Wednesday, December 10, 2008

The Franchising Way to Grow

The Franchising Way to Grow

Lisa Flynn, a mother of two young boys, never relished having her children photographed. For her, birth announcements and holiday portraits meant either spending a small fortune for a professional photographer who didn't cater to colicky clientele or settling for cheesy props and fuzzy blue backdrops at the mall portrait studio. "I thought, 'There has got to be a better way to get your kid's picture taken,' " says Flynn, who was running her own marketing and advertising firm at the time. She looked into buying a franchise that specialized in children's photography but, unimpressed, created her own studio instead. In 2006 she opened Whippersnappers Studio, a kid-friendly portrait specialist in Bend, Ore., that captures kids, families, and even pets in high-quality photographs. "We never tell the kids to 'say cheese,' " says Flynn, who charges $195 for a 45-minute sitting and all the digital images that result. "Instead, we focus on capturing their unique little personalities."

Whippersnappers, which has four employees and $200,000 in annual revenue, broke even in its first quarter and has been profitable since. In 2007 Flynn decided it was time to take the concept on the road. She considered opening other company-owned studios, but that came with the risks, costs, and hassles of setting up multiple locations and hiring managers for each. It would also be time-consuming and require Flynn to spend too much time away from her family. There was a better option, as she saw it, and that was to franchise.

There are nearly a million franchised establishments in the U.S., and it's not just the usual suspects of fast food and retail. Says Kenneth Franklin, president of Pittsburgh-based consultancy Franchise Developments and a minority partner in the founding of the Arby's franchise: "I've had clients in manufacturing, agricultural, health care, and professional services."

Most entrepreneurs who franchise do so for one reason: growth. In 2002, Jeff Klinger and Chuck Runyon founded Hastings (Minn.)-based Anytime Fitness, an exercise club that stays open 24/7 by giving members their own keycards and installing elaborate security. By the next year, Klinger says, franchises "were selling like hotcakes." Today the 80-employee, $20 million company owns 10 of its own clubs and has more than 850 franchises (which employ their own staff) nationwide. Such growth would have been next to impossible had the business not franchised.

At first glance, franchising seems like an easy and cheap way to get your company growing. You come up with the idea and figure out how to make it work universally. Then you give franchisees the rights to your trademark and brand, a crash course in running the business, and a detailed operations manual. In return for not having to reinvent the wheel, franchisees pay an up-front fee—usually between $10,000 and $50,000—as well as ongoing royalties that typically range from 4% to 10% of sales. High-volume franchises tend to charge smaller royalties than service businesses with less volume.

Because franchisees pay for most of the up-front costs, such as leasing and improving a site and buying equipment, franchising is relatively risk-free for entrepreneurs. "You can capture market share more rapidly than you could on your own and, by and large, [do it] with other people's money," says Matthew Shay, president and CEO of the Washington (D.C.)-based International Franchise Assn. At the same time, you can keep your overhead, payroll, and marketing costs in check. In a tight lending climate, instead of seeking growth capital from banks or investors, you'll be searching for individuals with cash to become franchisees. Those might be downsized executives searching for job stability or retirees wanting an alternative to the stock market.

And franchisees have a vested interest in your company's success. "Companies that don't use franchising need to worry about hiring good managers and maintaining a high level of service, often in markets that are demographically diverse," says Dennis Campbell, an assistant professor at Harvard Business School.

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