Startup Squanders #5 -- Franchise And MLM Fees

Franchises and Multi-Level Marketing schemes are absolutely one of the top five money wasters for budding entrepreneurs. Though they are bad ideas for different reasons, the bottom line is the same -- there are much better ways to spend your startup capital.

Franchises provide only one aspect of your startup - the operations. The bulk of what it takes to succeed in business is still on you, including managing the money, funding the remainder of startup costs, most of the marketing efforts, and all of the planning. The primary purpose behind buying into a franchise is to obtain a "proven" business model. The majority of the franchises available now, especially those within a reasonable price range, use the term "proven" quite loosely. Some have only one or two (or zero) corporate-owned stores…how proven can it be? The other advantage is supposed to be the marketing provided at the corporate level. If you are looking at a specific franchise, take a hard, unemotional look at the marketing efforts they are putting out. Will they actually reach your target market frequently and consistently? Will those people know how to find your particular business? Unless you own a McDonald's, Subway, or Stanley Steemer franchise, there is a good chance that the marketing advantage is not as strong as the hype. And, remember that as long as you are in business, you will owe the franchisor money -- and they always retain the right to rework your books to be sure they are draining you for every penny.

Buying into an MLM at this stage is just plain crazy. If you have ever dropped the cash on one of these schemes, you probably walked away from it believing that you didn't make any money because you did something wrong. You didn't. The vast majority of people who buy in to MLMs of any kind never earn a dime, not even enough to recoup the cost of buying in. One study found that the average gross sales per MLM member comes out to about $12 per month…that's before expenses. It may be true that your Uncle's barber's niece made a killing through a web-based MLM, or that your neighbor's son-in-law is making a fortune through Amway, but probably not. Unless you are at the very highest level of any MLM program, you are not going to get rich. Ever.

With franchises and MLMs, buying in is not the end of your startup responsibilities. To make any sales in any business, you have to do the work to market your product. Though franchise and MLMs often claim that marketing is included, this doesn't mean you are off the hook. For example, franchises may market the brand, but your customers still have to find your particular business. Even if they include your contact info somewhere on the corporate website, this will not drive enough business to make you successful. And, most of the 1,500+ franchises out there actually do very little effective marketing. You are also responsible for securing the commercial space, buying all equipment, and hiring and training staff…just like starting your own business idea. Many of the new MLMs include a "customizable" website to market your product, for which you pay a monthly fee. Posting a website on its own is not marketing. There are more 100,000,000 websites on the internet, so it's very easy for yours to get lost if you don't market it correctly. Of course, getting your website to show up on search engines takes time and effort that is better spent working on your own business idea. Basically, what you are buying with a franchise and MLM is an idea…and paying way too much for it.

If you want to be your own boss, find an idea that works for you and do the work to make it successful. The only realistic way to get rich (aside from winning the lottery, which isn't likely) is to build your own company from the ground up. Be mindful of the startup capital you have. Buy only what you absolutely must have to take the next step forward and look for deals at every turn. Plan your business in detail before you launch and you will get where you want to go.

K. MacKillop, an entrepreneur with a J.D. from Duke, is co-founder of LaunchX LLC and authors a business startup blog. The LaunchX System, a five Unit series of step-by-step business startup procedures, key software and more, answers the question, "Where do I start?" Visit http://www.LaunchX.com.

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