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Tapping into low-cost franchising.

Are fast food outlets beyond your reach? Less expensive franchises, with start-up cost as low as $10,000, are ideal alternatives.

Looking to crack the $758 billion franchise market? Be prepared for sticker shock. With an initial investment of more than $600,000, McDonald's golden arches may seem more like platinum. And "having it your way" at Burger King will set you back at least $400,000. Such prohibitive start-up costs may make the term "low-cost franchise" sound oxymoronic. Take heart. You can still manage to ease into franchising without flipping burgers--or burning your life savings.

"Cost is obviously a major factor for anyone looking at franchises," says Terrian Barnes-Bryant, vice president of research for minorities and women at the Washington, DC-based International Franchise Association (IFA). "But there are good, cheaper alternatives to the fast food giants."

Though franchises today require an average total investment of $147,000, there are plenty of opportunities to get started for as little as $10,000 or less. Many service-industry ventures can be started for $50,000 or less and often can be run from your home or on a part-time basis. Signing on with them means you won't have to bankroll major assets like land or heavy equipment. The one asset you'll need, in fact, is something money can't buy. "A big part of success in these types of businesses is a person's ability to generate sales," says Aaron Shingler, president of Shingler-Hollis Investment Group, a franchise consulting firm in Lanham-Seabrook, Md. "You've got to be aggressive enough to go out and bang on doors."

As a low-cost franchisee, you'll also need to keep your expectations in check. Though any good business has the potential for growth, a franchise that's easy on your wallet won't get you rich quick. "You can't expect to pay a small amount of capital and generate a large amount of sales--at least not initially," Shingler points out

Other things to watch for: * Financial position of the franchise. You'll learn about a company's finances, as well as details about the franchise agreement, from its 50-to-100 page 100 Uniform Franchise Offering Circular (UFOC), which is required under federal law. Shockingly, a 1989 Federal Trade Commission survey found that fewer than 50% of franchise owners actually read this crucial document. * Franchise fee. A low franchise fee alone should not be enough to rope you in. Find out exactly what you're paying for. It shouldn't be a fee just to open the door," says Michael Baum, vice president of Francorp, an international franchise consulting firm based in Chicago. The franchise fee should at least include any necessary training, on-site support and advertising. Otherwise, says Baum, "a low franchise fee may not translate to a low-cost franchise." * Total start-up costs. Once you've cleared the franchise fee, you'll want the franchisor to provide you with a detailed list of all estimated start-up costs and working-capital requirements. * Professional advice. No matter how seductive a franchisor's marketing materials, never sign an agreement until you've had an attorney -- ideally, one familiar with franchise law--comb through the contract. * Stability of the franchise. According to the IFA, fewer than 5% of all franchises fail. Still, you'll want to know how many units a franchisor has--and how many have dropped out or been "terminated." New or low-cost franchises may have a particularly high dropout rate, 15% to 20% or higher.

Discussed in detail below are four low-cost franchises, each in an area that is slated to experience better-than-average growth over the next decade.

DECORATING DEN INC., Bethesda, Md. Type of business: Home decoration. Start-up costs: $15,000 to $25,000. Royalties: 7%-11%. Financing available: Yes. Phone: 301-652-6393.

The husband-and-wife team behind Decorating Den is on a mission: to wallpaper, carpet and upholster middle America. "We've franchised the |unfranchiseable,' " boasts company president and owner James S. Bugg Sr. Indeed, the company's concept of door-to-door home design doesn't quite seem to fit the franchise mold. Yet, the 22-year-old franchise company has taken the tony field of interior decoration and delivered it to the masses. Equipped, literally, with showrooms on wheels, the Bethesda, Md., firm's 1,200 franchise owners are capitalizing on the notion that everybody--not just the town-and-country set--should be able to afford a design pro.

Sharon Henson of Plano, Texas, will second that. After seven moves in 12 years to accommodate her husband, Frank Henson's, career at Mobil Corp., Henson had polished her own homedecorating skills to a high gloss. When she stumbled across an ad for Decorating Den in the Dallas Morning News in April 1989, Henson, 43, knew she had found her calling.

Using money from the couple's savings, Henson plunked down $25,000 for Sharon's Decorating Den. Six months later, after the requisite tests and training sessions, Sharon was behind the wheel of her rainbowstriped Den van. She called on Plano schools, new neighbors, local businesses and churches--"anybody who had bare walls or windows," she jokes. In her first ear of business, Sharon logged $100,000 in sales, more than half of which was pure profit. "It takes a lot of knocking on doors," says Henson, whose well-tested knuckles have been rewarded. She estimates that more than half of her business is from repeat customers or referrals.

Den owners like Henson chalk up their success to the ability to pull together an entire house from the back of a van: Fabrics and carpets go for $15 to $60 per yard installed, and wallpaper sells for $18 to $40 a roll. There's also a catalog of furnishings, such as rockers, sofa beds and dining sets. The average sale is $1,500. "A millionaire probably won't want to use Decorating Den," concedes Sharon. "But that's okay. We have a niche--customers who want a nice home at a nice price--and we fill it."

Though previous design experience is not a requirement--the Den trains its own people--the firm sifts through 75 queries before spotting what it thinks is a qualified applicant. We're looking for people who are artistic, who like selling and who have an innate feel for space," says Bugg.

Of course, having the necessary cash doesn't hurt either. A Decorating Den franchise costs between $8,000 and $16,000, depending on how large a territory an owner wishes to command. In addition, the company requires that each franchisee start out with at least $6,000 in working capital. All told, the typical up-front investment requires $15,000 to $25,000. Promising candidates for franchise ownership who are short of funds may qualify for Decorating Den financing of up to 50% of start-up costs.

For their fee, franchisees get a two-week crash course in color coordination, fabric hanging and other fine points of design at Lifestyle University, the company's training facility in Bethesda, Md. (Franchisees are responsible for their air fare and hotel accommodations.) From there, franchisees get ongoing support from the company's 35 regional offices, which provide an additional two-months mandatory training session in the field, promotional events and referrals. Den owners have instant access to the company's network of hundreds of suppliers. in exchange for such privileges, franchisees pay royalties of 7% to 11% (determined by volume), plus 2% of their gross monthly sales in marketing fees. The Den van is also extra and is leased for about $400 per month.

Helped by promotional give-aways on television's Home Show and a national advertising campaign featuring an 800-number hotline, Decorating Den has more than quintupled its revenues--from 8 million in 1984, to $54 million last year--putting it in the top 5% of all franchises.

D&K ENTERPRISES INC., Dallas, Texas. Type of business: Personalized children's books. Up-front costs: $3,500 to $5,000. Royalties: None. Financing: No. Phone: 214-353-9999.

As a librarian/teacher in the Dallas public school system, Bernice Jefferson, 45, has devoted her career to the art of storytelling. But back in 1989, as a widow with a modest income of $26,000, her own tale wasn't headed for the happiest of endings. "I had taken on a lot of extra jobs," she recalls. "I sold cars, I sold insurance, I sold everything. Then it hit me. I realized I shouldn't be selling for other people--I should be selling for myself."

After scouring the business media for a good local opportunity, Jefferson found her niche: a Dallas-based franchise company specializing in personalized children's books. "This is perfect," thought Jefferson, who was delighted by such D&K titles as My Teddy Bear Party and My Little Mermaid Adventure. "This can help me promote reading, which is my goal." To the veteran librarian, the idea of using a child's own name in telling a story was already a familiar one. In school I would change the names of characters to fit whoever I needed to focus on," she explains. "Kids love to imagine themselves inside a story. I knew this concept would work."

In October 1990, Jefferson purchased her franchise, dubbed B.J. Media Products, with a $5,000 credit union loan. For this modest investment, she received a license to a D&K " dealership," a starter kit of supplies, plus a video that taught her the three-minute routine of printing, stapling and binding each book. Another $1,400, financed on plastic, bought her the two pieces of hardware required for the job: an IBM-compatible computer and a laser printer.

For her finished products, Jefferson charges between $9.95 to $13.95 each, the suggested D&K markup of 500% over cost. What she clears is hers to keep, as D&K doesn't charge royalty fees. Instead, the company makes its money on the book supplies it sells and on the annual dealer fee of $100 to cover upgrades in software packages. "There are no hidden costs," says Tom Mosey, vice president of D&K. "Hidden costs only hamper growth."

Certainly nothing has slowed down Jefferson. A tireless sales pro, Jefferson has been known to suit up and head for the malls, playing Santa, clowns and other characters she's endeared to her students over the years. Impromptu sales calls also take her to day-care centers, hospitals, churches and hotels. "Wherever I go, I sell," she gloats. "Even at the post office."

Since personalized children's books are by nature a portable business, roughly 60% of D&K's dealers ease into the business as part-timers; the remaining 40% operate full-time kiosks in theme parks, airports, schools and military bases. The company can also help dealers--full or part time--get set up in Sears and JC Penney department stores. "Our flexibility has helped us to double our sales every year," says Mosey, who reports that the company's sales jumped from $1 million in 1990 to $2.2 million last year.

Still a fledgling company, D&K does not yet guarantee its dealers regional exclusivity, says Mosey. However, D&K does attempt to limit the number of franchises it sells within a given area. Because of its small size, D&K can still afford to lavish attention on its 1,000 dealers. When Jefferson was faced with computer troubles one Christmas, for instance, D&K rushed her another printer. The company is also open--and responsive--to dealer input. Prompted by Jefferson, the company will this fall launch a new series of black titles, including tributes to Martin Luther King Jr. and other African-American heroes.

Ever the promoter, Jefferson herself has recently sealed a deal with a local pharmacist to peddle books from two of his drugstore locations. She's hoping that the partnership, along with D&K's newly expanded book line, will help transform her $200-a-week, part-time venture into a golden-egg-laying goose.

TRIPLE CHECK INCOME TAX SERVICE INC., Burbank, Cold. Type of business: Tax preparation. Start-up costs: $5,000 to $16,998. Royalties: 20%. Financing: Yes. Phone: 800-733-1040.

It's not your average 10-year-old who claims a fondness for the tax code. But Janis Miller smilingly remembers how as a little girl she shuffled receipts, bank statements and other nettlesome documents--all in the cause of easing her grandmother's tax-time burden. She wouldn't trust anyone else to keep track of her records and passbooks," recalls Miller, 45. "I guess you could say I have a sentimental attachment to the whole tax process."

Today, Millers desire to assist taxpayers is fulfilled through Triple Check, the second-largest income tax preparation service in the United States. After 10 years of doing taxes "on the side" while working in financial services for AT&T, Miller decided to take her business practice solo in 1989. in doing so, she intended to backpedal out of tax preparation and concentrate on financial planning. However, in 1990, when it became clear that the tax code was destined to get thornier, not simpler, she decided to put tax preparation, financial planning and insurance sales under one roof. "I wanted to put all of the pieces in place for the clients I had," she says. With her agenda set Miller sought out what she believed to be the best support system for her tax clients--and latched on to Triple Check.

Miller and her business partner, Caroline Podchski, named their business--a combination tax and financial planning outfit in Union, N.J.--for themselves. That's not unusual for Triple Check franchisees, who typically buy into the company as a means of enhancing an existing tax practice. "We're looking for people who have a minimum of one year's experience in tax preparation," says Triple Check licensee coordinator Andrew Siegel.

Miller's initial ante for the franchise was a mere $3,000, which covered the application fee, franchise fee and advertising support. She also pays an annual advertising fee of $600. Royalties, which are charged at 20% only after the franchise brings in new customers, pay for ongoing support: a full research library, a tax research hotline, discounted software products and business supplies. Specialized worksheets, also a part of Triple Chock's system, are designed to ferret out overlooked deductions. All Triple Check clients are entitled to a year's worth of free follow-up advice and tax planning. "Even if you get audited, there's no additional fee," says Siegel.

Today, their typical tax clients have incomes of $50,000 to $150,000; the fee on the average return is in the range of $125 to $300, based on the number of schedules required. "We did about $4,000 on the Triple Check side last year," says Miller, who expects to double that figure for 1992.

Based in Burbank, Calif., Triple Check franchises are concentrated in western states such as California, Colorado and Arizona. However, the company has been gaining market share on the East Coast. Triple Check, launched in 1978, now has 354 locations nationwide, and posted revenues last year of $1.4 million.

COVERALL NORTH AMERICA INC., San Diego, Calif., Type of business: Commercial cleaning. Start-up costs: $3,250 to $34,600. Royalties: 15%: Financing: Yes. Phone: 800-537-3371. Back in 1989, at age 32, Gerald Wheeler of Charlotte, N.C., suffered a serious case of worker blues. "It wasn't a bad job," he recalls of his position as an electrical products wholesaler. "But I knew there wasn't much room for advancement"

Like so many corporate malcontents, Wheeler soon switched his attentions from the "help wanted" section to the "business opportunities" ads. In his local paper, Wheeler spotted an ad for Coverall, a janitorial franchise in the $37 billion commercial cleaning industry. "I knew I could clean, and I knew I could sell," says Wheeler. "So I decided to take a chance."

At Coverall, Wheeler sifted through a menu of janitorial franchise packages--each of which promised a specific amount of contracted business (from $500 to $3,000 monthly), depending on an individual's needs. Making a clean break from his job, he started out full-time with a mid-level "executive" package that guaranteed him $24,000 in revenue. The cost: $10,000, half of which Coverall financed at 12% interest.

Coverall franchisees mop up business in one of two ways: They either pay outright for new contracts obtained for them by Coverall or they bid on jobs themselves. (Either way, the San Diego-based company takes a 15% royalty on all sales.) Wheeler, a self-starter, took the second route. He was in business just three months before he acquired new contracts on his own. If you go into business, you should know how to go out and sell," was his logic. "Otherwise you can't grow."

In business for himself for three years, Wheeler has grown his business from home. He prides himself on cleaning his buildings himself, with the help of one part-time and one full-time employee. All told, his industriousness will pay off, this yea(s billings are projected at more than $96,000. "I should've started something like this when I was 20," he says.

Working mainly at night Coverall franchisees can start out on a part-time basis and keep their daytime jobs. Even better, Coverall lets franchisees avoid the blizzard of paperwork that goes into running a small business: The regional offices handle all customer billing and collections. "I work them for their 15%," Wheeler observes.

The company also offers continual training to franchise owners and their employees at no additional cost. "The better trained our people, the more profitable the system," says Coverall vice president Ted Elliott. With more than 2,276 janitorial franchises, Coverall last year cleaned up $46 million in systemwide revenues.


By definition, a low-cost franchise will be lighter on your wallet then most entrepreneurial ventures. Still, what if you're short of funds?

Unfortunately, the answer isn't head for the bank." Commercial lending was down by $30 billion in 1991, and there's no sign that banks will ease their stringent lending requirements anytime soon. Although the failure rate is lower for franchises than for most business start-ups, banks aren't apt to fuss with commercial loans of less than $100,000. Your low-cost franchise venture, therefore, may be locked out of these traditional lending sources altogether.

Your best bet for financing? Surprisingly, it's your franchisor. According to the recent Franchise Marketing and Sales Survey by DePaul University and Francorp, the Chicago-based international franchising consulting firm, roughly 36% of franchisors provide direct or third-party financing to franchisees. Many of these franchise companies also offer special financing arrangements designed to assist minorities who want to buy into their systems Check with franchisors to see what's available. if no assistance is offered, consider these other sources: * The SBA's Microloan Program. Launched lost spring, this $15 million lending program provides start-up capital of $15,000 or less to qualified small business owners. Check with your local Small Business Administration office for details on how to apply. * Home-Equity Loans. Consider tapping the equity in your house. A home-equity line of credit lets you draw on funds as you need them, up to as much as 80% of your home's appraised value. The interest on loans up to $100,000 is tax-deductible, too. Recently, such loans could be had for rates as low as 6.5%. But, be careful--you are literally betting the house that you'll be able to repay the loan. * Local Programs in Your State. Check with your state's small business development agency to find out what special loon or grant programs may apply to your low-cost franchise. Several states, including Florida, Maryland, New York, Pennsylvania and Ohio, have established low-cost financing programs for minorities seeking franchise ownership.

Consult the States and Small Business Guide: A Directory of Programs, available through the U.S. Government Printing Office (202-783-3238) for $12.
COPYRIGHT 1992 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Branch, Shelly
Publication:Black Enterprise
Article Type:Cover Story
Date:Sep 1, 1992
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