Below is the Small Business Administration’s annual compilation of performance data on thousands of franchisee loans it has guaranteed covering loans made from October 1, 2000, to September 30, 2007. A “failed loan” below is when the SBA must step in and pay back a loan that it has guaranteed. However, does failure rate of a loan equal the number of failed franchises? No, because the chart below only captures the worst of the worst, when someone completely abandons their debt obligations. Definitions are tricky and can mask the true data. Franchisees who sell their units and pay off or transfer their loan or franchisees losing money are not caputred. But, the value in the report card can be a vague checklist for avoiding high-failing franchises.
Hat Tip: WSJ

REPORT CARD

Class Leaders

Class Trailers

Note: Listed by percent of SBA-backed loans that failed between Oct. 1, 2000, and Sept. 30, 2007, starting with the highest rate. When percent is the same, companies are listed from highest to lowest number of total loans.

Source: Coleman Report

• Patriot Express SBA Loan Initiative
• SBA Guaranteed Loan Program Q&A
• Interview with The SBA’s John Renner-Veteran Entrepreneurs
• Same-Store sales report
• Bally’s Total Fitness tries more franchising

Ace Hardware helping their franchisees by project weather-related sales:

Ace Hardware’s Director of Inventory Control,

Paul Sikes, pointed out that, “We have been able to make weather part of the DNA and culture at Ace, so that when we talk about sales opportunity, sales risk and past performance, weather is now just a part of that.” Sikes shared an example from ‘07-’08 winter season when Ace substantially increased inventories for snow removal products based on Planalytics’ projections. “We made an extra $10 million in sales in a tough economy because we planned it and we bought it. We were able to service 91% on the hottest seasonal category I’ve seen in years at Ace because of the support of Planalytics and the actions we took off that information.”

Subway franchised restaurants using weather to better understand buying trends:

SFAFT is a non-profit organization that provides marketing support to Subway’s franchised restaurants.

Adam O’Hara, Manager of Reporting and Analytics for explained in his presentation how the company isolates weather’s impact on sales through “a transaction-based model” specifically developed with Planalytics. “Our weather-driven demand number is tied directly to what percentage of our sales were up or down,” O’Hara remarked. “You would be amazed at the correlation between how our volume performs and how the weather performs.” Identifying the degree to which sales are impacted by weather enables SFAFT to better measure the effectiveness of advertising and to optimize the timing of programs going forward.

Source: News Blaze

• Recent Same Store Sales, May 24, 2008
• Recent Same-Store Sales Rundown
• Same-Store sales report
• Same-store sales roundup
• 2006 First Quarter - Yummy Same Store Sales Increase

Interesting article on gas franchisees offering discounts in Connecticut for customers paying cash.

Tala said Hess Corp. was fine with his decision to offer a cash discount. He knew that Connecticut law already allowed cash discounts, but banned surcharges for credit, and decided to begin offering a lower price on Memorial Day weekend after credit card sales became 90 percent of his business. They had been only 40 percent when gas was under $2 a gallon.

Tala said he wound up paying about $12,000 to $13,000 a month at his Newington store for credit card fees. He wasn’t making enough money to cover his costs.

• Paychecks via Debit Cards
• Franchise Benefiting from Slump in Housing
• Buy a franchise to get into the leasing business?
• What a Quiznos franchisee makes
• McDonald’s Franchisees, $100k+ in Costs for New Coffee Drinks

This article from the United Kingdom highlights some of the positive aspects of franchising.

He said: “Choosing the right franchise is a big decision – it’s your own money on the line and you need to be sure that you are investing in a sound business model. McDonald’s employs some of the most talented professionals around and it helps to be able to draw on that knowledge and expertise.”

There are significant advantages to running a franchised business, as a new idea has already been tested to ensure it is successful. What’s more, larger franchises will have a well-established trading name and are likely to offer marketing support and comprehensive training programmes in a wide range of business skills. Good franchisors can also help secure initial funding.

Mr Thomas said: “McDonald’s has some fantastic training opportunities for staff at all levels, which means that when I identify talent I have the tools to help my staff develop their skills.”

“At the same time, I can operate on a local level too and I’m involved in a number of community initiatives. I am deputy chair of the Trust for Sick Children in Wales, and regularly give talks on business and entrepreneurship at local schools and offer work experience placements through Careers Wales.”

He added: “For entrepreneurial people owning a franchise is a great opportunity to take a fantastic brand and make your own mark.”

The only portion I have issues with his last statement. For truly energetic entrepreneurs, owning a single franchise provides limited entrepreneurial satisfaction because of the lack of flexibility and adaptability limits built into the franchise operating structure.

• McDonald’s chickens out on Boston Market
• Fantastic Sams Hair Salon Franchise Receives Two Minority Awards
• Wendy’s franchisee bids for company
• Transfer fee benchmarks
• Tom’s Foods vending franchises

Most of my friends order food online whenever possible, especially pizza like Domino’s and Papa John’s.  Online ordering is making up 20% this Papa John’s franchisee’s sales:

In fact, Chesley estimated, about 20 percent of her store’s sales arrive via the Internet.Customers can insert exactly what they want and it saves on labor costs since the staff doesn’t have to spend as much time on the telephone taking orders, Chesley said. “We do great with online ordering.”

Potential franchisees should make sure you are free to engage an online ordering network such as Order Network, CityWaiter, eHungry, Kudzu Interactive, or GrubHub.

• Online Ordering Systems
• A Neighborhood Balks at a Franchise
• When Franchisors Compete Against their Franchisees
• New Englands own Papa Ginos wants a bigger slice of the national pie!
• Need to buy a license from your state to sell on eBay?

This McAlister franchisee with 30+ years of restaurant experience from Oklahoma is doing well. The article has some good tidbits:

“Our business is actually up,” said Bothwell, attributing that to McAlister’s market positioning and lunch focus, which accounts for 65 percent of its revenue. “People seem to still be eating out for lunch.”Competing for the fast-casual market with such well-established companies as Panera Bread and Jason’s Deli, McAlister’s offers more than 100 menu items for lunch and supper, targeting health-conscious customers.

“We have to get more sales to cover our increased operating costs,” he said, noting his average per-person ticket runs $7.85.

His firm ended 2007 with revenue of $10 million, his stores averaging $1.5 million per year. With eateries to open this year in Shawnee; Lawrence, Kan., and Joplin, Mo., as well as at 21st and Yale in Tulsa, he projects 2007 revenue of $20 million.McAlister’s restaurants established in existing shopping centers, like his new midtown Tulsa deli, cost about $750,000 to open, said Bothwell. Stand-alone stores can run $1.5 million to get off the ground. Both employ an average staff of 50, now a greater challenge since Oklahoma’s new immigration law further drained the state’s tapped labor pool.

UPDATE: May 29, 2008 @ 5:34pm EST

UPDATE #2: June 4, 2008 @ 3:14pm EST

There was an interesting comment to this post about whether a stand alone location can realistically justify the $1.5 million build out costs, which is double the $750,000 cost for a strip mall location. The short answer is yes. You wouldn’t need twice the sales, but there would be an incremental increase in sales to have the free cash flow to service more debt.

Here’s the analysis: The monthly cost of borrowing an additional $750,000 @ 8% with 10-year repayment term is

To cover this $9,100 in additional monthly debt service not including the extra taxes and maintenance, the store would need to attract an extra 1,160 tickets monthly @ $7.85 average per ticket. A store with $1.5 million in sales is attracting 524 patrons per day. Can a standalone location attract at least 38.6 more people per day versus a strip mall front? Sure, it is possible with a significantly more prominent street exposure.

• Delivery-only Restaurants
• Franchisee Now Prefers non-Franchised Businesss Route
• Recent Same-Store Sales Rundown
• ‘Homework’ Key to Restaurants
• Pet Franchises

Ever wonder what the real estate selection criteria look for a typical sandwich shop? Below is the criteria for a sandwich shop called Which Wich. Landlords are not often willing to dedicate parking spots to particular tenants as noted in the criteria. If you were considering being a franchisee and you were given this criteria, and you plan to open a store on a busy street that only provides street parking, make sure to get agreement from the franchisor prior to signing the franchise agreement.

• What to learn from this Subway lawsuit
• First Watch to Franchise
• Discount Real Estate franchises are booming
• Talk to Franchisees Before You Join the Club!
• Invest $240,000, but don’t hold me responsible for anything!

I should have guessed but was pleasantly surprised that an entrepreneur produced a GPS enhanced software  that managed a crew of delivery drivers and integrates with several POS.  A 21-unit Pizza Hut franchisee just purchased a system.

• Delivery-only Restaurants
• Online Ordering Systems
• Pizza Inn Soap Opera
• The Gas Factor
• Franchise News Roundup - 11/26/2007

Performance differences between corporate-owned and franchised hotels are slim to none, according to new research.

Leah Sipher-Mann h Sipher-Mann writes in Michigan in the News that, for a company pondering the question, “To franchise or not to franchise?” new research from Michigan’s Ross School of Business suggests that performance differences between corporate-owned and franchised outlets, when chosen right, could be slim to none.

Ross Professor of Business Economics and Public Policy Francine Lafontaine and colleagues Renáta Kosová of Cornell University and Rozenn Perrigot of University of Rennes, studied the effect of vertical integration on the performance of individual hotels. They found that a company’s decision whether to franchise or own a particular hotel has little effect on yield (average price) or performance.

Lafontaine and her team studied an unnamed multi-chain hotel company that has both franchised and corporate-owned hotels under each of its several brands, running the gamut from budget to luxury. They collected data to determine whether organizational form for each hotel has an effect on any of three outcomes: monthly revenues per available room (i.e., what the industry calls “RevPar”), price or yield (average room rate per month), and monthly occupancy rate. Across all three variables, Lafontaine and her colleagues found that franchising per se does not have a statistically significant effect.

“We conclude that the firm chooses which outlets to franchise and which to own in a way that yields no differences in pricing or performance, in the end, between the two sets of hotels,” the authors state. “This result is important as it suggests that when firms can choose, they indeed adjust organizational form in such a way that there are no real differences in outcomes.”

“This does not mean that franchising and company operations do not have different incentive effects, because they do,” says Lafontaine, “but simply that firms are smart about how or where they choose to rely on these differences.”

In the past, empirical evidence had suggested there were persistent performance differences between corporate-owned and franchised businesses. However, the authors note that much of that evidence comes from studying firms that have been forced into a particular organizational structure by legislative intervention. For their research, Lafontaine and her colleagues instead studied a situation in which the decision-maker (here the hotel company) was not forced by legislation into its particular structure.

The authors also ruled out that their findings might be driven by other potential influences on the hotels’ performance such as the presence of air conditioning, swimming pools, or restaurants, as well as proximity to an airport or train station.

“We view the results as suggesting that multi-unit firms can choose organizational form in a way that is responsive to the differences in market conditions across outlets, such that when all is said and done, organizational form itself has no direct effect on outlet-level performance or pricing,” says Lafontaine.

Lafontaine and her team recognize that while their findings are conclusive, the evidence is limited to data from a single company. Future research might strive to include data from multiple firms and different industries.

Cross Posted on Let’s Talk Franchising

• Financial Performance Representations
• Structuring the New Franchisor
• UPS Store Numbers
• Recent Same-Store Sales Rundown
• Performance of Franchisees’ Loans

Jan Dennis, Business & Law Editor of News Bureau, reports that a new study co-written by Steve Michael a professor of business administration in the University of Illinois at Urbana-Champaign reveals that fast-food restaurants and other chain outlets are less likely to fail when super-sized training programs prepare fledgling owners for the challenges ahead.Advance, in-depth training on everything from bookkeeping to dealing with customers and suppliers is a key to survival for franchise outlets, said Steve Michael, a professor of business administration in the U. of I. College of Business.

But while some chains put aspiring entrepreneurs through months of schooling, others turn them loose in as little as two weeks, increasing the odds of failure, said Michael, whose study was published in January’s Journal of Small Business Management.

“The notion of just watching while somebody else does the job for a while is a mistake,” Michael said. “People need to realize these are sophisticated businesses that require extensive training. The more time you spend at Hamburger University or Dunkin’ Donuts University, the lower the failure rates.”

Michael and Florida State University business professor James Combs studied nearly 90 national restaurant chains to gauge whether franchisors contribute to the success or failure of franchisees, which number about 700,000 worldwide in industries ranging from lodging and office supplies to tax-preparation and cleaning services.

Along with training, franchisors can help keep franchisees afloat by pumping money into advertising that promotes the company brand, according to the study, “Entrepreneurial Failure: The Case of Franchises.” “Chains that are out there promoting themselves create value and drive up demand. When they don’t, franchisees are more likely to fail,” said Michael, who says the study is the most extensive look to date at how chains influence the fate of franchises.

The study also found that rules set down by some chains help franchise outlets succeed, such as offering exclusive territories that restrict intra-brand competition or requiring franchisees to be owner-operators. “Franchisors could be viewed as bullies for forcing owners to actually manage the franchise, but it helps both of them survive for the obvious reason,” Michael said. “If someone puts their full time and effort into an operation, they’re more likely to be successful.”

Michael compared his findings with those of previous studies on the keys to success for chains and found that overall what helps the franchisee survive also helps the franchisor survive. The lone difference, he said, is royalty fees, which tend to help franchisors but hurt franchisees. “It’s often billed as a symbiotic relationship in trade publications and the fact is that seems to be true,” Michael said.

The study found that 13 percent of franchise restaurants in the survey failed – higher than results of some previous studies but far lower than failure rates for traditional start-up businesses that can approach 70 percent. But driving franchise failure rates even lower would be welcome news for the nation’s economy, with chains accounting for more than 40 percent of U.S. retail sales annually.

“It’s a big chunk of the economy,” Michael said. “And it’s a growing part of the economy as more people seek self employment, either because of changes in the macro-economy or just because they don’t want to work for someone else anymore.”

Cross Posted at: Let’s Talk Franchising

• To Franchise or Not to Franchise?
• Turnover
• No Financial Disclosures - The Excuse
• American Male
• Franchise Alternative

Here’s your self-test with questions and insightful examples.

Hat Tip: Pete Olson’s “Solo in Chicago” blog

• Advice for South African Franchisees
• Advice for Entrepreneurs
• Advice from a McDonald’s Franchisee in U.K.
• Domain Names that include Franchisor’s Name - OK?
• ‘Homework’ Key to Restaurants

Dairy Queen franchisee associations with members in Arizona, West Virginia, Ohio, Virginia, Maryland, Pennsylvania, Kentucky, Missouri and Illinois filed law suits to halt required remodeling:

Dairy Queen franchisees’ arguement:

The lawsuit contends Dairy Queen is trying to force franchise owners to spend between $275,000 and $450,000 to remodel stores to adhere to an unproven concept — one that will cost more to operate, double staffing requirements, and cut into profits.

“No one should have to make this conversion that is quite expensive unless they want to,” Caruso says. “If the DQ Grill & Chill concept was such a promising new concept, then the free market would solve this problem.”

That hasn’t happened, according to the lawsuit.

As of December 2006, the complaint says, just 105 Grill & Chill restaurants had opened in the United States. Some have performed poorly, and two have closed.

Dairy Queen franchisor’s argument:

Moreover, Mooty maintains no one is being forced to do anything. Dairy Queen does require about 70 percent of franchises to modernize restaurants periodically. But Mooty says Dairy Queen has capped the required investment at $75,000 for 2008, $85,000 next year and $95,000 in 2010. The required modernization should be no surprise to franchise owners because it’s standard in most of their contracts, Mooty says.

“It is not making somebody spend hundreds of thousands,” he argues. “And it is not forcing somebody to go to another concept.”

Mooty said it is the franchise-owner associations, which compete with the corporation to supply the restaurants, that are stirring up trouble. Dairy Queen is cutting margins on its supply business, which is hurting the associations, he contends.

“They are losing membership, they are losing market share and they are having to take more drastic measures in creating fear and concern.”

• Independent Franchisee Associations
• Today matters
• Great Set of Franchising Articles
• Quiznos franchisees file class-action fraud lawsuit
• QSRs see small sales increases

Things will probably work out for Heartland Automotive Services Inc. of Omaha, Neb, a 438-unit Jiffy Lube franchisee filing Chapter 11 bankruptcy as it will probably sell/close underperforming and money-losing units.

Chapter 11 bankruptcy, the business filing usually continues to operate while a bankruptcy court supervises the “reorganization” of the company’s contractual and debt obligations. The court can grant complete or partial relief from most of the company’s debts and its contracts, so that the company can make a fresh start. Often, if the company’s debts exceed its assets, then at the completion of bankruptcy the company’s owners (stockholders) all end up with nothing; all their rights and interests are terminated and the company’s creditors end up with ownership of the newly reorganized company. The other type of bankruptcy is chapter 7, whereby the business ceases operations and a court appointed trustee sells all of its assets and distributes the proceeds to its creditors in accordance with statutory defined priorities.

The large franchisee most likely negotiated favorable terms when faced with closing or selling units, such as reduced transfer fees, low or no penalty for closing a certain number of units, delays in royalty payments when filing bankruptcy, etc.

According to a statement on Heartland’s Web site, the company filed for Chapter 11 because of what it calls a “breakdown of negotiations with Jiffy Lube International to resolve long-simmering disputes regarding the companies’ relationship” over advertising and marketing, and support from the franchisor, product pricing from JLI’s parent, Shell Oil Co., and expansion strategies.

Economic pressures in the volatile gas and oil market were also cited as reasons for the filing.

Heartland said it anticipates going back to the negotiating table with JLI after the initial stabilization phase of its reorganization, which was to go heard in court on Jan. 23. If settlements still can’t be reached on the issue, Heartland said it will seek a rejection of its franchise agreements and rebrand the business.

Heartland said in the statement that it had $8 million in cash on hand at the time of the filing.

• Chipotle Going Public
• Mobile Oil Changes
• Captain D’s Largest Franchisee Files Chapter 11 Bankruptcy
• Jackson Hewitt PR Problem
• Turnover

McDonald’s is the largest supplier of free wireless internet in England. I imagine a similar plan is in the works for the USA.

I’m a fan of free wifi or near free wifi (pay an extra $5 and you can have unlimited internet for the day) if you have the seaing capactiy.  I am a frequent user of free wifi in stores and think it usually makes economic sense. I go to Panera Bread and other local restaurants just for the free wifi.  In fact, many visitors will buy a coffee and snack, then in a few hours buy lunch. The idea that people will sit there all day and not spend any money is rare because people simply cannot sit and not eat for 10 hours, especially when they are in a restaurant. You will always have people who pay you $2 for a coffee and use your wifi for several hours, but most don’t.  The $20-$30 per month spent on wifi will certain pay for itself in higher net sales.

Panera Bread limits free wifi to 30 minutes during lunch times (noon - 2pm).

• Clever Way to Get Free PR
• No freebie promotional coupons or gimicks
• Geek Perspective: Can a Gaming Cafe be Successful?
• Family ditches perfect life for pizza franchise, togetherness
• Franchisors vicariously liable for their franchisees?

I recently interviewed John Renner, who is the Business Development Specialist for the Small Business Administration’s Office, in Cleveland. John does great work for the Veteran community, including helping Vets learn about getting into their own businesses, the many programs available, and teaching them how to get contracts for work, when they get into business.

How long have you been at the SBA, and what is your official title?

I am in my 17th year at the SBA’s Cleveland District Office.
My title is Business Development Specialist.

How does that translate to helping veterans in small business, and those wishing to get into a business of their own?

I am a generalist at the SBA, focused on making sure that all existing and prospective small businesses are aware of the variety of programs offered through the SBA. I am also the offices’ Veterans Business Officer, a charge that I take very seriously. In that capacity, I work with many Veterans groups and Veterans who own businesses to insure that they are aware of specific benefits to businesses owned by Veterans and Service-disabled Veteran-Owned small businesses. Each SBA office across the country has a person who is designated as the Veterans Representative.

I understood you won an award for your work with veterans. Can you tell us about it?

I was honored this year to be chosen as the recipient of the Stanley Mageria award. Our Office of Veterans Business Development in Washington presents this award to “recognize a Veterans Business Development Officer who has provided exemplary business assistance and services to veteran, service-disabled veteran small business owners and self-employed members of the Reserve and National Guard.” This award is the most fulfilling recognition I have received in my time with the agency.

In your experience, do veterans make good small business owners? If so, what sets them apart from other small business owners?

There is no doubt in my mind that Veterans make great entrepreneurs. Military experience teaches strong organizational skills, solid decision making processes and focuses on motivational issues. These are the same skills and characteristics that are needed for business success. An article that drives this point home can be found here http://www.inc.com/news/articles/200708/census.html

Would you please describe some of the programs available to help Vets obtain loans for their new businesses?

The SBA has a stable of loan guaranty programs that can address the majority of financing needs of small businesses. This summer we introduced a loan initiative called Patriot Express that is specifically targeted at:

Veterans, service-disabled veterans, active-duty service member’s eligible for the Military’s Transition Assistance Program, Reservists and National Guard members, current spouses of any of the above as well as spouses of active duty service personnel and, the widowed spouse of a service member or veteran who died during service or of a service-connected disability. Additional details of the Patriot Express Loan can be found at http://www.sba.gov/patriotexpress/. Of course, it is important to point out that all of our loans are bank loans with an SBA guaranty and the process always starts with a strong business plan and a relationship with a small business banker. The SBA has resource partners all over the country.

Outside of the financing programs, we also assist small businesses who are interested in selling their products and services to Federal agencies. There is currently a mandated goal that all Federal agencies spend at least 3% of their procurement budgets with service-connected disabled owned small businesses. This creates a huge opportunity.

How is the SBA gearing up for the thousands of vets that will be returning from active duty in Iraq and Afghanistan?

The agency has recently taken a much more aggressive approach to assisting Veterans and the Patriot Express and procurement programs above are the first examples of what the SBA and the entire Federal community is doing to help create and build businesses owned by our Veterans.

{This article was cross posted on Thefranchiseblog4Vets.com}

• A Neighborhood Balks at a Franchise
• Franchise Industry Shakeout Coming? {Part 4 of 4}
• Sign a Rama First Franchise to Win U.S. Presidential E Award for Exporting Success
• Little Caesars Veterans benefits
• Investment Alternatives

Entrepreneur Mag has an article on the top franchisee mistakes.

• Lease terms.
• Construction and fixture costs.
• Business equipment
• Inventory and supplies.
• Marketing costs.
• Labor costs.

I vote for construction costs and labor costs as the biggest mistakes - that’s is where most of the surprises and mishaps occur.

• 10 Costly Mistakes to Avoid When Buying A Franchise
• Dubious Franchise Salesmen
• 10 Common Mistakes of Prospective Franchisees
• Not-so-super Super Suppers
• Stone Cold Sales

There are many popular and unique franchisees outside of the United States. I love reading foreign journals and learning about innovative brands developing overseas. If you are travelling overseas, keep an eye out for business that would work well in the United States. That is what this gentlemen did with a falafel restaurant. I am very skeptical whether this type of restaurant can work even with good branding…I have seen so many of them fail already. Venture, a radically innovative photography and portrait company, is one my favorite United Kingdom concepts…it is supposedly coming to the United States (Boston) soon.

• Ace Hardware evolves
• Quiznos gets toasted with lawsuit
• Family ditches perfect life for pizza franchise, togetherness
• News and Gossip Briefs
• Franchise Industry Shakeout Coming? {Part 2}

Accusations of franchisor misconduct and fraud occurs in every country. Australia, for example, franchise churn is a big issue:

At the centre of these 30-plus claims is what is known as franchise churn. This is where a franchisor sells a site or territory that cannot turn a profit then sits back and waits for the business to fold.

The franchisor reclaims the site for a nominal price and resells it to another franchisee who inevitably fails a year or two down the track.

Each time the franchisee spends up to $450,000 buying what he or she believes is a viable business and ends up paying another agreed amount (usually about $50,000) to the franchisor for marketing fees.

Royalties and annual franchise fees, which range from 5-20 per cent of revenue, are owed on top of this.
Business failures are easily pinned on the franchisee.

…

“All you’ve got to do is follow the money trail. In the robbery stream, the franchisor virtually drives the franchisee to the wall to the point where they throw up their arms, leave behind them assets worth 10 times [what they are sold for in a fire sale] and so it goes on,” Farrell says.

• Franchisors Not Liable for Negligent Franchisees
• Litigation disclosures in the UFOC
• More on the Quiznos Class Action in Wisconsin
• What if franchisor is slow supplying inventory?
• Talk to Franchisees Before You Join the Club!

This is an inspirational story of a couple of guys who followed their passion and started small store, and slowly added stores:

The customized white vehicle, emblazoned with smiling humans and healthy-looking dogs and the words ZoominGroomin in blue and Mobile Pet Spa in red, leaves little doubt about the reason for the visit.

In fact, it was because Carey Takach spotted the van on the road one day that she signed on with the mobile pet groomer. That and the coupon her sister had passed along to her.

…

Toback said he has 700 regular customers just nine months after starting the venture, along with two vans and five groomers and 100 appointments a week.

The former retail executive, who at one point was a vice president for menswear, became a mobile pet groomer at age 56.

“I was sick of looking at polos,” he said. “My cocker spaniel is my business adviser and was the catalyst to the whole thing.”

Toback said the idea to become a mobile groomer franchisee struck when he considered the amount of time involved in taking his dog to the groomer’s. He would drop him off at 8 a.m. and pick him up at 5 p.m.

“He was waiting in a cage for six hours, waiting his turn,” Toback said.

It occurred to Toback that many pet owners treat their pets “like children,” noting that a parent would not drop their child off at a barber for eight hours. The average mobile groom session is an hour and fifteen minutes, he said.

Is there something you do in your daily life that just takes too long? Perhaps it can “delivered” directly to the customer, such as pet services, home vet or medical care, 20 minutes dry cleaning while-you-wait, high-end group child care. Maybe you can be the franchisor.

• Family ditches perfect life for pizza franchise, togetherness
• What if franchisor is slow supplying inventory?
• ‘Homework’ Key to Restaurants
• Dubious Franchise Salesmen
• 10 tasks when starting a new business

Joel Libava, blogger at FranchiseKing and owner of Franchise Selection Specialists Inc. in Cleveland (and invited blogger at this web site), was quoted in a Wall Street Journal article about franchisee funding sources:

• Think About Franchising. These days, franchisers are actively targeting boomers because of their deep pockets. Entrepreneurs are generally expected to put up some of their own money to start a franchise, and boomers have lots of it on hand.

But you don’t have to bet the farm. “We recommend that you use the smallest portion you can of your own money and leverage the rest,” says Joel Libava, president of Franchise Selection Specialists Inc., a franchise consulting and marketing business in Cleveland. Generally, entrepreneurs should expect to pay about 15% to 30% of the total cost of starting the franchise out of their own pocket, including the franchise fee and working capital, Mr. Libava says.

For instance, Louis H. “Gig” Runge of Houston has put up about $80,000 of his savings to open a Martinizing Dry Cleaning franchise. The money has gone toward franchise and legal fees and other necessities. He plans to fund the rest of the business with a $350,000 loan guaranteed by the Small Business Administration. The loan requires him to provide an equity injection of $82,000.

“It was a challenge for me to work through the tax benefits of borrowing versus just funding it myself,” says the 47-year-old Mr. Runge, a certified public accountant who has done a variety of financial jobs at JP Morgan Chase for the past 18 years. Mr. Runge decided that the SBA financing would help him protect his personal savings and use it as collateral to invest in other stores down the road.

Here are my initial thoughts….

Leveraging (borrowing money) is a good idea so long as the business ultimately works out, or you’ll end up losing the same as if you funded the whole enterprise with your cash savings. Leveraging does buy you some time if things don’t work out by leaving you some personal cash in the bank to invest in the business should it be necessary. But, all lenders to small startup businesses will require a personal guarantee, so if the business fails you will need to cough up the money to pay back the loan even if the loan is to a business.

Before getting a loan, you should set up your personal estate plan to protect/preserve the asset you already have from bankruptcy or lawsuits - which in small part entails moving assets out of your personal name to irrevocable trusts and business entities that have special control features and tax provisions so that you will still have these assets available for your use even if you get sued for a $10 million dollars or file bankruptcy.

Funding your franchise by transferring your 401(k) savings without penalty is possible, but it comes with debt restrictions. One route without tax or penalty (but will include fees imposed by the new custodian) is to convert your 401(k) to a traditional IRA held by a custodian that permits you to invest the money in “alternative investments” (some companies, like Charles Schwab, permit alternative investments but require pre-approval and offering documents from the business offering the investment). This is exactly how we accepted investments of retirement plan money where I used to work at the private equity and specialty finance company. Also, most 401k plans allow you to borrow up to $50,000, or 50 percent of the value of the account, whichever is less. This is penalty-free, unless of course you don’t pay the money back.

• SBA Guaranteed Loan Program Q&A
• 10 tasks when starting a new business
• Alternative to buying a franchise
• Patriot Express SBA Loan Initiative
• Investing in Private Placement Offerings (Part 1)