Is a franchise salon really for us?

Some time ago we began looking into options for opening our own salon.  We thought the most logical place to start was with franchise salons.  After all, the large companies like Regis, Great Clips, and Fantastic Sams have the experience and walk you through the process.  We looked at them all and narrowed it down to Fantastic Sams and Cost Cutters (a Regis chain).  We did a lot of research, talked on the phone a lot, and met with regional developers.  Fantastic Sams was our first choice and seemed to have a terrific program.  All the while, however, I had been running numbers in excruciating detail again and again.  Something just did not add up, but we were still collecting information. 
We thoroughly reviewed the franchise disclosure document (FDD) to try and validate our estimates for startup costs and what we thought the monthly expenses would be.  We obviously could not predict as accurately as we would like what the income would be.  However, my wife worked in a franchise salon and was able to get a good idea of how much traffic went in and out on a daily basis.

One good thing about the FDD for Fantastic Sams is that it is very detailed on what you can expect for the major categories for start up costs.  There were things on there we were not aware of such as deposits into marketing funds, minimum requirements for startup marketing, proprietary point of sale systems with software and owner training.  The FDD also provided clarity on the franchise fees, ongoing royalties, monthly payments into marketing funds, minimum allowed advertising, and required computer support contracts.  When we combined those things with the things we already knew about, we had a pretty clear picture of what it was going to cost to start up and what our breakeven point would be every month.  Of course, the buildout costs and equipment costs are all based initially on averages.  We can tell you that the averages were very low compared to what we would later experience.  Our bottom line for startup hit just over $185,000 for a 1,500 square foot space with 8 stations.  That was a bit higher than where we wanted to be, but not too far off.  Then came the concern...

Being a detail oriented person, I listed everything I could think of for monthly expenses.  The FDD and all the franchise folks were very helpful with the big pieces.  But, once again, there were a number of small parts that very quickly added up.  For example, in our county, there is a business license tax that is paid on gross receipts and there is also a business personal property tax.  The franchisers also did not include merchant account fees, credit card fees, professional fees, and the kicker...employee theft.  Yep, you got it.  Employees stealing from you- more on that in a minute.  When we crunched all the numbers, our monthly break even point was $25,285.  Of course, no FDD is going to make any predictions on what your income will be other wise they assume liability.  So, again, you get averages.  For this, I can tell you the averages are very high, as would be expected.  After all, it's a sales pitch even if it is regulated and supposed to be completely objective.  We monitored closely the traffic in and out of franchise salons that rely heavily on walk-in traffic, as they all do, to get a feel for a reasonable income.  In the meantime, we spoke with franchise owners to see how reality compared to what they estimated before opening.  We took those numbers and combined it with our estimates and came up with a monthly gross income range of $25,000 to $28,000, with $25,000 being much more realistic than $28,000.  We were not entering into a open market.  We would have to go in and take market share away from established salons.  So, achieving even $25,000 in a month would be a challenge for a while.  Right away, we could see we would be cutting it too close.

The greatest factors eating away at our bottom line were royalties, which in the case of Fantastic Sams was not a % of gross receipts, but was over $300 paid weekly, a mandatory marketing fund, payroll or commissions and payroll taxes, inventory and supplies, rent, and loan payment.  When we went through the details, there were just no places to cut back as everything was required.  Then we started dealing with the issue of employee theft.  From my wife's experience at her salon and from talking with other owners, employee theft has the potential to drive even the best producing salon out of business.  Employees walk away with products and supplies like they're a perk of the job.  Not only that, but the waste factor can be outrageous if not closely monitored.  But, an even greater problem is in the accounting.  Most salons in our area pay stylists by commission (40 - 45%).  If customers pay cash, don't be surprised if those services do not show up in the system, but instead the entire payment goes into the stylist's pocket.  If there is the need to give the impression that they are entering it into the computer, a cut, wash, blow dry, and color will end up being only a cut and the rest going into the stylists pocket.  Credit card payments require a little more work, but it's still not difficult.  Employees will also steal from each other.  The "nice" one will offer to check out a customer for someone else so they can go ahead and take the customer that is waiting.  The "nice" one will then credit themselves with the service or pocket some extra tip when one is left.

When we factored in everything we could possibly imagine we were left with a very tiny to non-existent profit margin.  Granted we planned the worst case scenario.  But, we were not about to sink that much money into something only to find out we had been too rosy in our outlook.  There were a couple of mitigating factors that could have made a big difference.  If we could find the right residential area with no salon anywhere around, that could have bumped up the gross income.  Also, being owner/managers 24/7 could help with some of the theft and waste issues.  Finally, opening 3 or 4 salons (which negates the last factor of being owner/manager for all of them!) could generate enough net income to make a good living.  But, the headaches and stress would probably send you over the edge.

By no means are we the experts, but we just wanted to share our experience with researching the franchise option.  Next, we will discuss another option...going it on our own.

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