The world of franchising: It costs more, but with benefits

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Lynette Crow wants to expand Conspire! as a national franchisor and has put out feelers around the country, as noted on the map inside her office.

Lynette Crow wants to expand Conspire! as a national franchisor and has put out feelers around the country, as noted on the map inside her office.

Franchises — those businesses with recognizable names like McDonald’s, 7-Eleven, Radio Shack and more — have long represented a safe investment for people who want to work for themselves.

And that’s as true in Colorado Springs as it is anywhere.

The U.S. franchise sector created 27,913 jobs in June alone — the highest monthly number in the past year — bringing the annual number of employment opportunities in the market to more than 175,000, according to a report from the ADP National Franchise Report.

Although these numbers vary from month to month and can fluctuate rapidly, the trend is upward. And a local economy expert suggests that these trends are underlined by local and state markets.

“Franchises have become an increasingly popular way of starting a small business,” said Tom Binnings of Summit Economics, adding that he “would be surprised if franchising locally deviates much from national trends.”

Why the Springs?

For years, franchise chains have swarmed the economic and geographic landscape of Colorado Springs. But what about the Pikes Peak region makes it such a target?

Tom Duening, an associate professor of business at UCCS, says that it is simply because large chains have the resources and availability to do so.

“We really don’t have any dominant local brands, other than The Broadmoor,” Duening said. “As far as price point, I think our demographic just works well for [franchising] … especially for the military.”

Statewide trends in the franchise sector include interest in unconventional ownership types that provide safer and low-investment opportunities, which don’t require the franchisor to quit his or her day job, according to representatives from consulting firm FranNet.

“I think the memory of the stock market ‘hit’ a few years ago is still lingering in many minds so they tend to be a bit more risk-averse,” said FranNet franchise specialist Stacy Swift.

“Lastly, we have seen a fairly significant interest in recent months in what we call passive or semi-absentee ownership options — franchise models that allow the owner/investor to keep a full-time job while building the business, or simply allow them freedom from managing the day-to-day operations.”

Although restaurants, convenience stores and retailers are franchise mainstays, Swift said that she has seen a recent and keen interest in health care-related businesses in the regional market. But it really depends on preference.

“We represent such a wide variety of franchise concepts and every client’s interests, skill sets and financial capabilities are different,” Swift said, adding that lower-investment options are also popular because of the lower risk.

Franchising your own company

One such health care-related business is on the flip side of franchising.

During the past two years, local entrepreneur and Conspire! CEO Lynette Crow has opened four franchise locations — two in Colorado, and one each in Texas and Florida — of her Springs-based, drug-screening company.

At the corporate Conspire! location on Garden of the Gods Road, Crow and her team operate a franchise of their own, as well as host training and informational seminars, some of which are web-based. But she had to start somewhere.

The Colorado Springs native established the company in 2003 to cater to entities associated with the Department of Transportation, prevention of adolescent drug use and areas of industry that adhere to policies such as the federal Drug Free Workplace Act. The company also offers background checks and forms of DNA testing.

In 2011, during a recession that made it hard for many to acquire Small Business Administration financing, Crow decided that there was a demand for her company’s services beyond the Pikes Peak region. So she went through the process to become a franchisor.

“We are a very new concept to franchising, but it seems that we are in the right place at the right time with Amendment 64 passing and on 16 other state ballots,” Crow said. “I am not trying to just throw stores up and put them on the ground, I believe in building strong stores. Once we put a store up, my team spends a lot of time helping them market their product as well as constantly researching and testing new products to add to their inventory.”

Crow did her research, hired a franchise consultant and registered as a franchisor, all of which cost her about $150,000. That investment included the creation of a business plan, franchise agreement and disclosure document, which help keep her franchise locations consistent.

In the early days of the endeavor, Crow envisioned opening 200 locations within 36 months. That didn’t happen, and although interest was garnered by many more groups across the country, Crow decided that slow, selective growth was a safer option.

Now she has a U.S. map on the wall of her office, and the map is peppered with 50 or so stars where the company is implementing grassroots efforts to interest promising parties in Conspire! franchising.

Crow said that the company is currently in talks with potential franchisees in St. Louis, Minneapolis and Pueblo.

Becoming a franchisee

For many aspiring owners, franchising a nationally recognizable and competitive business can be simpler and sometimes more cost-effective than starting an independent small business from scratch.

The cost of franchising a business varies from market to market due to availability and the real estate market. Companies such as Daylight Donuts require a minimum investment of $30,000, while companies like Radio Shack require $100,000.

And those are just minimum startup costs. After that, it can become more expensive because of royalty payments and continual costs such as bills, payroll and maintenance.

Robin Roberts, president of Pikes Peak National Bank, said that PPNB and most other banks that provide Small Business Association loans also offer franchise financing.

The expected investment to become a Conspire! franchisee is between $103,000 and $143,000, which includes a $40,000 franchise fee.

Conspire! franchisees must also sign a 10-year contract that stipulates an 8 percent dedication of royalties to the franchisor.

Many franchise stores, such as McDonald’s, 7-Eleven, Subway and others that are highly popular in the Pikes Peak region, are essentially pre-packaged business ventures. And Binnings said that even though the upfront and ongoing fees can sometimes be substantial, there are three fundamental benefits to becoming a franchisee.

The franchisor provides a “very detailed start-up formula.”

The franchisee receives “more widespread branding with advertising dollars committed to promoting the brand regionally and nationally.”

The franchisee is faced with lesser risk than small-business owners, especially in startup mode.

And although the costs are substantial, the franchisee is also paying for reduced financial risk and the use of consistent branding. The reward is adopting a brand that is both recognizable and comfortable to people from all over the country.

That’s what Crow is trying to accomplish with her franchise venture.

As she puts it, “I think that if we had at least one in each state, we could really make a difference.”

FRANCHISE DATA JUNE
New jobs 27,913
Restaurants 21,007
Business services 1,364
Professional science and tech services 1,277
Accommodations 1,255
Food retailers 386
Source: ADP National Franchise Report, June 2013