New Franchises Find Formula for Success

Franchising is still very popular throughout the U.S., and some entrepreneurs are looking to expand as more banks begin to thaw out and free up investment capital. Experts …

Franchising is still very popular throughout the U.S., and some entrepreneurs are looking to expand as more banks begin to thaw out and free up investment capital. Experts say to look for key ingredients to success when choosing a franchise, like businesses with eye-catching concepts, CEOs that started at the bottom, franchisee satisfaction and smart brand marketing. The restaurant industry is typically thought to dominate franchise options, but new niches include upholstery repair, pet care, weight loss and crisis management consulting. For more on this continue reading the following article from The Street.

Franchised establishments are everywhere, starting with those ubiquitous multinational conglomerates — McDonalds(MCD) and Krispy Kreme(KKD), for instance.

But with the recession over and capital markets slowly opening up, small businesses with big ideas and bigger growth plans are making their way across the U.S. by franchising their concepts to entrepreneurs, layoff victims or early retirees looking for a second career.

Not every franchise can go national, and Steve Olson, publisher of Franchise Update, says potential buyers are well advised to look for signs of strength, including:

  • Good leadership from someone who has embraced their role evolving from, say, pizza maker to CEO.
  • A compelling concept.
  • Franchisee satisfaction.
  • Good brand marketing.

“The relationship is very co-dependent. The franchisor can only succeed if the franchisees are successful,” he says.

The largest market for franchises has historically been the food business, but categories such as senior care, nutrition and fitness, children’s and pet products and services are also growing, Olson says.

Being recession-proof helps, of course, an example being that in any economy there will be demand for someone to install fencing. Being necessary but not necessarily glamorous is another common trait of growing franchises, like a business that paints the stripes on parking lots. Founders of franchised companies also tend to describe moments when they realized their kind of business was common, but fragmented into thousands of mom and pop operations lacking brand recognition — like looking back at the time burgers and fries were served at diners across the country and McDonald’s was waiting to be born.

Here are seven up-and-coming franchised companies:

1. Medi-Weightloss Clinics
Headquarters: Tampa, Fla.
Locations: 92 through May 31, with 100 expected by the end of the year.
Obesity in the U.S. states is growing at an alarming rate. According to the CDC’s National Center for Health Statistics, approximately one-third of U.S. adults are obese.

The trend may be alarming, but it provides ample opportunity for businesses with programs and services that can help consumers lose the weight. Consumers spend roughly $150 billion on weight loss products and services every year.

Medi-Weightloss Clinics is a physician-supervised weight-loss program expanding nationwide. Whereas such companies as Weight Watchers(WTW) and Jenny Craig play up the role of their food products in weight loss, Medi-Weightloss Clinics touts its “90% program/10% supplement” model, according to Andrew Cox, the company’s senior vice president of business development.

Under a physician’s care, patients are given a full health consultation, program outline and weekly lessons on behavioral change. The process also includes weekly injections of an appetite suppressant and vitamin energy boost.

“We’re teaching them in today’s fast-paced environment what to eat and how to eat and portion control on a real food diet,” Cox says.

From a business standpoint, the model is attractive to physicians — the program does not take insurance, and revenue streams have dwindled at physicians’ offices hardest hit by HMO acceptance.

“The cost of running a practice is high, and malpractice has skyrocketed,” Cox says. That leads some physicians to seek ways to add non-insurance based services.

“We market [our franchises] primarily to physicians,” mainly OB/GYNs, he says. “Any subspecialty that has a significant patient base.” (Owners that are not physicians need to partner with one.)

Medi-Weightloss Clinics’ franchises are already in 22 states, Cox says.

The initial buy-in is $178,500, of which $53,500 comes back in medical capital equipment and ancillary supplies and marketing. Cox says the total investment is roughly $350,000, including working capital, center build-out and furniture and fixtures. Average annual revenue at a clinic is about $800,000.

“The return on investment is very attractive,” Cox says. “It’s a very strong cash business.”

For the clinics to be successful, educated and experienced staff is important, but success also relies on how well the parent company can support its franchisees, which includes strong IT systems, Cox says.

“We’ve been very successful with Medi-Weightloss because we have a very sound protocol [allowing us to be in] some areas that we didn’t think we’d be in,” he adds.

2. We Do Lines
Headquarters: Ridgefield, Conn.
Locations: 11; another 17 units are sold and another 14 are projected to open by the end of the year.
Looking for ways to diversify from their commercial landscaping and irrigation businesses, Chris Couri and his two business partners stumbled upon an underserved market: commercial parking lot striping. They opened We Do Lines in 2008.

Couri and his partners saw an immediate opportunity in booking business with landscaping clients.

“We did local due diligence and research and there weren’t a lot of providers out there — 13 in Connecticut. We called everyone that did it. Two called back, which really gave us an indication of how the industry was fragmented,” Couri says.

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But it was when they launched their Web presence that the founders saw the real potential for the business — a $600 million market within a $29 billion industry that is relatively untapped, the company says.

“When we look at the broader market of the U.S., there was no professional — certainly no national — brand,” he says.

We Do Lines started to franchise in 2009 and sold its first franchise last year.

Couri says the company can “comfortably” add 25 to 30 franchises per year, a major contributor being that the business model is extremely portable. We Do Lines hopes to have 100 units by 2014.

“It’s a very fragmented, off-the-radar industry that forced us to do our homework. We were able to book business from Maine to Miami in our first year,” Couri says. “It prompted us to pursue franchising to get the work done.”

Franchisees are targeted to have the operation up and running within 45 days from signing, aided by the experience of the founders. “The goal of a franchisee is the ability to leverage all the intellectual resources and ideas and background of franchisor,” Couri says.

Couri attributes some demand for the business simply to the name they chose. “The name says everything. People don’t forget it,” he says.

An initial investment costs between $77,000 and $133,000, including a $25,000 franchise fee. The balance is equipment and other supplies to get the business running.

We Do Lines has signed an agreement with Sherwin-Williams(SHW) paints to provide paint supplies nationally. “It’s a very strategic and very important piece of the equation,” Couri says.

3. Elevation Burger
Headquarters: Arlington, Va.
Locations:18; eight are set to open this year, and there are commitments for more than 100.
Elevation Burger, started in 2005 by husband and wife Hans and April Hess, is quickly making itself known as a player in the so-called better burger quick-service restaurant genre.

There aren’t many organic burger joints touting that restaurants outfitted with environmentally friendly materials and furniture. But Chief Executive Hans Hess says it’s the food that’s most important in competing in a category that includes Five Guys Burgers.

“Most guests, when they first experience a new restaurant, will judge you on taste. If you can win that battle then you’re competitive,” Hess says. “The reason why we think we can go a lot of different places — it’s not because it’s organic, but because it tastes good at an affordable price.”

The organic food and beverage segment has experienced roughly 20% annual growth over the past decade, growing from $1 billion in 1990 to an estimated $23.6 billion market in 2008, according to Elevation Burger, citing the Organic Trade Association.

Elevation Burger began franchising in 2008 and plans to have 100 establishments running by 2013. The company is expanding its territory and says it will be in California, Maine and Nevada as well as the Middle East by the end of this year.

“We franchised in order to grow,” Hans Hess says. “We felt we had a really good product and really good idea for the marketplace. We’re trying to bring a higher-quality product to the country and we’re trying to do it in a way that doesn’t rely on the old factory-farm system.”

Elevation Burger is looking for franchisees who can commit to opening at least three to 10 restaurants in the U.S.

The estimated initial investment for a franchise ranges from $373,500 to $738,500, including a $30,000 fee to lock in territory and an initial franchising fee. Royalties are 6% of gross sales plus a 1.5% contribution to a creative fund for brand building, the company says.

Before each establishment opens, franchisees go through a three-week training program covering all aspects of operations and management at a company-operated restaurant, as well as on-site training.

4. Dogtopia
Headquarters: North Bethesda, Md.
Locations: 23, with another 11 in development.
Products and services catering to household pets is a growing industry. According to the American Pet Products Association, 62% of U.S. households own a pet, and consumer spending on those pets rose throughout the recession. It’s expected to total some $51 billion this year.

“We look at our animals completely different than 10 years ago,” Dogtopia CEO Amy Nichols says.

Dogtopia caters to that, offering full-service dog day care and spa services to pet owners with busy lives. Nichols started the company in 2002 and began offering franchised locations in 2005 under its franchise company, Happy to Be Here Inc.

Like child care, dogs are dropped off in the morning and picked up in the evening. (Unlike child care, a few dogs are boarded short-term.) Before dogs are accepted for the first time they are given an evaluation, including temperament and vet records assessments. “Not every dog is suitable to be in a room with 30 other dogs,” Nichols says.

Customers buy passes in advance, which means Dogtopia gets cash upfront, making cash flow more predictable.

The estimated initial investment to establish a Dogtopia ranges from $242,900 to $458,300, including a franchise fee of $40,000 that secures a territory. Ongoing royalties back to the parent company are 7% of gross sales plus a 1% national marketing fund, according to the company.

Franchise owners and employees are given extensive training on safety and dog behavior. Nichols has recently created Dogtopia University so all employees are trained and educated the same.

Nichols isn’t kidding when she says the business is safe from recessionary woes. A Dogtopia store opened at least 18 months rakes in on average $600,000 in annual revenue. “That’s a substantial business,” she says. “You start getting over a half-million, it’s the real deal. But it’s a lot of labor.”

It was tough opening more franchises due to the lack of financing available for small-business owners, she says, but this year franchise growth is picking up. The company has had twice as many “discovery days” so far this year versus 2010.

“We are seeing a huge increase in what we call ‘organic’ leads, where people find us as opposed to us advertising the franchise,” Nichols says. “Most of these leads are customers of Dogtopia locations. Customers remain our No. 1 source of new franchisees because they ‘get it’ — they are the customer that they would service if they owned a Dogtopia, and therefore they understand the potential of the business.”

5. Fibrenew
Headquarters: Calgary, Alberta, Canada
Locations: 220, of which 100 are in the U.S. The target is to grow that to 450 to 475.
Leather, vinyl and plastic restoration doesn’t seem like the sexiest business to be in, but consumers are asking for it, says Michael Wilson, CEO of Fibrenew.

“We’re at about 15% to 20% of our potential in the U.S.,” says Wilson, who bought the first franchise in ’87 and went on to buy the entire company. “It’s a service that absolutely everybody needs.”

Especially during the recession.

“In the old days, manufacturers would just replace damaged items,” Wilson says. “Well, they can’t afford to do that anymore.”

The service is mobile and caters to five market segments: aviation, auto, marine, residential and commercial.

“Our business just keeps growing in terms of potential and the different things that we can come up with the marketplace. We’re finding new applications for our service. We do very unusual things aside all of the regular things. It just keeps opening doors to more opportunity and more possibility in this business,” Wilson says.

For instance, farmers look to repair plastic fertilizer tanks before seeding, as the tanks get cracks and holes and are expensive to replace. A Fibrenew franchisee partnered with a New Zealand university to fix plastic TV frames at the end of each semester.

Franchises cost $65,000, and operators must go through two weeks of training in Canada. The company provides all the tools, chemicals, equipment and an office package, as well as a five-year exclusivity contract for a territory.

What’s different about Fibrenew’s franchise system is that it does not charge royalties. Instead, the company charges a flat rate after the first six months of business — starting at $550 for the next two years.

“Once they go home our focus is to help them become successful,” Wilson says. “The more money they make, the more money they will put in their pocket.”

6. Firestorm
Headquarters: Roswell, Ga.
Locations: 19, with plans to add another 10 by the end of the year.
While most franchises cater to consumer demands, Firestorm offers crisis management consulting, business continuity and threat assessment services, among other things, to other businesses.

“We’re in a situation today where we are experiencing ever-increasing exposure with natural disasters” and crises, says Firestorm’s president and founder, Jim Satterfield.

There are more than 70,000 disasters annually in the U.S., Satterfield says, citing the Red Cross. Roughly 40% of businesses never reopen after a disaster, and 25% that reopen close within two years.

“The Japan earthquake and tsunami, recent tornadoes and Mississippi flooding bring the reality of disasters, crises and emergencies into the media and public awareness,” Satterfield says. After 9/11, “preparedness is not a luxury, it’s a cost of doing business.”

As a result, demand is increasing. Firestorm sales in the first quarter exceeded all of last year, Satterfield says.

Franchisees pay $75,000 (which includes a franchise fee of $55,000 and a $20,000 Fast Start Toolkit) and an 8% royalty to Firestorm. Franchisees must have 10-plus years of management experience as well as an ability to communicate with senior executives and perform business development.

Because the company employs top-level former senior executives and government officials, franchisees get the entire U.S. as a market; they get exclusives on any account they engage in discussions.

7. Guier Fence
Headquarters: Blue Springs, Mo.
Locations: six, with a dozen targeted by the end of the year, 30 by 2016 and 100 by 2020.
Guier Fence has been around since 1979, but it only began selling franchised territories last year under the direction of its president, Lea Bailes.

“I really saw potential for it to grow because the industry that we’re in is really fragmented. There wasn’t a national brand presence in our industry. There really is not a lot of consistency,” Bailes says.

Guier is in a position to lead because of its decades of experience, he says.

“I saw a good opportunity with the way we conduct our business to start a franchise and take all the information and tools we’ve gathered over the last 32 years and put it into a franchise program,” Bailes says. “There are not a lot of barriers to entry into the industry, but it is difficult to make that business model work unless you have some support to do it. There is a lot of turnover in the industry.”

Guier franchisees operate in specific territories — out of their homes — selling and installing fencing.

“We don’t compete on product,” he says. But she believes the competition has “lower quality products, lower quality installations and [the fence] doesn’t last as long.”

Guier is in an industry that is not economy driven, because, the company says, fence installation is like home remodeling in not relying on new home sales. The company has also been targeting more affluent customers who “always want quality products, even in a recession,” Bailes says.

Setting up a business isn’t that costly, since franchisees work out of their homes: $55,000 to $128,000. There is an initial $25,000 franchise fee, as well as up to four weeks of training franchisees must attend at the company’s headquarters. Ongoing royalties total 4% and 1% for a national advertising fund.

This article was republished with permission from The Street.


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