Salon Startup: Franchise Facts (The McSalon: Would You Like A Franchise With That?)

Perhaps the biggest downfall of franchising is the difficulty in converting an existing business. Some franchises aren’t even interested in partnering with non-startups because conversion requires re-training employees. An exception to this rule is Farmer’s Branch, Texas-based Palm Beach Tan. Ryan Christian, franchise support manager for the company, says the initial franchise fee dips from $30,000 for newly constructed salons to $20,000 for existing salons that simply need to be converted. Additionally, converted salons have options in how their royalty structure is set up. They can adhere to the traditional ramp-up structure, or they can set a benchmark—a revenue mark the salon used to hit under its previous business—and pay a percentage of any increase in gross sales after the conversion.

Profit

Another plus of franchising is making a profit sooner. The average small-business owner who starts independently may spend a few tough years in the red before seeing a profit—especially if he or she is continually paying toward start-up loans. David Nilssen, CEO of Guidant Financial in Bellevue, Wash., reports that 30 percent of all businesses fail each year. That fact, coupled with the promise of generating more revenue in infancy, makes buying into a franchise seem logical.

Even when franchising, the initial investment can be costly. At the very least, you will need to purchase equipment, lease a location and hire staff. One unique way to finance this is to use retirement funds from an individual retirement account (IRA) or a 401(k).

Guidant offers a program called Audeo specifically for this purpose. Essentially, salon owners wanting to finance a new business follow a four-step plan: start a corporation, sponsor a 401(k) or IRA through the new corporation, rollover funds from a current 401(k) or IRA into the new one, and use the new 401(k) to buy stock in the corporation. In short, this program allows people to borrow from themselves. Nilssen says that 55 percent of the program’s users are able to finance their start-up costs completely from this method, while 45 percent use this as part of their financing strategy. Of all Guidant’s clients, 6 percent are in the vanity sector, which includes tanning. In that sector, 85 percent are still in business. That’s staggering, as 71 percent are first-time business owners.

Nilssen equates the process to buying stock in a privately traded company. With this particular investment, the person fronting the money also is the person making the decisions. In the unfortunate event that the business folds, you will owe less—or perhaps nothing—to creditors. One more stat of interest regarding the program: in vanity and in other sectors, 44 percent of owners joined a franchise.

Many times when opening a new business, the whole is greater than the sum of its parts. Though the expression doesn’t make mathematical sense, its message of teamwork and being “a part of something big” is what entices new small-business owners to become part of a franchise. For more information about franchising in tanning and in other industries, visit http://usatoday.franchisesolutions.com/.