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Franchising 101 by Karen West

Franchises aren’t just the Golden Arches anymore. They come in all shapes and sizes and are becoming a fast-track to business ownership for a growing number of women across the country.

Massage therapy, dog grooming, elder care, housecleaning, home-based map publishing, even yoga have all gone franchise in the last several years. In the U.S. alone, there are more than 3,000 established franchise brands spanning 230 different lines of business.

Purchasing a franchise is viewed by many as less painful and less risky than starting an independent business. A franchise, which can cost from $100,000 to several million dollars depending on the company, gives you a tested market, instant name recognition, training and ongoing support. But like any investment, there is no guarantee of success.

Nevertheless, the franchise business approach is growing across the country. The International Franchise Association estimates there are about 800,000 franchised businesses today generating $1.53 trillion to the U.S. economy. Although only 10 percent of businesses are franchises, they represent 40 percent of all retail sales in the U.S. and employ nearly 20 million Americans, according to the U.S. Department of Commerce.

Women have taken notice. Many, like Lydia Alexander of Woodinville, want to go into business for themselves, but not by themselves — especially when the Small Business Administration estimates that one-third of all new businesses fail. Women owned an estimated 30 percent of U.S. franchises in 2005, compared with 8.5 percent in 1995, according to a report by the IFA.

Alexander purchased a Massage Envy franchise three years ago in Woodinville when the concept of monthly massage membership programs was just getting started. Her business was the 26th to open in the U.S. To date, Massage Envy, which offers introductory massages for $39.95, has awarded 707 clinics nationwide, 16 of which are in Washington.

Alexander, who worked in the medical field for 20 years, had been researching various franchise ideas for several months before discovering Massage Envy while vacationing in Scottsdale, Ariz. She says she knew it was the right franchise for her the minute she walked in for her then $29.95 massage. She had been paying $90 an hour for weekly massages because of neck and shoulder problems.

She spent the rest of her vacation visiting the corporate office in Scottsdale. Because of her success, Alexander opened another franchise in April, Facelogic in Redmond, with her business partner, Elizabeth Kasprzak, who had been working as an esthetician for 10 years.

Similar to the Massage Envy concept, Facelogic customers can receive facials for prices below the going rate of $80 to $90. The business partners, both of whom emigrated from Poland to the United States in the 1980s, are planning to open another Facelogic franchise in Issaquah next year.

Alexander says the built-in safety net that franchises offer is an alluring alternative to embarking on an independent business venture with no proven track record. Franchises come complete with operations, marketing, distribution, accounting and technical support.

“Usually, the product has been tested and most of the kinks have been worked out,’’ says Robin Schachter, a franchise attorney who co-chairs the IFA’s Women’s Franchise Committee, Seattle chapter. “A franchise is a ready-made community for your own professional development and possible business expansion.”

Schachter started the local Women’s Franchise Committee along with consultant Phyllis Pieri of MatchPoint Franchise Consulting Network in Issaquah and Victoria Starr, founder and president of Discovery Map International, a La Connor home-based franchise that publishes visitor maps and hotel directories for tourist destinations.

They agree that the franchise industry is targeting women, mainly because women have the characteristics suited to franchising: a willingness to take risks, interpersonal management styles and motivation.

“Women are great multitaskers and we are great at working ourselves to death,’’ says Starr. “What sometimes happens is you get so busy working in your business, you don’t work on your business.” After 12 years of steady growth, Starr, a former advertising executive, expanded her visitor map publishing company nationally via franchising. Doing that, she says, forced her to systemize her business and develop it so it could be replicated by others.

She founded her Starr Map Company 20 years ago in Sun Valley, Idaho, and in 1999, Discovery Map International, now based in La Conner, was formed as a subsidiary of Starr Map. Today, Discovery Map has 31 franchises and 12 corporate-owned territories, serving 43 markets (mainly resorts and vacation destinations) nationwide.

Instead of expanding by hiring sales representatives around the country, Starr decided to franchise her business so individual owners would have more of a vested interest in the product and could build relationships with the communities in which it is sold.

While buying a franchise gives many a head start in the business game, there is a downside: You are not your own boss and you have to follow strict guidelines for running the business. To ensure uniformity, franchisors typically control how franchisees conduct business, including approving site locations and the goods and services that will be sold.

“To be successful, you have to follow the franchise system,’’ says Schachter. “You rise and fall on the strength of corporate decisions.”

If you are a true entrepreneur with lofty visions of how to run your company, franchises are probably not for you. You wouldn’t be able to buy a yoga franchise, for example, and then introduce step aerobics classes, or a McDonald’s and decide to sell gourmet hot dogs. But if the corporate office decides to change the format — as with McDonald’s proposing to sell lattés — you must implement those changes whether you want to or not.

Alexander says following the franchisor’s rules is all part of the business. She compares it to owning a condominium versus a single family house: You own both, but if you live in a condo you need to agree to homeowner regulations. If you are a homeowner, you can do pretty much anything you want.

She says operating a franchise has taught her to listen, take advice and compromise if needed. “You have to be able to work with others and follow regulations even if sometimes you may not agree,’’ she says. “If you don’t have that virtue, you would be better on your own.”

Franchise consultant Pieri says she frequently deals with people who don’t understand franchises or their value. She recalls a client who had purchased a bakery after he retired, but found it wasn’t making any money so he wanted to buy a Dunkin’ Donuts franchise and “offer his cakes, too.”

Like her MatchPoint business name suggests, Pieri helps connect prospective business owners with the right franchise. “I help people make an educated decision when it comes to finding a business instead of just emotions. I’m the one they call when they wake up in the middle of the night in a cold sweat and say, Oh my God, what have I done.”

Franchises, which are regulated by the Federal Trade Commission and state consumer protection laws, typically enable you (the franchisee) to operate a business after agreeing to certain terms and paying a franchise fee, which can cost $20,000 or more. You are then given a Franchise Disclosure Document — similar to a company prospectus — that lays out the format or system developed by the company (“franchisor”). “The documents are daunting unless you have someone holding your hand,’’ says Schachter. She and other franchise experts say there are several “must dos” before investing in a particular franchise system. Here is a road map to help you along the way:

DO YOUR HOMEWORK. A good start is the FTC’s Consumer Guide to Buying a Franchise. www.ftc.gov. Research the wide variety of opportunities available and comparison shop. Talk to as many existing franchisees as possible. Find out what their experiences have been and ask for advice. Ask about the corporate office and its training programs. A good franchisor will have detailed training and ongoing support, including manuals, conferences, Web information and staff to help you with every aspect of your business.

KNOW YOURSELF AND YOUR MARKET. Carefully consider how much money you have to invest, your abilities and your goals. “Make sure you believe in the product or service you are providing,’’ says Alexander. Understand the market demand for that particular product or service in your area. And don’t forget: Location, Location, Location.

CONSULT PROFESSIONALS. Don’t try to wade through the franchise maze alone. Franchise attorneys, consultants, CPAs, bankers, real estate agents, architects, contractors and landlords all can offer insight into how you operate your franchise. Understanding the legal aspects of the franchise is crucial, especially because franchise contracts can be extremely detailed and complicated. Experts warn against signing anything or making any payment until you have read and investigated the franchisor’s offering. Get substantiation of all earnings statements. The FTC requires all franchisors to disclose important information about the franchise system such as their past earnings, franchise agreement terminations, how many outlets are in operation, etc.

DO A FINANCIAL ANALYSIS. Ask yourself these questions: How much money do you have to invest? How much money can you afford to lose? Will you purchase the franchise by yourself or with partners? Will you need financing and, if so, where can you obtain it? Do you have a favorable credit rating? The cost of starting a franchise varies widely depending on the business. For example, lodging services can require as much as $4 million to $6 million. A smaller franchise, such as Massage Envy or auto repair services, costs about $250,000, while some home-based businesses average about $100,000. In addition, a franchise fee ranging from $20,000 to $30,000 also is required.

Alexander recommends against doing what she did to get Massage Envy started: using her personal savings and home equity to finance her first franchise. She recommends getting a business loan from the start. For her second franchise, Facelogic, she and Kasprzak received an SBA loan. Although it took a frustrating seven months to close, she said the whole experience has been worth it. “You have to persevere and be flexible. It’s a great sense of accomplishment to see your project done.”

BE PROACTIVE. Think of potential conflicts and possible solutions before they are needed. For their Facelogic partnership, Kasprzak and Alexander designated a trusted and neutral mentor and negotiator “just in case” any issues needed to be resolved.

NETWORK. Attend a franchise trade show or join a business group. Schachter, co-chair of the Women’s Franchise Committee Seattle chapter, will be moderating a Business Roundtable at the upcoming International Franchise Association (www.franchise.org) conference Feb. 9-12 in Orlando, Fla. Also take advantage of franchise resources, such as the Washington Department of Financial Institutions (www.dfi.wa.gov) and the American Association of Franchisees and Dealers (www.aafd.org).

Schachter’s best advice for anyone thinking about franchising is to do some serious soul-searching and research first. “Nobody should jump into this.”

Karen West is a Bainbridge Island-based freelance writer and former business reporter for the Seattle Post-Intelligencer.

©2008 Caliope Publishing Company