Photos by Jeanna Duerscherl | The Roanoke TimesCary Broome, a retired United Postal Service delivery driver, expects to open Menchie's this month at Hunting Hills Plaza in Roanoke.
Menchie's employees fill out paperwork during a staff meeting.
Cary Broome worked for 24 years as a United Postal Service delivery driver.
Now 53, he's retired and he and his wife have decided to take on a new endeavor. They are opening Menchie's, a self-serve frozen yogurt shop, at Hunting Hills Plaza in Roanoke next to Kohl's. They expect to open Feb. 17.
The couple have poured their savings and stocks into the business, a move that makes them somewhat worried given the economy. But Broome said he believes that opening a franchise is less risky than starting their own business.
"It's really scary to me because we don't have any business experience," he said. "That's why we chose a franchise."
Franchising offers first-time business owners guidance, support and a proven business model. And in today's economy, starting a business can provide more stability than a job in corporate America. Franchises in particular can be see as lower risk.
"For a lot of people, it's really their only hope," said Heather Rosen, a Virginia-based consultant for FranNet, which offers advice and education to potential franchisees.
"What I'm hearing from people is that, 'My job isn't stable. I need more income security,' " Rosen said.
A report by research firm IHS Global Insight conducted for the International Franchise Association estimates that after three years of decline, the number of franchises will grow this year by 1.9 percent, from an estimated 735,571 establishments in 2011 to 749,499 businesses this year.
The forecasted growth also means more jobs. The report estimates that new franchises will contribute to 168,000 new jobs, a 2.1 percent increase from last year.
James Gillula, managing director for IHS Global Insight, said that the projected growth of franchise business is slightly behind that of independent business, but that job growth in franchising is ahead.
"One of the primary reasons is that access to credit, while improving, continues to hinder growth in parts of the franchise sector," he said.
For instance, the lodging sector is expected to see 3.1 percent growth, according to the report. Franchises that fall in the retail products and services sector will see only 0.1 percent growth. Retail food franchises are expected to grow by 0.9 percent.
In addition to tight lending, the decline in franchises the past three years is also attributed to lower levels of consumer spending.
But consumer spending grew slightly in the fourth quarter of 2011, according to the U.S. Department of Commerce, and the IFA expects it to continue to grow this year.
Lending is also loosening. One Roanoke banker said that the bank is very willing to loan, but has seen a decreased demand.
Franchise or independent?
When you start a franchise business, you're in business for yourself, but not by yourself - that's the franchising catch phrase that hooked Broome when he was exploring the idea of opening a franchise.
"We don't have any experience," Broome said. "We've never run our own business."
He and his wife, who works in human resources, wanted to open the frozen yogurt store to diversify their income, Broome said. He also wanted to be part of the community, he said, and to have an opportunity to teach his two daughters about work ethic.
Before Broome could sign a franchise agreement, Menchie's made sure he met their criteria.
Prospective franchise owners must have at least $50,000 in capital, according to the company's website. The typical cost for opening a Menchie's is from $340,000 to $400,000.
Broome flew out to the company's headquarters in Encino, Calif., to learn more about the company before submitting his application. He was interviewed and had to write an essay about why he wanted to open a Menchie's in Roanoke.
After his application was accepted, he signed the franchise agreement and paid a $40,000 franchise fee.
That's when Menchie's stepped in to start helping. It provided a third-party real estate agent to help him find a suitable location and blueprints for building out the 2,500-square-foot space at Hunting Hills Plaza, and it reviewed bids from contractors to make sure he wasn't paying too much.
"Now that I've been through it, I know I couldn't have done it on my own," Broome said.
The help comes with a cost. Not only did Broome pay a franchising fee, but he also will hand over 6 percent of his revenues in royalties and another 2 percent in marketing fees.
And he'll have to abide by Menchie's rules, which are as specific as dictating that he must carry a particular flavor of frozen yogurt.
The benefits of owning a franchise, though, outweigh the royalty fees and rules, Broome said. And he believes that having a nationally recognized brand will give him an advantage over the four other frozen yogurt shops that have opened in the Roanoke Valley since he signed his franchise agreement.
"They don't have the experience" or the brand name, Broome said.
Roger Henderson, who last fall opened an independent frozen yogurt store in Blacksburg, Frosty Parrot, acknowledged that his lack of experience made the opening a challenge.
Henderson said he considered several franchises when he was thinking about getting into the frozen yogurt business.
"I started looking at franchise fees and everything and I thought, 'You know, why don't we just try it ourselves?' "
Henderson, a former algebra teacher at Blacksburg High School, and his business partner went over budget and spent $300,000 to get the store open. They financed the store with their savings and an equity loan.
"There are just things that you don't know you have to do," Henderson said of the added expenses.
He said the advice and guidance that a franchise offers would have been nice.
"It would have been easier, that's a fact," he said.
Instead, he researched other frozen yogurt businesses and spent hours online talking to other business owners in public forums. He also sought advice from his contractors and from the company that supplied his frozen yogurt machines.
Opening the shop might have been a challenge, but going forward Henderson said he is glad he is in business for himself.
The biggest advantage, he believes, is that he doesn't have to pay royalty fees on his revenues.
"You're paying for it forever," Henderson said.
He also likes that he doesn't have to answer to a corporate office.
"I get up and go to work, but I know that if something comes up I can decide what to do about it rather than having someone else decide," he said.
Those who have been franchise owners for years say there is a reason for their success.
Denis Girard has been a Subway franchisee for seven years. He owns Subway locations in downtown Roanoke, at the West Lake Shopping Center and in Moneta near the Shoprite grocery store.
He said his businesses have succeeded because of the franchisor's support and marketing, and because of the strict rules he must follow regarding cleanliness and timeliness of service.
"If you live by the rules and follow the formula, it works very, very well," he said.
Financing options
Obtaining financing for a certain franchises can be somewhat easier than for an independent business, said Susan Still, president and CEO of HomeTown Bank in Roanoke.
"Franchising is a good route to go for certain people," Still said. "It makes them feel more comfortable, and it does add value to the bank if it's a known franchise that's been successful."
Banks generally don't finance startup businesses, whose owners often seek loans through the U.S. Small Business Administration or finance the startup themselves.
Financing for small businesses became more difficult during the recession, but banks are "very willing to lend," Still said.
"All banks are still very interested in lending," she said. "Banks would tell you that demand is down. A lot of customers are preserving cash and paying down debt."
The IFA last year launched an awareness campaign to bridge the gap between banks and franchisees.
"They've got the money and we've got some of the demand out there," said IFA spokesman Matthew Haller.
The campaign aimed to educate banks about franchises, their business models and return rates, Haller said.
The campaign also encouraged franchisors to help franchisees obtain funding.
Broome used his savings and money from his UPS stocks to finance the $250,000 startup cost of his business.
"I didn't want a banker breathing down our back," he said, and he was turned off by the 8 percent to 10 percent interest rates.
Broome's profits will go toward paying himself back.
He will have to pay the royalty fees on his revenues, but he said that's the price of having a nationally recognized brand. The fee also pays for the guidance he's gotten along the way, down to help with marketing his grand opening.
"I'm working out of a proven system," he said. "This is all well thought out."
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