How to find and build a cash-cow franchise

How to find and build a cash-cow franchise

How to find and build a cash-cow franchise — even if you have very little cash of your own

We wouldn’t fault you for thinking that the best way to build significant wealth in franchising is to spend significant money up front. Or, to put it another way, you get what you pay for. While there’s an argument to be made for paying for quality, there’s another side to this coin: searching out value. The best way to illustrate value investing is by example, and Jim DiMarzo’s is particularly apt. The owner of an eight-year-old Vero Beach, Fla., real-estate-brokerage business, DiMarzo was looking around for new opportunities. After much research, he finally settled on a franchise from the Buyer’s Agent, a Memphis-based real-estate-brokerage chain representing buyers. Aside from the obvious synergy with his own real estate, his total investment was less than $15,000. Two years later, revenue is $8.5 million, and his five-year plan is to purchase one more unit in five years. “I’ve taken my business to a new level — and it cost me almost nothing,” DiMarzo says.As DiMarzo discovered, you don’t have to buy a Marriott or a McDonald’s to get respectable revenue in franchising. “Low-cost doesn’t have to mean low-return,” says Andrew Sherman, a partner with Katten Muchin & Zavis, a law firm in Washington, D.C., who specializes in franchises and emerging growth businesses. Average revenue of low-cost franchises like cleaning services was a not insignificant $102,751, according to the International Franchise Association (that’s for 1993, the most recent figures). And for others, like real-estate-brokerage franchises, the average revenue soars to $1,091,380. That’s not small potatoes, especially when you look at the cost of entry, which we’ve capped at $35,000 for the purposes of this article. (The average franchise start-up cost is about $143,000, according to a recent Gallup survey.)The key to value investing in franchising is the same as it is in the stock market: knowing how to spot and take advantage of bargains. To do it requires street-smart business planning, plenty of hard work, and a constant alertness to opportunities. “From day one, you must look for growth avenues,” says Cheryl Babcock, director of the Institute for Franchise Management at the University of St. Thomas in Minneapolis. Here’s what you need to know: Make a healthy choice. Your success hinges on the health of the franchise chain. If you select a dud franchisor, then with rare exceptions your unit will also fall flat, no matter how spectacular your performance. “You have to make sure you’re investing in a franchise that lends itself to growth,” says Sherman. How to know that? Of course, you should take basic steps like reading the disclosure statement and checking with current franchisees. But take some other steps as well. Talk with former franchisees. Make sure the company has adequate cash flow. And set as an absolute baseline requirement that the franchise must have been around for at least three years, says Babcock. Check the label. If you’re looking for growth with low start-up costs, bypass obscure franchise operations. Why? Because you want to hit the ground running. Customers should recognize your business and logo from the get-go, and that can happen only with an established name. Take Dave Jussel, the owner of a five-year-old ServiceMaster franchise in Phoenix. He had no trouble building a client list because the clients — mostly insurance companies using his services to clean up after floods, fires, and the like — knew of the franchise and its reputation. “We were well known in the business when we opened our doors,” Jussel says. “It made us an overnight McDonald’s instead of just Joe Hamburger.” An a!=ordable McDonald’s: you can’t beat that, now, can you?Think big. This holds true even if you’re on a minuscule budget. Before plunking down your cash, make sure you have the option to grow your territory as soon as you can. At Coit Services, for example, a Burlingame, Calif.–based carpet- and upholstery-cleaning franchise, fast growth is a corporate imperative. Although prospective franchisees are encouraged to purchase large metro areas as territories right o!= the bat, people who can’t a!=ord to open many units are allowed to expand slowly. Think different. The typical growth track involves becoming an area developer, ultimately working with other franchisees for a percentage of their start-up fees and royalties. But there are other growth strategies. Sacramento, Calif.–based Mr. Rooter franchisee Je!= Rubie traded his bargain-basement plumbing franchise for a bigger unit in the same chain. Four years ago Rubie bought his first Mr. Rooter in the area surrounding Chico, Calif. (population: 185,000). He paid $25,000 for it and grew it to $45,000 in monthly revenue in less than two years. Then he swapped it for a location in Sacramento (population: 1 million), which was doing only $20,000 a month. Crazy deal? Hardly. Not only did Rubie pick up some cash in the trade; he retooled this underachiever so that it’s now pulling in $140,000 a month.Another option: Buy a franchise that lets you expand your services as you grow. The better you do, the more variety you can o!=er, thus increasing sales to existing customers and picking up new clients at the same time. Ten years ago Darryl Rockwitt bought an “A” Quik Services shoe-repair franchise in Smyrna, Ga. (“A” Quik o!=ers 16 di!=erent service options, from shoe repair to laundry pickup and delivery.) This franchise — which he was running out of his car — did so well that he added pickup and drop-o!= of dry cleaning (a service coordinated with local, franchise-a!=iliated cleaners). Three years later, Rockwitt moved to storefront space in a mall, adding key cutting and knife sharpening to his roster of services. Revenue has more than doubled every year since then, he says.Keep costs down. Low-cost franchises generally need to pay greater attention to the bottom line than their behemoth brothers do. St. Louis–based Buyer’s Agent franchisee Ted Wilding, who has had 50 percent annual sales growth since he opened for business seven years ago, follows a strict, no-frills approach. He still uses a $500 phone system from Radio Shack that he bought when he started (he did the wiring himself) and a secondhand copier. You can also look to fellow franchisees to help you cut costs. By teaming up with colleagues, you can save in a bundle of ways, from paying for a joint ad to getting a discount on the services of an accountant. Rockwitt of “A” Quik, for example, splits a $1,000 a month yellow-pages ad with nine other franchisees; he’s able to buy a significantly larger space than he could a!=ord on his own.Find the right location. One drawback of buying a low-cost franchise is that the parent corporation, the franchisor, doesn’t usually have the resources to conduct the kind of in-depth location-scouting research that higher-priced guys do. So, be prepared to do your own homework. Before buying in, ServiceMaster’s Jussel analyzed information he purchased from the publishers of two telephone directories. This information consisted of demographic statistics like household incomes in the Phoenix area. Jussel cross-referenced the data with a map showing the locations of franchisees. Ultimately his research led him to select a territory in western Phoenix. Though Jussel won’t give out revenue figures, he says his income has grown substantially since he started.Anthony A. Martino, 65Founder of AAMCO Transmissions (1956; ranked 94 in the Success Franchise Gold 100 for 1998), MAACO Enterprises (1972; ranked 8 in the Success Franchise Gold 100), Sparks Tune-Up (1982), and the Goddard School for Early Childhood Development (1988) Current status: Active in MAACO and the Goddard School Systemwide sales: $380 million projected for 1998Units: 545 MAACO Auto Painting & Bodyworks shops; 55 branches of the Goddard SchoolHow he got started: “After starting my own auto-repair shop, I noticed that transmissions were often a problem for my customers. So, in the 1950s, I opened AAMCO Transmissions. Soon afterward, I opened six shops, but I ran out of money to keep expanding. One of my friends suggested franchising. I teamed up with a partner, Robert Morgan, and started selling franchises in 1962. When I sold out in 1967, I’d made it the largest transmission franchise chain in the world.”Smart moves: “Not long after cashing out of AAMCO, I noticed another hole in the market. You either had to pay for an expensive paint job for your car at the dealer or custom shop or go to a mom-and-pop shop that would do a cheap job. The market was completely fragmented. In 1972, I personally developed a pilot shop for what became MAACO, a national auto-painting and body-repair chain that delivers high-quality service.“I look for growth niches, no matter what the business. When I became involved in the Goddard School in 1988, it was because I’d found a hole in the market when it came to quality daycare for the middle class. A former employee had bought two child-care centers and approached me for investment capital. I was now the money man, the way Bob Morgan had been for me.” Best advice: “Develop a business format that can continually produce profits in a growth industry. If you can provide value and make a profit, you’ll be around a long time. What keeps franchisees going is the ability to achieve. Failure is a demotivator.”A

Posted by on December 18, 1999

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