Franchise Fundamentals

A residential construction-related franchise can be a great investment — for the right firm or manager. However, the price remodelers have to pay is more than just the purchase cost — it includes significant capital to buy the territory and set up the franchise as well as payment of royalties over the duration of the partnership.

But even more of a concern for remodelers is the loss of autonomy over their business. Remodelers who enter a franchise agreement must be willing to restrain the self-reliant entrepreneurial spirit they called on to start up and run their company.

Some franchisors compare the process of finding, evaluating, and joining a franchise to the process of dating, engagement, and marriage — with the franchise contract as a pre-nuptial agreement that spells out the responsibilities of both parties.

Indeed, the back and forth can be both fun and frightening, and the future not always clear. Fortunately, there are questions to ask and answer and processes to follow to make finding “the one” all the more successful.

Buying a franchise has many benefits. A franchisor provides a sophisticated analysis of the market for their product or service, proven systems, peer and company support, buying power, and upped resale value.

For construction industry novices, a franchise offers a map to success. “We're an expeditor,” says Mark Richardson of the Case Handyman Service franchise. “With our process and systems, we allow [franchisees] to accomplish in one to three years what it would take them 10 to 15 years on their own,” says the president of Bethesda, Md.–based Case.

Franchises can also open up a new market. Remodeler Rich Maile decided to buy a DreamMaker franchise because his high-end design/build company was losing touch with middle-market clients. “They are thrown back and forth between a small carpenter who does not have coordinated process and a high-end design/build remodeler,” Maile says. If he had used the existing design/build model of Cincinnati-based Maile Build Remodeling and Design to try to expand his market, it would have required more of an investment of his time.

Remodeler Stephen Brooks in Columbus, Ohio, one of the first Owens Corning Basement Finishing System franchisees, liked having the brand name association. “Everyone knows who that is. It's associated with insulation, but they think of it as a large company,” he says. “Instant reputability.”

Gary Stoltz, owner of a Kitchen Tune-Up franchise in Ft. Lauderdale, Fla., wanted to buy, build, and then sell a franchise, so he researched the return on investment. He found the rule of thumb to gauge the resale price of a franchise is 40% of the previous year's sales. “If I were to sell, I would put it on the market for $300,000. I paid a little over $30,000,” Stoltz says. “That's a pretty good return.”

Franchisors also cultivate partnerships with manufacturers. Case Handyman Services has a partnership with Velux to repair its skylights. Their franchisees also receive rebates from The Home Depot and save on credit card processing fees. Case has a full-time alliance coordinator who works on strategic partnerships.

Kitchen Tune-Up franchises purchase doors, cabinetry, lighting, and hardware products throughout the year and then receive rebates from manufacturers at an annual convention. President David Haglund says Kitchen Tune-Up's yearly royalties from franchises are 4.5% to 7% of their total sales, but with vendor rebates, the franchisee actually only ends up paying between 3% and 4%.

Jeff Sloan, vice president and general manager for Owens Corning Remodeling, says similar to peer review groups, franchises offer group and peer support. “Our job, when we see something that works or doesn't work, is to disseminate that information to the rest of the franchisees,” Sloan says.

When Frisco, Texas–based franchise consultant John Hayes teaches a seminar, he asks the audience to list the negatives of franchising. He hears many things, including high initial investment, royalty payments, territorial issues, and loss of control. “You have to be a follower in some ways,” Hayes says. “If you break the system, you lower the value of the franchise overall.”

The drawbacks are surmountable — if you find the right fit. Hayes strongly recommends remodelers interview existing franchisees who have a long-term relationship with the company. “Ask them, ‘Knowing what you know today, would you buy this franchise all over again?'” he says. Also ask if the company has a history and record of delivering on its promises, and if the training prepared the franchisee to make money.

Maile admits he did not enter the franchise world with an open mind. He thought franchisors were greedy and did not care about quality. When he thought about the idea of giving someone money to teach him how to remodel, “I thought, this is crazy. I'm sending them money to buy a territory — I already have a territory,” he recalls. But when he finally took the plunge, he was relieved. “Overnight I was paying less for cabinets, plumbing, vanities, electrical, etc. I was buying some products at 50% less,” he says. “Right away, you chip away at that initial investment.

“Good franchisors know better than most of us that to build a good system, the product had better be valuable,” Maile says.

Stoltz heard franchisors would take anyone who had the initial investment fee. But during Kitchen Tune-Up's “Discovery Day,” representatives mentioned recently turning down a potential buyer. “They make substantial money on selling a franchise. If they were willing to forego that for concerns regarding quality — I was impressed,” Stoltz says.

Brooks says with the Owens Corning franchise, buyers should set up a plan and structure the fees into their pricing. “If you start with a sound business plan, the royalty issue is not a problem,” he says.

Pete Wiggins, vice president of development of deck franchisor Archadeck, says in return for the initial purchase fee of $33,500, a buyer leaves the four-week training period with over $500,000 in systems including pricing and estimating software, marketing materials, and personnel management.

Just like remodelers have to figure out for themselves if a franchise will work for them, so too does a franchisor have to know what kind of buyer is the right fit.

Remodeling is a difficult business to break into, so Owens Corning wants buyers who own existing remodeling companies. “We want to partner with people who have been through trial and been successful,” Sloan says. He says the ideal Owens Corning Basement Finishing franchise candidate runs a $1.5 million to $2 million company and employs a sales and a production manager.

Case is open to looking for buyers outside the industry. Case's vice president of marketing & public relations, Joaquin Erazo, says in the beginning remodelers do well in the handyman business because of their construction experience. “That knowledge is very good for the first year. They start strong, but when they get to $1 million or $2 million in sales, they can't see beyond that,” Erazo says. However, when entrepreneurs outside the industry reach that number, they start looking ahead to $3 million and $4 million in sales.

Maile was guilty of one of the common pitfalls of new franchisees — the tendency to break the system. “I thought, I'm so smart, I'll take little bits and pieces of this system and fit it into my existing system,” he says. “But then the new company starts looking like your old company.” He continued to use his estimating software, but that meant he lost out on the opportunity to benefit from tips and techniques from other DreamMaker franchisees. He also continued to use his sales process of visiting a client's home and producing a proposal with allowances for products. DreamMaker recommends bringing clients to the showroom for the first meeting where they can peruse products for a more accurate estimate.

Maile now advises remodelers to follow the systems blindly — as if they had never run a company. “The same goes for training someone from your existing company to run the franchise division. If you bring someone over, you're bringing over the same bad habits,” he says.

Many franchisors say the lack of spending on marketing — even with the marketing materials that are made available to them — is the No. 1 pitfall of franchisees. According to Sloan, franchisees forget they have to continually build the brand.

Doug Dwyer, president of the Dwyer Group, parent company of DreamMaker Bath & Kitchen, claims remodelers spend less than 1% on marketing their existing companies. When Dream-Maker asks them to spend 3% to 5%, there is some resistance. “It takes encouragement and coaching to get them on track,” he says.

Case emphasizes marketing by having potential franchisees speak to Erazo during the due diligence process. Erazo helps them choose a territory using sophisticated statistics and reports. But even after this conversation, he says, owners are reluctant to spend on marketing. “For the first one to three months, they have strong marketing, but at the three-month mark, they panic. They think they are spending too much money,” he says.

Stoltz didn't follow Kitchen Tune-Up's 12-week marketing plan and couldn't figure out where to spend his marketing dollars. The franchisor helped him track his leads to discover where to spend money.

If a franchisee fails to meet the obligations spelled out in the contract, there are consequences. “When someone does something they contractually said they would not do, we have to stand up and say don't do that. The result could be losing the franchise,” Sloan says.

“That's why we are tougher in up-front qualifying,” Dwyer says. “If they can't make it through the qualifying, they will not make it through the blows of a new division.”

Whether a franchisee is not meeting requirements or they want to sell the franchise, franchisors have rules that govern getting out, all of which are spelled out in their contracts. Some buy back the franchise, while others offer services to help the franchisee sell. Others allow sales but regulate whom the franchisee can sell to.

Maile says he likes being held accountable by DreamMaker. “I wanted to be pushed. Had it been less demanding, I would have been more suspicious about spending the money to purchase,” he says. “The demands were in proportion to what I was paying.”

Federal law requires franchisors to give potential buyers a Uniform Franchise Offering Circular (UFOC). This packet includes contact information for previous purchasers, financial statements of the seller, background of key executives, and the cost of starting and maintaining the business.

The Federal Trade Commission offers suggestions on what to do before you purchase a franchise.

For more information, visit www.ftc.gov/bcp/conline/pubs/invest/franchse.htm