Top 3 Franchise Opportunities in Washington State for 2017

health-food-franchise

With 2017 just round the corner, I want to share with my readers the top 3 franchise opportunities I see in Washington State at the start of the new year.

Boutique Fitness

The big-box gyms are now considered dinosaurs in the booming industry of personal fitness and healthy lifestyles. Personal training studios show amazing and rapid results…and at the same time build a sense of belonging and loyalty due to their interactive, community-based nature.

As per capita disposable incomes rise in both urban and suburban areas of Washington state, more individuals have the financial resources necessary to join instructor-led kickboxing, spinning, pilates or HIIT classes.

Over the next several years, the growing elderly population will be integral to driving demand for yoga memberships. Yoga has been directly linked to improving elderly patients’ sleep quality and overall quality of life. Lack of sleep among geriatric individuals translates to greater risk for numerous health problems, including physical and psychiatric morbidity. Hence, many industry-watchers believe healthcare providers will increasingly start prescribing yoga to their older patients.

Similarly, Pilates has become very popular with the urban women as a low-impact exercise. Many studios now offer “fusion classes” by combining Pilates with other exercises under the guidance of accredited instructors.

Merchandise sales, like clothing, mats, and equipment, offer another revenue stream.

Historically, January is the strongest month for this industry due to resolutions and the weather being more conducive to indoor exercise in Washington and much of the United States.

Key success factors in this industry include a good location, effective marketing by creating attractive packages, driving referrals among local clients, and recruiting and retaining top instructors.

Boutique fitness is well suited for semi-absentee owners with the skill set to effectively lead a general manager responsible for membership and day to day operations.  A common mistake to avoid is focusing on training background vs. a sales background.  Sales drives the business.

Fast Casual Food

Eating habits are fast-changing as consumers have become increasingly health conscious, demanding alternatives to traditional fast food options. Although major fast food chains have grudgingly responded by slashing prices and adding healthy items to their menus, they have been much slower than the market itself. Also, several of the largest fast food chains have shifted growth focus outside the US, further creating a vacuum that has led to the emergence of “super food cafes”.

The potential is really strong in more upscale neighborhoods where the median household income approaches or exceeds $100K.

Franchisors in this category sometimes seek candidates with food experience, though it is not critical to success.   It requires actively keeping track of sales and inventory to understand what is selling. The owner needs to respond quickly by ordering more of the big sellers and scaling back those with lower turns.

The cost structure is much lower than traditional casual restaurants given the relatively lower need for trained manpower.

Hair Salons

It is not just a haircut anymore!  Regardless of income, everyone needs a haircut every five weeks, making it one of the most recession-proof businesses. The “look good, feel good, perform at your best” trend has taken hold of barbershops and salons.  Additional services such as straight razor shaves, manicures, and men’s coloring are a few of the additional services growing in popularity.

Salons upsell a variety of high-margin hair and skin care products to a “captive audience”. This can be up to 15% of their total revenue.

Add to that the amazing potential to market the services through huge platforms like Instagram, Facebook and Yelp. After all it is about making clients look their best.

Increased sophistication among the buyers has led to the emergence of specialty salons catering to men and children.

Employing trained, licensed staff allows the owner to run the business on the side, in a semi-absentee ownership model. With a strong location and brand, hair care is one of the best and fastest growing franchise opportunities in Washington.

These franchise opportunities are especially attractive in the Puget Sound and Spokane markets due to regional demographic and economic trends and relative lower penetration (vs. California, for example).

I will be happy to share more of my research and specific openings with those who are considering any of these franchise opportunities in Washington. Please connect with me here.

Financing Guide for the First-Time Franchisee

franchise financing

The Problem with Franchise Financing

In my experience, it is extremely discouraging for first-time franchisees to learn the hard way that the lending sources who helped them buy their house or car may not be able to help them finance their franchise opportunity. The long and difficult financing process (made more complex after the recent US economic recession) can take the wind out of the candidate’s sails, and many unprepared individuals give up at the first or second financing setback. No one can help an entrepreneur who has already given up!

On the other hand, the difficulty in new franchise financing has created a huge drag on most franchisor’s growth, and many companies have responded by focusing on attracting more candidates to make up for the elevated attrition rates in first-time franchisees. My job is includes helping create a successful outcome for candidates already in the process.)

Hope exists for those who do their due diligence, seek appropriate counsel, and persevere. Many franchises have proven business models, plenty of brand awareness and standardized systems and processes. In fact, the first-time franchisee has a huge advantage over other entrepreneurs who are generally considered to carry much greater financial risk.

This is a quick financing reference for the new franchisee.

Conventional Methods of Financing

  • Rollover for Business Startups (ROBS): A ROBS provider (such as Guidant, FranFund or Benetrends) helps you take money from a retirement account, a 401(k) or traditional IRA, and invest it in your franchise without paying income taxes or early withdrawal penalties. A ROBS is not a loan, so there is no principal or interest to pay off, and you can use your income to grow your franchise.

  • Banks and Credit Unions: Believe it or not, franchisees have a statistically much easier time getting loans from banks or credit unions than other startup entrepreneurs. This is because most franchisees are associated with proven business models and well-recognized brands. The application process is slow and very detailed, and the lending institution might ask for personal collateral. However, you will be able to get lower interest rates. Bigger the brand, usually more favorable the terms!
  • Franchise Financing Company: These third-party lenders have an existing relationship with the franchiser or franchise advisor. Due to process standardization, the application process and the funding will be faster than the other sources. Franchise-Specific Lenders help franchisees avoid a slow, long, tedious process, although these options carry higher interest rates than banks, they offer speed, convenience, and usually require no collateral. Their specialization in financing franchises is invaluable to first-time franchisees.
  • SBA Loan: Don’t forget to look into the Small Business Administration’s 7(a) Loan Program. The Small Business Administration (SBA) doesn’t make loans— however, it guarantees loans made by banks and credit unions. These loans become more secured from the lender’s perspective because the SBA promises to pick up some of the cost in the event that you cannot repay the loan. Franchisees have a higher chance of being approved for SBA loans than other entrepreneurs. The SBA has a registry of pre-qualified franchises they’ve vetted in the past. If your brand isn’t on the list, you can still apply, but the process will take longer.
  • Online Lender: These lenders are much faster and easier to qualify for than a bank or SBA loan, which means they are ideal for businesses that need financing in a hurry. However, online lenders normally require at least a few months in business before they trust you enough to grant you capital. The longer you’ve been in business, the better your interest rates and fees will be. Here are some examples: https://www.ondeck.com, https://streetshares.comhttp://www.fundingcircle.com.
  • Line of Credit (LoC): For temporary cash flow issues or equipment repairs, you may want to get a line of credit. Much like a credit card, you can draw from your credit line at any time, and you’re only charged interest on the capital you’ve drawn. Lines of credit are available from a variety of sources including banks, credit unions, and online lenders.
  • Equipment Financing Companies: If your franchise requires expensive equipment, consider getting an equipment loan or lease. Loans are best for equipment that will be useful for a long time; leases are best for equipment that wears out quickly or becomes obsolete. Whichever you choose, you’ll be able to pay in regular installments instead of paying the full cost up-front.
  • Grants and Incentives: Start by checking your state and local job-creation programs. Some offer tax credits, loans, or other incentives to start new businesses. Also, see if you qualify for additional financial assistance through governmental programs for veterans, minorities, and women.
  • Franchisor Financing: Parent corporations can help with financing, too. Many have in-house financing programs, are partnered with low-interest lending institutions, offer equipment buy-backs and discounted franchising fees, or sometimes even just provide useful recommendations.

How Does a Franchisor Help

  • Participate in the SBA Registry: When a franchise joins the SBA registry, their franchise agreement is reviewed by the SBA and approved for use with all franchisees. This means loan applications for franchises on the Franchise Registry are processed faster by the SBA and its lenders, because the respective franchise agreements do not need to be reviewed for each individual franchisee situation.
  • Provide a Bank Credit Report: This document gives your lender basic information about the franchise in terms that banks easily understand, which can speed up the approval process. Legally, the franchise agreement is the only document the franchise can use with you personally as the franchisee, so they can only provide a bank credit report directly to the lender. But if you’re working with a lender, let your franchise know and ask them to send over a credit report.
  • Offer a List of Lenders: In my experience, most brands have a shortlist of lenders with whom they know their franchisees have been successful. If you talk to your franchise or your advisor, you may be able to get a list of recommended lenders who may be more amenable to approving your application. This will help you avoid wasting precious time completing applications with lenders who have a low rate of approval for franchise loans.
  • Match You with a Lender: Either the franchisor has an in-house financing specialist who helps guide franchisees through the lending process, or they partner with a third-party advisors, such as myself, to help facilitate financing. Franchisees of big brands are able to quickly and easily navigate through the lending process, and work with lenders who are known entities to the brands.
  • Build Strategic Relationships with Lenders: Some brands or advisors build relationships with particular lenders over time, to the point that those lenders effectively allocate funds for a certain number of qualifying franchisees of that brand. Since the lender already trusts the brand or franchise advisor, the qualification standards may be more forgiving than they would be through an independent lender.
  • Guarantee Your Loan: Occasionally, certain franchises are willing to help their franchisees qualify for loans by offering a guarantee program. These programs work similar to the SBA’s loan guarantee program, meaning that the franchise takes responsibility for paying back a certain percentage of the loan in the event that you as the franchisee may default on your loan payments. Guarantee programs can make a huge difference in a franchisee’s ability to qualify for a loan. However, they are rare, and typically offered on a case by case basis. If you’re already working with a franchise but struggling to obtain financing, ask if a guarantee program is something they’d be willing to consider.
  • Provide Internal Financing: Knowing that financing is typically the primary barrier to opening a franchise or adding additional units to an existing franchise network, a few franchisors have gone so far as to take the lending process in house. This is a trend that experts agree will continue into the future to reduce dependence on outside funding sources to grow the franchise company.
  • Waive Startup Fees: The specifics of franchisor fee (startup charges, royalties, marketing, etc) are included in the Franchisor Disclosure Document (FDD). Some franchisors do end up waiving a portion of their fees to lower the financial burden on the new franchisees.

Most first-time franchisees consider financing as one of their biggest hurdles in their entrepreneurial journey. Sadly, what works for one candidate may not work for another, and sometimes raising money at unfavorable terms is worse than not getting financing at all. I am happy to offer a free consultation to those who are considering franchise ownership, but are not sure they understand all the options when it comes to funding.

Protect Yourself From Franchise Fraud

fraud

To the trained eye, franchise fraud patterns are easily evident. However, far too many first-time entrepreneurs still fall victim to scammers. Why are there so many franchise scams? Well, in my experience, there’s no single contributor to franchise fraud — ease of developing a franchise, absence of common standards in franchise regulations and the way franchises are bought and sold, are a few reasons. But the biggest factor, by far, behind franchise scams is that there are still eager individuals who jump into a long-term commitment without doing their homework, and want to “go it alone”.

COMMON RED FLAGS

1. High-pressure to commit quickly

If the franchisor is pressuring you to sign contracts without allowing you to properly read them first. The franchisor who will not immediately disclose all relevant details to your satisfacion, is probably trying to hide something. The franchise may not be profitable or worse, a scam. You should never feel incentivized to buy a franchise quickly or penalized for delaying your decision, for any reason. Remember that you are making a long-term investment on behalf of your family, and you should be cautious with your decision.

2. Confusing contract

If the franchise agreement seems intentionally wordy, confusing, and in some parts completely nonsensical…before you sign anything, be sure you learn all of the relevant information, make sure your questions are answered fully in layman’s terms and you understand the answers.  Consider asking a franchise attorney to review the agreement.

3. Guarantees

There is always a risk associated with buying a new franchise – or any business, for that matter. Even the franchisor with the most successful concept cannot, by law, promise that you will make a profit. Be wary of those who make loose claims about money that can be made with practically no risk.  If the earnings claim is not represented in the FDD under item 19, be wary.  As the old saying goes — if it is too good to be true, it usually is.

4. Unjustified franchise fees

Startup fees can sometimes be legitimately high. However, some crooked franchisors have sold franchises and disappeared with the initial franchise fee. You should know whether the initial fees include services or goods that are to be received by the franchisee before the franchise business opens. Beyond the initial setup fees, are you being offered bloated costs for liability insurance, CRM system, billing service and other professional services?

PROTECT YOURSELF

It is difficult to avoid being the target of a fraud if you don’t know the warning signs. Law requires that every franchisor file a Franchise Disclosure Document, which is a document required by Federal Trade Commission (www.ftc.gov) about the franchise opportunity. Make sure that the copy you receive from the franchisor is identical to the copy submitted to the FTC.

1. Speak to your potential peers

It is surprising how many candidates skip this simple but important step in due diligence. Contact existing franchisees with prepared questions.  Speak to new franchisees in the system and some that have been around awhile.  The million dollar question is:  “If you had it to do over, would you do it again?”

2. Online research

Go online and research news stories about the company and the industry. If the company is public, look at their SEC filings on www.google.com/finance. Visit their Web site and get information about their offerings. Compare the company to its competition — both franchised and non-franchised.

3. Franchisor interview

Ask them about the process they use in selecting franchisees. If you get the sense that they don’t select franchisees but are in the business of selling franchises, that’s a red flag.

4. Strength of brand

A franchise system relies heavily on its brand, and that brand is reinforced by how well the other franchisees perform. If the franchisor lets anyone who has money in the system and does not have selection criteria, then your investment will probably be at risk.

5. Visit the headquarters

Most franchisors will invite a candidate to visit their corporate office before awarding a franchise license.  Don’t attend an event until the majority of your due diligence is complete.

6. Relevant experience and management expertise

Does the company have experience in the business being offered? I’m not talking about a related business, but the exact business. Does management have a history of success? Does the franchise management know how to operate your business successfully? If not, what type of support are you likely to get? In general, a mix of executives with experience in the business and as successful franchisors is a great benefit to franchisees.

7. Financial review

What is the financial strength of the franchisor? Your investment will probably be significant. Does the franchisor have skin in the game? Do they have a history of profitability? Are they earning their revenue from royalties and other continuing sources of revenue, or are they relying primarily on the sale of the next franchise for their own cash flow? Ask the other franchisees in the system if they got value for their money. (Keep in mind, though, that franchisees new to the system may not even know yet.)

8. Lawsuits

What’s the franchisor’s litigation or regulatory history? Franchisors must disclose relevant litigation. Sometimes litigation is good. Any franchisor that enforces system standards will occasionally need to sue its franchisees. If they’re able to still maintain a good relationship with their other franchisees, that type of litigation is an indication of a strong and responsible franchisor because it limits your risks due to the actions of other franchisees. However, if there is a long history of lawsuits from franchisees listed in the disclosure documents, that’s not a good sign. You need to understand the basis for the lawsuits and make a decision based upon the facts. Your attorney or advisor can help you analyze the franchise litigation.

SUMMING UP

Thousands of attractive franchise opportunities are available today, and there’s absolutely no reason for you to settle for less than the best opportunity to match your lifestyle, risk tolerance and investment range. There’s a lot you can do to protect yourself from franchise fraud. The franchisor is required to provide you with a disclosure document. The disclosure document is an important tool for prospective franchisees to do their own due diligence.

If this is your only experience with franchising, your best bet is to have the assistance of a qualified expert. An experienced franchise advisor or consultant has the advantage of having been through the selling process many times.  Having operational and training experience with different franchisors is something many franchise advisors lack, so ask about their experience.   Sometimes, as in my case, this expertise comes at no out-of-pocket cost to the client. However, if you do go it alone, use this guide to substantially reduce your exposure to franchise fraud.

Best of luck!

Location, location, location!

The phenomenon of social media continues to creep into our daily lives. Whether you’re looking at a business advertisement, a television show or your favorite website, the social media widget is omniscient.

 

Let’s say that you’re well on your way to becoming a successful entrepreneur by this point. You have made the decision to go into franchising because you like the idea of being your own boss, contributing to your own bottom line and experiencing a limitless future. You’ve done your due diligence and selected a carefully crafted opportunity that matches up with your needs. You have a business plan and it’s been blessed by a financial advisor and an attorney. The stars are aligned for your success and it comes down to a question of where your business will be located.

 

 

How Big Is Franchising Anyway?

The number of franchise establishments in the United States has grown to 781,794 – the highest it has ever been. Along with the steady growth, the International Franchising Association (#IFA) projects the industry to continuing its impressive expansion for a fifth consecutive year.