Solid data help emerging brands stay sound
One of the advantages of operating many corporate-owned locations before breaking into franchising is that you can predict earnings and expenses pretty closely. Blink Fitness, a player in the low-price fitness market, has been able to draw upon data from its 35 corporate locations and flex its muscle in this area.
The items 7 and 19 outlining expenses and revenue, respectively, in Blink’s franchise disclosure document are fairly detailed. Blink’s item 7 breaks down expenses into initial franchise fee; training; presale marketing; real estate services and costs; signage, utility costs, license and permits; fitness equipment; opening inventory and supplies; computer hardware and software; technology and support services and professional fees; insurance deposits and more. The total estimated initial investment for Blink varies between $642,800 to $2,082,100.
The item 19 is equally detailed and tracks average and median year-end results for Blink Fitness gyms that have been open at least 12 months. With an average tracking across 35 locations, the revenue averages to $1,186,184 and the earnings before interest, tax, depreciation and amortization for the same amounts to $241,066.
Todd Magazine, president of Blink Fitness, says such an approach to the FDD was a purposeful decision. “We waited to franchise until we had some confidence that our business was predictable, and our business was scalable. That was a real benefit for us. We are able to share pretty robust theories of information, because we are able to draw upon our corporate business,” Magazine says.
He explains the wide range of numbers in the item 7 comes from franchisee deals with landlords. Turnkey deals where the landlord takes care of the gym buildout tend to cost more versus those where the landlord simply hands the franchisee tenant the keys and expects the tenant to shoulder the burden of building the gym.
Magazine says since growth is focused on expanding both the franchise and corporate arms of the operation, “virtually everyone in the organization has worked on both parts of the business.” Nevertheless employees are trained to be very clear in what they can communicate, both in person and by email, about franchise sales. “If the franchisee is going to be in an urban location, we will share our urban data. If they’re in a rural location, we’ll share our rural data. We take care to say that this is not exactly what you will get but share our experiences so they can figure out what their likely results might be.”
Blink hires strong legal counsel and has also had a robust operations manual written for them. The FDD, Magazine says, might be excruciating to go through but is critical not only as an enabler for franchisees but as a protector for franchisors.
“When you’re dealing with franchisees, if issues come up, at some point the FDD becomes very critical and you want to make that investment at the outset.”
Lani Dolifka, president and CEO of Watermill Express, a drive-up drinking water and ice franchise, agrees the attention to the FDD is worth the investment. “Franchise attorneys are surprised I take the time to read every word in their document. It needs to be correct. It needs to have the right vision and the right rules,” she points out.
Like Blink, Watermill Express has the advantage of plenty of field data from its 1,301 corporate and franchise locations. The item 7 in Watermill Express’s FDD breaks down expenses into franchise fees, construction costs, water stations, opening supplies and inventory, marketing costs and more. The total cost for the first three stations varies from $456,700 to $581,700 and drops to a range of $138,200 to $206,900 after that.
Helpfully, Watermill Express’s item 19 breaks down expected revenue separately for affiliate-owned and franchise locations and predicts the average income for a franchisee to be around $72,573. While Watermill Express does sell ice too, the breakdown between water and ice numbers are not included. “We feel we’re giving enough information on our average annual sales number so our prospects can make a good decision,” Dolifka says.
Watermill Express doesn’t include labor costs in its calculations, which it marks as part of overhead expenses. There’s a reason for that, Dolifka says. “We’re not targeting single-unit operators but multi-unit operators who already have successful franchise businesses. So it’s their decision how they leverage their existing staff.” Dolifka points out it takes an average of only 15 to 20 minutes a day to service a Watermill Express station so the labor component is much smaller than a traditional franchise concept.
To make the franchise sales process foolproof, in addition to going through in-house training, all sales staff work with Fran-Guard modules, a training program developed by the International Franchise Association that covers the legal and business aspects of franchise compliance. “That provides additional proactive steps to reduce risk,” Dolifka says.
Keeping track of correspondence
To make their sales process bulletproof, Spray-Net, an exterior painting franchise based in Canada, has developed an in-house Customer Relationship Management (CRM) software system. “It tracks the prospective franchisee from a lead to compliance. It makes sure all the documents are sent in the right order, keeps track of all email correspondence,” says Carmelo Marsala, founder and president of Spray-Net. The software raises flags when processes stray from the prescribed path.
Spray-Net has seen rapid growth in Canada, and there is not enough reliable sales data to accurately predict item 19 numbers, Marsala says. Spray-Net has gotten to the point where franchisees are coming to them; they have not had to sell the franchise too rigorously. Canadian franchise laws, with Ontario province being the strictest one there, do not require the inclusion of an earnings projection in an FDD. Spray-Net’s item 9 is pretty detailed, however, covering training and franchise fees, starter kits, signage, travel expenses and more. Expected expenses range between $247,000 to $304,750.
Spray-Net has not had any legal claim issues so far (nor has Blink or Watermill Express) and is making sure to hire legal counsel that can help navigate stricter U.S. franchise laws.
Sales and operations are handled by the same staff, so one is not undercutting the other. “If they over-promise it’s going to be them managing the bad expectations later on, so they don’t,” Marsala says.
Spray-Net is very particular about setting a realistic picture, he adds, and potential franchisees are reviewed by a committee before being invited on board. “Usually franchisors have a discovery day; we call it expectations-setting day. At that point we’re no longer selling so the franchisees know what they’re getting into.”
One expert advises that franchisors guard against making agreements too strict when they start, says Steve Beagelman, president and CEO at SMB Franchise Advisors in Philadelphia.
You want to have clauses in the contract that protect you as the franchisor and if you are an emerging brand, you need protection rights. But if you make it too strict of a document, you might not get those first franchisees to sign up.