to take it upon themselves to talk with current franchise holders within a chain to find out as much as they can, nonprofit business experts say.

“I’m sure these laws are in place to protect the franchisees from a franchiser who says, ‘Oh, you’re going to make a fortune doing this.’ But it really makes you do the work,” says Jeff St. Romain, president of Volunteers of America Utah. The Salt Lake City charity spent more than a year recently exploring the possibility of opening a Ben & Jerry’s scoop shop, which it decided not to pursue, largely because of the downturn in the economy and the amount of money it would have needed to start the business.

Understand the costs. The price tag for opening a franchise business is considerable. And the expenses don’t end with the upfront franchise fee — which can be tens of thousands of dollars or more.

For example, most franchises have specific requirements about how a store should be constructed. “It can be pretty expensive to build the right shop with the right materials and signage,” says Jed Emerson, a senior fellow with the William & Flora Hewlett Foundation and the David & Lucile Packard Foundation.

Hire carefully. For charities that are operating a franchise business to provide job training to their clients, finding the right person to run the venture in a way that meets both its social and its financial goals can be a challenge.

“It’s a very tricky thing, hiring people who can be skilled as both business managers and, in our case, youth-development experts,” says Jim Schorr, executive director of Juma Ventures, a San Francisco charity that offers employment to disadvantaged teenagers and young adults at the three Ben & Jerry’s ice-cream shops and other businesses that it runs. While Mr. Schorr says Juma hasn’t found the secret to identifying managers with the right balance of nonprofit and for-profit expertise, the organization attempts to cast its recruiting net as widely as possible.

Monitor the business. The franchise model is based on high volume and low margins, so it’s important to keep a close eye on the venture, says Raymond M. Codey, director of development at New Community Corporation, an economic-development organization in Newark, N.J. , that runs several fast-food franchises, including Dunkin’ Donuts, Nathan’s Famous hot dogs, Pizza Hut, and Taco Bell. “You really have to watch the day-to-day operation,” says Mr. Codey. “You have to micromanage, because you can lose significant dollars very quickly in food.”

About two years ago, New Community instituted a daily sales and labor report to help managers stay on top of such issues as how much their stores have sold, their labor costs, and their progress toward financial goals.

Put some money aside. A healthy business needs to have cash on hand to pay for equipment repairs and other unexpected expenses, says Robert P. Smith, executive director of Platte River Industries. The Denver organization provides job training and employment for people with disabilities, in part by operating two Auntie Anne’s concessions at the Denver International Airport.

Mr. Smith says the temptation for many charities is to draw off as much money as possible from a franchise to support their other programs. But if the business does not have the money it needs to operate efficiently, he says, it won’t be able to generate revenue in years to come.

Be hard-nosed about quality. Charities cannot count on their good name and the public’s desire to help their cause to translate into a successful business, say social-enterprise experts. Like any other small business, charity-run ventures succeed or fail on the quality of the products and services they offer.

In 1998, the Center for the Homeless, in South Bend, Ind., started a landscaping operation as a ServiceMaster franchise. Some of the businesses that hired the company viewed their initial decision more as a donation than as a business transaction, acknowledges Brian Connor, the center’s senior director of business affairs. “That’s fine if that’s why they want to hire us,” says Mr. Connor. “But if they’re going to keep us, it’s going to be because of our service.”