Franchising's pathfinders - selecting a franchise

Nation's Business, Feb, 1989 by Nancy Croft Baker, Meg Whittemore

Franchising's Pathfinders

These days it seems that franchising can be attempted with nearly any type of business. Remember the freeze-drying service for people who wanted to preserve thier deceased pets? That company certainly received media attention, though it wasn't the most successful franchise.

For the first-time buyer who wants to tap into the next franchise blockbuster, purchasing a new franchise may look like a golden opportunity. Unfortunately, some new franchisors make unrealistic promises of hug success. Before buying a new franchise that promises to be the next Domino's or Jiffy Lube, do some detective work.

One way to spot promising opportunities in franchising is to follow demographic trends. Select for further investigation franchises in new industry categories that fill niches created by those trends, says William Cherkasky, president of the International Franchise Association. "As franchising matures, prospective buyers are finding it pays to look at growth forecasts in each franchised industry," he says.

Cherkasky tracks key growth industries for franchising by examining his association's membership applications, which he says are "good indicators of the most recent directions in franchising." During the past two years, he says, a number of the IFA's new members have come from franchise systems offering business products and services, automobile aftermarket services, and in-home services that range from providing companions and helping with child care to taking care of homes, gardens, and pets when owners are absent.

Following are several business categories that experts say will be sources of increased franchising interest in the coming years.

Accounting Services. In increasingly competitive and growing industries such as health care, franchises are stepping in to meet bookkeeping needs. One franchise that targets health professionals with accounting services is Mifax Service and Systems Inc., in Waterloo, Iowa. The 20-year-old company, which started selling franchises in the early 1980s and has seen a boom in sales in recent years, specializes in selling accounting systems to private medical practices. Cloients include dentists, podiatrists, optometrists, physicians, and anyone associated with the medical market. The company also offers services for billign patients and processing insurance claims.

The franchise system is based on a dealership concept, with no monthly royalty or advertising fee. Franchisees distribute Control-o-fax Office Systems exclusively. The franchisor charges a minimum down payment of $11,800 and requires the franchisee to keep an additional $13,840 in reserve for various initial expenses.

Franchisees, who can work from their homes, make "cold" calls to doctors' offices to sell the product. The franchisor makes a percentage of each sale (percentages vary according to product price). Franchisees stock no inventory, and the company manages franchisees' accounts receivables. Tom Mullen, president, says each market consists of 1,000 to 1,200 doctors' offices. Mifax has 70 franchises nationwide.

Legal Services. "The rapid growth of law offices has created a shortage of qualified legal secretaries, paralegals, law clerks, and other support personnel," says Louise Hackett. A former legal assistant who founded the parent company in 1973, Hackett began franchising a temporary-personnel agency specializing in legal support this year. Legalstaff Inc., which is based in Sacramento, Calif., has one franchise in Los Angeles and one in Washington, as well as company-owned units in San Francisco and San Jose, Calif. The company grossed more than $2 million in 1987.

A Legalstaff franchise's typical territory covers about 1,500 law firms. Depending on the size of the territory, start-up costs for a franchise are $46,000 to $54,000. They include a $25,000 franchise fee, $10,000 for office rental and related costs, and a $20,000 line of credit to cover payroll costs of temporary employees. Franchisees also pay a sliding-scale royalty--8 percent on the first $300,000 of monthly gross income, 6 percent on the next $200,000, and 4 percent on income beyond $500,000. There is also a 2 percent advertising fee to cover newspaper, magazine, and newsletter ads, as well as promoting the service at professional trade shows and meetings. Franchisees receive a computerized personnel-management system, which automatically tracks temporary employees' work time and issues billing statements.

Home Services. Busy homeowners and two-income households have created brisk demand in franchisee-provided home services, such as housecleaning and home inspection. Home-inspection franchisees, for instance, inspect a home or any other property for the busy home buyer who doesn't have time--or the knowledge of construction--to make an informed decision before making a purchase.

National Property Inspections, in Omaha, Neb., has sold nine franchises since it began franchising two years ago. Roland Bates, who was a general contractor before he franchised his home-inspection business, says there has been a growing demand for home inspections across the country. "We've basically evolved into a white-collar society," he says. "Most people today can't even change a light switch, and they don't have the time to really take a good look at what they're buying."