Beauty Franchise Industry Report 2011 - Franchise Information (3)

Franchise Information

Important Note: The provisions and fees illustrated in this report are only the most common and not a complete listing. Please review the Franchise Disclosure Document (FDD) for all of the provisions and fees related to investing in a specific franchise.

The qualifications needed for each franchise system vary by franchisor. Prospective franchisees considering the beauty franchise industry need to assess their qualifications to see if they match up with those required in this field. Prospective franchisees also need to determine which franchise most closely resembles their business philosophy. Stay open-minded during the investigation. A franchise can be the right one for you even when at first it didn’t seem to be.

In researching and evaluating potential franchises, there are several factors to consider. Below are some notes on a selected few of those items that must be considered when investing in a fitness franchise (in addition to the items covered in the sidebar).

Store Design

All franchise systems strive for continuity in their franchise outlets, and there may be no more important industry for franchise appearance than beauty. Because of the nature of the industry, the look and feel of the store is a critical factor to success. As a result many items pertaining to color, layout, product placement, etc. are dictated by the franchisor. For example, Merle Norman Cosmetics requires that their franchisees, among other design obligations, “present the visual impression of a cosmetic studio featuring primarily MN Products. [The franchisee] must, at all times, devote at least 50% of the Studio’s available front window space to MN Products.”

Regulations

Businesses in the health and beauty industry are subject to several government regulations. Personal appearance workers are required to be licensed in all states (with the exception of shampooers). License qualifications for a license vary by state, and licenses are usually non-transferable between states. Health and sanitation codes will dictate the standards for the upkeep of equipment. Environmental laws govern which solutions, and the ways permitted solutions are used, stored, and disposed of. In addition to typical building codes, special ventilation might be required within your franchise. While a franchisor can offer guidance to rules and regulation that must be followed, it is the responsibility of the franchisee to know and make sure all applicable requirements are met in relation to running of the franchised business.

Soft Skills

Beauty is obviously an image industry. As such, having a good appearance is a job requirement in this field because of the initial positive impression it can make on people. Interpersonal skills also play an important role in success due to its effect on client retention and retail sales, which are directly related to a franchised business’ bottom line. Some cosmetology schools consider “people skills” to be such an important part of the job that they require coursework in that area.

Absentee Ownership

Like the closely related fitness franchise industry, many franchisors in the beauty industry dictate that the franchisee must devote their “best efforts” to the operation of the franchised business, but aren’t required to be involved in day-to-day operations on-site. In fact, this style of “manager-run” business can be appealing to prospective franchisees that are looking to shift out of corporate life, but want to ease into being a franchisee. Logan has found in his experiences that it can help franchisors because it gives the incoming franchisees “a great deal of comfort during the ramp up phase of their business, and makes obtaining financing much easier. [It’s] a very attractive model for many in corporate America who are looking for an exit strategy over a 3-5 year time frame.” Higher multi-unit owner rates are also more common in the beauty franchise industry than in several other franchise industries. Many beauty industry franchisors have a multi-unit owner rate of well over 50% within their franchise system.

Liquidity Requirements

Before a prospective franchisee enters into the process of becoming a franchisee, many franchisors will have a set of requirements that must be met ahead of the process. One of these potential requirements is a minimum cash amount the franchisor has deemed necessary for the prospective franchisee to have immediate access to in order to cover costs until the franchised outlet is profitable, if needed.

Initial Costs

The range of investment between franchises can be large due to variations in their business systems and what it requires to execute them. The following charts demonstrate this by comparing initial costs associated with opening one of the 15 example franchises presented. Initial costs associated with opening a franchise include many items such as equipment costs, training expenses (such as travel and living expenses, not the actual training courses), real estate purchases (if applicable), additional funds needed for a specified number of months, and more.

Comparison of Estimated Initial Investment Ranges for Selected Beauty Industry Franchises
(Note: Some estimates do not include real estate and/or other selected variable costs. Please check a specific franchisor's FDD for details pertaining to that franchise.)

A significant item within the initial investment is the franchise fee. This part of the overall initial investment grants the franchisee the right to use the franchisor’s trademarks, service marks and other branding. It also gives the franchisee access to the franchisor’s business systems, including training. The average franchise fee among the franchises featured is just over $24,000.

But, there are exceptions like Merle Norman Cosmetics. According to the company’s FDD, there is no required initial franchise fee to become a Merle Norman Studio Owner. However, in place of the typical franchise fee, the franchisee must purchase an initial package of MN Products, supplies and other items upon signing the Studio Agreement. The initial package for Merle Norman includes a “full range of MN Products, business forms, supplies and materials.” If an incoming franchisee is purchasing an existing Studio from another Studio Owner, it is not necessary to purchase the initial package.

Franchise Term Length

The length of the franchise agreement for many beauty franchises is 10 years (some franchise terms can be as short as 5 years or long as 20 years) with most franchises offering provisions for renewal terms. There are special cases, however, such as Supercuts, where the company has a variable term length.

Ongoing Fees

Regardless of length, there will be costs that must be paid regularly during that time period of the franchise agreement. These include items such as royalty fees and marketing costs, and are predominately assessed for the franchisee to continue reaping the benefits that come with being a part of the franchisor’s business system. Although fees like these are common, the amount and way they are assessed aren’t universal.

Sample Beauty Franchise Royalties

Typically royalty fees are assessed as a consistent percentage, sometimes a flat fee, due weekly or monthly illustrated by the chart above. One example that runs contrary to this is South Beach Tanning Company. As a result of their belief that a reduced royalty will help their franchisees grow in the beginning stages, they offer a tiered royalty structure illustrated below.

Tiered Royalty Structure Based on Year

There are additional ongoing fees that are assessed regularly such as technology fees to cover items like the point-of-sale system, server hosting, internet access, etc. Select fees are assessed on an “as needed” basis such as audit fees or costs for additional training. All prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs involved before in investing in that franchise.

The beauty industry offers prospective franchisees a large, diverse set of opportunities to take the next step on their career path. “Franchising is a powerful business model that can make your first (or subsequent) venture much less stressful, and greatly increase your chances of success,” says Logan. “Find a system that feels right for you, and then follow the system! Execution is the key to success regardless of which concept you choose. Someone has spent a lot of time and money to perfect their system, and your efforts will be well rewarded if you focus on executing vs. trying to re-invent the wheel.”

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