Franchising Roundtable

Franchising Roundtable

LOOKING FIT® recently sat down with the following companies to get some feedback regarding franchising and the indoor tanning industry.

A: More and more, entrepreneurs are turning to franchisors as partners in starting new businesses. Consider that 2004 saw a 7-percent growth in domestic-franchised businesses and the growth predictions for 2005 are similar. Franchising a business helps in mitigating risk by utilizing proven methods and group buying power. Statistically, franchises have a significantly lower failure rate then non-franchised businesses.

Executive Tans has experienced growth greater than the domestic average, and we believe the growth trends in tanning will continue to increase due to the relatively low barrier to entry and the cyclical maturation of the marketplace.

—Wayne Smeal, Executive Tans

A: Today’s potential franchisee is looking at the support provided by the franchisor along with the profit sharing with the corporation. The current breed of franchisees is media savvy and wants to know what kind of advertising/marketing support is provided by the franchisor. Franchisors are under pressure to perform on a national platform and cannot survive on a regional basis.

—Nick Patel, L.A. Tan

A: There are several trends, but perhaps the most significant is in Area Development Franchising. In the past, franchising generally was driven by single units; now franchisors are seeking to avoid several of the potential conflicts that can arise between multiple, single-unit franchisees in the same market. The franchisees tend to like it for the same reason. They license a defined territory and as long as they meet their development schedule, they have exclusive rights to develop in that territory. This is how we franchise.

—Steve Berkman, Palm Beach Tan

A: In any industry, it is typically built to a certain level by independents then taken to the next level by chains stores. Recently the video industry went through this transformation. If you think back 20 years, the video tape rental business was built solely by independent stores. As the industry matured, the independents began taking a back seat to regional chains. Today the industry is made up of almost all regional and national chains. Our belief is that the tanning industry is some years behind the video industry and the future will clearly be dominated by regional and national chains.

—Rob Quinn, TANPRO USA

A: We require a minimum investment of $18,000.We are not seeking to make money off their franchisees; we are looking to open not hundreds but thousands of salons and you need to give the value to the franchisee in order to accomplish that goal.

—Nick Patel, L.A. Tan

A: The short answer is $250,000. Our Web site provides detailed breakdown of the start-up costs. It is important to remember that our store model is based on 3,000 square feet and roughly 26 to 28 rooms. Other operations are based on fewer rooms. At he end of the day the number of rooms will be a major factor in the profitability and gross revenues of a store.

TANPRO USA currently does not charge an upfront fee. We are a licensing organization only; we get our fees based on gross revenues only. The savings we generate to the licensees clearly more than offset the fee structure and allow the licensee to be a partner in the largest chain in Ohio, which is the biggest tanning state in the country.

—Rob Quinn, TANPRO USA

A: We estimate that the total investment range is from $440,000 to $770,000 per location.

—Steve Berkman, Palm Beach Tan

A: Owning a franchised business actually can be less expensive than building an independent business. The economies of scale that a franchisor can offer can decrease the overall monthly operating expense and offer significant discounts on initial purchases which ultimately lower the total project cost.

Executive Tans charges $25,000 for a single franchise location and has other lucrative incentive packages for purchasing multiple locations. We also offer a Master Area Developer opportunity for individuals that have an interest in building a territory rather than building a location.

One unique option that we offer is our “Executizing” program that provides existing salon owners a simple and affordable conversion program to become an Executive Tans salon.

—Wayne Smeal, Executive Tans

A: A successful franchise system offers a comprehensive, proven operating system. Those who execute at the highest levels tend to have the most success. An interested candidate must do a lot of due diligence to ensure that existing franchisees of any system validate the quality of the operating system provided by the franchisor, which should result in high profitability.

—Steve Berkman, Palm Beach Tan

A: Buying a franchise often means that an individual is transitioning from employment to self employment. Making the move from a guaranteed paycheck to a business owner’s compensation can be difficult if not properly planned. Having a clear revenue plan and the financial ability to cover your household and new business expenses during its growth is extremely important.

Becoming a franchisee or owning a business is a long-term commitment. It typically requires a 5- to 10-year lease commitment, a 5- to 10-year franchise commitment and a 7- to 10-year debt commitment.

Before you undertake any business, it is important to establish if your personality, skill set and lifestyle are ready for the lengthy commitment of time and resources.

—Wayne Smeal, Executive Tans

A: Under capitalization is one of the largest causes for failure in many small businesses. The good news is we typically will not allow someone to join the team without the necessary resources. We also hold the hands of the licensees throughout the process of getting started and beyond. Having our corporate resources minimizes, and often eliminates, many of the start-up bumps.

—Rob Quinn, TANPRO USA

A: A potential franchisee should look into the growth rate of the company, the history of the franchisor, the promoters and the combined experience it brings to the table. All this must be done before considering franchising as an option. The cost of a franchise is a very important criterion that needs to be assessed. The terms and conditions attached to a franchise often is ignored, and that can lead to potential problems in the future.

—Nick Patel, L.A. Tan

A: The Uniform Franchise Offering Circular (UFOC) is the document that outlines the franchise offering for all franchised businesses. Each year the Federal Trade Commission requires all franchisors to submit a current, accurate and updated version of the company’s UFOC.

In addition to FTC guidelines, each state has the ability to require additional information to be included in the UFOC. Less than half the states have these supplemental requirements for franchisors. Have your attorney and accountant review the UFOC documents before you proceed.

—Wayne Smeal, Executive Tans

A: As a licensing company, we do not offer a Franchising Disclosure Document. However, we open the books of all of our corporate stores to prospective licensees to show them the actual results of each store from inception. This policy clearly eliminates any concern over the potential success of existing stores.

—Rob Quinn, TANPRO USA

A: The candidate should meet the key executives and support people of the franchisor and get a sense of their integrity. If there have been failures in the system, this must be disclosed along with the contact information for those former franchisees. They also should validate information by talking to as many of the existing and former franchisees as possible.

—Steve Berkman, Palm Beach Tan

A: All the information provided by a franchisor to a prospective franchisee is as per the law and, therefore, truthful and accurate.

—Nick Patel, L.A. Tan

A: Many people want to discover and create their own way to operate their business. If so, franchising is not for them. Many people also assume that franchises don’t experience failure. This is not true. Franchising must be researched carefully before they commit to anything.

—Steve Berkman, Palm Beach Tan

A: Franchises are very valuable in helping you establish your business and providing a solid foundation. All franchise systems have specific requirements and regulations pertaining to the “autonomy” in which you have to operate your business. Most regulations are designed to enforce brand conformity. Some individuals view these regulations of the structure as a drawback.

—Wayne Smeal, Executive Tans

A: One drawback is only a perceived drawback from the point of view of new licensees. Oftentimes, new licensees feel that they have decorating ideas, proposed changes in operations or policies that are geared to their specific needs or wants but usually do not blend in with the big picture. In most cases, our job is to steer them through these uncharted territories.

—Rob Quinn, TANPRO USA

A: If the cost of the franchise is low and the business model of the franchisor acceptable, a franchise is a very good option to start a business. Looking at the current scenario, mom-and-pop stores are not able to compete against the marketing budgets of big companies.

More revenues are diverted toward the marketing of the business and, therefore, starting a franchise is a better option where a franchisor offers co-op on certain marketing activities and provides backend support that minimizes the cost of starting a business.

—Nick Patel, L.A. Tan

A: L.A. Tan does not believe in opening new businesses within a 3-mile radius of an existing salon. The only time the company makes an exception is when the demographics of a certain sector merits more than one location. Even in such cases, the existing salon owner is given the first preference in opening a new salon.

As stated above, the company believes in the growth of its franchisees and if the franchisees are not doing well there is no way that the company can achieve its goals and maintain good relationships with the franchisees.

—Nick Patel, L.A. Tan

A: We franchise using the Area Development approach. As long as a franchisee is in compliance with its development schedule, it has exclusive rights within a defined territory, and there can be no encroachment.

—Steve Berkman, Palm Beach Tan

A: Typically, we never place a store inside a 2-mile radius of another and we look at this on a case-by-case basis. Some large cities like Toledo, Cleveland or Columbus have dense areas with natural boundaries like rivers and highways that can warrant a competing store inside the 2-mile radius. In smaller cities, the radius could be much larger. In either case, the radius is established in the original licensee agreement.

—Rob Quinn, TANPRO USA

A: Executive Tans offers a 1-mile, 2-mile protected territory. This protects the franchisee from having any internal competition within one radial mile of their salon. Additionally, each franchise owner has a “first right of refusal” on any salon within two radial miles of the location. This provides an opportunity for a franchisee to protect a large geographic area.

—Wayne Smeal, Executive Tans