Small Business

Grounds for a Thorough Investigation


By Karen E. Klein Q: I have been approved to buy a mall-based coffee franchise and am now doing the analysis to see if it is right for me. I have come up with some research, but I'm not sure how to confirm the numbers. What I have is this: Cups sold per week, between 3,000 and 5,000. Average annual sales $600,000, with $800,000 tops. EBIT (earnings before interest and tax) 15%. How do I know if I'm on the right track with my research? What else should I look at before purchasing a franchise? -- J.J. Marietta, Ga.

A: You're doing research and crunching some numbers, so you're definitely on the right track. Making an informed -- rather than an emotional -- decision about investing in any business opportunity is the smart way to go. Your numbers sound realistic to franchise expert and author Michael H. Seid of West Hartford, Conn.-based Michael H. Seid & Associates. Calculations of EBIT are based on a factor of company profit, he said, so he wasn't able to confirm your 15% figure. But your annual revenue and weekly sales figures looked right to him.

However, he pointed out that selling 3,000 to 5,000 cups of coffee a week is not a lot, especially compared to some other franchise opportunities. Remember that coffee isn't a big-ticket item, so pulling in revenues without moving a huge volume will be difficult -- unless you follow the Starbucks model and add retail items, bags of ground beans, and extras such as bakery items and flavor shots to bump up the per-ticket total. Notes Seid: "Starbucks is averaging $4.70 to $5 per ticket because of the gifts and extras that go way beyond just a cup of coffee."

Nearly everything and everyone in the retail coffee market is affected by Starbucks -- a company-owned giant that "sucks the breath out of real estate in every market of interest," as Seid puts it. Because Starbucks has branched into so many product lines, such as ice cream and ground coffee in supermarkets, it can afford to close store locations that simply do not attract enough revenue. Franchisees, obviously, can't afford to be so cavalier.

LATTE LESSONS. How should you evaluate various franchises? Try to find opportunities with higher sales figures. Seid recommends Coffee Beanery as a possibility. Some sites sell up to 11,000 cups per week, Seid says, while the giant also offers smaller shops and airport kiosks to keep franchise fees down. Also take a look at the franchise's maturity, how built-out its locations are, and whether expansion is occurring. Will they provide you with additional items to sell that will help your bottom line? How is the company you are considering responding to the competition from Starbucks? "When Starbucks enters a market," says Seid, "the independents that survive seem to see their sales run up rather than diminished."

Examine the health of the franchise operation as a whole. What about the parent outfit's training programs? "The educational need for the staff at a coffee operation is hefty. Their staff training should keep the employees fresh," Seid says, "and their corporate culture should be excellent."

Additional advice and information on franchising can be found on the Web sites of two industry organizations: The American Franchisee Assn. and the International Franchise Assn.

Have a question about your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.


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