Entrepreneurs seek safety in the franchise fold

CHICAGO Wed Aug 18, 2010 12:34pm EDT

1 of 2. Corey Butcher of Gold’s Gym.

Credit: Reuters/Handout

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CHICAGO (Reuters) - If you can't beat 'em join 'em. So said Corey Butcher, a health club entrepreneur who progressively purchased four gyms before deciding he needed some national muscle to stay healthy in the competitive Dallas market. Last year, Butcher brought all of his clubs under the umbrella of Gold's Gym, a national franchise with some 520 U.S. locations.

"The problem was you're fighting against the dollars of LA Fitness, 24 Hour Fitness and Bally's," said Butcher, 38, who prides himself on turning around underperforming clubs. "We needed some synergy in the corporation. Really the only way of doing that I felt was with a franchise."

Butcher, who began managing health clubs at 23 and bought his first at the tender age of 26, first researched the idea of creating his own unified brand. After determining costs were prohibitive, he tossed his hat in the ring with Gold's in March 2009, spending about $50,000 on franchise fees and another $250,000 on physical upgrades to meet the company's requirements. It was a natural progression; he had already acquired one struggling Gold's location in 2007; in addition, the company's corporate offices were based in Dallas, making for easy access to corporate support.

In the 18 months since completing the conversion, Butcher said results have defied the economic downturn. At a time when many clubs around the country have suffered declining membership rolls, his business saw combined revenue rise 17.5 percent. He attributes it to strict protocol and the marketing power of a national brand.

"We felt very fortunate we did the conversion when we did," Butcher said.

As the recession continues to hammer small businesses, franchise converts say they are grateful for the benefits that come from buying into Big Brother: brand recognition, big advertising, group buying, training, technology and referrals, to name a few.

Dan and Naomi Stutzman converted their independent sign business in Erie, Pennsylvania to a Fastsigns shop in 2007. The husband-and-wife team, which already ran a healthy business, saw revenue triple the first year and have since tracked steady growth, despite the recession.

"We knew that at some point there would probably be a Fastsigns in Erie and that it would probably be our competitor," said Dan Stutzman, 48, whose business was approached by the Carrollton, Texas-based company amid a broader expansion initiative.

"There's no question the business wouldn't be where it is today without converting," said Stutzman, who spent about $100,000, including new equipment and store retrofits, to make the transition.

The Erie store gained valuable benchmarking tools to help keep business on track. It now relies on the franchisor's metrics, for instance, to help gauge when to staff up or down, as well as how it's fairing against sign stores of similar size in comparable markets.

"What Fastsigns provides is an industry standard. Here's what you should be doing," said Stutzman, adding the franchisor's insight also gave him confidence to invest in new technology he wouldn't have considered purchasing as an independent.

NO EASY FEAT

The Stutzmans lament the fact they didn't take up a national banner earlier in their career; but for them, like many entrepreneurs, it was a catch-22; in the early days of their business they didn't have enough cash to pony up for a franchise. Typically only operators with proven mettle and ample capital are viable candidates for conversions, representing just a fraction of the new additions rolled out by a given brand each year. "We deny more conversions than we do accept," said Joel Tallman, senior VP of franchising and global operations for Gold's Gym. "Usually you find people that come that are really struggling. If they're not willing to invest in it, we just don't add numbers to add numbers." Tight small business financing and stiff criteria winnow the field to a select few. But for those who pass muster, franchise conversions can offer a faster track to incremental growth, especially at a time when marketing budgets and other promotional dollars remain under pressure.

"Certainly the recession has made it more attractive for the franchisor and the independent business," said Alisa Harrison, spokeswoman for the International Franchise Association, a franchisors' trade group. Service industries, such as cleaning, automotive repair and maintenance are particularly attractive for both sides, as they are fairly simple to convert, she said.

Such was the case with Everette Wroten, 38, who until recently operated an independent home restoration business in the Baltimore area, fixing problems such as damage from fire, mold and water. While experiencing steady growth since founding the business in 2000, Wroten increasingly saw that big insurers sought out recognized names to refer to policyholders. "More and more to get on some of the bigger programs, they want you to be national," said Wroten, who converted to a PuroClean franchise in February. "I desired to be part of something bigger than me."

To be sure, yielding to the will of a corporate giant can be a tricky juggling act for entrepreneurs who previously called their own shots.

Corey Butcher, who eventually plans to own a small empire of Gold's Gym locations, said that's a small price to pay for a shot at larger growth. "There are times when you're frustrated by decisions," he said. "The return on investment has been huge."

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