Palo Alto Weekly

Cover Story - December 9, 2011

Seeking a perfect match

Franchise options range from yogurt to bus wrapping

When the economy turned downward, laid off workers turned to franchise ownership.

At least, that's been the experience at FranNet, a San Jose franchise-consulting business, which, appropriately, is itself a franchise.

"We increased our profits by 800 percent, helping people getting into franchises," said Katie Fagan, a FranNet consultant.

Sales for FranNet this year are ahead of 2009 and 2010, said Joan Young, president of FranNet and Sunbelt Business Brokers, San Jose, describing both companies as the largest franchise consulting group in North America and the largest business brokerage firm in the world, respectively.

In the U.S. alone, there are 3,100 different franchise companies in more than 80 industries, Fagan said.

FranNet represents 110 of those companies, opening new locations; Sunbelt sells existing businesses.

These companies are in a variety of industries, including home health care, tutoring, and health and wellness, which did particularly well during the recession, Young said. And then there's food, home repairs, automotive and small-business support services.

Opening a franchise is not for everybody, Fagan said.

"If you don't want to follow a system, it's not for you. It's a good hybrid, if you come from corporate. Engineers make amazing franchisees; they're systematic," she said, adding they helped an ex-Nike executive get into the rubbish-removal business.

Part of the attraction for franchisees is that most companies do not require prior experience in the industry. Instead the corporate office offers specific training on running a small business, provides marketing and advertising help, gives product-purchasing breaks, and offers the chance to network with other franchise owners.

That support comes at a price, usually beginning with a franchise fee ($25,000-$50,000) for the rights to use the name, systems, trademarks; a royalty fee (4-10 percent of revenue); and a national advertising fee (1-2 percent of monthly revenue) (see chart).

When exploring whether owning a franchise is the right choice, FranNet puts the client through a series of assessments, identifying the person as an "achiever" (go-getter, sales-oriented), "emulator" (image-oriented, empire builders), "belonger" (offers corporate support, likes proven systems) or "societal conscious" (makes a difference, contributes to society).

The achiever/belonger might find a good fit with business coaching or home health care; the person with the social conscience could do well in tutoring or running a day care business, Fagan said.

"Where someone's an achiever, we show them three or four businesses and they just run with it," Young added.

"People come in wanting to look at 7-11, Subway, and we send them in a different direction," Fagan said.

"Food is an up-and-down cycle. How many cups do you have to sell to pay $5,000 rent? We have a client, who wanted to open a yogurt store, now looking at the sign-manufacturing business," she added. Another now wraps Disney buses, at $10,000 a pop.

Ideally, a franchise business deals with something that can't be outsourced, has less expensive rent, fewer employees and more reliable employees — such as working with graphic designers rather than high school kids, Fagan said.

"We handle some food, but it's not our focus. We've been in business for 31 years and have found food is the toughest industry to sustain. The hours are tough. To many people we meet with, lifestyle is key. They want flexibility, want to take a little girl to dance or soccer, and they don't want to be a slave to business," she said.

And food businesses often come with a heftier investment, averaging $150,000, she said.

But close to 80 percent of their franchises have been approved by the Small Business Administration, meaning they only have to come up with one-third of the investment, and many are borrowing from their 401K retirement funds.

Looking back at the last couple of years, Young noted that many laid-off employees were drawn to opening their own franchise business. But sales of existing businesses definitely lagged, she said.

"The business-brokerage community did very poorly because revenues had been so drastically affected by many industries. They were down 20 to 30 percent in revenues; profitability was down. They really weren't sellable.

"I think it's coming back. We see such a difference this year, especially the second half, compared to '09 and '10," she added.

As for where to open a franchise, Fagan said that "Palo Alto is a prime place for franchises. Businesses are doing well. The population has made it through the recession. There are a lot of good tech firms. Even without Facebook, there are lots of good firms who like to use local people to do their services."

— Carol Blitzer

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