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TheStreet Open House

A Franchise Veteran's Secrets to Success

How easy or difficult is it for franchisees to get financing today? How has the difficulty in getting financing changed the franchise industry

Rotche: It's easier. It's still a ways from easy. The Small Business Administration has made some pretty big changes to their programs . The community banks are starting to really get involved with small business so it is easier, but it's not what it was and to some degree that's not a bad thing. It's been regulated a lot more.

Less money available has a domino effect. Let's say if the business model required them to invest in a 5,500 square foot space and required X-thousands units of inventory and X-thousands of dollars for a construction build out, well, we know that it's harder to get money and the odds are the pool of people that are sitting around with that pool of money is smaller.

So what you need to do then is get the business model to work in a 3,500 square foot space. Unfortunately, this is where everybody suffers. You must go to suppliers and negotiate inventory and supplies for lesser cost. The smaller that initial investment is for that franchisee, the larger the candidate pool is. It's forced everyone to kind of right size their business.

The other thing that happened in the franchise business is franchise brokers that were typically paid 70%-80% of the franchise fee -- some franchisors will give up 100% of franchise fee to the company that finds them a candidate because they know they will have 10 years of royalty -- now what's happening is people are starting to keep that franchise fee and not outsource everything and not bank on trailing royalty streams.

How do you pick the right franchise system?

Rotche: There are four main things I look at.

  • 1. Can you believe in the brand? Can you see yourself wearing that jersey? Do you believe in the culture, ethics and integrity? Can you be excited about the brand? Have you met the leadership team? If you can't check that box then the next two things don't matter.
  • 2. How good is their model? Does the model work? Is it a viable business? Can you make money? Can you do validation? Have you talked to other franchisees?
  • 3. Is it sustainable? When you buy a franchise you need to make sure all the blood, sweat and tears and money is going towards an asset you're building that you can sell. Life happens, and that will require you to make a change in your life and you just want to make sure that everything you have been doing is sellable.
  • 4. Are your expectations in alignment with the franchisors? If you're expectations aren't in alignment with the reality of the business, it's probably something you shouldn't move forward with.
  • What are some rookie franchisee mistakes?

    Rotche: A lot of mistakes that I will see are when franchisees first come into a system: They don't follow the system. It's counter-intuitive. Very often franchisees, and I will never understand this, they try to make their own system. It's probably the biggest mistake that franchisees make is they just don't trust the system.

    Other surprises are it's always harder than they thought. Once the bliss and the honeymoon wears off it's a real job.

    If you had to name one industry that would be the next hot franchise area, what would it be?

    Rotche: Group fitness with a focus on boxing. But seriously, I think wellness and not just exercise. It's why the spa industry is really coming back. People are starting to spend more money on themselves and that's why you are seeing more group fitness concepts.

    But membership businesses really. You're seeing a big thriving business on membership just because there is perceived value and the inherent value of membership where people want to be a part of communities.

    I gave the keynote speech at the Dealmakers' Summit in Chicago. It's kind of like Match.com between money and brands and lot of these questions were asked. This was probably the most resounding. What venture capital people are looking for is wellness.

    -- Written by Laurie Kulikowski in New York.

    To contact Laurie Kulikowski, send an email to: Laurie.Kulikowski@thestreet.com.

    >To submit a news tip, email: tips@thestreet.com.

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