Winmark Corp (formerly Grow Biz), franchisor of the retail stores Play It Again Sports, Once Upon a Child, Plato’s Closet and Music Go Round, has a new franchise concept called Wirth Business Credit. It’s mission is to help small businesses lease equipment.

Leasing can have many advantages for a small business owner: preservation of capital and credit for other expenses and investment in growth, simpler bookkeeping and tax reporting, tax advantages, improves financial ratios, etc.

Why would someone choose to lease from Wirth Business Credit over any of the other many leasing companies? I don’t know, unless their rates are cheaper and terms are more attractive. However, I doubt whether the tight structural constaints of a franchise is the best means to compete in a business where most sales comes down to price and, to a somewhat lesser extent, customer service.

Wirth charges around 9 percent to 14 percent today compared to a bank prime-lending rate of 8.25 percent, Morgan said. Winmark and its franchise owners earn a profit by building fees into the interest rate, much like points that are added to a home mortgage loan…..

Wirth President Mark Hooley said the company stands out from rivals because of its local presence, its automated leasing system that provides approvals in four hours or less, and the ability to finance up to 100 percent of equipment value…..

Wirth franchise owners pay an average of $60,000 to do business in a certain geographic area, including franchise, computer and marketing fees. In exchange, the company provides the brand, the business model, cash for leases, training, marketing and the collection of overdue leases.

I especially agree with the final comment in the article:

“Financing can be complicated and challenging,” Faras said. “But my part of the business is really about sales. You have to already understand sales.”

It often comes down to sales in a franchised or startup business.

There seems to be a constant flow of articles on discount broker franchises lately. Having recently gone through process of purchasing property using a friend who happens to be an excellent broker, I can recognize the value of paying 5-6% commission for that diamond-in-the-rough selling broker (or using a buyer’s broker who will split their commission with the seller’s broker) who is unconditionally looking out for your interests and not their personal wallet. Without that exteme level of certain dedication and loyalty, I would balk at paying the full commission to a selling broker and I would likely seek the services of a discount broker. As competition from discount brokers increase, more buyers and sellers will be able to command a commission rebate from their broker as well.

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• 2 (comments on the article by Redfin, a Seattle and San Francisco real estate services website)
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• 6 (newgroup discussion thread)

I stopped to read this press release because I’ve never heard of a retail radiator franchise before…1-800 Radiators looks interesting for those who enjoy autos and cold-calling sales. But, is it too narrow of a niche?

Tim Horton’s, a 2,885 upscale coffee and donut outlet, is entering the public capital markets of Canada.

The reporter characterized the IPO as “destined to go down as the most popular IPO this country has seen to date” and “The frenzy around this doughnut deal is putting Google to shame”. Is the author over embellishing? Tim Horton’s IPO buzz seems to be more in line with fellow Chipotle’s enthusiastic IPO, not the crazed delirium over Google’s IPO.

Is going public good for franchisees? I haven’t explored arguments on both sides, but my initial impression is no. The pressure to increase margins, meet analyst expectations, and pay for the increasing regulatory costs is going to increase the pressure for franchisors to squeeze more money and profit from their relationships with franchisees.

In the forum, we batted around the new meal preparation and assembly kitchens concept such as Super Suppers and Dream Dinners. There are lot of non-franchised startups, and they already have their own trade association called the Easy Meal Preparation Association. The general sentiment from the forum is that this concept is a “maybe”, with the big questions being

1. how much you can charge customers (and margins) before customers will just order restaurant takeout?
2. is the change of behavior and lifestyle too much to create a solid base of loyal customers?
3. how many competitors, if any, can enter the market and you still survive?  what if they have slightly lower prices and a nicer, larger facility and more creative menu?

A surprising celebrity newcomer is jumping in this arena – Suzanne Somers. Inc. magazine did a feature article and mentioned this tidbit.

And next? Suzanne’s Kitchen, an entry in the red-hot meal prep category, in which customers move from station to station inside retail stores, assembling family-size dishes from chopped meats, vegetables, and sauces. The first two outposts of Suzanne’s Kitchen, which Somers and her husband and business partner, Alan Hamel, expect to franchise, will open later this year.

Why is she getting in this business? I think it has more to do with an attempt to leverage her brand name to command higher franchise fees rather than this being an inherently superior and profitable business model. Certainly Somers will draw media attention to the industry, which currently suffers badly from low recognition amongst its target audience.

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.

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.

New smoothie franchises seem to be opening as fast as Starbucks and now Chipotle’s. Unlike coffee, a “smoothie” is not a staple of the American palate and never will be. Nonetheless, the smoothie business has been hot lately with the likes of Jamba Juice (who reinvented the market), Smoothie King, Maui Wowi, and Planet Smoothie dominating the marketplace. They’ve been riding the omnipresent “health” wave by using tasty fruits and vegetables and vitamin powders in their potions. But how long will smoothies be perceived as healthy? You should be asking that question if you are thinking of buying a smoothie franchise.

Just as financial markets always returning to the equilibrium, so do businesses. Eventually the product will commoditize, the market will saturate, and prices will drop (See the sub sandwich market).
The process can be accelerated by negative news, just as the low carb movement (which I followed for a while) subsided.

For example, if the national spotlight continues to highlight the high calorie count of smoothies defeating the impression of a healthy alternative to fast food, same store sales will suffer leaving smoothie franchisees with a lot of silent blenders. It’s already happening in the United Kingdom.

Mississippi’s The Sun Herald reports:

Thinking of ordering a smoothie for a healthful light snack between meals? Although these sweet fruity treats can be low in fat and rich in vitamins and nutrients, such as calcium and vitamin C, they can have a lot of sugar and calories. For example, a medium-sized Citrus Squeeze from smoothie chain Jamba Juice packs about five times as much sugar (103 grams) as a regular-sized Hershey’s milk chocolate bar (22 grams). It has 470 calories – more than a McDonald’s double cheeseburger (460 calories). Instead, try a lower-calorie smoothie option like of one of Jamba’s “Enlightened” smoothies.

The Wall Street Journal has an interesting article profiling an in-home elderly care franchisee.

Home Instead and the other senior-care franchisees pay caregivers somewhere between $8 and $12 an hour and charge clients about twice that amount. In the highly competitive Chicago market, the Melingers charge clients $18 an hour, with a minimum of two or three hours a day, or $180 a day for 24-hour care. They also provide a “rise and shine” or “tuck in” service, for $200 to $280 a week.

The Melingers declined to reveal just how lucrative their business is, but FranchiseHelp, a consulting firm in Elmsford, N.Y., provides some guidelines for similar businesses. In 2002, for example, a franchisee of Homewatch Caregivers in Denver, with 60 workers, took in gross revenues of $1,265,324 and paid out $1,141,578 in expenses that included royalties and the franchisee’s salary, leaving a profit of $123,746.

Their isn’t inventory to deal with, which is very nice. But that time is otherwise spent on finding and hiring responsible people they trust enough to send into an elderly person’s home. The franchisee said almost 1/2 the people don’t even show up for the their interviews and many quit after a few days. Ugh!

If you can maintain a steady staff, you can easily open a 2nd conierge style business, which we discussed perviously.

I’m neutral on elderly care franchises right now because they are heavily commonditized business (the market controls the fee level, it’s hard to charge more than $18/hr with all the competition). I am also hesitant when so much depends on finding qualified low wage employees that must work independently (unlike a retail location where managers can monitor what you do).

According to this 10-Q filed with the SEC by Papa John’s, average franchised store sales are 705k annually.

Papa John’s franchisees did increase sales 3.9% last quarter (Jan-March) compared to the same quarter last year.

Average weekly sales of franchised units: $13,563 ($705,276 annually)
Average weekly sales of company-owned: $15,075 ($783,900 annually)
* Why are the company owned stores outperforming franchisees by 11.15%?

The 10-Q speaks of one franchisee who sold his 19 restaurants with total annual revenues approximating $12.0 million ($631,578 per store) to a 3rd party. The restaurant sales were lower than the average by 11% or $70K, enough to obtain a loan writeoff from Papa John’s.

This isn’t good:

Domestic commissary sales increased 6.7% to $100.9 million for the first quarter of 2005, from $94.5 million in the comparable period, primarily due to higher cheese prices that were partially offset by lower volumes resulting from decreased restaurant transactions.

and this:

the first quarter 2004 operating margin was negatively impacted by the increased sales of lower margin promotional products

and this:

One group of 4 franchisees owning 33 franchises generated a $25,000 loss on $5.2 million of revenue, $4.6 million in operating expenses and other expenses (including G&A, depreciation and interest) totaling $600,000. Papa John’s also provided them with a large loan.

I do love their garlic dipping sauce for the crust that is included with each pizza!

Update 6-18-2005: Thanks to “Accountant” who in the comments pointed out my miscalculations. The post has been updated, including the title.

Update 6-19-2005: Thanks to “Ken King” who in the comments pointed out another miscalculation on my part. The post has been updated.

I’ve written a few articles on eBay drop offs. I was neutral on the franchise…

Pros:

• it’s a service people will use
• eBay buzz and hype is still strong
• all franchisors are charging the same 35% fee (for now)

Cons:

• the business is too simple to start, has no barriers to entry, new competitors will literally springing up overnight

existing used and consignment stores will soon add eBay sales

• the service will have to compete based on fees (who wants a constant lowering on margins?)

I’m sure I’ll be negative on the business within the next 5 years, but for now I’m staying neutral because the next 2-3 years will be strong.

Want proof the eBay drop off store is easy to start and run without a franchise? Campus Easy Sales recently set up shop on the Washington University in St. Louis campus. A couple of fulltime students thought it’d be a good idea and just started it. They do nothing different than any other franchise out there (the hold the item, take pictures of it, post an ad on ebay, ships the item after the auction ends, and send the seller their cut). However, the total fees add up to ONLY 24% COMMISSION off the first $500. Compare to other eBay drop offs who charge 35%. You can bet your dog’s favorite toy this puppy will see their commissions slashed to 25% or less in a few years.

Here are financial results from a Curves franchise. EBITDA is somewhat higher than I expected assuming these numbers accurately reflect the state of the business. It’s in Sarasota, FL and they project growing from 373 to to 500 members by the end of 2005. It’s large for a Curves, 2900 sq feet, and has the standard 12 workout stations and 12 recovery stations (those bouncy platforms). Let’s look at the numbers provided by the franchisee seller:

If these numbers are accurate, and place is run mostly by the part-time employees, then it’s asking price is only about 2x EBITDA, which sounds cheap. It doesn’t say if the expenses include the owner’s salary, but it’s probably safe to assume that it doesn’t. The owner has several part-time employees, but they must be “really part-time” because this franchisee only has on allocated $56,000 or $4,666 a month for rent, fees, operational expenses and owner’s/manager’s salary.

4-10-2005 Update:

This particular franchisee is earning its first year a 37% return on their $40,000 investment assuming $60,000 is allocated to either the owner’s salary or expenses for a full-time qualified manager. 37% is an excellent return. Keep in mind I’m working from unaudited and anonymous information. And as we saw from our Quiznos example, the devil is in the numbers things are usually more expensive than they appear.

This particular franchisee looks like a good deal. It is earning in its first year a 37% return on their $40,000 investment assuming $60,000 is allocated to either the owner’s salary or expenses for a full-time qualified manager. 37% is an excellent return. Keep in mind I’m working from unaudited and anonymous information. And as we saw from our Quiznos example, the devil is in the numbers things are usually more expensive than they appear.

positives

• national “buzz”
• low opportunity for employee theft
• customers tend to have a positive experience
• realistic possibility of positive cash flow the first year of operations
• a Curves franchise has very flexible real estate requirements
• it is a healthy, socially enriching venture

negatives

• 8% of all the franchisees out there are actively trying to sell their franchise (according to Curvesresales)
• If there is a profit margin, then competitors will quickly move in. Competitors will inevitably have a better business model, better facilities, and construct an improved workout system with better equipment. That will pressure Curves membership rates, retention and recruitment.
• Numerous clubs for sale have low membership levels, under 150 members
• Members may get bored of the same workout routine
• Typical health club equipment needs to be replaced in as little as every 3 years

I’ve changed my mind on Curves and think it is a very worthy and likely worthwhile venture. The modified womens-only workout system with a friendly, personable, and fun atmosphere is a winning formula. And Curves seems to have packaged it right. My biggest concern is obtaining and maintaining a profitable level of members in the face increasing competition.

(See our first post on Curves a few days ago for more background information and pictures)

I read an interesting article about Battery Plus. Their mainly in Canada but now expanding to the USA. I’ve heard of this franchise before but never really investigated the business. I have bought many after-market batteries for laptops and digital cameras before on eBay and Amazon and from miscellaneous stores I found on PriceGrabber for 75% under retail. It is true everyone uses batteries, and I think the store could work from a concept standpoint (I haven’t seen any financial numbers though). Most people don’t know where to go for batteries besides the limited selection at Best Buy and Circuit City. But, the biggest negatives I see are:

• high advertising costs to overcome the current zero brand recognition
• battery inventory turnover is probably quite low because there are such a wide array of electronics and computing devices
• mall kiosks seem a more appropriate cost effective way to sell these items and they will get free walk-by advertising
• storefronts can’t be dinky closest-like in size and feeling, so lease expenses will likely be higher than needed
• are batteries a commodity?
• Radio Shack seems in a much better position to capture this lucrative market

There are tons of eBay drop off stores popping up such as Orbit Drop, QuikDrop, and AuctionDrop’s relationship with The UPS Store . Many of them are franchises. None of the franchises have a household brand name, so the value of the franchise is in the training. Orbit Drop, for example, receives a fee of 35% of the selling price up to $501, then the percentage reduces free lessens as the sale price increases.

Is the franchise brand, training and support worth the $15,000 franchise few and 6% royalty? Probably not for someone with mild business savvy who has experience selling on eBay. $5,000 franchise fee + 3% royalty would be my limit, which is enough to pay for a good consultant to help you set up and maintain your business systems. Most high volume eBay sellers are already familiar with eBay and the eye-popping 3rd party eBay selling tools. If you are going to open your own store (besides regitering a state and federal trademark for you store’s name), go visit and learn from similar franchises in your area. Spend that $15,000 on your store and marketing.

I think the idea is good, and I was wondering when someone would start these. But, I question at this early stage in the industry whether the ongoing franchise fees of 5-6% will kill the margins need to be worthwhile. Look at other consignment and used reseller franchises such as Winmark’s Play It Again Sports to use eBay as another sales channel.

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April 7, 2005 UPDATE: Imagine this Sold is opening up their fist Canadina franchise. The franchise is fee is on the high side from what we’ve seen with others – $20,000 and for additional stores, $10,000 each. The royalty is 6% of net profit (all shipping & handling profits are excluded from net profits for royalty purposes). There is also a mandatory 4% “art work” fee which they claim is used to maintain signage designs (you still have to pay for all advertising media buys). The typical investment to open a store is between $120,000 and $180,000. That’s a lot of eBay sales ($6000,000 in sales would be needed to cover the high-end investment if you retain 30% of total sales as a selling fee).

According to recent articles, Curves is the fastest growing franchise in the world. Are Curves and other lady-only fitness clubs like Lady Fitness or Liberty Fitness good businesses for individual investment? Would I invest in this franchise? Why is Venture Link going to open 2,000 Curves Fitness Centers in Japan over a five-year period?

A Curves franchise is buying yourself a low-paying job

Let’s learn a little about the business. A typical Curves gym occupies an apartment-sized 1,200 square feet and has 10 to 12 machines along with springy recovery boards for walking or jogging between machines. Curves are found conveniently in strip malls and office parks. The outside could easily be confused with a doctor’s office (you can’t see inside from the sidewalk). I understand that women have simpler workout desires than males, and most women aren’t going to the gym to be picked up by slick guys.

But, I struggle to see Curves as a good investment for the typical franchisee, especially for absentee owners. Gross revenue for an average club with 300 $30 members is about $110,000 annually. The total operating requirements, administration, payroll and fees I estimate to be about $105,000 (I assumed $6,500/month in employee and owner salary expenses, and $2,250 for ALL other expenses). A franchise will probably beat a $35,000/year office manager job. But, if I had $50,000 to invest, I would probably work elsewhere and diversify my investment by putting the cash in the stock market. But that’s just me!

I checked out some Curves for sale at CurvesResales and MSN Groups. The asking price for most of the locations are way overpriced given my financial estimates.

Valuation
Keep in mind that ultimately a franchise is worth whatever someone else is willing to pay for it. The most common method of business valuation is the mutliples approach, particularly important being the EBITDA multiple (Earnings before Interest, Taxes, Depreciation and Amortization). Fitness Management lists a 5 times EBITDA multiple as typical for fitness clubs, so a fairly priced business selling for $200,000 at a 5 time EBITDA would have pre-tax earnings of $40,000. I saw one Curves with 300 members selling for $225,000, inferring that would be a fair price if EBITDA were $45,000 using the 5x EBITDA multiple.

Above we estimated gross sales to be $110,000 and expenses of about $110,000. Therefore, if I thought I could increase membership by a few dozen, I’d be willing to pay maybe $15,000 to get the franchisee out of their lease and burden of paying royalties and debt payments. A $225,000 sales prices seems absurd.

Why are there almost 50 Curves units in St. Louis already?

• low investment: The investment requirements are low ( $50,000 to open a franchise, individuals must have at least a $75,000 net worth with $50,000 liquidity)
• lifestyle: owners run a healthy, life improving business
• operations: it is fairly easy to run with a strong brand name
• career upgrade: many former and current personal trainers have dream of owning their own workout facility

I can only guess what the average membership base is for a Curves given the information available on the Internet. Curves franchise appears to be a truly lifestyle business that will require a lot of time and marketing. Here is a nice local Curves with pictures. The rewards are there, but they aren’t financial for the typical. Of course, if the franchisee can exceed the membership levels I used in my example and keep all expenses the same, Curves looks like a fun and worthwhile investment.