Experts share the basics to cover and pitfalls to avoid with this start-up alternative.
Father-son business team and franchisors Paul and Craig Peden.
Franchising is an opportunity to step out on your own, without starting from scratch.
Buying a franchise can remove some of the intimidation factor that comes with opening a business by providing a proven system, training and guidance. But franchises, which give you the license to operate a business, can come with hefty costs—as high as $1 million per franchise—and pitfalls.
Eyeglass shops, custom closet systems, exercise and entertainment facilities, tutoring companies, food kiosks, labs and home health care operations are just a few of the hot franchises that business, lending and legal experts are seeing pop up. Experts, franchisees and franchisors shared what it takes to become Southwest Florida’s next franchise owner.
First, the pros
The setup: Think of a franchise as a “business in a box,” says attorney Jeanne L. Seewald, managing partner of the Southwest Florida office of Hahn Loeser & Parks LLP. The franchisor has developed a business concept with all of the details, including how to find sites for it, how to furnish it and how to operate it. Franchisees have access to those procedures and manuals.
“There’s a system in place already. They don’t want to recreate the wheel,” says Suzanne Specht, assistant director of the Florida Small Business Development Center (FSBDC) at Florida Gulf Coast University.
The process: Franchisors must follow federal and state guidelines, including filing a franchise disclosure document with the Federal Trade Commission. The document includes the company’s financial statements, franchisee charges and additional information, including legal disputes with franchisees.
Be prepared for lengthy documents, typically about 2 inches thick if printed out, although Seewald has even seen one that reached a foot tall. Generally, the longer in business, the more a franchisor reports. Although the documents can be daunting to read, look for whether they’re losing franchises overall and if a significant number of units have transferred ownership.
There’s also the franchise agreement, which includes the term of the franchise, non-compete statements and information on terminating the franchise. For both documents, it’s smart to hire a franchise attorney so that you won’t be surprised about costs or expectations, Specht says.
The brand: A franchise offers tried-and-true marketing strategies with brand recognition, Specht says. Sometimes the franchisor also can provide guidance on potential locations based on its demographic and competitor research and data such as traffic counts.
The funding: You still have to meet funding requirements related to credit and liquidity, but you may have a leg up as a franchisee. “If a franchise has sent its financial statements and information to the SBA for approval, then they have rigorously reviewed the franchises’ financial condition,” Specht says. You can see which ones are approved at franchiseregistry.com. “Not that it’s easier, but I think the lending institution has more of a comfort level because they know the franchise’s financial condition has been reviewed.”
Lenders look for a credit score of 675 and up, and if you’re selecting a fast food operation, which has higher risk, you’ll need a 750 and up credit score, says Fred Crispen, senior vice president with United Midwest Savings Bank, which provides working capital for franchises under the SBA (Small Business Administration) 7(a) loan program.
Consider the cons
The cost: You have to pay for all of those pros. The biggest mistake for a franchisee is underestimating how much it’s going to cost to operate the business, Seewald says. In addition to an initial franchise fee ($25,000 is on the low end, and discounts sometimes are available for veterans), you have to pay a percentage of your revenue—called a royalty fee—to the franchisor. Some are 4 to 10 percent, or even a flat fee of more than $1,000 a month. Others are on a per-product basis (such as $48.80 per hearing aid by a Miracle-Ear franchise), according to the Entrepreneur 100 list.
“The support has to be comparable to what the fee is. If you are getting minimal or no support, [you] need to rethink this,” Specht adds.
The biggest pitfall that Crispen sees is people overestimating income by not accounting for the cyclical nature of an area or business and not including their personal salary in expense projections. “If that business can’t afford to pay you a salary with what you were commensurate with making working for someone else, what you’ve got is a real expensive hobby, and it won’t work for a long time,” Crispen says.
The franchise agreement also may state you’re responsible for buying equipment and supplies from the franchisor, which may be more expensive than purchasing them at a bulk store or online. You also may have to pay an ad royalty fee for overall company marketing; ad royalty fees for Entrepreneur top 100 franchises range from to 1 to 7 percent, or a set fee of $100 to $300 a month.
If so, remember to set aside funds for local marketing, which could be 3 to 4 percent of your annual sales. During your due diligence, ask other franchisees about their budgets and successful marketing techniques, Specht says.
The setup: Typically, franchisees are required to use the same point of sale system that immediately takes the franchisor’s percentage. “It’s very structured in that way so that the franchisors get their money,” Seewald says.
Also, franchisees have to comply with the company’s policy manual, which seeks to maintain consistency, quality and risk aversion. That could be a problem if you crave independence.
The operations: Some franchise companies are simply run better than others (for example, look at the top 100 in Entrepreneur magazine’s annual Franchise 500 list, at entrepreneur.com). That’s why it’s also important to talk to other franchisees about their overall experiences with the company and what it takes to make their location successful. If they won’t give other franchise owners names or allow you to talk to other franchisees, that’s a red flag for Specht.
The competition: You want to avoid entering into a crowded market, which in Southwest Florida includes restaurant and exercise franchises. “If you see a lot of them in the row, be careful,” Specht warns.
What they learned
After a corporate career, including helping start Sprint’s wireless division, Jay Highley jumped into the franchise world. He owns Sky Zone locations in Fort Myers, Tampa and Kansas City, Missouri, with two more planned, north of Tampa and in Kansas City. In 2017, he was elected as chairperson of the indoor trampoline park company’s Franchise Advisory Board and serves on Sky Zone’s Brand Council.
Aha moment: When Highley’s youngest son got a job at Sky Zone in Indianapolis, where they lived (they also had a home on Fort Myers Beach), he visited Sky Zone. “When I walked through the door, a light bulb went on and now I understood the concept, and I recognized it as an innovative opportunity,” he says. He had spent most of his career with Sprint and purchased a software company in Columbus, Ohio, which he ran for three years before selling it to an Atlanta company. “Like many of my other career projects, if you have to explain to others what it even is, I see that as a good sign that says you’re on the front edge of something,” Highley says.
Best tip: See if other franchisees are happy. When Highley called franchisees for a rapidly growing company centered around the cell phone industry, they were outspoken about how frustrated they were with the franchisor.
Franchise pros: Buying a franchise was a unique way to be on the forefront of an industry with less risk, Highley says. Sky Zone has 180 locations and about 100 franchisees. “It was new enough that there was a lot of opportunity for innovation, but yet it was mature enough that there was always a core structure,” he says.
Buy-in: Each franchise requires a franchise fee to be paid to “purchase” the territory. All in, a Sky Zone ranges from $1.5 million to $2.5 million in upfront costs.
Franchise cons: The financial requirements—at least $500,000 in liquid assets—might not be attainable. Highley, however, says he views the company’s exclusivity as a positive. “As opposed to other franchises you may be able to get into for a much lower initial investment, this is actually pretty high,” he says. “It creates a barrier to entry for other competitors or other people trying to get into what has become an exploding category.”
The process: After deciding to purchase a franchise, Highley met with the founder and CEO of Sky Zone in Los Angeles. Within a month, he signed his first franchise agreement in Fort Myers and then signed four additional territories.
“In this case, the reason I jumped in so quickly was really because of that opportunity to meet the founder and the CEO face to face in an office and talk for two hours,” he says. “My takeaway was that this is a culture that I can see myself enjoying and being a part of.”
Swimtastic Naples grand opening at LA Fitness. Back row, l-r: Martin Miller, Lindsay Pursglove, Suzanne Amon, Frank Duggan, Michael Dalby—president and CEO of The Greater Naples Chamber of Commerce; front row: Swimtastic pupils Mia and Beau.
Less than a year after Lindsay Pursglove called Swimtastic Swim School to inquire about franchising, she opened her first location in Naples in April 2017. She now also operates locations in Fort Myers, Bonita Springs and Cape Coral—all inside LA Fitness.
It’s been a whirlwind for Pursglove, a Florida Gulf Coast University graduate who previously was an assistant professor of sport administration at Ball State University in Indiana.
Best tip: Invest in a franchise that leverages your skills. Pursglove took the plunge with Swimtastic after 17 years as a swim instructor. “They already had the infrastructure in place, and with my background, it just made sense,” she says. “So it did minimize the risk a lot, for me, to go with a franchise.”
She also holds a Master of Science in sport management from Barry University, and a Ph.D. in kinesiology-sport management and MBA from Texas Woman’s University. “I have a lot of that knowledge in how to build a brand and how to market, and how to build relationships with customers,” she says.
Franchise pros: Swimtastic had a proven system with more than 400 schools nationwide since it opened in Waukesha, Wisconsin, in 1999. The franchise offers support and a curriculum, which saved Pursglove time creating lessons.
Buy-in: First location starts at $25,000.
Franchise cons: Other out-of- pocket costs are traveling for training. Pursglove spent about $900 for flight, room and food to attend weeklong training at Swimtastic’s corporate office in Colorado. “It was a very welcoming environment, and the training made me feel more secure about taking on this endeavor,” she says.
The process: Pursglove spent last fall developing business plans, securing financing and filing paperwork to start a limited liability company (LLC) as a business entity, with guidance from the FSBDC at FGCU. Once approved, it took 90 days to receive funding. In March 2017, she closed on the Naples location. After attending training in Colorado, she received a starter pack with signage, a supply list, staffing requirements and insurance requirements.
Biggest hurdle: Hiring staff, mostly part-timers. She planned to have at least 10 instructors by the end of the summer and would need about 20 staffers when all four schools fill their student rosters. To recruit workers, she uses indeed.com and Facebook.
“The hiring process just takes time, and we are trying to keep up with the demand for lessons,” she says. “I am continuously hiring and training staff.” She relies on her multitasking abilities as a franchise operator. “Running four swim schools, utilizing the franchise corporate team, managing my staff and all of our swim families means I manage a lot of moving parts,” she says. “I try to ... set a calm, stress-free, fun environment for my company, while behind the scenes we are always going.”
Aha moment: Receiving the first month’s revenue report. In her first month with all four locations, she had 200 swimmers on the roster. She hoped to add another 100 swim lesson customers during the summer.
“When the monthly report came in with the total number of families and the total revenues, I was like, ‘Wow, it’s working, it’s coming together, and my business is directly impacting families here in Southwest Florida.’”
Should you franchise your concept?
Franchising your business is a way to grow without making the investment of opening multiple company stores, which require enormous capital.
“If you don’t have that and do want to expand, it’s a great way to do it,” Seewald says.
Some opt to work with companies that can take them through the franchising process, but Seewald cautions that cost to work with those companies can reach into six figures. She’s also seen some people go through that process and then still have to hire an attorney to review the documents.
Seewald warns that franchising has to be seen as a separate business.
You must be prepared to replicate your entire process so that you can hand the business to somebody. Her suggestion is that you open a second location and record everything you need to start it. “That’s a good way to see if you can replicate it,” she says.
Father-son team Paul and Craig Peden opened their first Rib City in Fort Myers in 1989. The next year, the barbecue restaurant opened a second location in Cape Coral. The Pedens began franchising Rib City more than a decade ago after a regular customer asked about franchising and the Pedens decided to give it a shot.
“It is less of a risk because we don’t have any money involved in it,” Craig Peden says. “It’s our name or reputation, but the hard money going out the door to open the facility is the investor’s or owner’s physical dollars going out the door. It helps our concept grow by name recognition, but financially, they’re the ones taking all the risk on it.”
While the Pedens wanted to expand their business outside of Southwest Florida in 2004, they didn’t have the staff to do it. Franchising allowed them to grow their business to 14 corporate locations and 18 franchised locations. The investment fee in a single unit is $45,000, while multiple units are $85,000 with up to five locations.
Rib City provides training classes three times a day for staff at the franchised location three weeks before opening. The franchisees must also visit Florida for four to six weeks of training.
In addition to the financial requirements, Peden says he looks for franchisees with a restaurant background, integrity and a strong work ethic.
“It’s like trying to bring another relative or sibling or friend into the family; you want to make sure it’s a good fit for both parties,” he says. “I call it the Rib City family. We bleed, sweat and cry with you, and laugh with you and applaud with you; good times and bad times.”