If that sounds optimistic, Scandone points out that his own two child-care centers see gross margins in the high 20s. Reaching those lofty heights requires the kind of leveraging that represents the heart of his concept. Salaries in the child-care industry are dismally low. By offering 15% more in total compensation than his competitors -- but still only about $15,000 a year -- he says he can attract certified teachers and thereby position his service as an educational and developmental center. The $30,000 in resulting payroll expense should bring in up to $70,000 in additional tuition revenue, Scandone figures -- actually more, he adds, because the emphasis on education will also enable franchisees to fill a higher proportion of their licensed spaces.
Another key to profitability will be the efficiency of each franchised center. This doesn't mean saving money by making a smart buy on red crayons and construction paper; it means running full classes for as much of each day as possible. Most states set teacher/student ratios -- say, one adult for every 8 preschoolers. So centers that routinely get a multiple of 8 toddlers are very efficient; those that bring in 18 kids require a third adult to look after only 2 children -- and profitability suffers.
Juggling children to fill each class to capacity is one of the toughest parts of the business, but Scandone thinks franchisees have more incentive to do it well than managers in a national chain. "It goes right into their pocket," he says.
Scandone encourages franchisees to fill open slots with part-timers and after-school children up to the age of 10. Since these kids bring in a premium of about 25% per hour over the tuition of full-time kids, filling one spot with two half-timers can deliver 125% of the expected revenue for that space. Skillful scheduling of after-school children, he says, should produce extra revenues of $42,000 a year, or about a third of gross profit.
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The ideal franchisee, says Scandone, is someone with business acumen who has no prior experience in the industry. Scandone wants franchisees to follow his system to the letter, and he fears that experienced child-care providers would be difficult to control and eventually would graft too many of their own ideas onto his model, producing a hybrid that compromises the image he wants to project. So among the first people to sign franchise agreements were an engineer, an insurance executive, a computer company vice-president, a real-estate developer, and a supermarket retail manager. "What I'm looking for," says Scandone, "is someone who's worked in a corporate environment and supervised people."
The initial investment for a 122-child center is about $140,000, of which $25,000 is a franchise fee paid to Carousel. The royalty is 8% of gross revenues, discounted to 7% if payment is timely.
The fee and royalty seem relatively steep for the child-care business. Profit margins are very thin, an average of less than 5% on an aftertax basis. Unless the Goddard centers are far more profitable than the average, the royalty could drain the bottom line of each franchisee. To sell the franchises, then, Scandone must show that Carousel's support will make the centers much more successful than they would be on their own.
In Scandone's system, the franchise owner runs the business end of the operation and delegates responsibility over the educational program to the center director, a certified teacher. Most child-care centers combine these responsibilities in one job. The teaching program itself, detailed in an operations manual, was designed by one of Scandone's staff, Suzanne duPont, and consultant Fran Ritter, director of the child life department at The Children's Hospital of Philadelphia.
Aside from the curriculum, Scandone points to services that he says more than justify the fees and royalties. Carousel helps franchisees secure financing and assists them in identifying a promising site for a center. It provides support in recruiting, advertising, and public relations. For instance, last fall the company helped one franchisee place a children's playhouse and information desk in a local mall as a way of spreading the word among parents.
Carousel puts new franchise owners through two weeks of intensive training in all phases of the business. Once centers are open, Carousel will have operations people in the field to provide ongoing support.
Bud Gosnell, a 51-year-old engineer who in January became the first franchisee to open, says he couldn't have started without Carousel's help. "I'd have had to design the facility, get a curriculum, start from scratch," he says. "I don't have the savvy for that. They're already in the business, and that gives me a shortcut. They'll teach me how to run it."
Like other franchisees, Gosnell had heard about Carousel through a newspaper advertisement. In the future, a Carousel salesperson will work with interested people, guiding them through the process of approvals and signings. Scandone figures an average salesperson, after a six-month break-in period, will handle about 15 franchise sales a year, which he says will continue to be generated by ads and word of mouth. The marketing tool that will clinch the sale, he says, will be a tour of one of the Goddard centers, where thoughts about pro forma projections will dissolve into pleasant images of running a business for kids.
Successful sales and openings could produce attractive returns for Carousel. Scandone's pro forma projects profitability this year, Carousel's second full year of operations. It won't be until 1993 that the royalty fees will begin to produce significantly more revenue than the franchise fees; Scandone predicts operating profit of $2.7 million on revenues of $11.8 million that year. Scandone has a big incentive for moving the revenues up quickly; under his agreement with cofounder Tony Martino, he receives a bonus each year that is 12.5% of the royalty fees.
