Franchising

Consumers are increasingly brand driven. They associate McDonald’s with burgers and Dunkin’ Donuts with fresh pastries and coffee because the products and brands have been ingrained into their routines and psyches. Franchises are brand driven to appeal to this need for quality and consistency. This branding concept has grown the popularity of franchises, which account for 35 percent of all retail and service revenue in the U.S. economy, according to franchising.com.

For Americans, business ownership is a more attractive option than climbing the corporate ladder in someone else’s company. With ownership comes the American Dream of control, the potential for better financial compensation and a feeling of personal accomplishment. While many tanning salon owners have found success starting their own facilities, others have succeeded by identifying and growing an existing winning formula.

Over the years, the number of tanning salon franchises has grown, providing a branded image for tanning in many cities nationwide and a way for outside professionals to enter the industry with an action plan and support.

Defining Franchising

Although often associated with fast-food restaurants, franchising encompasses numerous business concepts from advertising/direct mail to construction to dating services to home inspection to security systems to video sales and rentals. Printing and copying services, maid services, computer services, cleaners, lawn care services, real estate, hotels and motels, and travel agencies are excellent examples of successfully applying franchising to established industries.

As defined by the 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 its 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. Franchising basically is signing up with a company that gives all of its years of experience the day the franchisee salon opens.

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 and operation manuals to run the business, as well as customer service and marketing programs. The success of a franchisee often is based on the proven success of the franchisor to operate company units and upon the success of existing franchisees. The franchisor should be able to show that the business can be successful in various markets and under different conditions. It has everything set and ready to go for the franchisee. Everything has been researched including advertising print work, computer programs and sales techniques. However, it’s important for potential franchisees to know how much experience the franchisor has.

Franchising and Tanning Salons

Tanning salon franchises give consumers a branded image for tanning in many cities nationwide. Franchising is popular for business owners because it’s a way for those who have little or no experience in owning or operating a tanning salon to go into business with an established method and support services.

The advantages of buying into a franchise over starting a new business may include opening quicker, experiencing success sooner, developing a customer base faster, having less risk and being more profitable faster.

Issues to Consider

Like every business, 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 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 of knowing somebody else has worked through the majority of difficulties in running a business. That somebody, the franchisor, has been through all of 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.

While franchise fees may seem steep to some, starting a business from scratch also will inevitably require capital. And when it comes down to securing financing, having the name, brand and stability of a franchise actually can improve one’s chances of securing a loan. In fact, the Small Business Association (SBA) has developed a program called the Franchise Registry that is designed to streamline the SBA loan application process for franchisees.

The annual fee that franchisees pay to franchisors can be viewed as a disadvantage, but it is a necessity. Franchisors cannot support the franchisees entirely. The annual fee goes toward marketing and the franchisor’s efforts to continually fine-tune its program. On the other hand, it should be noted that the annual fee works out to be an advantage because the franchisor is there to increase the franchisee’s productivity.

The professionalism with which a franchisee conducts business affects the reputation of the brand and, consequently, the franchisor and other franchisees. Therefore, be certain a franchisor sets professional standards that are adhered to at each and every location. The bottom line is salon owners should understand the costs involved in opening a new salon and must be financially prepared. They also should hire professional employees that reflect the positive image the franchise brand desires. In addition, owners need to make sure they emphasize education because it is a major part of a salon’s success.

Regulations

Experts agree that business-format franchising helps bring uniform standards to the industry. Franchise systems are monitored by the Federal Trade Commission (FTC), state regulations and by the franchisees themselves because compliance with regulations helps them meet the needs of their customers and provides 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.

FTC regulations also provide security for potential franchise investors. Franchisors are required by law to send potential franchisees a disclosure document called a Uniform Franchise Offering Circular (UFOC) before any money is paid or contracts are signed. The UFOC contains information including the franchise fees, estimated expenses, history of the franchise and, most important, names and contact information of both existing franchisees and those who have left the system in the past fiscal year. The UFOC must be provided to the potential franchisee at least 10 days prior to signing the deal.

Even though inaccuracy and misrepresentation carry civil and sometimes severe criminal penalties, there is no way to be absolutely sure. The disclosure document makes fraud and deception less likely. The IFA recommends careful consideration of the information provided in the UFOC, including the history and reputation of the company and its officers, with the assistance of a lawyer and accountant. The organization also recommends speaking with other franchisees of the company to help verify the information.

Fourteen states have disclosure regulations of their own and require franchise companies to file or register with a state agency including California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. These states, plus Oregon, also have disclosure regulations similar to those of the FTC. Certain other states regulate the offer and sale of franchises by means of so-called “business opportunity laws.”

It’s very important for anyone who is looking into buying a franchise to choose wisely. Beware if somebody boasts that his or her salon does X amount of dollars. Federal law makes it illegal to make earnings claims.

Research

The FTC suggests conducting thorough research prior to investing in a franchise. Find answers to the following questions before making a decision to go into business with a franchisor.

• How many years has the franchisor been in operation?
• Is the franchisor a corporation with an experienced management that is well trained?
• What is the total investment the franchisor requires from the franchisee?
• Does the franchisor provide financing? If so, what are the terms?
• Has the franchisor given information regarding actual, average or forecasted sales, profits and earnings?
• Will the franchisor provide the success rates of existing franchisees, and their names and locations?
• What is the extent of the training the franchisor will provide?
• Does the franchisor investigate all potential franchisees carefully to ensure they can successfully operate the franchise and help grow the franchise?
• Has the franchisor complied with FTC and state disclosure laws?
• Does the franchisor have a reputation for honesty and fair dealing?
• What is the franchisor’s experience in relation to past litigation or prior bankruptcies?
• Exactly what can the franchisor do for you that you cannot do for yourself?

In addition to reading the company’s disclosure document and speaking with current and former franchisees, potential franchisees should consider getting help from the following:

Lawyers and Accountants. Investing in a franchise is costly, and an accountant can help you understand the company’s financial statements, develop a business plan, and assess any earnings projections and the assumptions upon which they are based. An accountant can help you pick a franchise that is best suited to your investment resources and goals.

Franchise contracts usually are long and complex. A contract problem that arises after you have signed the contract may be impossible or very expensive to fix. A lawyer will help you understand your obligations under the contract so you will not be surprised later. Choose a lawyer experienced in franchise matters.

Better Business Bureau. Check with the local Better Business Bureau in the cities where the franchisor has its headquarters. Ask if any consumers have complained about the company’s products, services or personnel.