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l i s a f l y n n , a mo t h e r o f t w o y o u n g b o y s, n e v e r r e l i s h e d having her children photographed. For her, birth announcements and holiday portraits meant either spending a small fortune for a profession-al photographer who didn’t cater to colicky clientele or settling for cheesy props and fuzzy blue backdrops at the mall portrait studio. “I thought, ‘ T here has got to be a better way to get your kid’s picture taken,’ ” says F lynn, who was running her own marketing and advertising firm at the time. She looked into buying a franchise that specialized in children’s photography but, unimpressed, created her own studio instead. In 2006 she opened W hippersnappers Studio, a kid-friendly portrait specialist in Bend, O re., that captures kids, families, and even pets in high-qual-ity photographs. “ We never tell the kids to ‘say cheese,’ ” says Flynn, who charges $195 for a 45-minute sitting and all the digital images that re-sult. “Instead, we focus on captur ing their unique little personalities.”

FRANCHISING IS ONE WAY TO EXPAND YOUR BRAND QUICKLY AND

RELATIVELY CHEAPLY, BUT IT’S NOT FOR EVERYONE. HERE’S WHAT YOU NEED TO KNOW.

By Sarah MaxPhotograph by Steven Bloch

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Flynn strives to maintain her photo studio’s

“boutique” feel

W hippersnappers, which has fou r employees and $200,000 in annual rev-enue, broke even in its first quarter and has been prof itable since. I n 2007 F ly-nn decided it was time to ta ke the con-cept on the road. She considered open-ing other company-ow ned studios, but that came with the risks, costs, and has-sles of setting up multiple locations and hiring managers for each. It would also be time-consuming and require F ly nn to spend too much time away from her family. T here was a better option, as she saw it, and that was to franchise.

T he r e a r e nea r l y a m i l l ion f r a n-chised establishments in the U.S., and it ’s not just t he usua l suspects of fast food and reta i l. Says Ken net h F r an k-lin, president of Pittsbu rgh-based con-sultancy F ranchise Developments and a mi nor it y pa r t ner i n t he fou ndi ng of the A rby ’s f ranchise: “ I ’ve had cl ients in manufactu r ing, agr icultu ral, health care, and professional ser vices.”

Most entrepreneu rs who franchise do so for one reason: grow th. I n 2002, Je K linger and Chuck Runyon found-ed H ast i ngs ( M i n n.)-based A ny t i me F itness, an exercise club that stays open 24/7 by giving members their ow n key-cards and installing elaborate security. By the next year, K linger says, franchis-es “ were sel l ing l i ke hotca kes.” Today t he 80 -employee, $20 m illion compa-ny ow ns 10 of its ow n clubs a nd h as more t han 850 f ranch ises (wh ich em-ploy their ow n sta ) nationw ide. Such grow th would have been next to impos-sible had the business not franchised.

A t first glance, franchising seems like an easy and cheap way to get your com-pany grow i ng. You come up w it h t he idea and figure out how to make it work universally. T hen you give franchisees the rights to your trademark and brand, a crash course in r unning the business, and a detailed operations manual. In re-turn for not having to reinvent the wheel, franchisees pay an up-front fee—usually between $10,000 and $50,000—as well as ongoing royalties that typically range f rom 4% to 10% of sales. H igh-volu me f ranchises tend to charge smaller roy-alties than ser vice businesses w ith less volume.

to become franchisees. T hose might be dow nsized executives searching for job stability or retirees wanting an alter na-tive to the stock market.

A nd franchisees have a vested inter-est i n you r company ’s success. “Com-panies that don’t use f ranchising need to wor r y about hi r i ng good managers and maintaining a high level of ser vice, often i n mar kets t hat are demograph-ica l l y d i ve r se,” says D en n is C a mp -bell, an assistant professor at H ar vard Business School. F ranchising is a way to f i nd pa r t ners w ho k now t he ma r-ket wel l and, because t hey ’re ow ners, are mot ivated to ma ke t he busi nesses

Because franchisees pay for most of the up-f ront costs, such as leasing and improving a site and buying equipment, franchising is relatively risk-free for en-trepreneu rs. “ You can captu re market share more rapidly t han you cou ld on your ow n and, by and large, [do it] w ith ot her people’s money,” says M att hew Shay, president and ce o of t he Wash-ington (D.C.)-based Inter national F ran-chise A ssn. A t the same time, you can keep you r overhead, pay roll, and mar-ket i ng costs i n check. I n a t ight lend-ing climate, instead of seek ing grow th capital f rom ban ks or investors, you’ll be searching for indiv iduals w ith cash

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K E EP I T SI M PL E Uncomplicated concepts tend to be good f ranchise candidates because they have wide appeal and are easy to launch

Roeber franchised the family business

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work. T his was a key consideration for F lynn, who wor ried about maintaining her studio’s “boutique” feel. “ I wanted an ow ner in ever y studio,” says F lynn.

Still, franchising has its ow n draw-backs. Not on ly do you need to weigh t he f r a nch ise model aga i nst comp a-ny-ow ned locat ions, you a lso need to make sure your business is a good can-didate in the fi rst place. A nd if you de-cide you r business can be easily repli-cated, even in diverse markets, there’s t he t ime commitment. You cou ld f i nd you rself logging 100-hou r work weeks fine-tuning you r procedu res and spell-ing out ever y last one in a detailed train-ing manual. Legal fees, consulting fees, marketing expenses, and suppor t sta w ill run you any where from $50,000 to $250,000, says F ran k lin. You ty pical-ly need to sell at least 10 u nits to brea k even, though the number w ill var y de-pendi ng on how much you spend set-

t i ng up t he f r a nch ise a nd how much you ear n in royalties, he says.

But t he biggest hu rdle for f ranchi-sors isn’t the cost or the hassle. It’s this: “ E ver y t i me you put a f r a nch isee i n business, you give them your logo, your brand, and every detail about your oper-ations,” says Shay. “Some entrepreneurs just don’t ever want to lose control.”

If you decide that f ranchising is for you , be p rep a red for a ton of p aper-wor k. You’l l w ant an attor ney to help you t h rough t he worst of it, and may-be a franchising consultant as well. But w riting the operating manual, perhaps the most onerous task, is li kely going to fal l squarely i n you r lap. T hen t here’s the matter of f inding f ranchisees who won ’t r u n you r busi ness—a n d you r good name—into the ground.

S I M P L E C O N C E P T S W O R K

How can you tell if your business would franchise well? If you’re still str uggling to ma ke you r f lagship wor k, eit her f i-nancially or operationally, that’s a good i nd icat ion t hat you’re not ready, says Lane F isher, a senior partner w ith F ish-er Zucker, a Philadelphia law fi r m spe-cializing in franchising. A nd have you taken a vacation lately? If your manage-ment can’t r u n the business profitably i n you r absence, chances are f ranchi-sees won’t be able to, either.

T he n t he r e ’s t he b u si ness itsel f. “Some businesses are just too complex to f r a nch ise,” says F isher. A ny busi-ness that requires a specialized sk ill or creative talent—say, a restaurant w ith a complicated menu or a boutique cloth-ing store—isn’t ideal. Relatively simple concepts tend to do t he best because they appeal to a diverse pool of would-be franchisees and are quick to launch.

T hat w as t he case for O range T ree H ot Dogs, a Jacksonv ille ( F la.) restau-rant that opened in 1968. “People were always asking us why we didn’t have lo-cations in other places,” says A nn Roe-ber, who took over t he busi ness f rom her parents in 1999 and opened two oth-er locations. “But opening more stores on our ow n didn’t really make sense for us.” T hey did n’t want to have to over-see more restaurants or employees, and

W hile a slowdown in the economy might mean franchising is a more attractive way for entrepreneurs to expand their businesses, the credit crunch also means that potential franchisees will likely have a tougher time scaring up the money to get going. In the past, franchisees often tapped their home equity or retirement funds to raise initial cash, then turned to lenders to finance the balance. Now they’ve been dealt a triple whammy: Home val-ues and stock values have plummeted, and lenders are demanding anywhere from 15% to 30% cash up front, then scrutiniz-ing credit scores and business plans.

No industry is immune, but some fran-chise concepts are getting hit harder than others, says Reginald Heard, president and CEO of Bankers One Capital, a Dan-bury (Conn.)-based debt and private equity placement firm. Hardest hit: full-service restaurants, along with other chains seen as vulnerable to consumer belt-tightening.

Still, there’s plenty franchisors can do to help would-be partners navigate the tough lending market. Some are trimming their startup fees and helping prospective fran-chisees cut costs by, say, working out of their homes instead of using leased spac-es, says Matthew Shay, president and of the International Franchise Assn. You should also register with the Small Business Administration’s Franchise Registry (fran-chiseregistry.com), a national database of franchises that qualify for SBA-guaranteed loans. “Smaller banks rely on this registry when approving loans,” says Heard.

It’s also in your best interest to study up on which institutions are still lending mon-ey and build relationships with those lend-ers. “Look at banks that are true balance-sheet lenders,” says Heard. “They don’t rely on the secondary markets to make loans, and they’re still lending.” You can also look beyond traditional lending: Cer-tified development companies, which are nonprofits set up to boost local economic development, o er funding for capital as-sets, such as real estate or equipment.

Loans for Franchisees

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T he Federal T rade Commission re-qu i res t h at you p rov ide p rospect i ve franchisees w ith a disclosure document containing a summar y of the franchise ag reement, bac kg rou nd i n for mat ion on t he cor por at ion , f i n a nc i a l st ate-ments, and details on how the compa-ny operates. “It ’s a ‘war ts-and-all’ por-t r a it of t he f r a nch isor,” says D en n is W ieczorek, partner at d l a Piper, a Chi-cago law f i r m. Some 14 states requ i re f ranchisors to submit one before sel l-

ing f ranchises in that state. T he docu-ment needs to be updated annually, and also when there are significant changes to the company. If you haven’t already, you’ll also need to ma ke su re the f ran-ch ise name ca n be t r adema r ked, a nd file for federal trademark protections.

A s your attorney draws up the neces-sar y documents, you’ll be w riting your business’ operating manual. T he goal? “If I got hit by a bus, someone could run the business smoothly,” says F lynn. T he

it would have been slow going at best. I n 20 06, Roeber made t he f i rst steps tow a r d f r a nch isi ng. It took her n i ne months to w r ite the operations manu-al. T hen she spent $50,000 in legal and consulting fees—less than a quarter the cost of opening a single locat ion—and getting the paper work ready. She also opened a fourth location that could dou-ble as a training center and commissary for O r ange T ree’s secret on ion sauce, slaw dressing, and drink. “ W hen people saw that we were franchising, the phone started ringing o the hook,” says Roe-ber, whose company has 25 employees in four locations and $1.2 million in annual sales. A lready the company has sold 10 franchises, including one to a couple in their 30s and another to retirees whose ch i ld ren r u n t he busi ness. F r a nch i-sees pay O range T ree an initial $17,500 fee and a 4% royalt y on sales, plus 1% of sales that go into a marketing fu nd. Roeber doesn’t expect to start earning a profit on the franchises until all 10 stores have opened.

F I N D G O O D A D V I S E R S

M any wou ld-be f ranchisors hi re con-sultants to help them thin k through the busi ness plan and out l i ne t he detai ls. You r best bet is to wor k w it h consu l-tants w ith experience in your industr y. You can search for one on the Web site of t he I nter nat ional F r anch ise A ssn., at franchise.org. Most consultants pre-fer to work on a retainer, but Shay says many w ill wor k on an hou rly or proj-ect basis, pa r t icu la rly w it h new com-panies.

You’ll also need good legal help. A n attor ney w ho specia l i zes i n t h is a rea can put toget her t he f r anch ise agree-ment and the franchise disclosu re doc-u ments. T he for mer spel ls out detai ls such as the up-f ront fee, royalties, and other fi nancial details. It also outlines w hat you must prov ide you r f r anch i-sees, and exactly what you’ll get in re-tu r n. W hile many parts of the contract a re sta nda r d, you r attor ney ca n help you add key cont i ngencies. F ly n n, for example, can specif y which props can be used in photographs and monitor the final photos sold to customers.

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Klinger and Runyon have more than 850 franchises

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many loyal customers; some jumped at the opportunity to buy in.

A s eager as F ly n n is to sel l W h ip-p e r sn ap p e r s f r a nch ises, she is t a k-ing her time to fi nd the r ight par tners. “ I w ant f r anch isees w ho a re passion-ate about t he concept, but capable of fol low i ng a system,” says F ly n n. She tu r ned aw ay several prospect ive buy-ers before sel l i ng her f i rst f r a nch ise in A ugust, to longtime clients who are mov i ng to For t Col l i ns, Colo. T hese people rea l ly “get ” t he busi ness, says F ly n n: T hey wor ked i n t he Bend flag-sh ip for a cou p le of mont hs to “ test d r ive” t he st ud io before buy i ng. Now t hey ’re su re it ’s a g reat f it, says F ly-n n, a nd t hey have a head sta r t on t he 1,127 steps it w ill take to open their ow n W hippersnappers Studio.

from royalties, says F ranchise Develop-ments’ F r an k li n. F ly n n is cha rgi ng a $45,000 fee and 6% in royalties. F ran-chisees also pay 2% of sales into a W hip-persnappers advertising fund. But she doesn’t expect the franchise operation to make money until at least 15 locations are up and r unning, which means she, l i ke ot her ent repreneu rs, needs to be careful about who she chooses.

W hile some franchisors hire brokers to match them w ith franchisees, many do t he mar ket i ng on t hei r ow n, usi ng t he t r ade show ci rcu it, adver t isi ng i n related publications, through their Web sites, and in their stores. M any of A ny-t i me F it ness’s f r a nch isees have been clients or acquaintances of other f ran-chisees. O range T ree Hot Dogs was an established brand in Jacksonv ille w ith

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manual must spell out the mu ndane—finding the right location, working w ith approved vendors, and pricing—as well as t he id iosy ncr asies t hat ma ke you r busi ness u n ique. F ly n n decided ex-actly what needed to go into each loca-tion, from the camera equipment to the m&m’s in the waiting area, and spelled it out i n a manua l t it led, “ Now w hat? E ver ything You Need to K now to O pen Your Store in 1,127 E asy Steps.”

You’ll need similar attention to detail. “ T he No. 1 cause of the demise of chains is lack of consistency,” says Heidi Neck, an associate professor of entrepreneur-ship at Babson College. If the quality of just one location is subpar, that can hurt the brand across the board.

E ven the most meticulous operating manual doesn’t provide you w ith 100% insurance against bumbling or cor r upt f r a nch isees. T hat w as a ser ious con-sideration for Countr y Place Living, an I r v i ng ( Tex.) compa ny fou nded more t ha n 25 yea rs ago t hat r u ns assisted-liv i ng residences. I n 2006 t he compa-ny, then operat ing five homes w ith 40 employees, started franchising. “O ne of the things we really had to thin k about was whether we could keep ou r brand i nteg r it y a nd ensu re t hat t he qu a l it y of care was as good as at ou r cor porate residences,” says C y nt h ia G a r t ma n, the company ’s president and chief op-e r at i n g of f ice r. T he com p a n y too k many steps to maintain control over the brand, adding a clause to its f ranchise agreement that allows Countr y Place to take over an operation if anything goes ser iously w rong. T he $4.5 million, 60-employee company now operates eight compa ny-ow ned residences a nd h as sold three franchises.

C H O O S E W I T H C A R E

O f cou rse, the best way to protect you r company is to ma ke su re nothing goes w rong i n t he f i rst place. T hat mea ns f i nd i ng f r a nch isees w ho u ndersta nd you r brand and are committed to r u n-ni ng t he busi ness t he w ay you’ve out-l i ned it. I n most cases, t he one-t i me franchise fee w ill cover only your initial costs, plus training and suppor t of the franchisee. Most of your profit will come

WATCH CL OSE LY Nothing kills a f ranchise like lack of consistency—if just one location is subpar, it can comp romise the enti re brand

Franchise FraternityFranchisees will come to your business with a mix of backgrounds. Below, four franchisees—including one famous one—tell why they decided to take the plunge.

Earvin “Magic” JohnsonLOS ANGELES24 HOUR FITNESS, HEALTH CLUB

“Magic Johnson Enterprises focuses on owning businesses that serve urban commu-nities, and 24 Hour Fitness seemed like a natural fit. For example, the clubs have child care, and we get a lot of single mothers who need that. We were also able to tweak some things to better fit the urban customer. For example, you won’t hear elevator music in any of our clubs. It has to be Motown or R&B.”

Jimmie ThomasORANGE PARK, FLA.FOOT SOLUTIONS, SHOES AND ORTHOTICS

“I’d broken my ankle about 30 years ago and became really interested in the bio-mechanics of feet. It was almost a hobby. So opening a Foot Solutions franchise, and helping people find shoes and orthotics that work for them, seemed like a really good fit.”

Joe TartagliaNEW YORKPLAY N TRADE, VIDEO GAME RETAILER

“I was looking for a business that would benefit from the growth in gaming. I guess other people are thinking the same thing. Since I opened this store in Union Square in June 2008, at least a dozen people have come in to talk to me about the franchise.”

Chris GallagherCHICAGOCARTRIDGE WORLD, PRINTER CARTRIDGE RECYCLING

“When my brother and I decided to buy a franchise together, we hired a franchise broker. [He] put us through a series of tests to pinpoint our strengths and core values. We started with 80 companies, spoke with 16 on the phone, and visited three before buying our first Cartridge World franchise in 2005. We now own three.”