Starting a retail business (perhaps franchised)

First time poster on these new forums..... was on the old forums sporatically for a number of years..... so glad to see the community still so strong!!

Anyway, I've reached a point in my career that the next steps are cross-skilling with the aim to eventually land GM roles.... or go left field and start a business.
I think i've had my fair share of working to make someone else money....

So I'm looking at starting a retail business. I've worked pretty much my entire adult life in the retail industry, moving from pleb to store manager to purchasing to product development to senior product management/merchandising... and now in a national purchasing/product marketing role.

I am looking at a franchise model that is a bit unique - it's a member-based franchise group, where the franshisor is an unlisted public company owned by all the Members (franchisees). The entire structure is all about driving making profit to the member/franchisee... no big corporate or individual owner making money selling franchises.

There is no big up-front "franchise fee", only an ongoing FIXED monthly franchise fee (about $1200/mth)..... however the start up costs are big, as you could almost consider it big box retail ($400k-500k in stock to start with!), but the potential to earn is pretty good.
The average turnover in this group is $1.8million with a GP of 41%..... which includes a decent proportion of stores in regional locations (which reduces the avg turnover figures). There are a handful of stores with turnover >$3 million (similar GP%).

I wanted to see if people here have had much experience in running a big-box type of retail business, or any retail business.... and experience with retail franchises.
I am keen to hear feedback, personal experiences, advice or anything really!!

I've never run my own business before, so it's a bit daunting but also the concept is really starting to excite me.
I've been researching in the background for at least 6 months now, learning what works and doesnt work in the particular industry, understanding ongoing operating costs, understanding cashflow management, and generally getting a "feel" for what life would be like as an owner of this type of business.

I would be looking at doing this with a business partner, a long time friend and fellow property investor - we both have very similar mindsets around investment and business.
I dont think i could do it on my own due to the initial capital required, and also i dont want to end up working 80 hour weeks on my own..... the thoughts are that with a business partner we can share the burden..... and we have a common goal to open a 2nd store within 5 years, and a 3rd within 10 (sooner if we can manage!!!)

The curve ball is that i currently work for this group though!!
Which means i havent been able to talk to too many store owners candidly, so I've been keeping this all inside for quite some time! Im getting pretty close to opening up about my desire to open a store.... but i want to be absolutely certain im going down that path before opening the can of worms.

 

Good on you for considering it. Plenty of 'plebs' have moved through the business to franchisee etc (eg. Charlie Bell @ Maccas went all the way to CEO).

There's probably a pathway within the business to hop out and become a franchisee.

The things to consider are the support that you get, systems, standards & practices to be followed under t he franchise agreement. How much control d o you have vs the franchisor?

What do you get? Are property resources allocated to finding suitable sites? Lease negotiation to their standard inclusions? Does the franchisor go guarantor on the lease? Design support? Control of fitout contractor?

If you step out of the business, who is going to backfill your current role? How is this going to impact you when you're on the other side?

 

The group is fairly "hands off" in terms of their control of franchisees. They help and guide and give assistance, and there are some basic standards to follow.... but otherwise its very open and flexible for the franchisee.
As a franchisee, you have a very large amount of control within your own business, which is what i like. There is a corporate name on the building, and a free marketing program (mainly letterbox catalogue drops), then there are 5 core ranges that you *must* carry at a minimum level... but outside that there is really only just a tick list of what you need to have to comply to the group - beyond that its very open.
There is over 150 approved suppliers, so its quite unrestrictive.

To answer some questions:
# Property resources - they will guide you and give feedback on what is/isnt a suitable site and give experience on what will/wont work, but otherwise you do that yourself
# Lease negotiation - again, will they will guide and give expertise, but is up to you to negotiate your lease
# No guarantor on lease or head lease taken by franchisor. The store owner owns the lease.
# Design support = YES fully provided by head office.
# Fitout = there are corporate identity requirements to follow, and design/artwork is all provided for you to use your own contractors that you prefer. Again full guidance and support is offered and provided.


As for me stepping out of the business in my current role... that's where it gets tricky. I dont know what they would want to do.... my gut says that they would ask my to stay on in a part time capacity and just cover the marketing aspect, and the purchasing management will then fall to the GM in the interim - until they can find a suitable replacement.
It took them 9 months to find me... so unlikely i can be easily replaced.

Worst case is they ask me to leave the role - but i am not sure they would want to do that.

Once i get into operating the store, i would then nominate to be on the marketing/product selection committee so that i still have involvement in the marketing aspect - as i have a lot to offer there. I currently work with that committee to produce the catalogues and do all the supplier negotiations.....


I'm just nervous about raising that discussion. I dont want to be out of a job until im 100% sure and 75% ready to open a shop.

 

It's more like career development and taking on new challenges. Would there be an option to run a company store before taking on a franchise?

 

There are no company owned stores....

 

Very interesting! Good for you!

Can you stay in your current role and have your partner start up the business, remain silent but perhaps make known to the certain company members?

Is there a possibility of owning and staying in current role? Or having an exit plan arranged with them till they find someone else?
Or even change roles to part time or contract while they find and train someone else?

 

To make the business really kick off, i would want to be active in the set up and initial running of the shop. The first 6 months are the most important, as my plan is to open around June (for a june catalogue), and build things up to be firing on many cylinders come Xmas to ensure maximum capitalisation on the big boost in sales for Xmas.
I wouldnt be able to do my full time role + set up the shop - i would fail at both.

I like your suggestions of negotiating an exit plan or changeover role or contract position until they find a suitable replacement.
Even better would be to get paid a salary to do some aspects of the job part time.... a stable salary whilst starting a business sounds very helpful!

 

You're in a unique position because you already work for the company and get get a good feel of the figures. I say go for it but ditch the business partner idea. Find a way to come up with the money yourself even if you have to sell your mother. Don't be scared of doing a lot of hours the first couple of years, as you become more profitable you can hire help but they will always be under your thumb.

 

Agree with Biz

Your background knowledge is a massive advantage! You should begin copying files and document's before letting anyone know your plans!

 

My inside knowledge is honestly what planted the seed!
I've always wanted to run my own business, but never seen anything that either interests me or seems like a workable option for how i want to run a business. Most franchises are way too restrictive IMO.
This one is different.

As for the business partner......
Quite simply i dont have enough capital to go it myself.
I comfortably have $300k to do this..... and intend to get some business finance to bump this up a bit.

However to do what i want properly.... i reckon i need about $750k to start off.

• Stock = $400k
• Initial fit out = $100k (includes removable shelving, electrical/lighting work, building work)
  
• 1st year lease = $150k, depending on the site
• Local marketing = $20k (1st year)
  
• Contingency = $80k

Yes i can fund some of the above creatively, but i want to be safe when i start out. I see too many examples of people starting off without enough capital backing, and being too hamstrung to grow their business to suit their market to get into profitable territory.
If my initial stock and 1st year lease are covered, then there is a lot more freedom to expand stock ranges and market to grow the business quickly and start writing black ink as quickly as possible.
The idea is we each bring $250K, then get bank to tip in $250k as business lending. Some of the fitout can also be leased to reduce the bank's business lending.

Furthermore, the expansion plan hinges around a 2nd store. Much easier to both fund and manage when there are 2 owners, versus just one.
Also, my intended business partner brings a skillset that i lack - tax/business structures and accounting.


Then there is the family factor.
Talking to my wife and family at length, i dont think doing it alone is going to work without breaking the family.

 

Woah tiger! Get the initial one out of the ground first.

 

Very different scenario, however, a family friend ran a sucessful franchise for 9 years and then bought into a second one which was also quite sucessful. It was a well known franchise and the turn over was $16k per week on his first store (one of the best earners in NSW)

He worked 6.5 days per week. After all the business expenses he was only making $85k per annum for himself BEFORE tax.

He was on a 10 year agreement and upon signing and re-signing there was a $100k fee, hence why he sold at 9 years. The only time he made any money was when he sold.

The franchise as a whole is still quite sucessful but his words to me (when I was considering buying one) were 'a lot of the franchisees make less than than a worker in a chinese shoe factory'.

His biggest regret was leaving a $100k+ a year job in Sydney for the franchise.

 

Hi Witzl

A couple of questions if I may :

1. When the established stores change hands, what level of goodwill (if any) over and above the stock and plant values does the incoming owner tend to pay to the outgoing franchisee – just in ballpark figures for a good and bad store?

2. Is the brand a unique market leader in its industry, or just one of several market players supplying homogeneous product to the public ?

3. What sort of threat will online suppliers be to your future retail sales ?

4. Have you identified the suburb / location where you want to locate, and with your marketing knowledge are you confident about which demographic areas tend to suit success for the store brand ?

Cheers

 

I think - give it a go and why not ... but ... make sure you have in place (and legally written up) very detailed exit plan for both yourself and your financial partner.

Think of every scenario where you might have to suddenly buy them out - or they you - and work from there

 

TW, this sounds like it's got legs.

But before you go any further, let the franchisor know that you will take 35% of Gross Profit (not Net) as a commission in a company owned store in any premises that you were considering opening yourself. And you will commit to the same percentage for the lease, shop fitout and ongoing expenses.

Further more, you commit to another 3 stores on the same terms within 12 - 18 months.

And, if you're feeling adventurous, the franchisor will cover 100% of all IT expenses related to both your IT and POS expenses (assuming they want the sales/profit data on a regular basis) to keep tabs on what you're telling them....

What do you think they will come back with?

Didn't think so.....

Open your own shop and keep the 100% (after working your your arse off...)

And, while I think of it, Bayview, assuming he's in a good mood, should be able to give you some outstanding tips..

 

Agree. For many years was in a partnership. Never again . It's like any relationship when things work well it's great but when they don't it can be stressful and ugly.
There is plenty of stress enough in running a retail business without having partner problems . It can easily ruin a good friendship.
So many joint decisions to be made . No two people can have the same ideas. You will disagree and sometimes that will cost the business.

If your partner wants out its like a divorce .Not pleasant and the one who wants to stay has very little leverage. I ended paying my partner to
Go.
I also agree with not sharing 50% of the profits .
It costs less to use the banks money .
It sounds like your baby don't share it .
A partner often seems like the logical solution .
Borrow as much from lenders as possible . Don't share 50% of your profit , avoid potential clashes and added stress. Best of luck . Just My five cents worth

 

Wow - thanks for all the advise and replies!
I'll respond in a little bit, the coffee van just arrived!

 

Ok so here's the more detailled response (now that i have some coffee in me!)....


Tim & Chrissy,
Thanks for the insight into your friend's experience in franchising..... sounds like a tough gig. Thankfully in this franchise it is only a 5 year franchise agreement, which you can end sooner by mutual agreement, with some obivous anti-competition clauses of course.
There is also some good potential turnover in this industry - it would not be uncommon to turnover in excess of $2-3million per year, at 40-43%GP. I've done some rough calcs, and even with the "average" figures of $1.8mill there is potential for >$150k net profit on top of paying the 2x business owners $80K each as a salary.


Foxy *****
Some good questions there!! I do like the idea being challenged, it really helps to ensure that i'm not dreaming about this idea.... i want to be totally grounded by reality in looking at this!

Some answers:
1. Store changeovers/sales.... to be honest, most of the "good" stores have never changed hands (they just passed to the children) - they are still owned by their founding families. The ones that sell are usually because the owners have driven it into the ground either by poor management or coming up to retirement age and have lost the drive, because they left selling the business too late.
Generally, they sell for stock + plant value + 1-2 years net profit for a "decent" store.
There was a couple of very good stores that sold to a corporate owned competitor.... but those sales values are obviously skewed as it was a bit of a hostile strategy from the competitor. Those sold for some good values.... mainly because they had very good net profit too.

2. The brand isnt a market leader per se.... they are a reasonably well known market player in an industry that has probably 3 ubiquitous "major" players. This brand would sit 4th.
The uniqueness of this brand is that it's full independent, provides experienced & knowledgable service, and actually supports brands - as opposed to the majors that do mostly house brand stuff, and have pimply faced kids at the counter that wouldnt know their arse from their face... let alone know about the product they "sell".

3. Online competition.... there is some of this happening already, but to be honest the core of this industry *NEEDS* bricks and mortar stores. There is also a lot of "same day service" required in the industry which to a degree isolates it from the online factor.
That said, an e-commerce platform is also part of the strategy. Head office is developing the infrastructure for that now, which having seen it from the inside is a very good tool to make online selling very easy.

4. We have identified 3 potential locations. There are multiple demographics this industry targets - from lower socioeconomic groups through to more affluent middle class.
The first two areas are almost completely devoid of competition, the 3rd has strong competition but absolutely ideal demographics and population density. Demographics of the 1st location are a bit more affluent, and population density is good... difficulty is finding a suitable premises (will be costly). With a train line coming in a few years, the area is going through a mini commercial RE sales and redevelopment boom.
The 2nd location is a growth area, with good demographics for the industry, and will be an excellent site going into the future (in 3 years time it will be very strong).
All 3 options would do well, but the 1st location is the preference... with target to open 2nd stores in the 2nd location (the growing area).


Ted Varrick
The company store idea sounds great in theory, but i dont think they will go for it - because from their side if i were to walk away, they dont have the infrastructure to take it on themselves. Head office is just a support office, it's just not structured to run its own stores (not at this stage anyway - maybe in 1-2 years).


Patsystone
I really appreciate your feedback (and others) on the partnership strategy.
Look i'd love to do it alone..... but i just dont think i have enough support around me to do it. My wife works full time in a management role (and wants to continue her own career, which I fully support), we have 2 small kids (that i do want to spend time with)..... and not having done this before im not sure i want to go whole hog on my own just yet.

There is also the question about whether i would even be able to get the finance!
Like i said, i need about $750K to get this off the ground... and at this point i have about $250-300K to kick into the business. I can ask my broker.

That said though, my wife isnt 100% comfortable with me doing this solo. Without her support there is no chance this business will go ahead.

I will give careful consideration to flying solo on the business, it is certainly worth taking experienced input on board!!


Once again - thank you for all your input.

 

Hi Witzl,

In a previous life I was an accountant for a major retail company (with multiple stores) - Just a couple of financial points - not sure if you can control these levers (and if not I would think long and hard about the structure) - but I feel are really important in a successful retail atmosphere.

- GP is super important, we found price match discounting was not always the best NET result, though give the store managers ability to discount to achieve volume.
- Rebates - can you negotiate volume rebates back to suppliers - this was key in adding vital NET GP
- Marketing, really important to review and spend on marketing projects to analyse the value of spend. Huge issues in trying to do everything and anything (running all sorts of promos without actually reviewing the success)
- Freight, will you control stock routes and drop offs. Being in control of this will have a huge impact on Other COGS
- Similar to freight control, stock control. Huge impact on holding costs and cashflow - will you have control over SKU width and weeks of hold? I would expect full control over this. This is an exact science.
- Sales pay - success in negotiating a lower base rate per hour + a simply commission structure, if staff understand one sale = $1 dollar, they are driven and generate sales and income
- Partnership, only bring in a partner if their skills compliment your skills and you have no/little experience in their skill set. I would lean towards private/credit funding and employing great management.

Jeremy

 

Hi Jeremy (charpj),

Great line of questions!!

1. GP.... agreed super super important. The franchise doesnt have a price match guarantee, in fact their slogan doesnt mention price at all. Store owners have full freedom to price as they see fit.

2. Rebates.... these are all negotiated at a head office level. Some suppliers have deals with the group whereby you get rebates back those suppliers (thankfully on key $$ turnover lines). Majority of supplier rebates go towards marketing activities for the group.

3. Marketing.... national marketing is quite good (letterbox catalogues, 9 per year), 10,000 copies per catalogue all funded as part of the franchise. You can opt to increase your household coverage per campaign, or do multiple drops. TV commercials are produced for the group, and available to run at your own cost. Likewise radio and other media marketing all produced by the group is available to use. National marketing is controlled by a committee made up of elected Members, so it's quite cost effective.

4. Freight... you 100% control your own ordering, so you can act to minimise freight impacts

5. Stock control.... 100% control of your own stock.

6. Sales pay.... good ideas, was thinking similar.

7. Partnership..... the partner i am considering is fairly complementary. We both have similar ideas in where/how we want to build this business, so for the bigger picture we are on a similar wavelength. Day to day, he is more of a details person, and im more of a big picture thinker... but we can both swing into the opposite mindset when required.
His wife is also an excellent accountant/financial controller.... if i were doing this alone i would be coming to her for paid tax/accounting/business structure advice. As a partnership she would (for free) help the business get set up with the right structures, get us rolling with teh right accounting tools and processes, and give advice and tips... so that we can eventually do most of that ourselves.