By Kevin Kipp
Just because you’re a franchisee, doesn’t mean you have to claw your way up Hamburger Hill.
You could run a PR firm. Creativeworks LLC is based in St. Louis and has a franchise in Indianapolis. Steve Leek, president of the company, says, “We consider ourselves a full service ad agency and marketing firm. We provide systems and branding; [franchisees] develop a business on their own.”
PR’s not your game? You could run an American Pool Players Association billiards league. Or you could sell the Biologix enzyme that eats grease. Or fix up tile surfaces as one of 30 Surface Specialists Systems franchisees.
Saturation may have a lot to do with the emergence of diverse franchises like these. “Business-to-business is really where it’s at,” Leek says. “All the other commodities have already been considered for franchising. How many different ways can you make hamburgers?”
The St. Louis region is headquarters to enough franchisors that the Washington, D.C.-based International Franchise Association regards this market as a “hotbed of franchising activity.”
Moreover, the nature of these local ventures “dispels a few stereotypes about franchising,” says Don DeBolt, president of the IFA. Besides breaking the burger-and-fry mode, he points out that franchisors who call St. Louis home are generally not McBehemoths; most have less than 100 units.
Exceptions, like Medicine Shoppe, exist. Headquartered on Lindbergh Boulevard, its 1,295 units ranks it fifth among drugstore chains in America, according to Elaine Cooper in the company’s legal and corporate departments.
St. Louis franchisors also dispel another of the stereotypes DeBolt cites, by having “relatively low investment requirements.” Opening a Medicine Shoppe drug store, for instance, requires between $69,600 and $120,000.
Bread, however, takes a little more dough. St. Louis Bread Company-owning, Webster Groves-based Panera Bread Inc.’s franchise department’s automated outgoing message says you should have net worth of at yeast...er...at least $3 million, liquid assets of $1.2 million, and a willingness to open a minimum of five bakery-cafes in three years.
Diane Drollinger, Panera’s public relations manager provided information that estimates start-up costs at $599,648 to $965,725. Included is the $35,000 franchise fee. Real estate is not.
Less than a million, but still, if that’s too painful, consider Creativeworks. For $45,000, they entered an Area Development Agreement (ADA) for Indianapolis, a territory that Leek says will support four offices.
Four more units are under contract for an ADA in Boston. Applications for franchises in a Sunbelt market and a West Coast market also are under review. “The barrier to entry is [that franchisee’s have] some kind of advertising or marketing background,” Leek says.
Even smaller is the up-front fee that’s required to queue up for an American Poolplayers Association franchise.
Scott Nenninger, marketing director with the Lake St. Louis-based outfit, says $6,220 can make you one of their league operators. You “run the tournaments, administer the handicap system, sign up people locally and manage the league.”
You profit from the weekly fees paid by teams of five-to-eight players, who compete in three sessions of 10-to-16 weeks each year. Nenninger’s team and their opponents, for instance, each pay $25 per week to their league operator. He says 180 individuals operate 218 leagues.
The APA starts you out with start-up, marketing and support materials, and handicapping software. The software is significant.
“Our players are amateurs, but because of the handicap system they can play in competitive circumstances at virtually any level of ability,” Nenninger says.
Whether the franchise is a Kinko’s Copy shop, a Sylvan Learning Center, or a Burger Doodle eat-in-the-car restaurant, franchisees are paying for an idea, a territory, a system, a brand name, products, supplies, advertising, or all of the above.
In addition to the up-front licensing fee, franchisors usually collect a percentage of franchisees’ monthly sales. It’s called a royalty.
For instance, the APA gets 20 percent of their league operators’ gross. Nenninger points out that the operators have 45 people in the national office they can call on for help.
At Creativeworks, the royalty is 5 percent. The company provides what Leek calls “internal support for production capacity overflow.”
So for instance, if a franchisee’s client needs a TV ad, but the franchisee has no expertise in video production, Leek says the parent company “can provide them a solution, whether it’s education or we do it for them through our network of qualified suppliers. We call it a ‘virtual commissary.’”
Panera collects 5 percent royalty also, and provides recognized branding and operational support.
Some franchisors also collect a percentage of sales, which is plowed back into advertising the brand: a little like taking a bite of Johnny’s dessert, but making him eat his greens.
None of the fees and percentages should be a surprise, though. According to Gary Roiter a partner in Thompson Coburn’s Belleville office, the Federal Trade Commission regulates the activities of prospective franchisors, in response to what he calls “perceived abuses.”
“In the ’70s, the FTC came up with a disclosure format. Since then some states have come up with their own disclosure requirements to regulate this industry.”
Illinois is one such registration state. Missouri is not, although Roiter says there are some statutes affecting closing and transferring franchises.
Either way, selling franchises requires one to bare the soul, maybe more.
Start with all fees, from franchise fees and ongoing royalties, to advertising and marketing fees, and “hidden costs sometimes associated with restrictions on the use suppliers, or items to be bought from franchisor.”
And: the nature of the business, the business experience of the franchisor’s principals; protected trademarks, patents and copyrights; contents of the franchise agreement; circumstances of termination or transfer of the franchise; and costs associated therewith.
Any earnings claims must be documented in the disclosure statement with support from the track record of either company-owned stores or independent franchisees.
Roiter tells his clients who are thinking about a franchise that disclosures and franchise agreements are public documents: “For a nominal fee, you can go to any state they’re registered in and get current copies.
“What’s interesting,” he continues, “is that part of the disclosure statement is three years of financial statements...audited financial statements.”
The franchisor’s bed of roses gets even thornier, because losing a legal dispute with a franchisee carries liability for attorney’s fees plus trebled damages. “That’s why it’s extremely important to comply with every aspect of the disclosure requirements,” Roiter says.
More Roiter: “The first thing you’ll hear from an aggrieved franchisee’s attorney is that the franchisor is not delivering [what was promised.] ‘I’m not making the money I thought I’d make.’ But notice the difference. Not the money you said I’d make. There’s the rub.”
Other typical areas of dispute include support, training, delivery of product and advertising.
Non-compliance is also subject to sanctions from the FTC and some states’ attorneys general offices.
They may start with a slap-on-the-wrist reprimand, or an injunction not to do again whatever it was you shouldn’t have done in the first place. Early transgressions may incur a $1,000 fine, Roiter says, then maybe $10,000.
Most regulators’ pet peeves, he says, is franchisors who “take money from a prospect without complying with the disclosure laws. You can’t even talk to an individual until you deliver proper disclosure documents.”
If a bright side of all the requirements can be conjured up for franchisors—at least legitimate operators, which most are—it might be that all this disclosure contributes to prospective franchisees’ confidence in pursuing a deal.
The terms of the agreement are knowable.
And just in case some unscrupulous franchisor repeatedly abuses the rules, Roiter says regulators can impose the death penalty: “They can shut you down.”
Kevin Kipp runs Bubble Communications, a creative services and community relations firm in St. Charles.
