Charnita and Angela Brock have been operating a Rita’s Italian Ice franchise for more than three years. But you won’t find either just sitting behind the desk pushing papers. With two Washington, D.C. locations, Charnita frequently works the window, dishing out the flavored slush that has become a summertime treat for many people, while Angela can often be found in the back of the store making the ice.
Charnita, 40, and Angela, 50, became franchisees in 2004 after paying a $25,000 franchisee fee and spending $350,000 in start-up costs to build the first store, purchase equipment and inventory, and create a stream of working capital. Theirs became the first Rita’s to open in the Washington D.C. metropolitan area. Last year the business had $420,000 in revenue. Having enjoyed sweet success with the first location, the two opened a second store in 2007. This year they project revenue for both stores to reach $450,000.
“We purchased a franchise because we like the fact that their methods are tried and proven, and it gives you a roadmap to follow to success instead of you trying to figure it out yourself.” Charnita says. “But what made me interested in specifically opening a Rita’s was the product. Once I tasted it, I was hooked,” Angela adds.
According to the International Franchise Association (IFA), there are more than 900,000 franchised businesses representing 85 different industries, including business and personal services, food, travel, and real estate. A 2008 study conducted by PricewaterhouseCoopers reports franchises generate $2.3 trillion. Franchising is big business, but operating a unit is neither easy nor for the faint of heart.
“We’re open seven days a week from 11 in the morning until 10 o’clock at night, so it’s hard work,” Charnita says. “One of the first things I ask people who say they’re going to open up a Rita’s is if they are going to work the store, because it’s not something that you treat as an investment and just hand it over to someone else. You have to work it,” she says.
Unlike independent start-ups, franchises afford you a proven brand and system, access to training and marketing, and overall support from the franchisor. But successfully navigating the industry takes energy, time, and money. Here are some steps you should follow when buying into the system:
Determine if you’re franchise material. Although the IFA reports that more than 7 million people earn a paycheck from a franchised business, franchising is not one size fits all. Take some personal inventory to determine if franchising is right for you. Are you willing to work in an environment that sees little change? Franchises are structured systems with uniform procedures, so there’s little room for creativity. Are you capable of working a non-traditional work schedule? Depending on the franchise, you may have to work seven days a week and some holidays. Are you a hands-on person or do you prefer to completely delegate to others? While some franchises may be able to operate with absentee ownership, most are best run with the owner actively on board. Are you dedicated? Franchise agreements typically run 15 to 20 years, so be sure you’re prepared to hang in for the long haul. Also weigh your strengths, weaknesses, and goals. This well help you determine which franchise is right for you.
Identify your interests. Compatibility is important when choosing a franchise, so consider what you like to do and then match your interests and skill sets to available opportunities. Darrell Johnson, president and CEO of FRANdata, says there are 3,500 active franchised brands in the U.S. with between 50 and 100 new brands starting every quarter. There are many resources you can use to find a franchise that fits. Visit www.frandata.com and sort by industry and sector. There are 30 industries and 230 sectors from which to make your selection. Also, visit www.franchise.org for more lists of franchise opportunities.
Consider what’s hot. Some of the growth sectors include health care (in-home health services and companion services for seniors); beauty and fitness (fitness centers); residential services (dog walking and pet grooming); lawn service; legal and accounting services; and handyman services. “Franchising is operating in sectors that you would never typically associate with the use of the franchise business model,” says Johnson, whose company monitors franchising activity nationwide. “It’s not just the traditional food or business-to-consumer retail type of establishments that are franchising. Franchising is in a lot of business-to-business as well as business-to-consumer markets,” he says.
Research the costs. “One of the first things we did was look at our financial position to make sure that it was financially feasible for us to do something like this,” Charnita says. Determine how much you can invest. There are several costs to consider when purchasing a franchise, including a franchisee fee, royalty payment, and advertising outlay. You may also incur the expense to rent, build out, and equip a facility, purchase initial inventory, and
secure operating licenses and insurance. Your franchise fee depends on the type of franchise you choose but can range in amount. The Brock sisters paid a $35,000 franchisee fee to buy their second Rita’s and spent nearly $400,000 to build out and equip the store. Royalties are typically paid as a percentage of sales and range from 3% to 8%, but some franchisors vary in when they’re paid. Rather than paying their royalties after sales, Angela and Charnita pay a percentage of the product they purchase from Rita’s – anywhere from 6% to 8% of the total amount of goods bought. As for advertising, FRANdata’s Johnson says almost all franchisors require a contribution to an ad fund, fees that go toward national or regional promotions.Investigate your pick. Franchisors are required by law to supply a Franchise Disclosure Document (FDD, formerly called the Uniform Franchise Offering Circular). This document provides information about the franchisor, the franchise system, and includes the franchise agreement that you will need to sign. A franchise agreement details the terms of the relationship between the franchisor and franchisee. Once you make your pick, use the FDD to gather information about the company’s track record of success, financial strength, number of years in operation, training and ongoing support, business background of key executives, any prior litigation, and costs to get started. The report also informs you of any restrictions placed on the franchisee such as certain suppliers from which you must purchase products or the territories where you are allowed to sell your goods and services. IFA President and CEO Matthew Shay suggests enlisting the help of an attorney when reviewing
the document. “Understanding the legal language of franchising can be daunting because franchising is governed by federal and state laws. Plus there may be local and state health and environmental laws that a franchisee must follow,” Shay says. “So, it is important to seek out the advice of an experienced franchise attorney to ensure that you are aware of all the laws that apply in your areas and state.” You may also want to consult an accountant to review the company’s financials.Interview existing franchisees. The FDD lists the names and addresses of current franchise owners and those who have left the system in the past year. Talk to a few to help verify a franchisor’s claims and to find out about their experiences. Some questions you should ask include: Did the franchisor provide adequate training and ongoing support? Is the business profitable? What are the biggest challenges you faced? Are you satisfied with the franchisor’s advertising program? Were there any hidden or unexpected costs? For those who have left the system, find out why they left, whether they would consider returning, and what their overall experience was like.
Find financing. Many franchises have working relationships with banks and other lenders. Contact the franchisor to see what kind of financial assistance it can provide. The Small Business Administration is also a good source. In fact, the Franchise Registry lists all of the franchise systems that have been approved for SBA lending. The Brock sisters used an SBA business loan to cover 65% to 75% of their costs. They used personal savings, home equity, and credit cards to finance the rest.