Out of Work? Invest Time, Savings, in Franchises!

March 7th, 2011

(Buy A Franchise Unlimited)

As job growth continues to sputter, some frustrated or laid-off workers are taking an alternative route to finding new employment.

They’re opening their own businesses, often through the world of franchising, in which they take someone else’s successful business concept and run with it toward the goal of becoming financially independent.

Jumping into business by buying a franchise doesn’t come without risks, though. Costs can run from $20,000 to several hundred thousand dollars to get started. And not all franchise parent companies offer their offspring the same level of marketing, back-office and sales support.

“Fire Your Boss!” screams a banner over several booths in the Nashville Convention Center during a recent two-day Franchise Expo, an event designed to put would-be small-business owners in touch with franchise opportunities.

“A lot of people are tired of working for someone else — and tired of the uncertainty that comes with that,” said Judy Moreland, coordinator of the Nashville event. Franchise opportunities range from sandwich and yogurt shops to quick oil change outlets. The least expensive options often attract first-time business owners who may be less savvy about the financial risks and only dream of the possible rewards.

At a marketing booth for Yogurt Mountain, the chain’s franchise vice president, Brian Robinson, said that about 40 percent of would-be entrepreneurs inquiring about opening one of the Birmingham-based company’s stores “are people who have lost their jobs and are down to the last of their savings.”

The company came to the Nashville expo because it hoped to find its first franchisees in Middle Tennessee, said founder David Kahn, who started selling yogurt in late 2009 after getting out of a Blockbuster video rental business.

Franchising is an idea I’m ready to embrace,” said Lewis Cleaton, who took early retirement in 2008 after 31 years with General Motors to avoid being laid off at the automaker’s Spring Hill plant. He’s been looking for some other line of work since.

“I’m not ready to retire, but I am at a place in my life where I want to find something I’d enjoy doing,” Cleaton, 55, said. He was visiting booths at the expo to see which franchises might fit his key criteria: something simple, inexpensive and not too time-consuming that he could do from home.

Some first-time franchisees use Small Business Administration loans to get started, but business analysts say tight credit during the past three years has slowed the rate of growth that the franchise world typically sees.

“The SBA had been the lender of last resort in the past, but lately it has become the primary lender,” said Alisa Harrison, spokeswoman for the International Franchise Association, a trade group. “We’re trying to get the banks more comfortable about making loans. Once we get credit flowing again, we will see franchising begin to grow as it did in previous recessions.”

Ideas abound, but costs vary.

Franchise ideas are almost limitless, with more than 3,000 companies now offering franchises, according to the Washington-based International Franchise Association.

Many franchises are quite well known — such as McDonald’s, Subway and Pizza Hut — and some of the most famous ones come with expensive buy-ins. Others are less visible, but they may offer modest startup costs and the ability to work from home in some cases.

Among the possibilities are senior-care services, one of the fastest-growing franchise fields because of the aging of baby boomers and their need for health care, said Joel Buckberg, a franchise attorney with the Baker Donelson law firm here. He coordinates quarterly franchise conferences.

“There are some franchises as low as about $5,000, and some that go into six figures,” he said. “The frozen-dessert segment is hot now, along with any kind of services that can be provided from your home. Those include such things as employment agencies, cleaning services and business consulting.”

Although Lisa and Bill Meek of Murfreesboro had good jobs, they started searching for a small-business opportunity in hopes of becoming their own bosses. They found a unique (if somewhat stinky idea) in the Charlottesville, Va.-based DoodyCalls, a pet-waste pickup service that offers franchises.

The business involves removing dog waste from people’s yards or cleaning litter boxes for people with cats. Anyone calling the company to inquire about the service is greeted with a tongue-in-cheek phone message: “We’re No. 1 in the No. 2 business.”

“Yes, we heard a plethora of jokes when we told our friends we were going to do this, but we’ve been at it for a little over two years now, and I’ve already quit my other job,” said Lisa Meek, who used to be a physical education teacher. “I’m already making more money.”

She said her husband read about DoodyCalls in a newspaper ad.

“When he first told me about it, I said, ‘You’ve got to be kidding.’ But we fell in love with the idea, and it’s perfect for us.”

It cost the Meeks roughly $25,000 to start the business, besides buying a truck to drive to clients’ homes. They took out a Small Business Administration loan to help.

One key to a successful franchise business is finding a parent company that provides marketing, accounting systems and other key services. The Meeks rate DoodyCalls as a good partner in that respect.

“We have done our own marketing, but we get lots of referrals from the company’s website, and they pretty much taught us everything we needed to know to make our business a success,” Lisa Meek said.

Buckberg advises clients to check out a franchise carefully before signing a contract.

“There are a lot of concepts that have done well, and some that have not done so well,” he said. “I always suggest that you talk to people already in the business to find out about their experiences.”

Franchisors often give potential new owners help finding a good location, along with other training. Many franchise parents take new owners to a training site at the corporate headquarters or a flagship store for a few weeks to drill business routines into them.

“With a franchise, you benefit from the learning curve of people who came before you,” Buckberg said.

Some people choose to buy an existing franchise location, but most owners start from scratch.

That’s exactly what Scott Snover, who operates a FastSigns location in Antioch, did.

He moved to Nashville from Dallas in 1994 to open the business, having scouted around the country for a good location. Today, he’s the largest FastSigns franchisee, and his business making signs and banners of all descriptions grossed more than
$5 million in sales last year.

“I was a tennis professional after college, but I didn’t want to do that forever,” he said. “I stumbled across FastSigns, and because I had a computer background in college, decided it was the right business for me.

“I came to Nashville for the first time to scout out the area, and after eight hours decided this was the place. I didn’t know anyone here, so I started from scratch with an investment of about $150,000.”

Even with the more liberal lending rules of the SBA bolstered by last year’s federal Jobs Act that raised the limit on small-business loans to $5 million (up from
$2 million), “financing remains a challenge for everyone,” Buckberg cautions would-be franchisees.

But the SBA has a program specifically to help people seeking loans to start franchised businesses, said David Tiller of the agency’s Nashville office. The SBA has a “franchise registry” that lists companies whose business plans the agency has reviewed and approved.

“All of our loans are open to franchisees, and they range from $5,000 to $5 million,” Tiller said.

The SBA recently made two large franchise business loans, including one for $4.95 million to a company setting up a DirectBuy warehouse in Brentwood, Tiller said. Community First Bank & Trust in Columbia facilitated the loan through its Franklin office.

Jerry Woods, Community First’s senior vice president and chief lending officer, handled the paperwork. He said the bank actively seeks good candidates for small-business loans, especially those seeking to open franchises.

“The first thing we do is make sure they’re on the SBA registry,” he said of the business concepts. “If they’re not, that doesn’t mean we can’t get them registered, but the SBA has to review their documents. Most experienced franchisors know this, and they make sure they’re preregistered before they go out to market.”

The amount of a loan “depends on the type of industry,” Woods said.

“A popular sandwich shop franchise can run in the tens of thousands, but we’ve done hotel franchises, too, and those can run into the millions. It’s really all over the board.

“If it’s a startup and an owner has no direct experience, I like to see the borrower put in a third of the project’s costs,” Woods said. “If we don’t do that, it’s just too highly leveraged.”

Also important is a good business plan, he said.

“We have to plan for the unforeseen. I need to see their projections on income and profits for the next two years, and cash flow needs for the first 12 months. We work hard with people to determine what their cash-flow and marketing expenses will be. Sometimes they underestimate that, and it can cause them to run into trouble.”

Subway sandwich shops are among the most successful franchises, especially for people with smaller amounts to invest, Woods said. “They have done a spectacular job of selling franchises,” he said. “They have a relatively low cost of entry, and they do a pretty good job of supporting franchisees.”

The SBA’s Tiller said prospective borrowers need “reasonably good credit,” but the approval criteria vary widely and are set by individual banks reviewing the loans. SBA guarantees the small-business loans.

“Some require really high credit scores, but each one has a different outlook on what is considered good credit,” he said. “All of them require a business plan and a thorough package of franchise information.”

(Buy A Franchise Unlimited)

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