Franchises
Panel Discussion
Panelist: Wayne Unruh, Greg Stewart, Dave
Vandervort, Fred Vandervort
Explain the financial aspects of franchises
(royalties, startup)
Wayne Unruh -
With Kitchen Solvers I am owner-operator. My start-up cost was
$30,000 and it included materials. They have an executive
model which has a startup fee of $40,000 and a larger, protected
territory and more on the marketing end. I already had an
office setup with my existing business. Otherwise, I would
have had that setup expense as well. I do pay royalties but it
depends on the product (only on Kitchen Solver products).
I deal directly with the manufacturers. I do not have to go
through the corporate office for supplies.
Fred Vandervort - I bought one of the first Fastsigns
franchises in the Valley. I paid $10,000 back then. I
have since bought two territories since then at $2,500 each.
My royalty fees for the original store is 5-1/2% sales and 2%
advertising. The other stores are at 6% and 2%. Their
startup costs were $20,000 each.
Dave Vandervort -
Over and above the franchise fee, you have your building and
inventory expense and must have enough capital to sustain you for
two years. It takes about $125,000 to open the doors.
Most stores that follow the operating model carefully are profitable
in the first two months. Those that think they can just put
the name up but do things their own way usually don't succeed.
Fred Vandervort - You have to submit a financial plan and
prove that you have enough operating capital for two years.
Dave Vandervort -
They do decline people. They have to be careful to chose
people that they believe will succeed. If they show a lot of
closures, it looks bad to potential franchisees.
What about training before the doors open?
Dave Vandervort -
They provide three weeks of training in Dallas. They also
provide a couple of training dates with actual owners so you can
experience the day-to-day operation. New franchisees get both
managerial and technical training. The training is covered but
you are expected to pay your traveling expenses (airfare, hotel).
Wayne Unruh -
With Kitchen Solvers we had two weeks of training. The first
week was manager training and the second week we learned
installation procedures.
Greg Stewart -
I paid a $30,000 fee and had to provide the backup cash. It
cost about $110,000 to start. Today it costs about $150,000.
Satellite stores cost $40-50,000 to open. If you sell a
satellite store, they will have to upgrade the facility. You
are given a 10 year license that costs $35,000 to renew. But
the usually waive the renewal fee.
Fred Vandervort -
The renewal fee is in our contract too but they waive it.
They are more concerned with stores using money to get up-to-date
equipment.
Do they expect the owners to also be
operators?
Dave Vandervort -
You can choose the executive model but only 2 or 3 of the 400
stores are setup this way. Kinko's is now competing in the
sign industry. But we have the advantage because we are mostly
owner-operator.
Do you have to operate within a strict
"box"?
Wayne Unruh -
My own company is not in conflict with Kitchen Solvers' business
model. In fact, they were happy to have an already established
business owner join them. Using their suppliers is
advantageous but not required.
Greg Stewart -
I have preferred suppliers through the franchise that I can use.
They save us money. The franchise has better negotiating power
with suppliers and can get us better pricing. But there is no
pressure. I can use whoever I want.
Can you market your business any way you
want to?
Wayne Unruh -
They have a marketing director that you can work with. But
they don't dictate to you.
Randy Clark - Some dictate because they want to
protect their name.
Greg Stewart -
Fast Frame is always looking for new ideas and ways to promote
products and services. In all the years I have been with the
franchise, they have never once said "no" to me.
Greg passed around a sample marketing brochure that the
franchise produced. All he had to do was pay for postage.
Fred Vandervort -
The more you sell the more royalty fees they collect. They
have a vested interest in helping you succeed.
What is the exit process?
Wayne Unruh -
If I wanted to sell, they would have to approve the buyer.
But I would get the built up worth.
Fred Vandervort -
The franchise has a manual that helps you value your business.
There is no rule of thumb.
Dave Vandervort -
You are going to want to get the most money when you sell.
If the franchise has a buyer, that buyer will obviously want it for
as low as they can. The franchise will lean more to the
buyer's side since they will have a continuing relationship with
them.
Greg Stewart -
If they find the buyer they take 10%. If you find the buyer,
the franchise takes only 5%.
Where do the royalty fees fall on your
expenses and when do you pay them?
Greg Stewart -
They like to get paid as quickly as possible. I have
received "Love notes" when I fell a week behind. We pay ours
weekly. I have never once regretted that check.
Fred Vandervort -
We have two methods that can be used. Royalty fees are
calculated from the point-of-sale. A weekly or monthly report
is generated and tells us exactly what to pay. We send the
report in with our payment. We choose to pay weekly as it is
easier on cash flow. Newer stores are setup with automatic
deductions from their accounts.
Wayne Unruh -
I put the number in my cost of goods. I don't look at it as
an expense.
What are the advantages of owning a
franchise?
Greg Stewart -
If you are with a franchise that is growing, it is advantageous.
Fast Frame is a household name in California. People move here
and come to me because they are familiar with the name. Also,
the franchise gives you price guidelines based on the valuation of
your market but you have complete latitude in this. I also
meet with other Fast Frame owners in the area on a regular basis and
we discuss price levels, etc.
Dave Vandervort -
They keep you on your toes. You are more likely to provide
good customer support. If you don't, it will get back to the
franchise and you can expect a call.
Wayne Unruh -
We have a formula that makes it easy to price.
Fred Vandervort -
We have representatives that "mystery shop" our competition and
let us know how they are pricing things.
Greg Stewart -
They may even mystery shop our own stores. It is nice to
tell staff - Keeps them on their toes.
What are the disadvantages of owning a
franchise?
Stuart Schindler - My situation was unique. I wanted
to buy property. But they didn't want me to move from my
territory because they knew it would be difficult to replace me in
the area. I was dealing with a restraint of trade.
Greg Stewart - You do want to be careful about the type of
franchise you buy into. How would you like to be the owner of
a Dunkin' Donuts and have to compete with the grocery store on your
corner selling your product? I haven't seen a downside to
owning my franchise. It is the economic times that has
affected us. The franchise tries to support you. But
they will even tell you that things that have worked in the past
don't work anymore.
Wayne Unruh -
There is the additional cost of royalties but even then you get it
back in the money you save on supplies, etc.
Fred Vandervort -
No real disadvantages except maybe territory-wise. But the
support far outweighs any complaints you may have.
Statistics show that 95% of non-franchise businesses
close in the 1st two years and 95% of franchises make it.