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Old 02-21-2017, 05:10 PM
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Default My adventure in franchising

Here is the short story version of my foray into franchising.

In 2009, I decided that I would have to leave corporate life, or I would die of a stroke or heart attack at a young age. I had some real estate investments, but I wanted to have an additional source of income that was substantial – enough to walk away from the man.

I looked at all kinds of franchises – yogurt, pizza, coffee, clothing, auto repair, tanning salons – pretty much everything. I happened on to a hair salon franchise that had not expanded into my area.

There were a few things that appealed to me about this:
1. You could start one of these franchises while you kept your job – a salon manager runs the place.
2. There is very little inventory to keep track of.
3. There are no accounts receivable.

So…in early 2011 I signed an agreement that would allow me to open up to 3 franchises. The franchise fee was $40,000. To open a salon, it was another $120,000 or so. Well I didn’t have another $120,000.

And surprise surprise, banks don’t lend money for new businesses. I found out that banks only do business lending when the loan is heavily collateralized with hard assets. Banks don’t really lend money at all. They effectively lend you your OWN money.

So…I looked to a rental house that I owned, that was worth around $150K. Sure enough, the bank would loan against that, and I borrowed $120K to open the first franchise.

I opened it in 2011. It was earning a profit within a few months. We stashed away the profit while paying back the home equity loan. In 2012, we would open our second location, this time using equity out of YET ANOTHER rental house that we owned. That location was making a profit within 6 weeks.

All combined, these two salons were earning around $120K a year. That, combined with my real estate investments and vacation rental management company, allowed me to give my notice at my company.

In 2015, we opened our third location. It has never made a dime. We spent $120K opening it, and it loses about $3,000 a month, and will likely from now on. We simply chose the wrong location. I suppose it could get to break even, but I doubt it.

The good news is that the other two salons do great, so net income including all three salons is still over $140K per year, and we think that number could approach $200K at some point.

We wanted to open a fourth and fifth, but salon number 3 kind of wrecked things for a bit. We certainly cannot afford to have another one of those.
I have no retirement accounts. I own this franchise business outright now with no debt, as well as around $600,000 equity of income-producing real estate, as well as a highly profitable vacation rental business. These are not only my current income, but also my future income.

I am functionally retired. I don’t care about what they say on CNBC, although when the markets are soaring, real estate prices are climbing, which presents some pretty tempting offers. I just had someone offer me $150,000 on a lot where a cabin of mine just burned. He said he just made a bunch in the stock market. I declined. I’m rebuilding a luxury cabin there that will hopefully produce $50K per year.

Most people my age are frantically saving for retirement, and hoping like heck that there isn’t a major bear market between now and then that could really screw the pooch.

Myself, I am not assuming business will always be good – I am constantly searching/seeking expansion opportunities in all areas. This will be my income sources for the rest of my life, for better or for worse.

Feel free to post questions. I'm pretty much an open book. I'll tell you the good, the bad, and the ugly.
disneysteve, scfr, 97guns and 2 others like this.
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Old 02-21-2017, 05:23 PM
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Thank you for sharing this.

And how true about banks not lending you money. Many people don't understand this. I don't remember who it was but some comedian years ago used to joke that the only way to get a loan was to go in and prove that you don't need it.

What are your plans for the money-losing location? Are you going to try and sell it? Of course, that might be difficult since when they look at the books, they will see that it isn't profitable. Unless you find someone who is convinced they can turn it around.
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Old 02-21-2017, 05:30 PM
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What are your reoccurring franchise fees?
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Old 02-21-2017, 07:26 PM
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How involved was the company in getting your franchise locations up and running? Help picking the locations or did you do that on your own?

What factors led to you passing on a Yogurt franchise? That happens to be one that has crossed my mind before.
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Old 02-21-2017, 07:39 PM
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1. We won't close the losing store, likely ever. Closing a location is very damaging to your overall brand image. Secondly, even though the location is in the red, it continuously brings new customers into the brand. So there is value to keeping it open even if it is operating at a loss.

2. Franchise fees are 6%. But we consider that a bargain for what we receive in return.

3. The franchisor is heavily involved in site selection. They do not want the location to fail because it casts a very negative light on them.

4. I skipped on the yogurt franchise because those seem to come and go with regularity, and food service has a host of challenges.

The big key for me is that when selecting a franchise, I didn't want a job. I know a fellow who did a pizza franchise for approx twice the $$$ as my deal, he works at it 60 hrs a week, and doesn't make what I make.
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Old 02-22-2017, 09:44 AM
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like you've said before, it really does take a leap of faith if you want to gain wealth fast, you gotta put your neck on the line
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Old 02-22-2017, 11:42 AM
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Texas,

Since we are on the topic, what franchises would you recommend beginners start with?
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Old 02-22-2017, 11:47 AM
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Originally Posted by james.hendrickson View Post
Texas,

Since we are on the topic, what franchises would you recommend beginners start with?
There would be a thousand different answers to that question, based on:

1. Your risk tolerance
2. Your interests
3. Your available capital
4. Your ROI expectations
5. Your preference on working the business or being absentee, etc.

There is no shoe that fits all or even most.
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Old 02-22-2017, 12:15 PM
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Originally Posted by TexasHusker View Post
There would be a thousand different answers to that question, based on:

1. Your risk tolerance
2. Your interests
3. Your available capital
4. Your ROI expectations
5. Your preference on working the business or being absentee, etc.

There is no shoe that fits all or even most.
Your location and the market saturation of different options would matter too. If there is a chain hair salon in every strip center, you may not want to open another one. If you would have the only yogurt shop around, maybe that would be a better option.
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* Despite the high cost of living, it remains very popular.
* Why should I pay for my daughter's education when she already knows everything?
* There are no shortcuts to anywhere worth going.
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Old 02-22-2017, 03:14 PM
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Your location and the market saturation of different options would matter too. If there is a chain hair salon in every strip center, you may not want to open another one. If you would have the only yogurt shop around, maybe that would be a better option.
I always thought that way too. But my franchiser said "It doesn't matter to us if Brand X is next door...our product will stand on its own."

Wendy's, McDonalds, Whataburger, and Burger King all often coexist together.

Believe it or not, there is actually quite a lot of differentiation with even haircuts. Customer convenience (low wait times and punctual service), staffing, technology, price, training, and service consistency are all key measures.

Since most hair salons can't even deliver customer convenience - much less the other measures - our franchise is comfortable going head to head with about anyone, if the demographics support it.
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Old 02-22-2017, 03:36 PM
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Believe it or not, there is actually quite a lot of differentiation with even haircuts. Customer convenience (low wait times and punctual service), staffing, technology, price, training, and service consistency are all key measures.
I am really not sure if the other salons in our area offer online check-in, but it is one of the reasons we continue to go to Great Clips. My DH gets a clipper cut and my DD just gets split ends cleaned up. No way are we waiting 30+ minutes for that. We check in before we leave the house and often are taken before we get a chance to sit down. All while others are sitting there waiting because we checked in before they walked in.
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Old 02-22-2017, 03:49 PM
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Originally Posted by james.hendrickson View Post
Since we are on the topic, what franchises would you recommend beginners start with?
I have no experience in franchising and agree with the others that there is no one shoe fits all answer to this.

That being said, I will toss out a recommendation that I believe has really great potential.

Soccer Shots

This youth sport has been experiencing tremendous growth in the U.S. Total estimated start up costs range from $32k to $39k.

https://www.soccershotsfranchising.com/the-numbers/
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Old 02-22-2017, 03:57 PM
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I always thought that way too. But my franchiser said "It doesn't matter to us if Brand X is next door...our product will stand on its own."

Wendy's, McDonalds, Whataburger, and Burger King all often coexist together.
I recall hearing something years ago, I think it might have been from an economics class, where the professor asked the students if they were planning to open a hamburger shop, would they rather open it right down the street from McDonald's or on the other side of town. Most of the students said on the other side of town so that they wouldn't be competing with McDonald's. The right answer, though, was down the street. As the professor explained, McDonald's had done extensive market research before choosing that location and they had determined that the best market for burgers was there. It would be better to be in that location, even with competition, than on the other side of town where burger sales probably wouldn't be as good.
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* Despite the high cost of living, it remains very popular.
* Why should I pay for my daughter's education when she already knows everything?
* There are no shortcuts to anywhere worth going.
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Old 02-22-2017, 05:21 PM
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I am really not sure if the other salons in our area offer online check-in, but it is one of the reasons we continue to go to Great Clips. My DH gets a clipper cut and my DD just gets split ends cleaned up. No way are we waiting 30+ minutes for that. We check in before we leave the house and often are taken before we get a chance to sit down. All while others are sitting there waiting because we checked in before they walked in.
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Old 02-22-2017, 07:57 PM
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I recall hearing something years ago, I think it might have been from an economics class, where the professor asked the students if they were planning to open a hamburger shop, would they rather open it right down the street from McDonald's or on the other side of town. Most of the students said on the other side of town so that they wouldn't be competing with McDonald's. The right answer, though, was down the street. As the professor explained, McDonald's had done extensive market research before choosing that location and they had determined that the best market for burgers was there. It would be better to be in that location, even with competition, than on the other side of town where burger sales probably wouldn't be as good.
This is correct. The franchisers have done their homework and if you ignore it, it is at your peril.

My haircut salons charge a very modest price. My first thought was "put one in the lower income side of town. Franchiser said "no way". Their research showed that they do very poorly in such areas. They do their best in UPPER income areas - most of our customers have a household income of $100K or more.

I asked the franchiser about this phenomenon. Many of our customers are degreed and have lived in other markets. They use our franchise wherever they live because it is something they know and trust. Additionally, our clientele is very busy - doctors, real estate professionals, soccer moms, etc. They don't have time for appointments, waiting around for an hour, or stupid prices for something that takes 15 minutes. Just get me in, give me a great haircut for $14, be friendly and professional, and I'll keep coming back. And be open on Saturday's, Sunday's, and evenings when it is convenient for ME.

The old salon model of making an appointment, waiting 45 minutes on a fake leather couch with a stack of 100 dingy fashion magazines, and then paying $35 for your 30 minute haircut from some tatted fellow with spiked purple hair...that model is a dinosaur.
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Old 02-22-2017, 08:16 PM
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This is correct. The franchisers have done their homework and if you ignore it, it is at your peril.

My haircut salons charge a very modest price. My first thought was "put one in the lower income side of town. Franchiser said "no way". Their research showed that they do very poorly in such areas. They do their best in UPPER income areas - most of our customers have a household income of $100K or more.

I asked the franchiser about this phenomenon. Many of our customers are degreed and have lived in other markets. They use our franchise wherever they live because it is something they know and trust. Additionally, our clientele is very busy - doctors, real estate professionals, soccer moms, etc. They don't have time for appointments, waiting around for an hour, or stupid prices for something that takes 15 minutes. Just get me in, give me a great haircut for $14, be friendly and professional, and I'll keep coming back. And be open on Saturday's, Sunday's, and evenings when it is convenient for ME.

The old salon model of making an appointment, waiting 45 minutes on a fake leather couch with a stack of 100 dingy fashion magazines, and then paying $35 for your 30 minute haircut from some tatted fellow with spiked purple hair...that model is a dinosaur.
$14?

We went to our local salon the week they were giving out calendars with multiple $8.99 & $9.99 haircut coupons. We also get a calendar in the mail that has coupons for multiple businesses in the area. The salon puts an $8.99 coupon in there for every other month, so we got 6 of those sometime in January.

We won't need a full price haircut until the end of summer at the earliest.
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Old 02-22-2017, 08:46 PM
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$14?

We went to our local salon the week they were giving out calendars with multiple $8.99 & $9.99 haircut coupons. We also get a calendar in the mail that has coupons for multiple businesses in the area. The salon puts an $8.99 coupon in there for every other month, so we got 6 of those sometime in January.

We won't need a full price haircut until the end of summer at the earliest.
They must be trying to build their business.

We have found that overly discounting the product cheapens its value in the eye of consumers. Soon, all of the customers expect something for nearly nothing and you have no price integrity.

We do very little discounting, although we offer a $2 off coupon if you return within 30 days.
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Old 02-22-2017, 09:04 PM
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The coupons we get are valid "at participating stores" in the city. So it isn't just this particular salon that is discounting the service.

Do your stylists receive an hourly wage plus tips, or just tips? Even when I see people using coupons, they are typically very generous with their tipping.

The tipping is always awkward when we all get cuts because they turn it into one transaction. We usually tip the same amount for all three stylists, but the one doing my hair definitely spends more time than the other two.
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Old 02-23-2017, 05:22 AM
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The coupons we get are valid "at participating stores" in the city. So it isn't just this particular salon that is discounting the service.

Do your stylists receive an hourly wage plus tips, or just tips? Even when I see people using coupons, they are typically very generous with their tipping.

The tipping is always awkward when we all get cuts because they turn it into one transaction. We usually tip the same amount for all three stylists, but the one doing my hair definitely spends more time than the other two.
Our stylists are hourly.
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Old 02-23-2017, 05:34 AM
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My first thought was "put one in the lower income side of town. Franchiser said "no way". Their research showed that they do very poorly in such areas. They do their best in UPPER income areas - most of our customers have a household income of $100K or more.
That makes perfect sense. I work in a poor area. My patients often don't go to salons to have their hair done. They do it themselves and for each other. While $14 sounds cheap to you and me, it sounds expensive to someone on a limited income when they have a friend/sister/neighbor/cousin who will do it for free.

I went to Hair Cuttery for years for the $13 haircut plus $2 tip. Then I bought myself a $15 pair of clippers and started doing it myself and have never gone back. But the point is that I fit the franchiser description perfectly. Six-figure income, busy professional, wants to get in and out, and doesn't want to blow a bunch of money for a simple service. No way would I set foot in one of those fancy upscale shops where the exact same haircut would cost me $40.
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* There are no shortcuts to anywhere worth going.
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