The Creative Investor

Gambling on everything from real estate to race horses, Baltimoreans are finding ways to grow their money without stocks. Or not.

By Mary Medland

INVESTING IN A FRANCHISE, SUCH AS a Great Clips, is not as romantic as collecting art or antique children’s books. It is, nevertheless, becoming more popular. According to the Wall Street Journal, thousands of stock market refugees have sought shelter in franchises since the downturn in the market two years ago, increasing franchise sales 30 percent.

Nevertheless, it pays to be cautious, says Mario Herman, a Washington, D.C., franchise attorney. “Unlike securities, there is not a national franchise statute,” he says. “Caveat emptor very much applies to franchises, although certain disclosures are required by the Federal Trade Commission. Much of what I do is negotiate the termination of franchise agreements that have gone awry, along with advising people who are considering becoming a franchisee.”

In spite of the Department of Commerce’s assertion that franchising has a 95 percent success rate, Herman doesn’t believe the numbers. He instead paraphrases Mark Twain: “There are liars, damn liars, and statisticians.” He estimates that about one-third of all franchises are doing well, another one-third are marginal, and the remainder are pretty much losing their shirts.

Still there are success stories. Although Herman says the initial investment may vary, he estimates that a major-name fast-food franchise that seeks $1.5 million in annual sales will reap a $300,000 profit. On the other hand, the initial investment for a mail and parcel center franchise might run in the range of $115,000 to $185,000. “Someone doing well in this arena might be seeing a profit of between $75,000 and $100,000 per year,” he says.