Salon Suites Franchises: A very bad idea
Why is a salon suites franchise a bad idea? (This is a long post, but you should read it entirely as it may save you hundreds of thousands of dollars.)
First of all, a salon suites franchise is a great idea...for the franchisor. But for the operator? Absolutely not. Here's why: Franchise providers make their money three ways, and none of them align with your interests as a franchisee:
1. Initial Franchise Fees:
By going with a franchise, you start your business in a hole and at a competitive disadvantage right out of the gate because of onerous franchise fees. The initial franchise fee typically buys you the right to put the franchise's name on your building, and not much more. (Think of it as your ante to get into the game.) Once you add up initial franchise fees, development fees, real estate site evaluation fees, lease negotiation fees, construction management fees, training fees, on-site fees, supplier application fees (and on and on and on), initial charges can easily add up to $70,000 and more! Unfortunately, these costs are incurred in addition to your hard start-up costs (architecture, engineering, market analysis, construction, financing, facilities, marketing, operations, etc.) and must be paid before you ever open your doors for business.
One surprise that many franchisees discover after signing the Franchise Agreement is that much of the development must run through the franchisor, and each step of that process is a very healthy profit center. The franchises play this game pretty-much the same, with variations, but it can DOUBLE the cost of your development. For example, you may be required to include significant cabinetry in your suites, which is a great selling point to your tenants. However, the Franchise Agreement does not allow you to source those cabinets yourself, nor does it allow you to acquire them from the franchisor's cabinet supplier. You can ONLY get them through the franchisor, which conveniently often marks them up 1200-1500%! That's right: NOT 120-150%...1200-1500%! And it doesn't stop there: doors/windows, ceiling tiles, furnishings, architectural services, etc. All of it is subject to enormous markups for which you have no control because you're locked into the Franchise Agreement. If you want to develop a salon suites business, you have no options since the Agreement does not permit you to cancel and develop on your own. You can either do it their way at great expense, or give up and get out completely, losing your initial investment.
3. Ongoing expenses:
Franchise operators are on the hook for ongoing royalties of up to 7% of your gross revenues PLUS other fees (tenant recruitment fees, local advertising fees, national advertising fund contributions, ongoing training fees, national franchise meeting fees, transfer fees, maintenance/refurbishment fees, audit fees, legal fees, renewal fees, indemnification costs, etc, etc, etc.), all of which have an unnecessary major negative impact to your bottom line and monthly cash flow.
At the end of the day, the salon suite franchise model is hugely problematic because:
a. With such inflated development costs, many franchisees are taking on an enormous debt load, which will have to be serviced for years, putting the operator at a significant disadvantage in a competitive environment.
b. Franchises providers under this scenario are mostly motivated by development, not operations. Think about it: If you do the math, franchise-provided inflated goods and services can double the cost of your development, and net the franchisor upwards of $400-$500k PER FRANCHISE! The best way to understand any business relationship is to know how each party is financially motivated. In this case, the majority of the franchisor's compensation comes from development (not franchise fees or royalties), so their motivation is to make sure developments get done, and that they get built as large as possible, with little regard to the economic viability of their development market. This explains why franchise providers are allowing franchisees to build facilities in ridiculously competitive or otherwise non-viable markets.
Other problems -
In addition to all this, the franchise will commonly control how and where you operate your business, including designation of their approved suppliers (who are often the franchisor or are receiving a commission from the supplier, see above), size, territory/location, dimensions, decor, color, design, software, furnishings, fixtures, etc. This is a bit problematic since many franchises are stuck on a deisng that they have had for years, and their suites are already dated the day they open. Additionally, franchise providers typically have the right to access your financial books online at any time(!) to assure that the franchise operator is paying all fees based on actual revenue. Most independent entrepreneurs don't appreciate anyone snooping into their business, and prefer to rely on their own style and taste to reflect the local nature of their business.
Competitive Disadvantage and Onerous Location Restrictions:
The franchise grants an exclusive territory to the operator under the guise of competitive protection, but is that really an advantage? Just the opposite. In fact, it's a huge NEGATIVE since artificial territory boundaries restrict you from establishing your facility at any location that makes the most economic and operational sense! Additionally, protected territories only protect you from other like-licensed franchise operators, not from independents or operators of other franchises. The franchise operator paying perhaps $40,000 per year in royalties has a difficult time competing with the independent operator without that burden.
The arguments against the franchise model are easy to make and sometimes funny. Here are several articles worth your time to review if you are thinking of going that route:
1. Salon Suites Franchising: It's worse than you think - Click here to see how the franchise's interest are not aligned with the operator's, how franchises are incentivized, and how they make their money. Short answer: it's bad for you, great for them.
2. Competition: Independent Operator vs Franchise Operator Case Study - Click on this link to see how the franchise operator is bringing a knife to a gun fight when it comes to competing with an independent. It's just not a fair fight.
2. Franchise Case Study - Click here to read a franchise case study. More information on why the interests of the Franchisor and the Operator are NOT aligned, and how that negatively impacts your success.
3. Franchise vs Independent Operators - Click here to see how a franchised salon suite compares to an independent operation
4. News and Blog Page - Check back to this page for the latest articles and updates.
How does a typical franchise differ from a salon suites franchise? (Click here for a summary table.)
A suites facility is not like a traditional franchise (i.e. Subway, 7-Eleven, Papa John's, etc.) which typically provides brand recognition, product supply chains with corporate leverage and economies of scale, product research and development, programmed Point of Sale terminals, inventory management software & hardware, and national advertising support. The reality is that on-going royalty fees are not necessary and provide little or no value to the operator. We will show you why, and how to eliminate them.
The bottom line is that many modern franchise business applications offer a great way to help the small business entrepreneur start and operate their business. Franchising makes a lot of sense for many other types of business applications.
But does it make sense for a salon suites operator?
The short answer: Absolutely not.
Once a salon suites facility has been established and the tenant sub-leasing process initiated, a suites business is relatively low maintenance and easy to operate, requiring little or no additional support. If designed and operated properly, a salon suites facility typically requires comparatively few hours of hands-on management per week, and certainly doesn't require product supply chains, national marketing, and especially royalty fees (or any of the other myriad franchise fees). We think that money should stay in your pocket and go to your bottom line. (For a brief comparison of the benefits and drawbacks of a typical franchise versus salon suites, click here.)
Suites Consulting Group can provide the same or greater level of expertise and assistance at a fraction of the cost, with no ongoing fees. Once you're up and running, you probably don't need us, but if you do, we're just a click, text or call away.
(Note: The type of information summarized above can be found in the Franchise Disclosure Document, or FDD, which must be provided by any entity offering to sell a franchise.)