• February 10th, 2017

Case Study-Case: “A Cautionary Tale”

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FFor 29 years, Jan Lee had thrived in the corporate environment at international giant IBM. When she decided that it was time for a career change, she knew she wanted to work in something completely different from the computer industry. She also knew that she had grown accustomed to having the support and guidance of a management team throughout her career and wanted that assistance to continue. That’s why a franchise seemed to be the ideal solution for her second career. After evaluating several franchise opportunities, Lee decided to open a Slender Lady diet and exercise outlet near her home in Hawthorn Woods, Illinois, a Chicago suburb. “I was attracted to this business because it was about helping people, especially women, be healthier,” she says.
Lee paid a $30,000 franchise fee and began getting her business ready to open. The franchiser also convinced Lee to reserve five other franchise territories in the surrounding area at a cost of $5,000 each so that she could open franchises there once she was able to get her initial location established. Lee soon discovered that the $30,000 franchise fee she paid for her first outlet was just the tip of the iceberg.
She paid $40,000 to land a storefront location in an upscale mall that attracted many of her target customers. Signs and décor cost Lee another $9,000, and other expenses that she had not expected constantly cropped up. “Even the music you’re supposed to play had to be downloaded from a certain source, and that cost extra,” she says. “There was one expense after another that wasn’t mentioned in the initial estimates—$10,000 in advertising, then payroll taxes—or payroll period. To get new customers, I had to hire a salesperson, who cost me $2,500 a month. That wasn’t mentioned anywhere.”
Lee was expecting to get lots of support from the franchiser, but she says that the company provided her with very little management and marketing assistance. She says the franchiser’s idea of marketing was to use drop boxes located in nearby businesses, into which prospective customers could deposit information cards. Lee found the boxes to be of little value to her franchise’s marketing efforts. “They’d be full of gum wrappers,” she says. When she contacted the franchiser about the problems she was encountering, she says their response was, “Keep using the drop boxes.”
As time went on and expenses mounted, Lee ran through the entire $100,000 she had saved from working at IBM. She took out a home equity loan to keep her franchise afloat, but by then a new Curves franchise had opened nearby, and new customers were increasingly more difficult to come by. Just as she did in her corporate career when things got tough, Lee responded by working harder and longer. She was spending 12 hours per day on the phone contacting people who had signed up as customers and then dropped out. “Nothing in my corporate life prepared me for this,” she says. “I was exhausted and depressed all the time.”
Lee soon hit the cap on her home equity line of credit, but because her franchise was operating at a loss, she could not afford to repay the loan. She was about to lose her home, and her marriage was failing. A few months later, Lee signed the franchise over to one of her employees for $1. “I just wanted out,” she says.
When Lee called the Slender Lady headquarters to ask about getting a refund on the $25,000 she had put up to reserve the right to develop the other five territories, the franchiser declined. She learned that her options had expired and that the franchiser already had sold two of the territories to other franchisees. Bruce Sharpe, CEO of Slender Lady, says, “There is a time limit clearly stated in the contract. If you don’t use the territory within 12 months, you lose it, and you don’t get a refund because you have tied up that territory for that time.”
Lee admits that she learned a valuable—and expensive—lesson. Those who have succeeded at franchising emphasize the importance of researching the franchise opportunity and the potential for the market you are considering entering before taking the plunge.
Before Terry Tryon, a 30–year veteran of the insurance industry, purchased a Tutor Time daycare franchise in Wyomissing, Pennsylvania, he investigated the franchiser and the local market thoroughly. “I looked at statistics on the rising need for child care in two–income families, and then I looked at this part of Pennsylvania to see what demand was and who my competitors were likely to be,” says Tryon. “A gut feeling is fine, but the more knowledge you have, the better off you are. I also talked to lots of other franchisees, some of whom had succeeded and some of whom had failed. I got more insights from the ones who failed.”
Source: Adapted from Anne Fisher, “Risk Reward,” FSB, December 2005/January 2006, pp. 45–61.
1. What should Jan Lee have done differently before purchasing her Slender Lady Franchise?
2. Suppose that a friend tells you that he is considering purchasing a franchise and asks for your advice about the steps he should take to ensure that he makes the right decisions. What would you tell him?
3. Summarize the advantages and disadvantages your friend is likely to experience if he buys a franchise.

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