Posted on Aug 22, 2022
Is franchise ownership the right move for your post-military career?
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About 200 Veterans open a franchise every month, and 14% of franchises nationwide are Veteran-owned. But is franchising the right move for your post-military civilian career?
A recent GI Jobs virtual workshop explored that question. The event featured advice from panelists Gordon Logan, the co-founder and CEO of Sports Clips Haircuts, a men’s salon franchise with over 1,800 locations; and Austin Meek, broker relationship manager at Neighborly, a holding company for 29 home services businesses.
Here’s some of their advice and other information about franchise ownership:
What is a franchise?
The U.S. Small Business Administration (SBA) describes the business model this way: “When you buy a franchise, you get the right to use the name, logo, and products of a larger brand. You’ll also get to benefit from brand recognition, promotions, and marketing. But it also means you have to follow rules from the larger brand about how you run your business.”
Meek said a franchise is similar to bumpers blocking the gutters of a bowling lane: Franchises provide systems and processes that effectively remove some of the risks of starting a business.
“What franchising does is that it helps you avoid those gutters,” Meek said. “So, if you’re able to provide enough money up front, and if you’re able to mentor and engage your employees and work hard, you will have a business that is successful.”
As the SBA noted, franchise owners buy into a proven concept (more on how to assess the franchise is covered below) and get help operating and promoting the business. Gordon said that these collective benefits can include favorable pricing from bulk buying (e.g., lower credit card processing fees), collective advertising services, initial and ongoing training for franchisees in areas such as sales systems and business trends, and opportunities to network with other franchise owners to learn best practices. The franchise may also provide access to accounting, customer service and payroll systems.
However, these benefits aren’t free: You pay an initial fee that can run to five figures and contribute an ongoing percentage of your gross sales to royalty fees. Even successful franchisees may wait one to three years or longer to break even and start making a profit. Again, you have to follow the procedures of the franchise. And the business could fail.
However, Gordon said that Veterans are well-suited to franchising because they have experience operating and executing within a system and leadership skills learned from their time in the military.
“Franchising is simply a way of doing business,” Meek said. “All that franchising means is that a parent company is going to give you the support that you need and, in exchange for that support, you’re going to give them a percentage of your sales.”
How much are the franchise fees?
So how much does it cost to become a franchisee? The short answer is it depends. In general, Meek said, the franchise fee is what you pay to be awarded your territory — whether it’s to sell garage doors, open up a salon or operate another type of business.
Meek said his brands typically conduct market research about the potential customers in the franchisee’s territory — say, the number of households with detached garage doors. “Our franchise fee,” Meek said, “is going to be dependent based on the number of attributes that we need to generate a significant territory, a viable territory, for you.”
At Neighborly, he said, most of the brands require owners to pay a franchise fee that’s close to $50,000 and then to contribute royalty fees of 2% to 6% of gross sales. Meek said at Neighborly this helps pay for a local marketing specialist and a business coach, who are assigned to the franchise owner for the duration of the relationship.
Gordan and Meek later cited SBA loans and home equity lines of credit as possible ways to financing franchise fees. Meek also mentioned rolling over a 401(k) to finance the fees but this IRS article — https://www.irs.gov/retirement-plans/rollovers-as-business-start-ups-compliance-project — contains several cautions about “Rollover as Business Start-up” arrangements.
Who are the ideal franchise owners?
Beyond the investment considerations, do you need to be or become an expert in door installation, haircutting or another trade to be a successful franchisee?
No, said Logan, and he’s a prime example: He flew C-130s in the U.S. Air Force, earned engineering and business degrees, and worked as a consultant for large accounting firm, so “I knew nothing about the haircare business.”
But he said few franchisers look for franchisees who are skilled in the occupation of the franchise.
“We’re looking for businesspeople who have demonstrated leadership qualities … who are passionate about developing people and helping people grow and develop,” he said. “Again, Veterans are very well-suited for that … because they have those skills already developed.”
How much you can earn as a franchisee?
Although franchise owners don’t have to provide profit-and-loss statements, they are required by the Federal Trade Commission (FTC), under what’s called the “Franchise Rule,” to provide the Franchise Disclosure Document prior to formalizing a relationship. This 23-item legal form contains material information about the franchise, its office holders and other franchisees. The Franchise Rule requires disclosure of all 23 items and is designed to help you “weigh the risks and benefits of such an investment,” according to the FTC.
Gordon said the document is packed with helpful information and should be reviewed in its entirety. He advised possible franchisees to scrutinize item 19, which relates to financial representations; and item 20, which lists the number of franchises and other information about the franchisor’s system. He added that talking to existing franchisees, especially those in a similar business or market, can elicit critical information, including about potential profits and loss.
Meek said he generally schedules hour-long video chats with prospects about the business model and, if their interest remains, introduces them to existing franchisees.
“You’re able to ask these franchise owners anything you want,” Meek said, including when they first broke even or the amount of their profits in the last month.
“There are some less scrupulous franchises out there,” Meek added. “But I think if you’re looking at a franchise opportunity, and they don’t have an item 19, that would be a big red flag for me. You need to have validation — you need to be able to prove, ‘Hey, this is what I can make.’”
In addition to franchises that withhold information, beware of those engaged in predatory practices and other violations of the Franchise Rule: In February of this year, the FTC filed suit against the BurgerIM fast-food chain for targeting Veterans and others with “false promises and misleading documents.”
“BurgerIM promised consumers, including Veterans, the American dream, only to leave them in a nightmare of debt and deceit,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection, in a Feb. 8, 2022, news release. (The FTC lists the case as pending.)
Look on the Financial Disclosure Document for information such as the top 10% franchise owners’ gross sales, the bottom 10% owners’ gross sales and the average owners’ gross sales, Meek said.
“Use the information that’s in that item 19 in conjunction with the anecdotes and the stories that you hear from franchise owners in the validation process,” he said, noting that this can give you “a reasonable expectation of what you can actually make.”
Other Veteran-franchising resources
Gordan and Meek said Veterans can also get help assessing franchisors by working with the organization VetFran, a nonprofit founded in 1991 by the International Franchise Association (IFA) and its foundation to promote Veteran franchising.
Among other Veteran-focused franchise educational programs and tools, VetFran has a three-tiered “STAR” ranking system to assist Veterans in evaluating franchisors, which can earn one, three or five stars. “The star system showcases the ability to meet increasingly higher criteria indicative of various strengths,” according to IFA.
VetFran said the program designations “provide Veterans with more information beyond the VetFran incentive discounts and encourage best practices by franchisors participating in VetFran.”
Additional recommendations from VetFran include having a franchise attorney review all documents before signing on the dotted line.
Learn more
Read FTC’s “A Consumer’s Guide to Buying a Franchise” at https://www.ftc.gov/business-guidance/resources/consumers-guide-buying-franchise
Read “FTC Sues Burger Franchise Company That Targets Veterans and Others With False Promises and Misleading Documents” at https://www.ftc.gov/news-events/news/press-releases/2022/02/ftc-sues-burger-franchise-company-targets-veterans-others-false-promises-misleading-documents
Read the FTC’s Franchise Rule at https://www.ftc.gov/legal-library/browse/rules/franchise-rule and a frequently asked question document about it at https://www.ftc.gov/business-guidance/resources/amended-franchise-rule-faqs
Visit VetFran at https://www.vetfran.org, its franchise FAQ at https://www.vetfran.org/opportunities-portal/faq and is small business financing and resource page at https://www.vetfran.org/opportunities-portal/financial-and-other-small-business-resources-for-veterans
A recent GI Jobs virtual workshop explored that question. The event featured advice from panelists Gordon Logan, the co-founder and CEO of Sports Clips Haircuts, a men’s salon franchise with over 1,800 locations; and Austin Meek, broker relationship manager at Neighborly, a holding company for 29 home services businesses.
Here’s some of their advice and other information about franchise ownership:
What is a franchise?
The U.S. Small Business Administration (SBA) describes the business model this way: “When you buy a franchise, you get the right to use the name, logo, and products of a larger brand. You’ll also get to benefit from brand recognition, promotions, and marketing. But it also means you have to follow rules from the larger brand about how you run your business.”
Meek said a franchise is similar to bumpers blocking the gutters of a bowling lane: Franchises provide systems and processes that effectively remove some of the risks of starting a business.
“What franchising does is that it helps you avoid those gutters,” Meek said. “So, if you’re able to provide enough money up front, and if you’re able to mentor and engage your employees and work hard, you will have a business that is successful.”
As the SBA noted, franchise owners buy into a proven concept (more on how to assess the franchise is covered below) and get help operating and promoting the business. Gordon said that these collective benefits can include favorable pricing from bulk buying (e.g., lower credit card processing fees), collective advertising services, initial and ongoing training for franchisees in areas such as sales systems and business trends, and opportunities to network with other franchise owners to learn best practices. The franchise may also provide access to accounting, customer service and payroll systems.
However, these benefits aren’t free: You pay an initial fee that can run to five figures and contribute an ongoing percentage of your gross sales to royalty fees. Even successful franchisees may wait one to three years or longer to break even and start making a profit. Again, you have to follow the procedures of the franchise. And the business could fail.
However, Gordon said that Veterans are well-suited to franchising because they have experience operating and executing within a system and leadership skills learned from their time in the military.
“Franchising is simply a way of doing business,” Meek said. “All that franchising means is that a parent company is going to give you the support that you need and, in exchange for that support, you’re going to give them a percentage of your sales.”
How much are the franchise fees?
So how much does it cost to become a franchisee? The short answer is it depends. In general, Meek said, the franchise fee is what you pay to be awarded your territory — whether it’s to sell garage doors, open up a salon or operate another type of business.
Meek said his brands typically conduct market research about the potential customers in the franchisee’s territory — say, the number of households with detached garage doors. “Our franchise fee,” Meek said, “is going to be dependent based on the number of attributes that we need to generate a significant territory, a viable territory, for you.”
At Neighborly, he said, most of the brands require owners to pay a franchise fee that’s close to $50,000 and then to contribute royalty fees of 2% to 6% of gross sales. Meek said at Neighborly this helps pay for a local marketing specialist and a business coach, who are assigned to the franchise owner for the duration of the relationship.
Gordan and Meek later cited SBA loans and home equity lines of credit as possible ways to financing franchise fees. Meek also mentioned rolling over a 401(k) to finance the fees but this IRS article — https://www.irs.gov/retirement-plans/rollovers-as-business-start-ups-compliance-project — contains several cautions about “Rollover as Business Start-up” arrangements.
Who are the ideal franchise owners?
Beyond the investment considerations, do you need to be or become an expert in door installation, haircutting or another trade to be a successful franchisee?
No, said Logan, and he’s a prime example: He flew C-130s in the U.S. Air Force, earned engineering and business degrees, and worked as a consultant for large accounting firm, so “I knew nothing about the haircare business.”
But he said few franchisers look for franchisees who are skilled in the occupation of the franchise.
“We’re looking for businesspeople who have demonstrated leadership qualities … who are passionate about developing people and helping people grow and develop,” he said. “Again, Veterans are very well-suited for that … because they have those skills already developed.”
How much you can earn as a franchisee?
Although franchise owners don’t have to provide profit-and-loss statements, they are required by the Federal Trade Commission (FTC), under what’s called the “Franchise Rule,” to provide the Franchise Disclosure Document prior to formalizing a relationship. This 23-item legal form contains material information about the franchise, its office holders and other franchisees. The Franchise Rule requires disclosure of all 23 items and is designed to help you “weigh the risks and benefits of such an investment,” according to the FTC.
Gordon said the document is packed with helpful information and should be reviewed in its entirety. He advised possible franchisees to scrutinize item 19, which relates to financial representations; and item 20, which lists the number of franchises and other information about the franchisor’s system. He added that talking to existing franchisees, especially those in a similar business or market, can elicit critical information, including about potential profits and loss.
Meek said he generally schedules hour-long video chats with prospects about the business model and, if their interest remains, introduces them to existing franchisees.
“You’re able to ask these franchise owners anything you want,” Meek said, including when they first broke even or the amount of their profits in the last month.
“There are some less scrupulous franchises out there,” Meek added. “But I think if you’re looking at a franchise opportunity, and they don’t have an item 19, that would be a big red flag for me. You need to have validation — you need to be able to prove, ‘Hey, this is what I can make.’”
In addition to franchises that withhold information, beware of those engaged in predatory practices and other violations of the Franchise Rule: In February of this year, the FTC filed suit against the BurgerIM fast-food chain for targeting Veterans and others with “false promises and misleading documents.”
“BurgerIM promised consumers, including Veterans, the American dream, only to leave them in a nightmare of debt and deceit,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection, in a Feb. 8, 2022, news release. (The FTC lists the case as pending.)
Look on the Financial Disclosure Document for information such as the top 10% franchise owners’ gross sales, the bottom 10% owners’ gross sales and the average owners’ gross sales, Meek said.
“Use the information that’s in that item 19 in conjunction with the anecdotes and the stories that you hear from franchise owners in the validation process,” he said, noting that this can give you “a reasonable expectation of what you can actually make.”
Other Veteran-franchising resources
Gordan and Meek said Veterans can also get help assessing franchisors by working with the organization VetFran, a nonprofit founded in 1991 by the International Franchise Association (IFA) and its foundation to promote Veteran franchising.
Among other Veteran-focused franchise educational programs and tools, VetFran has a three-tiered “STAR” ranking system to assist Veterans in evaluating franchisors, which can earn one, three or five stars. “The star system showcases the ability to meet increasingly higher criteria indicative of various strengths,” according to IFA.
VetFran said the program designations “provide Veterans with more information beyond the VetFran incentive discounts and encourage best practices by franchisors participating in VetFran.”
Additional recommendations from VetFran include having a franchise attorney review all documents before signing on the dotted line.
Learn more
Read FTC’s “A Consumer’s Guide to Buying a Franchise” at https://www.ftc.gov/business-guidance/resources/consumers-guide-buying-franchise
Read “FTC Sues Burger Franchise Company That Targets Veterans and Others With False Promises and Misleading Documents” at https://www.ftc.gov/news-events/news/press-releases/2022/02/ftc-sues-burger-franchise-company-targets-veterans-others-false-promises-misleading-documents
Read the FTC’s Franchise Rule at https://www.ftc.gov/legal-library/browse/rules/franchise-rule and a frequently asked question document about it at https://www.ftc.gov/business-guidance/resources/amended-franchise-rule-faqs
Visit VetFran at https://www.vetfran.org, its franchise FAQ at https://www.vetfran.org/opportunities-portal/faq and is small business financing and resource page at https://www.vetfran.org/opportunities-portal/financial-and-other-small-business-resources-for-veterans
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