Franchises and Chains

Mega Salons, Franchises and Chains:
The Future of Tanning is Here--Part II

by Nancy A. Foster

Times are changing in the indoor tanning industry. Long gone are the days of the "mom-and-pop" salon run more as hobby than as a "serious" business. With the millennium, a new era in indoor tanning is emerging, bringing with it a new class of business people and enterprising entrepreneurs staking out their tanning territories and finding their fortunes.

Last month, LOOKING FIT discussed the terms redefining the indoor tanning industry. Terms such as conventional salon, franchises, chains and mega salons. In addition, we presented the advantages and disadvantages of owning and running a mega salon. This month, franchises and chains are explored with the people who actually own and operate them on a day-to-day basis.

Franchises and Chains

A franchise is an organized business (known as the franchisor) that gives the purchaser (known as the franchisee) the right to buy or sell a product or service. Well-known franchises include McDonald's, California Pizza Kitchen and Boston Market.

A chain, on the other hand, 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.

"In a franchise there is a chain of stores under the same name," explains Ed Chaney, owner of the metropolitan Phoenix, Ariz.,-based franchise and chain, SUNCHAIN^SM, "The stores look alike, act alike and there are supposed to be many similarities between each store and their environment so the customers will become immediately adapted and comfortable when they walk through the door.

"When you are developing a chain of stores with one owner or one entity, it's exactly the same thing. You will want to keep a certain amount of consistency with each location."

Chaney says that's because customers have comfort zones and they want to maintain those comfort zones each and every time they go into the store.

Franchises

Steve Smith, president of the New Orleans-based Planet Beach, became a franchisor on April 1, 1996. The corporation currently has 22 stores, 10 of which are corporate and 12 of which are franchised, and are located in southern Louisiana and Georgia with a number of salons opening in Mississippi and Alabama in the near future.

"It's like being in business for yourself, but not by yourself," says Smith. "When our franchisees purchase a Planet Beach salon, corporate performs the role of a constant consulting firm with the experience and background they need to succeed."

With a McDonald's on almost every street corner and a Boston Market on every other corner, one might assume that putting together a franchise is a relatively simple procedure. However, that is not the case.

"You need to find an attorney who specializes in franchise law," says Cheri Cosgrove, president of Sioux City, Iowa,-based franchise Tan World, Inc. "The attorney we selected to help us through the process helped write the franchise laws in Iowa, so our comfort zone was really good because our attorney obviously was very knowledgeable."

However, Cosgrove also investigated using a franchise development firm.

"It's definitely an option," she says. "A franchise development firm sets your franchise up and then markets it for you. Typically, this will cost around $100,000."

According to Chaney, depending on the lawyer you select and his or her fees, it will require between $10,000 and $40,000 to put together the franchise contract, which is also known as the "Uniform Franchise Offering Circular."

"This is a very intense document that discloses everything about the franchise and its members," he adds. "This document also defines all the expectations and criteria involved in being in business with a franchise."

Additionally, every franchise must have a corporate store where it can evaluate the franchise's programs. (Depending on the franchise's size, it may have several corporate locations.)

Todd Beckman, owner of the St. Louis-based mega chain and franchise St. Louis Tan Co., also knows the challenges of coordinating a franchise operation.

"It's very complicated to establish a franchise," he says. "There are many legalities that need to be attended to and many things you can and can not do. All in all, it probably takes six months, if not longer, to get a franchise legalized."

Keith Lipman and Randy Eddlemon, co-owners of Phoenix, Ariz.,-based chain Energy Tanning, agree that putting together a franchise is a complicated process.

"We've already had several inquiries about franchising Energy Tanning and we're putting together the legal documentation that is required," says Lipman. "However, 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."

Dallas-based mega chain Palm Beach Tan also is in the process of putting together the necessary documents to become a franchise.

"What we're doing right now is putting together the legal documents," says Troy Cooper, president and CEO of the company. "When that is accomplished, we'll be prepared to start franchising nationwide."

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 most sound advice you will ever receive is to do your homework.

"As a consumer, if you are talking to somebody about purchasing a franchise store, you need to do your homework and find out if they are actually a franchise," Cosgrove says. "For example, if I'm talking to you about purchasing one of my franchises, federal law regulates our first face-to-face meeting. I have to provide you with the franchise's offering circular which tells you we are a franchise, what the franchise fee is, what the royalty fees are and what the initial investment is going to be. Then you have 10 days to look over the information. However, that doesn't mean you have to decide within 10 days. It only means that as a franchisor I cannot sign you up for that time period."

The 10-day time period definitely works to the potential franchisee's advantage.

"It's like a marriage license where you have to wait a certain period of time before you get married," explains Cosgrove. "This 10-day period allows you to look over the information with an attorney, accountant or both. If the people you are talking to are not presenting their franchise in this manner, then the consumer needs to be cautious."

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," says Beckman. "From the advertising print work to computer programs to sales techniques, everything has been researched and is ready to go. So, when somebody wants to get into the tanning business, instead of spending a year trying to figure out how you're going to do this or that, all of the work has been done for you."

Along with an initial financial investment (a franchise can cost between $46,000 and $350,000--depending on the salon's size and location), all the franchisee needs to bring is his or her passion to succeed.

"Franchisees should have the same type of passion as single conventional salon owners," says Chaney. "After all, this is their business and they want it to be successful."

The Advantages and Disadvantages

Like anything 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 behind them," says Energy Tanning's Eddlemon. "They also will share in the advertising costs, but 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."

St. Louis Tan Co.'s Beckman agrees: "Name recognition is a huge advantage. However, the financial advantages also are tremendous," he notes. "At St. Louis Tan Co., we buy lotions, lamps and equipment in bulk for 15 25-bed stores at a better rate than individual salon owners. Therefore, we are able to give those discounts back to the franchise owners.

"In addition, most 10-bed salons will spend $6,000 per year on advertising--and the cost goes up depending on the number of beds and size of the salon. We charge $12,000 per store, per year for advertising and our franchisees get $200,000 worth of advertising."

According to Smith, the difference between Planet Beach and other franchisors is the size of the salon and the experience the company brings to the franchisee.

"We don't do mega salons," he says. "We keep it simple by operating salons with a minimum of seven units and a maximum of nine units. Typically, the salons are 1,000-1,200 square feet in size. In addition, we provide for our franchisees and salon managers 26 hours of in-class training at our corporate headquarters in New Orleans, as well as ongoing 24-hour operational support. It is critical for salon owners who are considering becoming a franchisee to look at the current numbers that salons within the franchise are doing, the franchisor's financial stability and what their executive staff consists of."

SUNCHAIN's Chaney says one of the biggest advantages of owning a franchise is 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," he says. "So, the risk of failure to the franchisee has been reduced."

In fact, Cosgrove says the risk of failure has been greatly reduced.

"Statistics show that 95 percent of franchises succeed where four out of five independently-owned businesses fail," she notes. "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?"

This demonstrated success of a franchise also helps when the prospective franchisee goes to the bank to get financing.

"It's not quite as hard to get financial backing because there is so much information available," says Tan World's Cosgrove. "For example, if the bank wants to see the franchisor's audited financials, the company is able to provide that type of information."

As far as disadvantages, Chaney notes the annual fee that franchisees pay to franchisors.

"Franchisors cannot support the franchisees entirely," he says. "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 franchisees productivity."

Another disadvantage that Planet Beach's Smith sees is the conversion of existing salons.

"It might be difficult for an existing salon to buy into a franchise," says Smith. "We have found that hiring employees from other tanning salons has been very difficult because of some of the bad habits they have acquired. It is much easier to start with a brand new salon and do everything correct from the beginning."

The Challenges

As with any type of business venture, there are challenges to being a franchisor and franchisee.

"When you're a franchisor, you not only have to satisfy your own goals, but everybody else's," says Chaney. "In addition, you have to grow the franchise system correctly. A franchisor must pay attention to where its franchises are going up, as well as keep refining and improving upon the franchise program."

Additionally, franchisors need to anticipate problems.

"If you don't anticipate problems in the franchise system, the franchisor can incur liability lawsuits," Chaney notes.

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," says Chaney. "They don't have to develop programs, they only have to make the franchisor's program better."

Chains

Chain store owners are a busy, determined breed. These enterprising entrepreneurs first proved themselves as successful single conventional salon owners and then decided to spread their wings and fly.

If you currently own one salon and are thinking of expanding to two, you are thinking chain. And, like an expectant mother of twins or triplets, you need to be prepared.

A business plan is a good place to start and will provide you with an excellent compass to guide any business venture to success.

According to Bryan Noland, co-owner (his partners are Allen Dear and Terry Clifford) and general manager of metropolitan Dallas-based chain Desert Tan, Inc., the key to his company's success lies in its business plan.

"It's hard to go through uncharted water without a map," he says. "Forty-five percent of business owners don't have a business plan and, truthfully, they can't build a solid foundation without one. Every serious business owner needs one--especially one that is well thought out."

Briefly, a business plan consists of a company "mission" statement (100 words or less explaining what your company is all about), as well as actual, anticipated and predicted financial information.

"Go to your local library," says Noland. "It will have books on how to write a business plan. In addition, community colleges in your area may be offering night courses on how to prepare a business plan."

If you don't have the time to attend night classes, computer software now is available to take you step-by-step through the business plan process.

Noland offers another suggestion.

"Be sure to revise your business plan on a month-to-month or quarterly basis," he says. "This is wise to do because change is the one thing you can count on when it comes to running your own business."

However, what you don't need to revise or improve upon, especially if you already operate a successful single salon, is the way you do business.

According to Gary Haw and Richard Guyette, co-owners of Thousand Oaks and Agoura Hills, Calif.,-based chain Tan L.A., if you are thinking of expanding from one to two stores, it is important to remember that one of the reasons your first salon was so successful was because you were there to run it in the first place.

"Everything at our first salon is still the same," says Haw. "We didn't change anything. I think that's important because too many people place too much emphasis on the second salon and they tend to forget about their first one. Keep in mind that your clients are used to having you there. So, when you open your second salon, find the right people to run it and let your new clients develop a rapport with them."

However, Haw admits that is a lot easier said than done.

"One of the challenges of owning a chain is that you want to be at all of the locations, all of the time," he says. "But you have to let go and let the new manager run the salon. Of course, you'll oversee it, but it's important to give him or her an opportunity to do it their way."

The Challenges of Chain Store Ownership

According to Scott and Bobbie Jo Lundgren, co-owners of the Advantage Tan chain in Rapid City, S.D., one salon is fun, but two can be too much sometimes.

"There are longer hours to put in when you own a chain, says Scott. "And, trying to get employees to show up on time can be challenging,"

Energy Tanning's Lipman and Eddlemon agree: "Every day there is something different to contend with," says Eddlemon. "Employee turnover is definitely an issue. We run Energy Tanning as a corporation and when you have lower income positions, those positions don't always stay filled. Fortunately, though, we've been very lucky with our employees."

Desert Tan's Noland believes finding the right key personnel is an essential ingredient for any successful chain store owner.

"Finding the right people to put in place as you expand and grow is definitely a challenge," he says. "The bottom line is you are only as good as your people and you need to have managers that you can count on."

According to Tan L.A.'s Haw, with two or more salons you have twice as many problems and twice as many things to worry about.

"That alone is the No. 1 reason for hiring good people," he adds.

However, SUNCHAIN's Chaney believes there is an even greater challenge in owning a chain of salons.

"You have to take a successful single salon program including your customer service program, sales program, equipment program, etc. and duplicate it," he says. "It's one thing to be successful in one place, but it's a lot harder to duplicate the program."

On the other hand, there seems to be one good reason to be fruitful and multiply.

The Advantages of Owning a Chain Store

Despite the apparent challenges, one of the best reasons to expand is money. Obviously, when you own two or more salons you will be earning more money. However, another fiscal advantage involves borrowing money.

Of course, almost every person who has ever walked into a bank to get their first salon financed will testify that attaining funds isn't always an easy task. The good news is getting funding for your second or third salon doesn't seem to be as difficult.

"First of all, when you go to the bank, you will have a successful track record to take with you," Chaney says. "So, you will definitely have the ability to go out and get funding because you have experience."

Of course, this doesn't mean that after owning a single salon for six months you can just saunter into a bank and expect to get a loan.

"When it comes to lending purposes a bank will want you to be in business at least two years," Chaney adds.

Noland agrees: "Banks have a tendency to notice you and funding is more readily available as a chain," he says. "The bank definitely will have more confidence in you."

A chain also shares some of the same advantages as a franchise including shared advertising and marketing costs, equipment and accessory discounts, and, yes, those two important words--name recognition.

"Overall, being a chain shows security and stability," says Noland. "The thing about owning a chain is it calms peoples fears. Clients and potential clients will recognize you as a professional and your business as a growing entity. When you own a chain it demonstrates business stability and the customer relaxes."

Final Thoughts & Advice

Big things and little details cannot be overlooked or ignored when it comes to running a chain of stores--this includes purchasing the right equipment for the salons.

"Be sure to buy and invest in the right equipment," says Tan L.A.'s Haw. "Equipment definitely can make or break a tanning salon."

In addition, these chain-store pioneers suggest you watch your expenditures and location choices.

"Without a doubt, you will have higher overhead," says Noland. "So, don't only watch the big costs, be sure to look after the small items as well. The little touches, the extra amenities you offer your clients can really add up."

More importantly, when you are looking at locations, be sure to do your homework.

"Be cautious about locations," Noland advises. "Research and study the market and know what the trends are and where they might be heading. I realize it's extremely hard to predict growth, especially in a growing market, but try. For example, when opening another salon, you might want to ask yourself whether it would be better to build a 30-bed salon and put in 20 beds now and leave yourself some room for growth in the future. Of course, it could mean you will be paying rent on 1,200 square feet of space that is not generating any revenue for awhile. On the other hand, it could be an extremely wise choice. So, it's important to study the market, as well as ask and answer these types of questions honestly."

Conventional, mega salon, chain or franchise, ultimately the success of any business venture depends upon one word and one word only--professionalism.

"Whether you are developing a conventional, mega salon, chain or franchise your top priority should be professionalism," Chaney says. "That professionalism should be passed down to each and every one of your locations. This priority is of utmost importance because I believe a weeding process has begun in our industry. 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."