Christmas Decor is a very interesting franchise, and one of the classic examples of making a business from providing a service people are willing to pay for that makes lives easier (like the weekly dog cleanup services). The franchisees are Christmas house and yard designers, with any kind of lighted scene you can imagine. The franchise is great to provide winter income for those who make most of their money in warm weather (lawn care, nurseries, fence or irrigation builders, etc.). The minimum project is about $3,000 for the customer, and that includes installation and removal of the lights and decoration. The web site claims:

$200 million last year was spent on decorating services during the holidays. With over 800% growth in the past six years, now is the perfect time to begin your Christmas Decor franchise.

It looks like a high margin rental and services business, especially business clients. The concept is a winner, I believe. The devil is the numbers, of course, and a franchisee would have to figure out how many homes can realistically be done and what contribution margins would be to make the personal income worth the time and aggrevation. Most home and business owners are unaware of the service so advertising and PR are important and expensive. But, word of mouth advertising is likely very high.

Here is an article (and another and another) from Entrepreneur Mag.

From Christmas Decor’s web site:

Start up Costs/Working Capital?
This is one of the least expensive businesses to get into because costly equipment is seldom required. For each full service installation crew we estimate ladders and tools at $750-$950, and a start up inventory of $3,000-$5,000. Each additional crew will have about the same cost in ladders and tools, but inventory should be increased about $2,000 per crew.

More Financial Requirements:

start up capital: $10,000 to $30,000
total investment: $45,000 to $100,000

Fees:
-Franchise: $17,500 for terrirtory of 100,000 customers
-Royalty: 4.5%
-Advertising: $180 a year or 20% of the royalty payment

43 Burger King franchisees operating 1,112 restaurants filed for bankruptcy in the past 5 years, almost 15% of all Burger King units. While costs rose for franchisees (utilities, labor and food), total customer flow and average sales per customer did not. The price wars between McDonald’s, Hardee’s/Carl’s, and Wendy’s did not help. Many franchisees are highly leveraged, so a reduction in in cash flows put a serious strain on finding the money to service the debt.

Burger King charges a $50,000 franchise fee for a 20-year agreement. Renewal after 20 years is possible for another $50,000 fee, but only if the store meets the new Burger King operational and design standards, which usually require about $400,000 in upgrades. Additionally, the Burger King franchise agreement prevented multi-unit owners from closing underperforming stores.

One bright side is that Burger King reported the highest same-store sales in 10 years this past year. With so many franchisees in bad shape, speculative business owners can pick up a franchisee on the cheap. Any takers?

Update November 24, 2005:
Though I’m not a fan of NPR, you can listen to the audio of a reporter slam Burger King’s new “King” character marketing. He wrote this critical article.

Sorry for the gap in posting…my time has been clipped by some legal and political endeavors.

Everyone reading this blog should already know this basic pros and cons of opening a franchise, but here is short article listing most of the basic points.

We mentioned DoodyCalls in a previous post and liked the witty franchise, and it looks like they are expanding easily across the US. It’s the type of service that may make a good acquisition candidate for one of the many cleaning or maid services.

Cold Stone has grown very quickly, though the franchisees I’ve spoken to say their store are barely churning a positive operating cash flow. Ice cream catering is becoming a popular side business for the franchisees, especially at kids parties and bar mitzvah where parents are willing to spend big bucks.

I’m surprised to see Panera Bread franchises selling for only about $1.3 million each which include repurchasing some area development rights in Indiana.

Entreprenuer Magazine wrote an informative introduction to the kiosk and cart business a few years ago.  It a good place to start when deciding if a kiosk location is for you.  A Maui Wowi kiosk is picture to the left.

I’m sticking with my prediction and reasoning that soup focused franchises such as Simply Soup Co., Zoup, and San Francisco Soup Co. will be one of the fastest growing QSR segments.

My favorite soup is Butternut Squash, by the way 😉

Related: 

• soup posts at Franchise Pundit
  
• Insightful articles about Zoup:  article 1, article 2

When I first heard of a chili franchises 10 years ago, I thought it was a stupid idea.  How often are people really going to each chili?  Then I spent time in Cincinnati, OH, home of Skyline Chili and Goldstar Chili.  I soon became a loyal fan, endulging in 4-ways (spaghetti noodles, chili, mustard, onions and cheese) and Cheese Coneys (hot dog, chili, cheese) like I never imagined.  Apparently, the chili has a hint of chocolate and licorice that adds to the uniquely smooth flavor and addiction.

Skyline Chili is the champion in Cincinnati and the surrounding markets.  It’s so popular that fans often try to duplicate the secret Skyline Chili recipe at home.  Of course, a small minority of people hate the chili with equal passion.

Each restaurant has a drive through and inside seating resembling a 1960’s diner.  Skyline is open late for the night crowd coming home from the bars.  The business lunch crowd is big, and so is the early evening with families and college students.

Fransmart’s Red Rock Chili Company looks similar, but I have no experience with it. 

Skyline Chili, Inc. is currently franchising in the states of Ohio, Indiana, Kentucky, Michigan, Pennsylvania (western), West Virginia and Florida.  Residents of the following states may not purchase a franchise: California, Hawaii, Illinois, Maryland, Minnesota, New York, North Dakota, South Dakota, Oregon, Rhode Island, Virginia, Washington or Wisconsin.

Background Skyline Chili Research:

• article 1
• customer reviews
• customer review
• photo

 Pros:

• Proven successful concept in Cincinnati
• Fast preparation times
• Fun food and atmosphere
• Reasonable franchise fee ($20,000), royalty (4%), and advertising (4%)
• Small space needs: 2,800 square feet; free standing, store front, strip center, end cap

Cons:

• Chili must be purchased from franchisor
• Franchise popularity may take extra time to build if no other chili franchises are in the market
• High Average net worth and total investment is $650,000
• High Average Number of Employees: 15 FT, 20 PT

From a concept standpoint, this niche QSR play is a winner.  From a profitability standpoint, I do not have enough data to comment.

"Speaking a language other than English is not only disrespectful, it’s also prohibited" allegedly read the sign posted at a Supercuts on Michigan Avenue in Chicago.

The stylists claim Supercuts managers prohibited foreign languages (Spanish) from being spoken by employees anywhere on the business property, including break rooms. 

Is this prohibition of speaking foreign languages even in private conversations where customers can’t hear (in break rooms) a violation of the of the 1964 Civil Rights Act that prohibits employment discrimination based on national origin?   Probably yes.  But, the Suprecuts franchisee (owner of 20 Supercuts) denies such a policy existed as alleged.

The Equal Employment Opportunity Commission ("EEOC") joined the stylist in a civil law suit against the Supercuts franchisee. 

The EEOC has already given direct guidance on this issue.

…an employer’s rule which require employees to speak English at all times, including during their work break and lunch time, is one example of an employment practice which discriminates against persons whose primary language is not English.

However, an employer may require employees to speak only English at certain times and this would not be discriminatory, if the employer shows that the rule is justified by business necessity. The employer must clearly inform its employees of the general circumstances under which they are required to speak only English and the consequences of violating the rule.

If the reported facts are accurate, the EEOC will probably win this one.

Whether the EEOC’s regulations goes too far in interferring with employer-employee relationships is a debate worth having.

Do you love animals?  Sometimes the best franchise opportunities are the ones you’ve never thought of and are a labor of love.  Here are some I found unique and interesting:

• Camp Bow Wow: canine day care center (article)
• Doody Calls: scheduled yard clean ups of your dog poo
• The Pet Pantry: scheduled local delivery of pet food
• Wag My Tail:  pet grooming (free pickup & delivery  )
• Interquest Detection Canines:  trains dogs for contraband and drug detection
• Pets Are Inn:  pet hotel

So, you bought a franchise and it’s been successful for a few years and now you want to sell it.  The franchisor reserves some influence and financial discouragement.  The two biggest considerations given to the franchisor are:

1. Right of first refusal – the franchisor can match your highest legitimate offer and buy your franchise
2. Transfer fee – a fee you must pay to the franchisor for the privilege of transferring your licensing rights and obligations to another party

Sample Transfer fees:

FOOD:

• Pizza Factory: $12,000
• Quizno’s: $5,000
• Dominic’s of New York: $1,000 + 6% of sales price
• Submarina: $1,000
• Cheeburger Cheeburger: $12,250
• Pizza Patron: $5,000
• The Dugout: $5,000
• Arby’s: $13,500
• Doc Green’s Gourmet Salad: negotiated at time of sale
• Jerq’zine:  $10,000
• Original Hamburger Stand: $250
• Sub Station II: $5,000
• Steak-Out: $18,750
• Fazoli’s: Reaonable attorney, accounting, training and other related costs

OTHER:

• Bartercard: 10% of sales price
• Herman’s World of Sports: $12,500
• Sears Carpet and Upholstery: $3,000 – $6,000 (depends on market size)
• Stone Mountain Carpet Mill Outlet: $2,500
• Screenz:  $5,000
• Tax Centers of America: $1,000
• Sports Clips: $25,000
• Fantastic Sams: $20,000 or 10% of sales price (whichever is greater)
• Hair Cuttery: $5,000 ($0 if franchisee for 5+ years)
• Fastframe: 5-10% of purchase price

We the People is a paralegal document preparation service.  People typically use their service for simple legal documents and court filings (name change, non-contested divorce, wills, incorporation).  The company provides customers with forms to fill out with a pen, and the franchisee then sends the form off to a processing center located in the state.  One to seven days later (14 days max), the forms are sent back to the franchisee to give to the customer.  The franchisee may also offer to file the forms with the appropriate court for an additional fee.  The processing center takes a 25% cut of the document charge.  

No legal training is required.  Franchisees are basically a sales and marketing arm for the processing centers.  Franchisees are not allowed to alter any document or provide any service not performed exclusively by the processing center.  

Franchisees are free to set their prices above the mandatory minimum.  For example, restraining orders will run customers $100, a noncontested divorce run $400. (article listing more services and fees)

The company was founded in 1996, purchased by a couple in California, and recently sold to Dollar Financial Corp. (NASDAQ: DLLR) in March, 2005.  Dollar plans to also open the store in conjunction with the Dollar Financial stores (like H&R Blocks).

The experience for customers is somewhat odd if you have previous experience speaking with a lawyer.  We the People employees can’t recommend a form, can’t point you in the right direction, and can’t discuss specific facts about your problem.  All the employees can do is generally describe a form and offer a form booklet to fill out.  Recommending a form or solution is considered engaging in the practice of law, and it can subject the franchisee to fines, jail, or liability for damages resulting from the legal "advice".  When you walk into a We the People, you are simply asked, "What form would you like to fill out?"  

I visited one.  There was one man on the phone trying to explain three different types of divorces.   I was promptly greeted by the other employee asking me which form I wanted to fill out.  I said incorporation and will, and she lept into her sales pitch with a brochure, eager to hand me a paper form to fill out.

The franchisor’s disclosed litigation in the UFOC is staggering.  The company has 13 cases pending and 12 concluded cases that range from unauthorized practice of law to fraud.  Several franchisees have sued the company for fraud and unfair business practices.

From their UFOC…

Franchise Fee: $89,500 (ouch!)
Total Investment: $116,000 – $152,000
Exclusive Territory: usually 2 miles (at discretion of Company)
You must be Notary before opening
Supervising Attorney fee (mandatory): $200/month
"We the People" Do it yourself legal books: 50% off retail price
Time to locate a site after signing Agreement: 90 days (if no site selected, franchise fee may be refunded less $10,000)
Time to Commence Business after signing the Agreement:   120 days
Document Processing Fee:  25% of total customer charge
Royalty on any other products or services: 25% of gross sales
Advertising Co-op:  4-6% of gross revenue
Promotional Fund: 2-4% of gross revenue
Independent Advertising:  $2,000 or 8% of gross revenue (whichever is greater)
Franchise renewal fee: $2,500
Current transfer fee (charge to sell the business):  $7,500
Advice from company fee:  $250/day
Square feet (usually in strip mall):  about 1,000 square feet
Included Training:  5 days in Santa Barbara, California
Phonebook ad requirements:  Must maintain a bold listing
Internet sales from your territory:  15% of company’s net profit is paid to franchisee
Personal Guarantees: Franchisees must personally guarantee the entire Franchise Agreement and all payments due to franchisor
Time to cure default under agreement: 10 days or franchise can be terminated
Litigation:  All disputes must be arbitrated in Pennsylvania

If this franchise can throw off about $20,000 in extra cash flow AFTER paying all expenses and salaries (including the franchisee), then this can be worthwhile investment.  Mandatory royalty, advertising, promotional fees total over 18%, plus the 25% commission earned by We the People to process each document.  So there goes 43% off the gross before paying any operating expenses. 

Let’s make this simple.  If the business is open 300 days per year, and sales total $1,600 per day (that’s about 8 $200 sales each day, which to me seems very high), that will generate $320,000 in sales, minus 43% is fees is $137,600 to pay all rent, salaries, other operating expenses, and still earn a return on your $150,000 investment.  No thanks!

Here is an existing franchise for sale in New York, asking price is less than $250,000.  Gross revenue is also $250,000 and they claim $75,000 in profit (sellers discretionary cash), so that is before taking a salary.  Remeber that beside your fair salary, you should be earning a return on your investment of at least 10% ($15,000/year). 

Pros:

• little competition
• easy business to run
• virtually no inventory to manage
• seems to be relaxed on granting franchisee’s site preferences

Cons:

• nasty past litigation by franchisees
• assistance after your intial 5 days of training is charged at $250/day plus expenses
• high fees
• no brand recognition

I’m especially attracted to non-food franchises, but this one I wouldn’t buy!

Panaderia Taza is a coffeehouse targeted specifically at Hispanics with Spanish music, pastries, churritos and Mexican newspapers.  They’ve been getting good press lately and I thought I’d give our readers a heads up on this soon-to-be franchise.

NPR did a short profile on them.  Listen to the MP3. 

 Follow up to Franchisor as Exlusive Supplier (Krispy Kreme case)

More on the Krispy Kreme and Franchisee lawsuit:

Court documents filed in the case paint a cloudy financial picture for Sweet Traditions. In an affidavit, Sigurdson said a "continued catastrophic decline" in sales contributed to net losses of $1.2 million in 2003 and $3.2 million in 2004 and an operating loss of $2.2 million so far this year for Sweet Traditions.

He blamed Krispy Kreme for pressuring the franchise to expand too quickly, for overcharging it on supplies and equipment and for failing to promote the brand, even though Sweet Traditions has paid $2.5 million into a "brand fund."

As a follow up to the previous post Is caring for the elderly a profitable business?, I’ve been looking at a few other elderly care franchises.  My preliminary favorite is Comfort Keepers. All the non-medical elderly care franchises have roughly a $25K franchise fee and 5% royalties. But, Comfort Keepers sets itself apart with its strong brand recognition, blanket coverage of the United States and internationally, and smart online marketing. Why not buy into a system with the largest network of referrals and strongest brand recognition?  With social and demographic trending in a favorable direction, and heavy referrals from its web site, and barring any show stoppers from their franchise agreement, I’d lean towards buying it.

I was surprised to learn from this article that Quiznos pays commissions to its Florida outside real estate firm, Kotis Properties, to sign up franchisees. Possible conflict of interest?

In addition to helping find sites, Kotis Properties will also be helping Quiznos sign up new franchisees.

It seems this sales practice, along with high pressure seminars, is becoming more common in the franchise industry.

What can go wrong if your franchisor is also your supplier? A lot. Krispy Kreme, along with many franchisees such as Dippin’ Dots, are required to buy supplies direcly from the company. So what’s the big deal, right? Well, what do you do if they threaten to not ship supplies unless you agree to new terms, such as payment upfront instead of the normal 30-35 days? If you don’t comply you can’t operate your business. That was the unfortunate situation faced by a few Krispy Kreme franchisees. Krispy Kreme threatened to stop shipments unless it received $1 million that is in dispute (it didn’t say if those were late payments or due to new Agreement terms sought by Krispy Kream). In this case, the franchisees were lucky and the court agreed with their argument. The court ordered Krispy Kreme to resume shipment of supplies under the traditional terms of the agreement. The order includes assertions by the franchisee that Krispy Kreme –

"has refused to ship Plaintiff ingredients, supplies, and equipment, including doughnut mix – all of which are necessary to Plaintiff’s business operations – on terms previously agreed to by the parties."

Developing a high margin specialty niche in a stagnant industry is usually a formula for success (see Panera Bread’s twist on fast food, Sports Clips and Snip Its on hair cutting, Starbucks on coffee, Applebee’s on chain restaurants). Foot Solutions is a new shoe retailer looking to capitalize customers who require more comfortable foot wear, namely sufferers of diabetes, obesity and arthritis.

Concerns
Foot Solution’s web site details the anticipated $200,000 investment to open a store. The company expects the franchisee to sink $65,000 in shoe inventory before opening, yikes!

Foot Solutions requires you use only their vendors and approved products. And you must use their supply division to order opening orders, construction materials, fixtures and equipment. Of course, you should now be asking yourself, “How much more will I be paying if I was permitted to source the products myself?” Be sure to benchmark the average vendor and supply mark-up by asking the franchisor or franchisees for the actual price sheets.

Part of the reason to buy a franchise is the ability to buy into an already strong brand name. It is unlikely that customers are already familiar with the Foot Solutions brand (though it is a descriptive trademark, so intuitively people will generally understand the business’s purpose). There is also the dynamic of how many Foot Solutions can a local market support. Is it one, three, five? Niche franchises are much more susceptible to competition so the protected territory is an important issue.

There is a heightened liability risk. Franchisees receive training in foot pathology and physiology along with understanding the feet and related problems and symptoms. What if your sales person recommends a shoe that worsens a customers foot problem, or a customer relies on what they believe is your superior medical advice? Make sure you have high liability insurance coverage.

On the brights side…
From their FAQ:

Is this business profitable?

We cannot tell you how much you will make. Each store’s profit will depend on a number of factors such as total sales, monthly rent, labor cost, etc. We can tell you that most of the products you will be offering have an approximate cost of 40%, based upon our suggested selling prices.

The population trends favor this sort of business – obesity, diabetes and number of seniors are increasing. Local doctors can help generate a steady flow of referral customers. The customers are usually require special shoes and are willing to pay the hefty premium, with an average sale is expected to be about $200.

Conclusion
This is the sort of play that can work and be sustainable through referrals from customers and doctors. The margins are high and one or two trained staff can mind the store. I’d tentatively buy it!

Update 7-9-2005: Here is another article that includes pictures of their digital foot scanning machine.