When the Little Guy Goes Big

Turning a small business into a franchise can look like a good idea in this economy. Here's how to figure out if it actually is.
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Writer and Author, Specializing in Business and Finance
8 min read

This story appears in the December 2009 issue of Entrepreneur. Subscribe »

Like a lot of small- owners today, was nervous. For 18 years, he'd built Sure Signs, his Idaho Falls, Idaho, sign shop, and he was sick of running hard for 60 hours a week. Instead of putting his energy into building new business--critical in this --he was drained by being the only person who could solve day-to-day problems. And one worry loomed over all the rest:

"If anything happened to me," says Smith, who is 43, "my wife would have had a nightmare taking over the business."

So, last year, he began looking for and found Fastsigns, a national sign and graphics chain. He met with franchisors and liked their way of doing business as well as the promise of a department and other professionals to help brainstorm ideas and manage his operation. Plus, with the added support, Smith was sure his wife could run the shop should anything happen to him.

He made the leap. After an initial investment of about $60,000--he saved $80,000 off the typical startup costs because he already owned some of the equipment--he reopened in October 2008 under the Fastsigns brand. Less than a year later, in June, Smith had his best month ever, making 71 percent more than his top month as an independent.

Then fall rolled around, and business took a dip. Nervous making, yes. But Smith is still happy with his decision, and still working significantly fewer hours than he did before.

In uncertain economic times, some independent businesses find stability in becoming part of a bigger team. While exact numbers of independent-to-franchise conversions aren't tracked, the best opportunities, according to , CEO of The iFranchise Group a franchisor consultancy in Homewood, Ill., are in "industries that are fragmented and don't have one clear brand leader."

These are markets that aren't dominated by one or two mega-brands--think about optical centers, automobile repair centers, travel agencies and real estate brokers--and they can provide ripe opportunities for franchisors to step in and use their collective power. Suddenly, the little guy going it alone has the benefit of being part of a big network of independently owned locations. That broader base can also give franchisors more resources to invest in marketing systems and technology support. And everyone benefits from greater volume discounts from suppliers.

Smith's success aside, some franchise consultants say it is beter to start fresh. "You can't just call up Carvel and say 'Hey, I have this great ice cream store and it's successful and I think you might want to take it over,' " says , president of The Franchise Alliance in Haverford, Pa. Most of the time, he adds, it's easier to start with a clean location than to try to reconfigure an existing shop. And the franchisor may be concerned about how easy it will be to re-train the business owner in the operations, rules and guidelines of the franchise.

A New Way
That need to conform can be one of the biggest challenges in converting to a franchise, says Donald MacDonald, CEO of Rooter Man, a home-services franchise based in North Billerica, Mass. MacDonald estimates that Rooter Man has signed up approximately 40 independent home improvement contractors as new franchisees during the past three years, and weaning them away from habits that don't match the Rooter Man way is a big part of his job.

7 Signs You're Ready to go Franchise

1. You feel being part of something bigger is more important than calling all the shots

2. You're genuinely willing to adopt someone else's way of doing things

3. Your customers are open to a national brand instead of a mom-and-pop shop--and might even prefer it

4. You have the patience to investigate the pros and cons

5. You like the idea of starting a business outside your field of expertise

6. You're able to shell out more startup money in exchange for brand recognition and other benefits . . .

7. . . . but you understand that a national name is no guarantee of success
MacDonald's Rooter Man franchises collect a flat fee based on the population of the territory, ranging from $75 to $1,200 per month. "They all pay the same fee, based on population," he says. "There's no secrecy and if they do really well, they don't get punished because they sell more."

In MacDonald's experience, independent business owners are "used to doing it their way. Some adapt very easily. The ones who continue to want to do things their way will encounter obstacles."

But MacDonald quickly adds that Rooter Man has worked hard to create a quality "experience" when customers hire its franchisees. It demands a high level of service and responsiveness, and that's the focus of the training, rather than teaching franchisees how to turn a wrench. When they adapt to the systems and practices of the franchise, he says, they have an easier time making it a success.

And there is success to be found. Dr. Richard Klics, a chiropractor, ditched his Dallas-based practice in 2007 for a new kind of business: A franchise called Massage Envy. Today, Klics says he is taking home the same salary he made as a chiropractor, but without the insurance headaches that drove him from a practice he had built since 1996.

"As an owner, you have to wear so many hats. It was taking up so much of my time to try to do everything myself with no help and support," he says. "Now, I can offer my employees better benefits. I have HR support. Advertising support. I have help with everything from legal counsel to decorating to signage. There was no way to say 'no.' "

For all that support, Massage Envy franchisees pay a $39,000 franchise fee, plus ongoing 5 percent royalty and 1 percent marketing fund fees. Klics, who calls himself a "chiropractor at heart," has hired nearly 30 massage therapists so far for his location in Rowlett, Texas.

MacDonald emphasizes the importance of the power of a big brand: He believes that consumers are often more comfortable doing business with national brands so franchisees also get the advantages of name recognition. Siebert, the franchise consultant, also points out that in exchange for franchise fees--which may be a flat fee or a percentage of sales--franchisees often enjoy group buying power, access to other franchisees as advisors, pooled marketing dollars, additional training and tools resources such as specialized software programs.

On the other hand, Smith, the Fastsigns franchisee, had to overcome some hesitation among his clients when he went big.

"At first, my customers wondered why I made the switch because I had a good thing going," Smith says. "They actually liked the old name and look better. That part of the transition was a little tricky, but they're over it now."

Do The Research
Like any other business investment or career move, Myers and others say investing in a franchise requires serious due diligence. He recommends seeking counsel from an accountant and attorney experienced in franchising. In addition, and not surprisingly, he also suggests working with an experienced franchise consultant.

It's important to carefully examine the company's Uniform Franchise Offering Circular, a legal document required by the Federal Trade Commission. It outlines details about the franchisor including its finances; fees, royalties and other costs; information about patents, trademarks and copyrights; obligations of the franchisor, and a variety of other issues about the company.

The franchisor must also provide names and contact information for other franchisees--and you must make those calls, Myers says. Conversations with existing franchisees can give you invaluable information about the actual experience of working with the company and the true impact of the brand's advertising efforts.

What's more, Myers says, it's important to meet the franchisor's management team in person, preferably at their headquarters. "You want to have lengthy conversations with them and meet the entire management and support team," he says. "You're marrying these people. You have to look them in the eye and like what you see."

Crunching the numbers is also key, Siebert says. Look at all investment costs, including upfront outlays, monthly franchise fees, advertising contribution and royalties. Work with your accountant and your best estimates of the future of your business and your industry. Develop a pro forma profit-and-loss analysis that includes how much you would have to sell to make the royalties and other costs worthwhile.

And don't skip online searches using media and lawsuit databases, such as Lexis Nexus. They're a relatively simple way to find out if there is anything going on that hasn't been disclosed, Myers says. Also, find out what the franchise requires: For instance, do supplies need to be purchased from specific sources? They may be more expensive than other sources, which could affect profitability.

Smith says that one reason he chose Fastsigns is that its only revenue comes from franchise fees and royalties--not from markups on suppliers' goods. In addition to his initial investment, Smith pays a royalty of 6 percent of sales as well as an advertising fund contribution of 2 percent of sales. But he's free to find his own sources for various jobs and makes use of the franchise's online network of more than 400 franchisees who frequently share information and resources to help one another. And in the end, that kind of banding together is one reason why so many independent businesses are attracted to franchises.

"We live in a time where we don't even know who our next-door neighbors are," MacDonald says. "People have always grouped together for protection. A franchise can offer that kind of community and support to your business."


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