Franchising

Franchising

The indoor tanning industry has exhibited an incredible amount of thrust over the last decade. Just look around your community; there are tanning salons are everywhere these days.

In the past, the industry consisted of thousands of mom-and-pop salons located in tiny strip malls throughout the country. 

Today, indoor tanning is a growing, sophisticated entity that has added terms like mega salons, chains and franchising to its vocabulary. For nearly a decade, the industry has continued to report growth even during a tough economy.

One Michigan salon owner says the boom is mainly due to the numbers. “There are more tanning salons now than ever before, so people have become so much more aware of the tanning industry,” he says. “We also are hearing all kinds of ads on the radio. It’s just a constant promotion.”

Some veterans believe it is important for the industry to continue to become more mainstream. “We still have independent ownership, but for us to be looked at seriously from a banker’s eyes and our community’s eyes and just in general, I think it’s important that we become mainstream and that includes franchising. Almost ever other industry includes franchising as a method of expansion,” says one Iowa owner.

Franchises are not the same entities as chains. A chain is created when the successful owner(s) of a conventional salon decides to open an additional store (or stores) in a complementary area. A chain consists of two or more stores; however, it is not always a franchise.

Operators that have a good and profitable business concept actually can make more money if they just open their own stores, but chains are very capital and resource intensive from the standpoint of human resources.

“Operators are using franchising to expand their names and get more brand recognition at a more cost friendly rate than simply opening more and more chain stores,” says one Dallas salon owner.

According to the International Franchise Association (IFA), franchising is a method of distributing products or services. At least two levels of people are involved in the franchise system— the franchisor, who lends his trademark or trade name and a business system; and, the franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.

Technically, the contract binding the two parties is the “franchise,” but that term often is used to mean the actual business that the franchisee operates. Well-known franchises include McDonald’s, California Pizza Kitchen and Boston Market.

Franchising is basically signing up with a company that gives you all their years of experience the day you open the door. In a franchise system, the franchisee is the owner and operator of the business, very much like a conventional salon owner. However, the franchisee also has a business entity (the franchisor) to show them the way. In many ways, franchises can be likened to “turnkey” operations with the franchisor offering the franchisee guidance on location selection, operation manuals to run the business, as well as customer service and marketing programs.

A franchisor has everything set and ready to go for the franchisee. From the advertising print work to computer programs to sales techniques, everything has been researched. However, it’s important for potential franchisees to know how much experience the franchisor has.

According to the IFA, in 2000, most analysts estimated that franchising companies and their franchisees accounted for more than $1 trillion in annual U.S. retail sales from 320,000 franchised small businesses in 75 industries. Moreover, franchising is said to account for more than 40 percent of all U.S. retail sales.

According to studies conducted by the U.S. Department of Commerce since 1971, less than 5 percent of franchise outlets have failed or been discontinued each year. Of the 5 percent, many of the business closures were not due to business failure. In other words, when franchising is done under the right circumstances, it is pretty healthy for any industry.

Imagine a store owned by an individual with a particular concept. If the business is successful, the owner may develop a second or third store and hire employees for the day-to-day operations.

At that point, if the entrepreneur still wants to expand but prefers not to operate additional stores himself, he may decide to “franchise” the store name and business system to an independent businessperson, a franchisee. In return, the entrepreneur may ask for an initial fee and/or a continuing royalty payment based on a percentage of that franchisee’s sales. The business is now franchised.

The IFA says the franchisor must have some degree of distinctiveness, or the potential to achieve distinctiveness. Without distinctiveness the franchisor will have difficulty attracting high-caliber franchisees. The elements of success must be teachable to persons with capabilities that exist among prospective franchise buyers.

Some salon owners say the documentation required to start the franchising process is very extensive. “From the uniform offering circular that has to be put together to the registration in all the states and the franchise agreements themselves, franchisors will spend upward in the neighborhood of $50,000 just on documentation alone,” says one owner.

Therefore, consulting an attorney who specializes in franchise law is a must. A franchise attorney is tasked with ensuring that your franchise system meets with federally mandated standards and that you, as a franchisor, have addressed very important issues regarding the franchisor/franchisee relationship, such as protected territories, performance expectations and payment arrangements.

Setting up the relationship correctly will help you avoid costly lawsuits in the future. One salon worked with a franchise attorney and a franchise consulting group. He tried to do it on his own in the beginning, and it was a mess. He discovered they were running illegally and weren’t registered.

“We also found out that it is illegal to make an earnings claim. We didn’t know that. We were showing potential franchisees our books to show them how well we were doing. That’s against the law,” he says.

A franchise development firm is another option salon operators can consider. Franchise development firms are instrumental in creating a franchise structure that is marketable and has all the necessary components to make it run smoothly. When developing a franchise, the use of both the attorney and the development firm are important because of they offset one another. The attorney creates a legal and compliant atmosphere with contracts that favor the franchisor, which tend to reduce the franchise’s marketability, so the development firm is used to bring the system back in balance.

Conclusion? It’s very complicated to establish a franchise. All in all, it takes at least six months—if not longer—to get a franchise legalized.

One Pennsylvania-based salon owner finished up most of the legal documentation required to start franchising his salons. “The franchise agreement has taken us roughly nine months to complete,” he says. “The biggest headache was getting all the particulars in the document for the Federal Trade Commission.

We’re talking about a large questionnaire, a very particular, precise questionnaire that you have to fill out completely.

“We do everything in a wacky, goofy kind of style. Each store costs about $240,000 to build. They are very distinct, so our customers think we are a national chain. Each store has tremendous wow factor.”

To get prospective franchises to feature that wow factor a franchisor has to have everything they don’t want to be changed documented in the agreement, as well as the things the store must have.

“You have to include everything from the color of the carpet to the color of the logo to what kind of signage can be used,” he says. “It pays off down the road because as you grow and get bigger there is no question what each one is going to look like or have. It’s like going to McDonald’s, you’re going to get the same Big Mac in California that you will get in Florida.”

As with any type of business venture, there are challenges to being a franchisor and a franchisee. When you’re a franchisor, you not only have to satisfy your own goals, but everybody else’s as well.

For the franchisee, his or her biggest challenges are to keep up with the franchise system, make it better and be more productive. Franchisees don’t have the same challenges as a chain store operator. They don’t have to develop programs; they only have to make the franchisor’s program better.

Franchising is not something you can just go out and do. First of all, a potential franchisor has to be in business one full year legally. Next, the franchisor needs to be able to show the franchisees how to open a business and make money at it.

It’s very important for anyone who is looking into buying a franchise to choose wisely. If somebody boasts that their salons do $600,000 a year, you should beware because, first of all, they are not supposed to be discussing what they make.

Franchisors do have to give franchisees audited financial statements when you present them with a franchise agreement.

The audited financial statement gives the franchisee a clear picture of how that particular company is doing, beyond that you really need to do your own homework and figure out whether their market is conducive to what you are trying to do.

The challenge is to not just go out and sell the name, give it away, or make deals to move some equipment and turn some cash. The real challenge is to constantly have salons that make good money for the owners so the owners can get people to invest with them and grow the business in their exclusive territory.

While it may be complicated for the franchisor to put together a franchise, it isn’t difficult for a franchisee to own one. And, whether you are a potential franchisor or franchisee, the best advice you will ever receive is to do your homework.

Ask a lot of questions. How many locations does the company own? What kind of unique items do they have that goes along with the franchise? How does the franchisor define why it’s different from somebody else? Do they have operations manuals and an ongoing training program available? A franchisor has to have a good enough training program and facilities to fulfill the needs that of the franchisee.

One of the most important areas of information that a prospective salon operator must be aware of is that the brand and the system are there to service the customer, not to service the franchisee.

Like everything else in life, there are advantages and disadvantages to owning a franchise. First and foremost, with a franchise, franchisees have the backing and knowledge of a corporation. They also will share in the advertising costs, and because the corporation is dealing in mass equipment purchases, they will get products at a discounted rate.

One of the biggest advantages of owning a franchise, or a chain for that matter, is name recognition. While name recognition is a huge advantage, the financial advantages also are tremendous.

Some veterans agree that people want to buy a franchise because they want somebody to put them in a successful business overnight. Franchising is great for the industry as long as the franchisor is doing the right job. Franchisors have to provide support. Otherwise the franchisees aren’t buying franchises, they’re simply buying a name.

Another advantage for the franchisee is security—knowing that somebody else has worked through the majority of difficulties in running a business. That somebody, the franchisor, has been through all the hard knocks and has set up a program that has demonstrated success in the past. So, the risk of failure to the franchisee has been reduced.

Statistics show that 95 percent of franchises succeed where four out of five independently owned businesses fail. The real question seems to be do you want to go out and invest $200,000 in a 20- bed salon and have a four out of five chance of failing or would you like to have a 95 percent chance of succeeding?

The demonstrated success of a franchise also helps when the prospective franchisee goes to the bank to get financing. As far as disadvantages, the annual fee that franchisees pay to franchisors can be classified as a disadvantage, but it is a necessity. Franchisors cannot support the franchisees entirely.

So, the annual fee goes toward marketing and the franchisor’s effort to continually fine-tune its program. On the other hand, it should be noted that the annual fee works out to be an advantage, as well, because the franchisor is there to increase the franchisee’s productivity.

Another disadvantage exists when a franchisor wants to convert an existing salon. It might be difficult for an existing salon to buy into a franchise. Some companies have found that hiring employees from other tanning salons can be very difficult because of some of the bad habits they have acquired.

It is much easier to start with a salon and do everything correct from the beginning.

“Business format franchising helps bring uniform standards to our industry,” says one Arizona-based salon owner. “Franchise systems are monitored by the FTC, state regulations, and mostly by the franchisees themselves for their compliance with regulations, their ability to meet the needs of the customer and to provide a safe and profitable business environment. Higher standards set by tanning salon facilities will lead to a smarter customer, which translates to a growing and profitable market.”

Whether you are developing a conventional, mega salon, chain or franchise your top priority should be professionalism. That professionalism should be passed down to each and every location.

The bottom line is salon owners should not open their stores on shoestring budgets or hire barely living people to work behind the counter. In addition, whether you are a conventional, mega salon, chain or franchise owner, you need to make sure you emphasize education. As a professional that still is a major part of your responsibility.

10 Questions A Salon operator Need To Ask Before Franchising. 

1. Do you have adequate financial resources to fund your expansion?
2. Will your concept be successful in other markets?
3. Do you want substantial control over your expansion?
4. Is your trademark or service mark capable of being federally registered?
5. Will a franchisee obtain an adequate return on his/her investment?
6. Are you prepared to support your franchisees?
7. Do you have sufficient management staff?
8. Are you prepared to enforce standards?
9. Will the projected fees and royalties that your salon will receive from franchising offer a significant profit?
10. Are you willing to learn the methods and techniques used in franchising?