Published in UT San Diego, February 5, 2013
At its most basic concept, “franchising” is the practice of using another firm’s successful business model.
Franchising is also a financing technique. The franchiser gets the other person (the franchisee) to put up the dough so that the franchiser can expand, and in return, the franchisee pays a modest fee, ostensibly for the trademark, distribution, purchasing power, advertising and general business smarts.
Except it doesn’t always work out that way. Sometimes buying a franchise is essentially buying yourself a job that will require long hours, constant oversight, and modest income, and at the end of the day, you have created equity for the other person — not for yourself.
To start a Subway outlet, the startup cost is around $125,000, a McDonald’s around $1.3 million, a Jani-King around $25,000. If you own more than one franchise, if you can afford to create several, then the business can be quite profitable because you have spread costs and created scale.
Remember that the legal language and terms and conditions of a franchise agreement are complex, and you cannot do this alone. You must have a lawyer. The agreement makes clear that both sides make promises and have obligations.
But it can be done successfully, and Karissa Peterson is living proof of that.
When she was laid off from her hotel management position, Peterson decided to pursue her dream of being her own boss. She thought about opening a restaurant and then determined that buying a franchise was a better option because of the lower startup costs, the benefit of a proven business model and brand, and the training.
Further investigation led her to Curves, a fast-growing fitness franchise aimed at women.
“I’ve always loved to exercise and to dance. I was a competitive figure skater until I was 16 years old,” Peterson said. The entire process took about eight months, during which she read numerous franchise packets, spoke to the Small Business Administration and contacted many franchise owners to ask about their experiences.
After looking at nine Curves franchises in the San Diego area, Peterson and her husband, Tom, who still works full time in the hotel industry, ended up purchasing Curves La Jolla in 2007 because she liked the location and the fact that there was cash flow from the existing membership. The five-year commitment was “less intimidating,” and the startup costs were “doable.” After buying the franchise, she said that she and Tom invested $17,000 to update the equipment and renovate the club. While she didn’t disclose the purchase price, the basic Curves franchise fee is $25,000.
During Curves’ intensive one-week Club Camp, she learned about marketing, finance, equipment repair and sales processes.
At the time of the purchase, her store had 236 members, and the highest has been close to 400, she said. The economic downturn initially dampened growth prospects.
“My accountant said, ‘Hang in there.’ Most people burn out after four to five years. It’s at that time that you have built up the loyalty, and your customers know you’re in it for the long-haul,” she said.
She works about 60 hours per week, and she believes the franchise can’t support an absentee owner.
Until recently, Peterson also had one part-time employee. When that person unexpectedly quit before Christmas, the Petersons had to postpone a vacation to Germany. Now she has two part-time employees.
Her experience in the hotel industry has been very helpful. At Curves La Jolla, she greets every client by name.
“This has been the hardest job of my life. When I don’t have an employee, I’m a one-woman show. I’m the manager, the trainer, the bill payer, the janitor, the repair man and the receptionist,” she said. “But it’s the most rewarding thing that I’ve ever done.”
Rule No. 153
Caveat emptor, the word “franchise” is sometimes followed by the word “litigation.”