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Fall 2012 Finding and Funding a Franchise

Looking to expand your specialty retail business? A franchise might just be the right fit for you.

A franchise can take a retail business to the next level or add a new business to your portfolio. There are nearly 750,000 franchise establishments in the United States that employ more than 8 million people, according to the International Franchise Association.

Experts say that in tough economic times, it makes sense to buy into the proven business system that a franchise provides. “Franchising is a great model for someone who already owns a business or who wants to get into a business and grow that in a more rapid way,” says Alisa Harrison, a spokesperson for the International Franchise Association. “With a good franchise you know you’re working with a successful concept so you’re not reinventing the wheel.”

Apricot-Lane-extIn a franchise relationship, the franchisor offers the brand name, training, technical support, inventory purchasing, location selection and other business support. The franchisee typically pays an upfront franchise fee and ongoing royalties, and may pay other fees such as advertising and marketing. In addition, many food service franchises, among others, require franchisees to purchase inventory from a single supplier or small group of suppliers.

Why buy into a franchise?

Apricot-Lane-horiz.intA franchise can fast track a person to business success. Someone else has already figured out the business model and many other aspects of running a business. Some franchises allow conversion of an existing store into the franchise concept, says Kim Ellis, senior consultant with MSAWorldwide, a franchise-consulting firm based in Hartford, CT.

A franchise is successful because the owners follow the procedures and training laid down by the franchisor. “It’s a great business model for people who want to get into business for themselves but not by themselves,” Harrison says. If you’re the type of person who likes to play by your own rules, however, a franchise may not be the right choice. “You may not want to have it all laid out for you, you may enjoy the chaos of starting your own business,” Ellis says. “Make sure that if you buy a franchise you’re completely willing to follow a system.”

How to buy a franchise

Experts recommend starting with a strong personal and financial self-assessment to determine what kind of franchise would best suit your wants and desires. “It can depend on what your personal interests are and also what’s needed in your community,” Harrison says. “If there are already four coffee houses on the same block you probably don’t want to open another one.”

Next you’ll need to research industry and community trends. For instance, frozen yogurt shops are making a comeback, and senior care services are growing as the population ages, Harrison says. Ryne Everett, a research analyst at Franchise Help, a web-based service that offers a free online franchise comparison guide, recommends starting with industry market research. “Look at whether the industry is adapting to demand or dying out; because you don’t [want] to struggle for survival as you build your customer base,” says Everett. “Also look at projections; will your franchise be in demand in 15 years?” Then narrow down the choices to five or 10 franchises at most for further study.

The U.S. Federal Trade Commission

regulates franchising, and franchisors are required to disclose certain information to potential franchisees, usually in the Franchise Disclosure Document. To get a franchise’s FDD, a potential franchisee typically has to fill out an application form with some basic personal and financial data. Among the most important information in the FDD is an overview of litigation with franchisees, the number of open stores and the number of stores that have closed. “If you see many lawsuits pending and there’s a contraction in the number of units opened, I would say there’s some conflicts going on in the company,” Ellis says. The FDD also contains the contact information for every franchisee. “My no. 1 piece of advice is to call as many franchisees as possible so you get a good idea of what to expect,” Ellis says.

Franchise trends

Apricot-Lane-intWith malls under pressure to keep every square foot occupied, there may be opportunities for businesses that fall outside the traditional mall or food court options. The national and local market can also play a role in deciding what franchise makes the most sense.

Keep in mind it may not be immediately clear if a franchise offers a mall inline or kiosk option. Contact the franchisor directly before writing off an otherwise attractive opportunity. “I’ve found several brands that have kiosk locations but there’s no way of finding that online,” Everett says.

Nonetheless, malls and strip shopping centers remain a popular destination for franchises. “The mall management love to have franchises because they’re popular and draw people to the other businesses,” says David Nilssen, CEO of Guidant Financial, a financial consulting firm in Bellevue, WA, that specializes in small businesses and franchises.

Of course, location plays a big role in the success of a franchise, as it does with any other business. Nilssen recommends doing market research to determine whether the mall’s traffic will support the store business model. Leasing costs in a mall are typically higher than in a strip center location. “It depends on the concept and location of the mall and whether the demographics of that mall fit your business plan,” Harrison says.

A mall location brings with it the additional foot traffic, but also requires following mall policies on hours of operation, Ellis points out. Some malls are open to various types of service businesses as well as retail. For instance, oil-change shops can find a home on the end cap of a mall, and service business such as hair and nail salons and wellness spas can be found in the common area.

“People are looking at any business that follows the demographics of the aging population and the health and wellness industry because people are interested in being healthier longer,” Harrison says.

A new financing option

The cost to open a franchise can range from $5,000 to $5 million, so for most people financing will be part of the picture. All too often, potential franchisees don’t think about paying for it until late in the process, Nilssen says. However, buyers should treat it like a real estate transaction and get pre-qualified for financing before the excitement of starting a new business takes over.

“With credit access becoming a major challenge, financing takes a lot longer for people and it’s much harder to qualify for,” Nilssen says. Franchisees can choose from an array of traditional financing options, such as debt financing, which is like a mortgage guaranteed by collateral; and an unsecured line of credit from a bank, which is not secured by collateral, but carries a higher interest rate. Often the franchisor may offer incentive rates to use a particular lender or financing source. The U.S. Small Business Administration offers loan programs for small businesses through local banks. Other common sources of financing include home-equity loans and personal savings, as well as investments or loans from friends and family.

Nilssen says banks look for a credit score of at least 680 and track your record of making payments. Pre-qualifying helps franchisees understand the amount of investment they’ll be able to make based on their financing. More franchisees are using an IRA rollover. In this case, a potential franchisee transfers investments from stocks and bonds and re-invests the money in the new business. Essentially, the owner invests in his or her own business rather than someone else’s business via the stock market.

Guidant Financial offers an online pre-qualification tool that allows a potential franchise buyer to conduct a financial assessment. “It gives them the general ranges and types of financing they could be eligible for,” Nilssen says.

Get help

The experts say that if you’re going to invest your retirement savings or take out a loan to finance a franchise, seek professional help. Franchise consultants and attorneys who specialize in franchise agreements can help navigate the complexities of starting a new business.

“We recommend people work with a consultant or a lawyer so that you fully understand the contract and you fully understand what your obligations are,” Everett says.


Franchise Finds

You want to try a new concept but worry about venturing into shaky waters. This is where franchises are especially useful – their biggest advantage is that you can launch a tried-and-tested concept. Here is a listing of franchises that might steer you in the right direction. You can find updated listings on our sister website, retailresourceguide.net.

Name Headquarters Products/Services Franchise Fees Royalty Fees % Phone
Amplifon Hearing Aid Centers Plymouth, MN Hearing aids, accessories. $30K-55K N/A 888.510.0766
Apricot Lane Vacaville, CA Apparel, accessories $29.5K 6 707.451.6890
Auction it Today Brighton, MI e-Bay dropoff $14K-22K Varies 810.225.0555
BannaStrows Miami, FL Crepes and coffee $30K 6 786.273.7371
Batteries Plus Hartland, WI Batteries, light bulbs $37.5K 5 800.677.8278
Berrybrook Farm Franchising Inc. Charlotte, NC Natural foods, supplements $25K 5 704.334.6528
Best Personalized Books, Inc. Addison, TX Personalized books, novelties $400-2K N/A 800.275.7770
Bijoux Terner Miami, FL Apparel, accessories $30K 4.5-5 305.500.7500
Brilliant Sky Toys & Books Okemos, MI Specialty toys, books $35K 5 517.381.1655
Candy Bouquet Little Rock, AR Candy bouquets $7K-35K None 877.226.3901
Cartridge World Spring Grove, IL Ink, toner cartridges $30K 6 815.321.4400
Cell Again Idaho Falls, ID Sell, trade cellphones $29.5K 7 208.523.1506
ClosetsbyDesign Southern, CA Custom-designed closets $36.9K N/A 800.377.5737
Clothes Mentor Minnetonka, MN Apparel resale $20K 4 952.303.6673
Club Tabby Franchise LLC Lake Charles, LA Toys, accessories, parties for girls $25K 4 337.478.3600
Color Me Mine Glendale, CA Ceramics painting, parties $30K 5 888.265.6764
Complete Nutrition Omaha, NE Weight loss, nutrition $30K 8 866.366.5766
CrepeMaker Palmetto Bay, FL Hand-held crepes $25K 6 855.427.3737
Dippin’ Dots Paducah, KY Ice cream, yogurt $12.5K 4 270.575.6990
Doc Popcorn Boulder, CO Gourmet popcorn $37.5K-69.5K 6 866.599.9744
Doctors Express Towson, MD Urgent care $55K 6 888.-330-3791
Earthwise Pet Supply Fort Mill, SC Pet store $35K 803.802.3040
Edible Arrangements Int’l. LLC Walingford, CT Fruit bouquets $30K 5 888.727.4258
EmbroidMe West Palm Beach, FL Embroidery, custom apparel $44.5K to 6 877.877.0234
Extreme Pita Mississauga, Ontario Pita sandwiches $20K 6 888.729.7482
Fab’rik Atlanta, GA Affordable designer fashions $35K 5 404.881.8223
Fast Fix Jewelry & Watch Repair Delray Beach, FL Jewelry, watch repair $40K 6 800.359.0407
Flip Flop Shops Irvine, CA Flip flops, sandals $30K 5 949.385.3547
Foot Solutions Inc. Marietta, GA Comfort shoes, inserts $32.5K 5 866.338.2597
Gift Card Monkey Miami, FL Gift card trade, cash $14.9K N/A 305.592.9229
Gigi’s Cupcakes LLC Franklin, TN Gourmet cupcakes $35K 5 615.472.1508
Glamour Secrets Woodbridge, Ontario Salon-quality products $30K 6 888.264.7444
Golf USA Oklahoma City, OK Golf products, accessories $35K 2 800.488.1107
Great American Cookies Norcross, GA Gourmet cookies $25K 6 877.639.2361
Great Clips Minneapolis, MN Haircuts, hair products $20K-45K 6 952.844.3444
Guard-a-Kid Child identification, safety products $14.9K-19.9K None 866.202.3866
Hannoush Jewelers Springfield, MA Fine jewelry $20K 4 888.32.JEWEL
HobbyTown USA Nashua, NH RC cars, railroad models, etc. $20K-25K 3 603.459.4427
Instant Imprints San Diego, CA Scree- printing, emboridery $29.95K 5 800.542.3437
Kid to Kid South Jordan, UT New and used kids’/maternity clothes $25K 5 801.359.0071
LA Boxing Santa Ana, CA Cardio, kickboxing, mixed martial arts $30K 6 714.668.0911
Learning Express Devens, MA Educational toys, games $35K 5 978.889.1000
Liberty Tax Service Virginia Beach, VA Tax-preparation services $40K Varies 800.790.3863
Marble Slab Creamery Norcross, GA Ice cream blended on cold slab $10K-25K 6 877.639.2361
Massage Envy Scottsdale, AZ Massage, facials $45K 6
Mathnasium Los Angeles, CA Math tutoring $27.5K 10 877.601.6284
Maui Wowi Greenwood Village, CO Coffees, snacks, smoothies $27.5K-59.5K N/A 877.849.6992
Menchies Los Angeles, CA Frozen yogurt $25K-40K 6 818.708.0316
MixStirs Garden City, NY Smoothies, shakes, wraps $25K 5 866.999.2410
NYS Collection Metuchen, NJ Eyewear, accessories $25K 5 732.429.1500
Partyland Toronto, ON Party supplies, accessories $35K 5 800.778.9563
Petland Chillicothe, OH Pets, pet supplies $30K 5 800.221.5935
Pickles & Ice Cream Dallas, TX Maternity apparel $30K 6 888.496.6684
Pinot’s Palette Houston, TX Paint-and-sip $25K 5 713.523.4769
Planet Beach Marrero, LA Day spa $39,950.00 6 504.361.5550
Plato’s Closet Minnneapolis, MN Used designer clothing $25K 5 800.433.2540
PretzelMaker Norcross, GA Pretzels $10K-25K 7 877.639.2361
PumpItUp Miamisburg, OH Play structures $40K 6 866.977.5867
Rocky Mountain Choc. Factory Durango, CO Old-fashioned chocolate $24.5K 5 970.259.0554
s.h.a.p.e.s. Brow Bar Cerritos, CA Threading, makeup $16.5K-25.5K 8 213.988.8344
Shoes-n-Feet Bellevue, WA Comfort shoes, accessories $25K 5 425.653.2329
Smashburger Denver, CO Burgers $40K 5-6 303.633.1500
The Great Frameup St. Peters, MO Custom framing $30K 6 866.719.8200
The Melting Pot Tampa, FL Fondue $45K 5 813.881.0055
The Original SoupMan New York, NY Soups, salads, sandwiches $30K 5 212.768.7080
Til We Meet Again Wichita, KS Custom caskets, urns $40K 5 316-945-0404
TITLE Boxing Club Overland Park, KS Boxing, kickboxing workouts $35K 6 913.498.0960
Wild Birds Unlimited Carmel, IN Bird-feeding, watching supplies $18K 4 888.302-2473
YoFresh Yogurts Café Boston, MA Frozen yogurt $29.5K None 857.928.9096
Zoup! Southfield, MI Soup $39K 6 248.663.1111

Gary Wollenhaupt

Gary Wollenhaupt is a professional writer covering business, retail and self-service industries for a wide variety of publications.

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