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Palo Alto Online Reports on Franchise Growth

Dec 21, 2011

Former corporate employees leave in numbers to start their own business, become their own boss

A recent article found in Pala Alto Online features the story of three people who made the move out of the corporate world and into business with themselves. But this isn’t the normal “work for yourself” story – these people found their independence through franchising. Read the full article below:

Franchise owners weather turbulent economic times

by Carol Blitzer
Palo Alto Weekly Staff

While other girls were playing with their Barbies, at 6, Lisa Anter was charging 10 cents a cup at her lemonade stand at a lake near her Montreal, Canada, home.

The following year she upped it to 15 cents.

It would be another 20 years or so before her entrepreneurial instincts kicked in and she left the corporate world to open her own business.

But Anter didn’t choose to go it alone. Instead she purchased a franchise — in her case a couple of Curves circuit-training gyms —  where she could count on a national organization to back her new endeavors.

Amos Wu and his wife were concerned about how the economy was affecting Wu’s career as an engineer in Silicon Valley. Just as the economy was starting to get rocky, Wu opened his first Subway in Palo Alto.

And Lewis Knapp, made “redundant” by the Oracle buyout of Sun Microsystems where he’d spent more than 20 years, opted to open his own business — Team Logic IT — which offers computer services to small businesses.

Each did their research, learning that opening a franchise can take anywhere from $19,000 for Made in the Shade Blinds or Creation Carpets to $1 million for ARCO and AMPM, according to www.franchisesolutions.com.

And each weighed the pros and cons of going the franchise route, rather than opening an independent business.

Most said they found the corporate support — often in marketing and advertising — filled in vital gaps.

“You can’t be an expert in everything — design, finance, customer service. Nobody is good at everything,” Anter said.

But that support comes with a less flexible side. Franchise owners are locked into an agreement with headquarters and must meet certain expectations, including financial ones.

“If you need to close, you can’t. … If they’re unhappy with you, they might not negotiate with you when something happens,” Anter said.

But for those motivated by basic disenchantment with the corporate rat race or by the economy, with its mergers, takeovers and layoffs, opening a franchised business can be an attractive choice.

Success rates appear to back them up: “The No. 1 reason businesses fail is lack of cash for working capital. After 10 years, only 16 percent of existing start-ups are still in business. With franchises, it’s 90 percent,” said Katie Fagan, franchise consultant for FranNet, a franchise consulting group in San Jose.

What Anter, Wu and Knapp have in common is their choice to pursue their passions, drawing on their corporate experiences to help them run their new businesses — their way.

Originally from Taiwan, Amos Wu, now 44, came to the U.S. in 1989 to attend graduate school at the University of Southern California, then moved to the Bay Area in 1997 to work as an engineer at Lucent.

But by 2003, he and his wife, Amanda Lee, were looking to start their own business.

“We thought it might be easier for us to open a restaurant,” Wu said,  given his wife’s background in hotel management and experience working in France and Switzerland.

They briefly considered going it alone, but they didn’t have any family members knowledgeable about running their own businesses and were discouraged by information they gathered.

“We read some articles that said 50 percent of new businesses fail in the first year; 70 percent of businesses fail in three years. So we wanted to take a more conservative approach to starting our own business,” Wu said, adding that they could minimize risk with a franchise.

So they started checking out food franchises, such as Togo’s, Quizno’s and Jamba Juice. Some were rejected because of location; for Jamba Juice they were told they’d need to start by opening five stores.

“At the time we wanted to start small. We think this is too big (of a) commitment for us,” Wu said.

Ultimately, Wu and Lee bought an existing Subway franchise on University Avenue in Palo Alto in 2003, followed by one on El Camino Real in south Palo Alto in 2006, California Avenue in 2007 (a month after a fire at Walgreens closed his adjacent University Avenue location), and Midtown in 2008.

They re-opened a University Avenue shop, across the street from the first location, this past August.

At first the couple lived in San Jose, but they soon moved to Palo Alto.  Today they manage about 10 employees per store, and they each work in all four locations as well.

Wu chose Subway for both the product and the company.

“We provide value food to customers. Subway in general is still growing — the number of stores, but also sales. People start seeing Subway provides value. Look at the $5 footlong — that has helped us. It really helped us to survive at a difficult time. It’s healthy but also real affordable,” Wu said.

Wu not only talks the talk, he eats at Subway most days.

“I believe in the food and that the system will do well,” he said.

Although he easily puts in more than 40 hours a week, Wu said, “I wish I would have changed earlier. My wife feels the same.

“We want to do this business long term, so we must enjoy our business.  It’s not only ourselves but (we want to) keep our employees happy,” he said, noting that some have worked for them for more than eight years.

The couple has chosen to build their business slowly.

“When we opened, we took three years to open a second store. We have hands-on experience for three years. Now our focus is training people to do the right things,” Wu said, noting that he and Lee come in at different times, morning, evening and night.

“On University Avenue, we’re open 24 hours,” he added.

In addition to training the Wus on how to run a Subway franchise,  corporate also offered demographics, including where competitors are located and what average disposable income is.

“That information helped us decide what location was more doable than others,” he said.

He also meets monthly with his development manager, who handles franchises in Santa Clara and San Mateo counties, to analyze the competition and talk about how to get draw customers in.

“This system works. They listen to the individual franchisee’s voice.  It’s flexible. Corporate understands what individual stores need,” he said.

And when the Walgreens fire happened, the Wus were able to terminate the lease and salvage some equipment, including the bread oven. It took nearly four years to find the right-sized space on University Avenue.

In the future, the Wus could open another Subway, perhaps in Los Altos.  Once they hit five, they’ll need a general manager to help keep the businesses going, Wu said.

But family is still their first priority.

“If we sacrifice our family, what’s the point of doing business? We have one 8-year-old daughter. We always keep cell phone within reach for her,” he said.

—

Lisa Anter, now 36, entered the corporate world by working for Reebok after earning a masters degree in international studies and an MBA. Then she was recruited to work in Denver at Johnson Controls, a Fortune 100 company headquartered in Minneapolis. But after a few years, corporate life palled.

“I had been working for huge corporations and was very disenchanted. As a young woman working in a predominantly male field, I found it really difficult.

“I think it would be different for me today, in my 30s, but it didn’t work in my 20s,” Anter said.

After her parents moved to Santa Barbara County, she decided to follow them to California and open a couple of Curves franchises in the Bay Area. She considered opening her own business but said that buying “a franchise is less risky. Curves had a 10-year track record.”

At first she looked at San Francisco, but its younger demographics didn’t suit the Curves model: 40- to 60-year-old women with a finite amount of time for working out.

As it turned out, most of the dozen Curves franchises in the City have closed, she said.

“I wanted a business where I wouldn’t work every weekend — that took out restaurants and sandwich shops — provided a service that I believed in, could really stand behind, and could provide me with a stable income so I could live my life and run a small business,” she said.

Anter opened the Menlo Park/Atherton Curves on El Camino Real in November 2003.

Setting her sights on Burlingame, she cleared the regulation hurdles in that city within a year and opened in a 100-year-old cottage that had parking on site.

In 2006 she purchased an existing Curves franchise in Belmont. But soon,  she found that running three was more than she could handle.

“I thought I would get economies of scale but needed five locations (with a district manager, to do that),” she said.

“I was running myself ragged. I could see that my other two locations were suffering because of it,” she said. She ended up selling the Belmont gym a couple of years later. The buyer closed it less than nine months after that.

Then, a year ago, an electrical fire destroyed the Burlingame location.  Not only did she lose her equipment and the structure but all of her membership records as well.

“Curves was as supportive as they could be,” she said, including not charging royalties for six months.

But by the time the building was repaired, re-opening would be just like starting a brand-new business — and this was not the right economic environment for that, she said.

As early as 2007, she said, “We started noticing numbers weren’t where they should be. Other Curves were starting to close in areas that I said were precarious to begin with.” She noted that Curves shouldn’t have opened a gym in East Palo Alto, “but they’re in Texas; they don’t know about rent.”

Curves’ traditional model is $400 rent, 120 members, in a rural town,  she explained, adding that rent here is “thousands and no one has 400 members (to support that).”

But back in 2007 “there was no growth. Membership plateaued. … Slowly, slowly, we saw our numbers dropping.”

Curves corporate did offer advice on renegotiating leases, cutting hours and promoting the program. From the beginning, headquarters emphasized that a successful owner works in the business, Anter said.

“When I first opened the club, I had one part-time employee. I spent every second breathing, building up that business. Membership was growing; systems were in place. I knew how to run payroll, bookkeeping.

“I’ve always considered myself an active Curves owner. I never had a second job.”

Anter attributes the drop in enrollment to the economy. Although the business is based on a model of members working out three times a week and paying $45 each per month, many members only used Curves four or five times a month.

And when women — or their husbands — lost jobs, it was easier to cut out Curves than not pay for cable, she said.

“It’s very short term (solution). Now you’re not going to fit into your clothes. A pair of jeans is at least $50! … If you think about it,  it’s a tank of gas,” she said of the monthly membership fee.

Economic pressures have kept her from re-establishing Curves in Burlingame, where she lives and used to bike to the office. She’s gathered contact information from about 75 former members, she said, but “I lost so many clients — many of them went to do other things, or join other Curves. Once you start a routine, it’s hard to switch back again. There’s no guarantee people would come back.

“I wasn’t willing to risk the time and my heart to reopen. And it was a huge financial risk. … I don’t know anyone who would open a Curves in this economy,” she said.

Asked if she had considered buying the recently closed location in downtown Palo Alto, she said, “The economy wasn’t where it needed to be to expand. Membership wasn’t where it needed to be in order to be viable long term.

“I don’t know if I had it in me to build another Curves. There isn’t the challenge for me. Opening a business at the beginning was really fun.”

Today she’s putting in 20 to 25 hours a week, a sharp contrast to the 65 to 80 hours she devoted when she had three Curves franchises.

“It was ridiculous. I had no personal time at all.”

She’s earning a living but not without personal sacrifices, she said,  such as no more international travel. But she’s living a few hours away from family and values the time with them.

Where will she be in five years?

“I’m 36, single. I hope to be married and have kids and be able to run a business,” she said.

—

Leaving Sun Microsystems wasn’t Lewis Knapp’s choice in 2010. He had started there as a software developer in 1987, working his way through program management, an executive role as chief of staff, then into the visual design of Sun’s website. But upon being downsized, he took the opportunity to look around. Part of his “transition” package was meeting with a career-services company, which in turn put him in touch with FranNet.

After assessment, he met with a counselor who earmarked eight potential franchises, showing him a binder several inches thick. They narrowed the choices down to three.

Knapp, who formerly thought of franchises as fast-food businesses, found the range of opportunities eye-opening, he said.

He considered the three carefully: Hoods was a company devoted to cleaning restaurant exhaust systems, which are required to be serviced every quarter; another was a private-investigation business; and the third was what he ultimately chose, Team Logic IT.

His company provides information technology (IT) support to small- to medium-sized businesses, covering computers, backup systems, telephones,  email, security and network management.

What appealed to him most was the independence.

“In the back of my mind I always wanted to run my own thing. Having the ability to start something up with the support of a known system took a lot of the uncertainty out.

“I don’t have a strong marketing background or direct-sales experience.  The franchise can help shore up those gaps in my experience,” Knapp said.

Where his personal skills come into play are in the knowledge of hardware, operating systems and software development and in understanding the IT landscape his clients need.

“Every client is different. We want to represent ourselves as the trusted partner for everything IT,” he said.

And if he can’t come up with an immediate solution, he has a network of 50-plus other Team Logic IT franchise owners who are available for consultation.

“I don’t get any sense of competition. … Everyone’s been really helpful offering up solutions that have worked for them,” even sending supporting documents, he said.

Start-up was slow: It took him five months to hire his first (and only)  employee, a technician. He finally opened in mid-June 2011.

But start-up costs were relatively low: $35,000 for the initial fee,  plus royalties that were suspended for the first six months.

“I could get by with a desk phone and laptop for each employee,” plus a server for the office and a Prius wrapped with the company’s logo and contact information.

Over time, Knapp expects to hire a team of three technicians and a salesperson.

“That will give us a scalable model to support our clients,” he said.

While Knapp has the territorial rights to sell his services to clients in Menlo Park, he’s not limited by contract to those borders. The next closest franchise is Mountain View, which covers the southern part of Palo Alto.

Part of his attraction to Team Logic IT is its overlap with his corporate background. Although that background is more on the software side, he calls himself a very advanced home-computer user. That enables him to talk easily to potential customers about their office needs.

He also enjoys being able to control his work hours. Even putting in 45 to 50 hours a week, he can see his kids in the morning and be home for dinner.

“I might work after the family goes to bed and a little on weekends,” he said, including cleaning the office. “I wear many hats — but I try not to send emails in the middle of the night.”

That contrasts with the old Sun schedule, when “clients were worldwide and we had to get the job done yesterday.”

One of the reasons he rejected Hoods was the third-shift work.  Restaurant equipment needs to be cleaned in the middle of the night.

Although he’s only been open for a few months, Knapp expects to become profitable within the first year.

“We’re bringing customers on at a rate that’s pretty healthy,” he said.

So far he’s found the Team Logic corporate support useful. He talks with someone at corporate weekly about what’s in his pipeline, going over his prospect list and making sure he fully understands the systems the company provides.

“I can call the president anytime asking for advice,” Knapp said, or any other department, from legal to human resources.

“I see them as both my board of directors and an employee I’m paying 8.5 percent as a salary,” he said.

Will that ever get old?

Once his business stabilizes and he isn’t taking as much advantage of the company’s resources, he said, he might question what he’s getting out of the partnership.

But “I don’t foresee any regrets,” he said, pointing to the company’s constant updating of marketing materials, leaving him free to look for new clients.

For Knapp, opening a franchise has taken much of the risk out of starting a new business.

“It’s almost an inverse: In the first five years, one in 10 independent businesses succeed and one in 10 franchises fail. It’s a remarkable difference,” he said.

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