Some 50 years ago, fast food as we currently know it was a foreign concept. Today, it is an institution upon which many busy families rely weekly and sometimes daily. In 1955, when Ray Kroc encountered a small, California hamburger stand run by Dick and Mac McDonald, he was inspired by how fast they served their food.
At the time, families ate home-cooked meals that took hours to prepare, but times were changing. Automobile use increased and women headed to work more often. Kroc saw a developing need and jumped at the opportunity to build more restaurants with the same operational plan as the McDonald brothers. Back then, investors considering his franchise might not have guessed that his hunch would turn into a multibillion dollar empire with more than 30,000 locations across the world.
Finding a profitable franchise can be as simple as looking at world trends and asking questions about what services individuals and businesses will need to make life more convenient or enjoyable.
Charting unfamiliar, yet lucrative territory
According to Miriam Brewer, director of education and diversity at the International Franchising Association Educational Foundation, there are more than 175 different industries that have franchised companies, many of which are unfamiliar to most. “When people think about franchises they automatically think about fast food, restaurants, or hotels,” Brewer says.
There are many advantages to investing into lesser-known franchising concepts — a significantly lower franchising fee is one. In rough economic times, people look to entrepreneurship, but many popular franchises will have start-up costs ranging from $200,000 to $500,000 — a price tag that is out of reach for most working-class Americans. However, some franchises in unfamiliar industries have significantly reduced franchising fees.
Take for example, Marietta, Georgia-based ShelfGenie, a franchise that sells custom-designed, glide-out shelving systems. An initial investment of $80,100 to $128,000 will put an investor in business without requiring them to hire staff. ShelfGenie’s business support center receives all customer calls, schedules sales appointments, and makes customer service calls for you, according to the ShelfGenie Website.
“The franchise does all of the business administration, making the franchisee responsible only for delivering the product,” says Matthew Biskup, chief marketing officer at the Ad Engine Franchise Network, the largest franchise recruitment network of Websites in the industry. “All you do is meet [clients], measure, make sales, and install it. It is a huge cost savings to the individual franchisee.”
“Some franchises are overlooked because they are completely not sexy, but as a business model they are viable,” Biskup says. He says FiltaFry, an oil filtration and fryer-cleaning franchise has low competition, but can be labor intensive. The initial franchise fee or territory fee ranges from $76,050 to $83,800, but can run as low as $32,000 if an investor already owns a white Ford E-150 van from which to operate the business. Customers can be found anywhere that food is fried.
Instead of buying one territory from FiltaFry, Stephen L. Bias decided that based on the profitability of the franchise model that he would buy 13 territories, which include all of Detroit and the surrounding areas. “The overhead is extremely low,” says Bias, who expects a $2.5 million profit with 100% return on investment within the first year and after that upwards to $6 million to $8 million per year.
“Who gets up in the morning, stretches and yawns, and says I’m going to go clean grease fryers?” Biskup says. Bias, CEO and owner of Detroit Fryer Management Services, may have had that thought himself because he took on five partners — all of whom took buyouts from the failing Detroit auto industry — and is looking to have 35 to 70 employees in the next 24 months. His workers travel to restaurants, take the grease out of fryers, filter them, clean the frying apparatus, and then put the oil back into the fryer. The process, which is done at each restaurant, will allow restaurants to use oil a lot longer and provide a better-tasting fried product.
“With the amount of fast food in this country and the price of cooking oil, FiltaFry basically lowers the bottom line of restaurants and keeps them from having to raise their menu prices as the price of oil goes up,” says Bias, a former financial analyst at General Motors who has bought and sold several businesses including cell phone, construction, and pool and spa installation companies. After running several non-franchised businesses, Bias likes that franchises provide a blueprint which circumvents the trial and error of going into business alone.
Bias has also invested in FiltaFry’s sister operation, a Florida-based biodiesel plant-building franchise called Xenerga, which he expects will revolutionize the world’s energy consumption. He used $800,000 of revenue from another business, along with money from private investors, to become involved in the $2.5 million franchise.
Xenerga isn’t the kind of franchise that one can start on a whim. Bias broke ground last May on his first Xenerga plant and has invested his money, but it will take one year for the plant to be built and for profits to be seen. He will also need to hire 32 employees, and his profits will be highly dependent on the locations of his plants.
Biodiesel is clean burning and biodegradable and when blended with petroleum it helps automobile engines last twice as long. He can sell 6000 gallons of the Biodiesel oil to oil companies at a profit ranging from $1 to $1.35 per gallon. Bias would like to eventually open two more plants, with each plant profiting him anywhere from $5 million to $8 million per year.
“There is a 60 million barrel shortage of diesel fuel every year. If they built factories for the next 50 years, there will still be a need.” Bias says, explaining that his interests piqued when he learned that Xenerga’s biodiesel plants will supply renewable energy alternatives that can be produced from wastes like cooking oil and feedstock. The Xenegra parent company assists Bias in finding and negotiating feedstock contracts.
“[Xenerga] is not a cookie-cutter [franchise] where you just get in and become successful because you’re in,” Bias warns. “[People have] got to realize that profits are made off of pennies and if you don’t put those managerial attributes to work then it won’t work.”
Determining the future of a franchise
Not all franchises are established to the point where a proven and vetted business plan is available. The Small Business Administration warns that investing in a financially unstable franchise is a significant risk. That risk may increase with franchises that are not well established or franchises that are based in sprouting industries. If a company goes out of business or into bankruptcy after money has been invested, then an owner’s recourses might not be recompensed. “Sometimes the parent company may go under but the individual system could still operate,” says Brewer, who adds that an interested investor should read the disclosure form carefully before entering into any agreement.
The IFA works in conjunction with the Congress and Federal Trade Commission on improving the industry’s relations with franchisees and to protect them from fraud and predatory franchises.
Finally, the SBA advises that speaking with current and former franchisees is probably the most reliable way to verify the franchiser’s claims. “The anonymity of the Internet is not going to help you,” Biskup warns. “You need to make contact with people to understand the strengths and weaknesses of the system.”
The Federal Trade Commission, which regulates franchises suggests on their website that before purchasing a franchise potential investors should check with associations of franchisees who are operating similar outlets. They can provide information about the relationship between the franchisor and its franchisees.
Web Resources:
SBA Franchising Resources
History of Franchising
The Beginnings of Franchising
Franchising Law