Tammy Beil was among hundreds laid off from recession-hit courier FedEx Freight in April. The 51-year-old former marketing vice president decided to use the experience of losing a job to make over her life. With severance pay in hand, she is in the midst of packing up her Memphis, Tenn. home and returning to Philadelphia, where she lived previously.
"No one likes to be in this position, but the good part is being laid off forces you to stop and examine yourself." she says.
For Beil, as for millions of others these days, such examination involves asking herself both what she wants to do and where she’s likely to find the best risk-adjusted return on her time and money. So far, she’s taking a very broad view, including starting a business, buying an existing one, acquiring a franchise or finding a whole new sort of corporate gig.
"I’ve been investigating everything," she says. "There are golden nuggets out there, even in this economy. The question is, do they make financial sense?"
Running the numbers on specific alternatives depends on where you’re starting out financially. Beil’s severance precludes her from sharing details of her own situation. Instead, we hypothesize for a midcareer exec who previously earned $135,000 annually and has squirreled away $500,000 in savings.
Because they tend to be a fairly risk-averse bunch, corporate refugees often favor the "tested concept" of franchising, says Ronald Hoxter, president of Mill Creek Partners, a Conshohocken, Pa. business brokerage. As such, we began by scouring industry portals like franchisegator.com and franchisebuyersnetwork.com.
Jazzercise came up as one of the more promising prospects. Founded in 1969, the firm ranked fifth out of 300 on D&B’s AllBusiness AllStar Franchises list. The blend of dance and aerobics has survived various fitness fads and has been growing around 7% annually through the recession. One reason may be that Jazzercise’s franchises are cheap to set up.
The Carlsbad, Calif. franchiser charges $1,000 up front and then royalties of 20% of gross revenues a year, with a $6,000 minimum. (Many franchisers charge tens of thousands of dollars in setup fees and royalties of 3% to 6% of revenues.) Jazzercise gives its franchisees a bit of training in both dance and business routines and provides marketing materials and new choreography every ten weeks. Total startup costs: around $40,000 for 1,800 to 2,300 square feet of space, says Kelly Sweeney, Jazzercise’s vice president of sales.
"You want to get a small space and have a lot of classes," Sweeney says.
Jazzercise’s somewhat expansive view of the potential is for a franchise to draw in 0.5% of the population living within a 15-minute driving radius. But Sweeney hastens to add that it can take five to seven years to do so. (Please don’t sue us if you don’t make it.) That means a suburban Philadelphia location could eventually attract a customer base of 900. You have no protection, beyond Jazzercise’s desire to support its franchisees, from the possibility a competing outlet might open up nearby.
Let’s assume 200 sign-ups the first year, 400 in both years two and three and a 35% annual attrition rate. That means, with $60 sign-up fees and average monthly fees of $45 per customer, year-three revenue will be $316,000.
Gross revenue, that is. The franchisee must deduct 20% in royalties and 20% for dance instructors. Deduct another 25% for rent, utilities and other operating expenses, 15% for promotion and 5% for miscellaneous items, such as the $3 million liability insurance offered through Jazzercise. After all that a hard-working franchise owner will do well to clear all of $47,000 in year three.
Perhaps the franchisee could boost his or her take to $94,000 by opening a second studio. Even then the reward is not great for taking an entrepreneurial risk and working long hours. The profit, moreover, is not comparable to a salary; Social Security taxes and medical insurance premiums have to be paid.
Lesson: Even "tested" franchises are startups for the franchisee and take years to build. Beware of Web sites claiming that a U.S. Department of Commerce study showed franchises have a "success rate of 95%," warns Sean Kelly, editor of FranBest.com. No such report exists.
How about instead buying a going concern where cash is already flowing? Here’s a deal tailored to our executive, based on a nightclub with a 20-year track record that sold recently. The club’s a known stop for rising rock bands and generates $1.5 million a year in revenue from two floors, two bars, a kitchen and a seasoned manager. It reported $30,000 a year in operating income (earnings before interest, taxes, depreciation and amortization) on average over the last three years.
Understanding its true financial picture requires adding back what small businesses call seller’s discretionary income. That includes what the owner takes out for himself. At the nightclub it’s $270,000 a year in pay, health insurance and personal vehicle reimbursement. That brings adjusted income to $300,000.
Business broker Hoxter says the prospective owner probably could bag the nightclub for 2.3 times that, or $700,000, with an all-cash offer. Since our hypothetical buyer has only $500,000 to put down, she’d probably have to pay $750,000, with a seller’s note covering the shortfall. (A cheaper Small Business Administration loan is a possibility but can take months to process.) Assuming the buyer uses the $250,000 note, she will have to pay it back over three years, plus around 8% in annual interest. Closing costs will add $15,000, mostly for lawyers and accountants. The broker’s fee is paid by the seller.
"It’s very difficult to pinpoint the value of cash businesses," warns Michael Bullinger, a former health care executive examining the books of small firms for sale. "These guys [sellers] often want more money than what the books are saying [that the business is worth] because they haven’t always been reporting all their income."
Hoxter concurs that the "numbers are squishy" in many cash-based businesses and in the nightclub’s case recommends "carefully checking out things like the volume of beer sold and traffic coming in the door, to see if the reported numbers add up."
Assuming they do, and that the nightclub’s $300,000 in adjusted annual profits are static, the $94,000 a year the buyer will pay over the first three years to repay her loan brings her income down to $206,000 annually. From that she must deduct 30% for items like medical insurance and Social Security. That leaves $144,000 annually, with the figure rising to $210,000 or so after the loan has been repaid. That’s more than the exec earned before and would leave her a valuable asset to sell. But she’d have to risk her life’s savings and go into hock, to boot.
If she’s not such a big gambler, a third possibility would be to aim for a corporate position in one of the rare sectors adding jobs.
Health care has underinvested in data processing, says Paul Hattis, associate director of the Masters of Public Health program at the Tufts University School of Medicine. "It needs people with skills, and it’s possible your executive could find a job without any additional schooling," says Hattis.
Possible, yes, but according to Absolutelyhealthcare.salary.com, the median industry salary for a database manager around Philadelphia is $116,000. If our hypothetical instead goes for a master’s degree, she’d find that two years of tuition at Tufts, along with room and board, runs $94,000. Living costs might force her to burn through $50,000 a year in savings and bring the two-year price tag to $194,000. The upside is that her new degree should put the career changer in the running for a job as, say, senior director of software engineering at $180,000 a year.
This looks like the safest route, but there are dangers. The exec could find the work deathly dull or Obamacare might squeeze salaries. Life is never without risks. That goes doubly when you’re changing careers.