So You Want to Franchise_excerpt

Document Sample
So You Want to Franchise_excerpt Powered By Docstoc


    The Benefits of

L   et’s say you own a gym. Not just any gym, but the

    best gym in town—that’s what your clients and train-

    ers tell you. You aptly named the gym “Fit,” and the

    moniker doesn’t just describe your clients, it depicts

    your business. The place is immaculate, well located,

    and features the best equipment. No wonder the

    place is humming from 6 A.M. to 10 P.M.


          The gym practically runs itself. Your trainers are the finest in the
    area and they know how to treat customers. Your services are priced
    fairly. Your programs are scheduled to attract early-morning com-
    muters, moms, kids, athletes, and the corporate crowd. And your mar-
    keting plan works like clockwork, enticing folks to keep their New
    Year’s resolution in January, shape up for spring in March, and take
    advantage of cool summer specials in June.
          One day, you have a vision. You imagine your gym not just in your
    town, but in the next town over. And the town beyond that. And in the
    next county. OK, throughout the entire region. Suddenly, you envi-
    sion going national, even international.
          For a moment, it all seems possible. You could simply duplicate
    your fool-proof operation so that there are hundreds of well-located,
                                       immaculate Fit gyms not around the
                                       country, but across the globe. Then
    With franchising, people pay you
                                       reality sets in. Where would you get
    for your proven business model.
                                       the capital? A bank? Maybe a banker
    Even better, they pay royalties.
                                       would loan you the money to open a
    But you will need a good con-
                                       second location. But to expand rapidly?
    cept, good management, and the     Not so likely. Venture capital? That
    right amount of capital to be suc- could mean giving away the farm,
    cessful. A franchise can be        which is what most early venture
    defined simply as an entity that   firms would expect in return. Plus,
    has three factors: 1) the grant of you would then need to contend with
    trademark rights, 2) a prescribed  the hassle of someone looking over
    marketing plan, or significant     your shoulder, telling you how to run
    control or assistance in the oper- Fit. Most entrepreneurs would not
    ation, or a community interest,    find that scenario all that appealing.
    and 3) payment of a franchise fee  We know we wouldn’t.
    for the right to participate.
                                           Then it hits you: Franchising. By
                                       franchising, people will actually pay
                                       you for your tried-and-true business
    model so that they, too, can run a profitable enterprise. Even better,
    they will pay you royalties based on their sales. But does franchising

4    Part I   •   Why Franchise?

really work? It has for more than 50 years and, for the most part,
    The history of franchising is filled with success stories.

      Ray Kroc got his start as a mixer salesman whose California
      clients, brothers Dick and Mac McDonald, ran a popular ham-
      burger restaurant, McDonald’s. Mr. Kroc purchased the restau-
      rant and transformed it into today’s giant operation through
      Fred DeLuca, the Subway Restaurant founder, launched his
      business as a 17-year-old when a family friend wrote him a
      $1,000 check so that he could open a sandwich shop in
      Connecticut. After opening 32 other Subways in the state, the
      company grew nationally and internationally by franchising.
      Tom Carvel, the famous ice cream maker, launched his business
      with a $15 investment, selling ice cream from a truck. Later, as
      a refrigeration consultant and concessionaire, he taught shop-
      keepers how to create his ice cream for a flat fee and a percent-
      age of the sales—in other words, through franchising.
      William Rosenberg created Dunkin’ Donuts from a small “roach
      coach” in the Boston area.
      David Sandler, founder of the Sandler Sales Institute, sold his
      sales training program to Fortune 500 corporations as well as
      small- and medium-sized companies.
      Gary and Diane Heavin, founders of Curves for Women, grew a
      small chain of women’s only 30 Minute fitness centers in Waco,
      Texas, to an international chain
      of more than 6,000 such fitness      Quick Stat
      centers.                             Franchises generate a total eco-
                                             nomic output of more than $1.53
    The list goes on to include a host
                                             trillion according to the
of other franchising luminaries.
                                             International Franchise
    Of course, these names are leg-
endary in the franchise world. But           Association.

don’t be intimidated into thinking that

                                       Chapter 1   •   The Benefits of Franchising   5

                                       franchise success stories are only
    Once you begin franchising, you    attainable to a select few. Nothing
    have new responsibilities:         could be further from the truth. With
    namely, selling units and sup-     a good concept, good management,
    porting your franchisees.          and the right amount of capital to get
                                       you started, you can build up a solid
    enterprise, even if you decide to grow only regionally.
         As the franchisor, you assume the role of working on your business,
    not in your business (a mantra made famous by Michael Gerber in his
    book, The E-Myth Revisited). If you are franchising Fit, the gym we
    mentioned earlier, your job is no longer the business of running the
    individual fitness center, but the business of finding others to open and
    run more fitness centers. The beauty is that these people are paying
    you perhaps hundreds of thousands of dollars in fees and between 4
    percent and 8 percent in royalties for that privilege—and that they are
    earning a living as well.
         In 2006, more than 300 small-business concepts adapted the
    business-format model of franchising, demonstrating a continued
    increase in the industry’s growth, according to a report issued by the
    International Franchise Association’s Educational Foundation. In fact,
    the 2000s have shown explosive growth for franchising. From 2003
                                       through 2005, 900 new franchise
                                       concepts were launched in the United
    Quick Stat
    Franchise companies added
                                           There are numerous reasons to
    nearly 30,000 new establish-
                                       franchise your business. You need
    ments to the U.S. economy in
                                       additional capital, so why not use
    2006, according to the
                                       franchisees’ money? You need people
    International Franchise            to open more Fit centers; who better
    Association.                       than an owner/operator who has
                                       “skin in the game”? People who buy
    franchises have their own money invested in the venture, and for this
    reason you know that they will work harder than if they were mere
    employees of your business. But the rationale doesn’t stop there. By

6     Part I   •   Why Franchise?

franchising, you can open numerous Fit centers before your next com-
petitor pops up. And, though you probably know nothing about real
estate in the next county or state, for that matter, in all likelihood your
local franchisee has in-depth knowledge of the area, or knows the real
estate brokers who can assist in finding the right location for his or her
Fit center franchise.
     Then there is your exit strategy. Let’s be honest here. Owning one
or two Fit centers is not going to provide much of a retirement cush-
ion for you. However, going public, selling your chain of Fit centers
to an industry giant, or having a legitimate equity firm buy a majority
of your stake, certainly will. Of course, not all franchise concepts make
it big, or become huge successes, but if you are not in the game, you
are never going to find out, will you?
     Franchising is booming today because it works. You are, in effect,
providing a turnkey operation—with all the tools needed to immedi-
ately open for business—so that others can emulate your proven
method and reap the benefits. Though food is the fastest growing
franchise sector, other segments are growing as well. Fitness, educa-
tion, and pet care are all thriving. And specific categories within the
food sector are flourishing. For instance, Tex Mex shows particular
promise. Other than Taco Bell, there are few Tex Mex franchises
around—yet. A savvy entrepreneur could do well by growing this con-
cept regionally. Indeed they are already doing so: the category now
includes Del Taco, Chipotle, Baja
Fresh, and smaller players are also
                                              Quick Stat
getting into the action.
                                              Fast food makes up 19 percent
     If franchising sounds like the
                                              of the franchising sector, while
right direction for your business,
                                              retail and service businesses
congratulations. It is a terrific adven-
                                              make up 11 percent each,
ture, exposing you to people and
potential you might not otherwise             according to the IFA.

encounter. But, like any endeavor,
you will want to move forward strategically, armed with an arsenal of
knowledge and assisted by professionals who have been in the game

                                         Chapter 1   •   The Benefits of Franchising   7

    for many years so that you have the appropriate tools to reap hand-
    some rewards.

                                     IN SUMMARY

       Franchising is a terrific way to turn a company into a regional, national, or
       international sensation. But you will need a solid concept, adept manage-
       ment, and the financial resources to be profitable.

       By franchising

              ✓ People will pay you for your proven business model so that
                they, too, can run a profitable operation.

              ✓ People will pay you royalties based on their sales.

              ✓ Your concept can grow regionally, nationally, or even interna-

              ✓ You are creating a viable exit strategy for when you are ready
                to retire.

              ✓ You are following a model that has worked for more than 50
                years, for the most part, successfully.

8    Part I   •   Why Franchise?


        Not So Fast

Y   ou are sold on franchising. The market seems ripe

    with opportunity and the rewards—fees and royal-

    ties you will receive—could not sound more promis-

    ing. You are excited about seeking out the right fran-

    chisee prospects and sharing your expertise with

    them, so that they, too, can thrive. Truth be told, you

    are ready to charge full-speed ahead.


         Not so fast. There are many factors to consider first. Ask yourself if
           your business is truly franchisable.
           you can afford to do it.
           your personal life can handle the process.
                                            If you are used to taking entre-
     A “franchisable” business is      preneurial risks, franchising may
     one that is profitable, has the   seem like any other gamble. Think
     ability to be replicated, and has again. Franchising requires a substan-
     a documented system that is       tial amount of time, effort, and
     easy for others to follow.        patience. It also requires traveling to
                                       franchisee locations to assist with site
                                       selection, training, and support.
     Simply put, those who presume they can continue to run their own
     location and build up a franchise venture are in for a big surprise.
           For starters, not every business is franchisable. You might argue
                                       otherwise. Even if people are walking
     Keep your focus. Franchisors      into your place of business and mar-
     who believe they can run their    vel, “This is a great concept!” and beg
     own location while also growing
                                       you to sell it to them, that is not
                                       enough of a reason to franchise your
     their franchise system invariably
                                       business. Ask those prospects to show
     find they cannot do both well.
                                       you the money, and that is probably
                                       the last time you will hear from them.
           To determine if your business is franchisable, see if the following
     criteria apply to you:
           Do you have a proven operation that is making money?
           Have you been in business for six months or longer?
           Do you have good management in place?
           Do you have between $100,000 and $150,000 in capital to
           invest in the franchise program?
           Do you have in place, or have access to the proper legal repre-
           sentation and advisors who are well-versed in franchising?

10     Part I   •   Why Franchise?

       Do you have the time to pursue the endeavor?
       Will you find the endeavor fulfilling?

    Let’s explore these criteria in greater depth.
    To determine if your business is franchisable, you need a proven
operation. Having more than one location would be preferable so that
you can ensure that you have worked out any kinks, and to help vali-
date that your initial success was not some sort of fluke.
    There are, of course, exceptions to this rule. There have been many
franchisors who start out with a concept, and even though they were not
operating for any great length of time were still able to franchise their
business successfully. This can be seen in the non-bricks-and-mortar
franchise systems—those where the franchisee can operate from a
homebased business or that provide services as opposed to products.
    Nevertheless, retail-oriented franchises do need at least six months
or even a year to determine their viability and whether another person
(the franchisee) can make a go of it successfully. It will take at least this
long, or longer, to make sure that everything works properly, that your
product mix is right, that your marketing strategies work properly,
that your pricing formulas work correctly for the area in which you are
operating. A track record of at least six months is critical, and if you
cannot accomplish this, you are not ready. Please do not think that if
you are bent on franchising a retail concept, like a restaurant, and do
not have at least one prototype operating, that you can accomplish the
franchise model. It is not going to happen, period. During the course
of writing this book a gentleman called Harold and said he wanted to
start a franchise program. But, he said, he only had a concept, and did
not have an operating prototype. Asked what the concept was, he said
it was a pizza venue. This prompted a chuckle, because this poor soul
thought he could join one of the most crowded spaces in the food
industry without having an operating restaurant. Harold told him that he
really had no chance unless he built a restaurant and actually operated it
for at least six months or a year. He was another example of an overly

                                                     Chapter 2   •   Not So Fast   11

                                        optimistic entrepreneur who wanted
     Don’t start franchising until you  to get into the game, but had no real
     have at least one proven opera-    chance of success.
     tion that has been in existence        If you are not making money—or
     for at least six months to a year. worse, you are losing your shirt—
     You will need this time to deter-  franchising is, in all probability, not a
     mine if the concept is viable,     good option. Unless, of course, there
     and if another person could        is a good reason for losing money,
     make a go of it successfully. It   such as perhaps operating out of a bad
     is very difficult, if not impossi-
                                        location. Frequently, a bad location
                                        will doom any business, even a fran-
     ble, to attempt to franchise “a
                                        chise operation. The old saying,
     good idea.”
                                        “location, location, location,” is vital
                                        for a successful franchise operation.
     For example, if your restaurant is not in the right spot in a regional
     mall, it will make no difference how many people shop at the mall,
     they may never walk past your site. The same applies to which side of
     the road you are located on. If you are a breakfast/coffee business and
     your location is on the return-home side of the street, you will miss
     out on a substantial number of potential customers. And if the parking
     is not easily accessible, you will lose additional customers as well.
           You will need much more than a good concept before you can
     safely deem your business franchisable. Good management is vital. If
     you have never previously operated a thriving business, you may con-
     sider bringing in a person who has successfully operated a franchise
     chain. In fact, you might even consider giving this person equity in the
     franchise company in order to help you develop the franchise model.
     Many good business people who have never experienced the franchise
     model try their hand at franchising, only to run into problems later.
     Thus, it is often ideal to bring in a person, whether they be an experi-
     enced franchise director or an operations person from a franchise
     chain, to work with you to help you through the process of becoming
     a successful franchisor. Retaining good consultants and other profes-
     sionals is critical, but they are not going to be by your side each and

12      Part I   •   Why Franchise?

every day. The hiring of such a person shortens your learning curve
and gives you the competitive advantage that you will not have if you
are not familiar with franchising.
     Additionally, you will need
                                             There are at least 20 states with
between $100,000 and $150,000 in
                                             some type of franchise law that
capital to properly put together your
                                             deals with selling franchises and
franchised business. It will be money
                                             a number of states that have
well spent. It will enable you to hire
                                             franchise relationship laws.
a franchise attorney (an attorney
who specializes in representing fran-
chisors) who will create a Franchise Disclosure Document (FDD). A
document legally required to be given to prospective franchisees, it
describes the offering and the investment that the franchisee must
make, and gets filed with a number of states even before you can sell
franchises in those particular states. (See the appendix for what
makes up a FDD.) Franchising is a highly regulated industry; if you
do not have the proper legal guidance, you risk exposing yourself to
serious trouble, trouble that could be very costly and time consum-
ing to rectify.
     The initial capital will also cover expenses to hire an experienced
franchise consulting company who will produce an operations manu-
al, a brochure, a website to help you market your franchised business
to both consumers and potential franchisees, and a franchise-knowl-
edgeable accounting firm because your FDD must have an audited
financial statement, which must be written on an annual basis.
     There is no question that franchising requires a sizeable invest-
ment, which will not typically show any return for up to three years
while you are ramping up the system.
For many, this is a difficult amount of
                                             You will need between $100,000
money to raise. So weigh your
                                             and $150,000 in capital to prop-
options carefully. Banks typically are
                                             erly put together your franchised
not interested in financing such spec-
ulative ventures. Some would-be
franchisors look to venture capitalists

                                                      Chapter 2   •   Not So Fast   13

     but keep in mind: with VC money, you will have to give away a great
     deal of equity, including control of the company, at the inception.
     Most likely, this is not what you want to do. If at all possible, try to
     raise the funds through family or a second mortgage on your home, or
     take it out of your existing business. Always keep in mind that if you
     are not successful, this money cannot be recaptured, and if borrowed,
     must be paid back. Although rare, some newer franchisors who lack
     sufficient capital to develop a worthwhile franchise program will find
     an equity partner to fund the project. That equity partner will typical-
     ly receive a percentage of the newly created franchise company. The
     percentage can vary, but Harold has seen as much as 50 to 60 percent
     of equity given up for this seed capital. It is very expensive money and
     many young franchisors are reluctant to give away so much of their
     company. Although not very common, some investors will agree to
     permit the franchisor to reacquire the equity in the future, at a signif-
     icant premium. This is a risk for the franchise company since the pre-
     mium can be very high. On occasion, and again, rare, Harold has
     heard of young franchise companies finding someone with a particu-
     lar expertise in franchising also who can invest capital. This is not
     common and no company that has done this successfully comes to
         Sometimes the cost alone is enough to deter an entrepreneur from
     franchising. For instance, an interior designer who specialized in Feng
     Shui received numerous calls from other designers eager to buy her
     concept. She thought that franchising was the way to go, so she called
     for advice. We explained to her what the costs would be to start the
     franchise process. She did not have sufficient money and passed on the
     idea. The fact that she did not have the start-up capital does not
     undermine the integrity of her concept, but this particular would-be
     franchisor decided that the circumstances were not favorable.
         Aside from a solid concept, and the required dollars, you will need
     to dedicate yourself full time to the business of building a successful
     franchise system. Don’t let anyone tell you otherwise. Franchising is a
     lot of work, and you cannot grow a franchise on a part-time basis.

14      Part I   •   Why Franchise?

Franchising is a separate business
from the one you currently operate.           Franchising is a full-time
You need to be able to devote full            endeavor. Do not make the mis-
time to the franchise business and            take of thinking you can grow a
hire a manager to operate your exist-         franchise on the side. You will be
ing units—it is virtually impossible to       pulled in too many directions
do both. As we said in Chapter 1, you         and not only will your franchise
want to work on your franchise business,      suffer, but also, in all likelihood,
not in it.                                    you will have wasted your
    Simply put, if you are growing a
donut franchise, you cannot be up to
your elbows in batter at your flagship
location and expect to find quality franchisee candidates and support
existing franchisees with training, site visits, and troubleshooting to
ensure a viable enterprise. There just aren’t enough hours in the day.
    Imagine yourself as a full-time franchisor, where your priorities
are devoted to supporting the system. This means you will no longer
spend your days working on the business on which you based your sys-
tem. So, if you are an auto mechanic considering franchising, recog-
nize that you will no longer spend your workday fixing engines. If your
true passion is auto repair, franchising may not really be right for you,
no matter how franchisable your business really is. We will examine
this philosophy more fully in Chapter 3.
    Life can be complicated. Perhaps you are consumed with the birth
of a new baby, caring for a loved one, or putting all your resources into
saving up for your child’s college tuition. Maybe your attention is
diverted because you are dabbling in another career, such as selling
real estate part-time. Plain and simple, if you cannot personally devote
your time to building up a franchise, you may want to set the idea
    Perhaps this sounds harsh, but it is reality, anything less than your
undivided commitment will inevitably cause your operation to suffer.
You want to make sure your franchisees are successful so that they will
“sing” to prospects about their experience. If they are not singing, you

                                                         Chapter 2   •   Not So Fast   15

     will have a problem. Good prospects will walk away and your venture
     will not live up to its full potential. You want your franchisees to tell
     prospects that if they had it to do all over again, they would still buy
     this franchise, or that they want to buy additional units. Those are the
     testimonials all franchisors strive for.
          A thriving franchise system requires a good concept, proper capi-
     tal, and good management. But if the good concept is all you have, you
     probably can find the other two. Still, you must weigh your options—
     and the potential risks—very carefully.

                                       IN SUMMARY

        Even if you are sold on franchising, your concept must be truly franchis-
        able in order to succeed. Before you move full speed ahead, be sure that
        you have the time, money, and advisors to see the endeavor though. Read
        as much as you can on the topic, and speak to existing franchisors to
        understand what it takes to build a solid system.

        To franchise, you will need:

             ✓ To ascertain that your company is indeed franchisable.

             ✓ Between $100,000 and $150,000 in capital to properly put
               together your franchised business.

             ✓ At least one proven operation that has been in existence for at
               least six months to a year.

             ✓ To devote yourself to the venture or it will never reach its

             ✓ To hire an experienced franchise expert who can help you get
               your company off the ground.

16      Part I   •   Why Franchise?


     Not All Roses

Y   our concept is solid, you are properly captilized, and

    you have put together a smart management team.

    But that does not put you on easy street. Far from it.

    Even franchisors who have sold thousands of units

    run into their share of trials and tribulations.

        Put a group of franchisors in a room together

    and you might be surprised to discover the number


     of challenges they face on a continual basis. Here is what you will likely
            Grumbles about finding quality franchisees in a sea of interested,
            though in all likelihood neither qualified nor properly funded,
            Growing pains from new franchisors who must adjust to the
            role of selling franchises, as opposed to their former roles run-
            ning a business that sold a product or service.
            Complaints about renegade franchisees who think they can run
            the operation better on their own rather than by following the
            tried-and-true methods that really work.
            Laments about the business lessons learned the hard way,
            including the level of handholding necessary to get a new fran-
            chisee up, running, and ultimately thriving.
            Gripes about discovering franchisees who are not functioning as
            owner-operators but are instead, hiring incompetent people to
            operate their franchises while they continue working their day jobs.
            Complaints about listening to franchisees who complain that
            they are not making enough or any money in their operations,
            and blaming you for the failure.
         In short, some people make the mistake of thinking that franchis-
     ing a business will put them on Easy Street. But, as you will learn from
     this book, nothing can be further from the truth; and while collecting
     royalties and enabling franchisees to make a handsome living is indeed
     gratifying, franchisors must align themselves with experts who can
     help them on the right path. Otherwise, as one expert put it, “they
     wind up with so much litigation,” and perhaps in the end, with no
     business at all to speak of.

     The Importance of Personal Rewards
     Plain and simple, franchisors must build and protect their brand. So it
     is important to understand the process, and decide if the process is,

18      Part I   •   Why Franchise?

indeed, for you—ideally, before you invest your hard-earned money
and time. Remember, just because your concept is franchisable, there
is no guarantee that you will enjoy growing a system.

                n 2004, Jessica Pollack decided to franchise her compa-
              I ny, Not Just Art, a successful children’s art and science
               facility and toy store in Oyster Bay, New York. Pollack felt
               she had a business model worth replicating, but to be
              sure, before she got into franchising she checked with
  experts who confirmed her beliefs.

  In so doing, they asked her about her financials and her operations, but
  no one ever asked her if franchising would be something she would
  personally find rewarding. Now she wishes they had.

  As Pollack became more immersed in the process, she discovered
  aspects that she did not like.

  For starters, what had always given her the most pleasure at Not Just
  Art, and a major reason for starting the company, was mentoring
  young children and staff, helping them to discover and express their
  unique selves. As a franchisor, rather than encouraging the fran-
  chisee’s creativity, she found herself having to make them into little
  clones of herself, which went totally against her nature and her pur-
  pose. An added pressure was that if the franchisee didn’t do things
  the “Not Just Art way,” and their experiences as a franchisee did not
  work out favorably, it was her name that would be associated with

  There were also added costs associated with franchising besides the
  initial startup phase. For instance, she discovered, once she got into
  the game, that there were filing fees in many states and ongoing legal

                                                    Chapter 3   •   Not All Roses   19

     fees to a franchise attorney who tracked updates within each state as
     laws changed.

     “If I had paid $2,000 to an advisor” who would have provided a more
     honest picture about what it means to franchise, “instead of the
     $100,000 it took to put the franchise together, I would have been very
     happy,” she notes.

     Pollack did sell a franchise unit, which helped her recover some of her
     costs, but she decided to cut her losses completely and get out of the
     franchise business. Today, in addition to running her Oyster Bay facil-
     ity, she also serves as a consultant to like-minded entrepreneurs who
     want to run a similar operation. And, she says, there is a silver lining
     to the franchise experience: It prompted her to put together the train-
     ing materials she now uses as a consultant; had she not pursued fran-
     chising, she might not have put those materials together. Still, she
     says, she would have much preferred to find that advisor whose sole
     purpose it would have been to give her all the necessary information
     to make a truly informed decision.

     To the best of our knowledge there is no personality test available that
     helps would-be franchisees analyze if franchising actually coincides
     with their personal goals. Personality tests do exist for franchisees
     who want to know if franchising is right for them or if the system is a
     good fit for them, and if so, which concepts would make the best
     match. So, what is a would-be franchisor to do? Speak with other new
     franchisors and ask about their day-to-day experiences, their chal-
     lenges, their likes and dislikes. Harold holds franchise forums around
     the country where seasoned franchisors, as well as those just starting,
     speak openly and ask questions about best practices. The International
     Franchise Association also provides opportunities to rub elbows with
     veteran franchisors and talk strategy. Talk to as many experts as pos-
     sible. Generally speaking, they like to help.

20   Part I   •   Why Franchise?

     Most franchisors agree that mov-
ing into the business of selling fran-          It is not unusual for nascent
chises is a tough transition. Like any          franchisors to feel frustrated in
field, it can have its highs and lows. So       the beginning. Many clients are
the more you know about the difficul-           impatient and look for instant
ties, the better equipped you may be            gratification, wanting to sell
at overcoming the challenges ahead.             franchises as fast as possible.
                                                What they often fail to realize is

The Opposite of Cushy                           that franchising is a marathon,
                                                not a sprint: It takes time and
Consider this perspective from Chris
Goebel, chief operating officer of          patience. Harold tells new fran-

TheHomeMag, a franchised advertis-          chisors that they will sell five to
ing publication for the home                seven franchises in the first year
improvement sector, headquartered           they are legally eligible to do so.
in Cape Coral, Florida. When he asks        A good franchise attorney will
people why they want to franchise,          slow franchisors down to control
they often say it is because that regu-     their growth—rapid first-year
lar royalty check sounds so enticing.       growth is not only unrealistic,
And enticing it is. But as Goebel           but also unsustainable.
points out, a franchisor has to work
hard for it. “You have to give them
cause every day” to pay that royalty, he says. That means providing
constant support and value-added services to your existing fran-
chisees—as well as finding new and innovative ways to attract addi-
tional qualified prospective franchisees.
    Many say that in franchising they work harder than they ever have
before. So if you have an image of lolling about, collecting royalties—
forget it. As Goebel notes, “You get out of it what you put in.”

Brand Consistency
One of the big challenges in franchising is maintaining a brand con-
sistency. Without consistency from unit to unit, from neighborhood

                                                      Chapter 3   •   Not All Roses   21

                                      to neighborhood, across state lines
     Being a franchisor is truly hard and regions, the product suffers.
     work and the royalty checks      Once that happens, the strength of
     must not be taken for granted.   your franchise declines. Building the
     Franchisees work hard and        brand has become an essential
     expect the franchisor to do the  byproduct of the franchising model.
     same.                            Brand awareness, to cite an often-
                                      used cliché, has become very impor-
                                      tant for franchise systems and their
     success. People who travel will, more often than not, gravitate towards
     a brand they know and trust and avoid the independents, no matter

                             ary Occhiogrosso is diligent about protecting his
                        G    franchise, Desert Moon Fresh Mexican Grille, a
                        Southwest/Fresh Mexican concept headquartered in
                        upstate New York with units in the Northeast and new
                        markets developing in the Midwest and Florida.
        Occhiogrosso understands all sides of the franchise equation, having
        assisted in launching the original grilled chicken concept known as the
        Ranch*1 franchise system with the company’s founders, as well as
        serving as a franchise consultant for launches of several national fran-
        chise brands. A former Dunkin’ Donut franchisee during the mid 1980s,
        Mr. Occhiogrosso also served on its franchisee advisory council and its
        advertising committee.

        “There is nothing more important than the integrity of the brand,”
        Occhiogrosso says, citing the philosophy of the legendary Ray Kroc,
        who built McDonalds into the multi-billion-dollar operation that it is
        today. Still, franchisees may unwittingly sabotage a brand “for a host
        of reasons,” he says.

22      Part I   •   Why Franchise?

how good they may be. Still, an E. coli outbreak or rodent infesta-
tion—the kinds of incident to which any restaurant franchise may fall
susceptible—can really hurt the reputation of even the most standard
    It cannot be said often enough: You cannot afford to let your fran-
chise decline. A thriving unit is the most powerful way to sell those
highly desired additional franchise units. The more units you sell, the
more potent the brand—and the more royalty fees you stand to col-
lect. As a franchisor, you are in the business of building and expanding
a system, and helping it to thrive. So do not be surprised if this new
role means being on the lookout for potential problems, and putting
out lots of fires before they grow unmanageable.

Recalcitrant Franchisees
How can the actions of a franchisee cause harm to a brand? They may
choose to build a location that differs from the original plan without
recognizing that they are adding unnecessary construction and oper-
ating costs. A franchisor must address such incidents early, before they
become costly issues, Occhiogrosso warns. Many profitable fran-
chisors dedicate a consultant or employee who concentrates on the
site selection and build-out process in the earliest stages, preventing
such problems from ever happening in the first place.
     Other times, franchisees may doctor recipes, making up a menu
item to please one customer, or because they are convinced that their
new creation is “delicious.” What they do not understand is that the
new item “may be so complicated that not every franchisee can make
it,” Occhiogrosso points out. Or the item may contain high-cost
ingredients that compromise the brand’s profitability structure. In any
case, a franchise brand becomes diluted when a visitor can find one
specialty in, say, Connecticut, but not in Pennsylvania.
     Of course, you do not have to be in the food industry to encounter
franchisees that think they know better than you, even after you have
labored to develop a business model that truly works. Take Marc

                                                Chapter 3   •   Not All Roses   23

     Shuman, president and founder of GarageTek, a national concept
     headquartered in Syosset, New York, that provides garage organiza-
     tion and storage systems. Shuman has met all kinds of franchisees.
     Fortunately, the majority has followed the franchise model to the T.
     But he has encountered his share of franchisees who believe that their
     ideas will deliver better results than his method.
          “They will say, ‘you’re in New York, I’m in LA. You don’t know
     my market,’” Shuman says. That kind of thinking can lead to trouble.
     Especially when these franchisees go ahead and independently hire an
     agency, for instance, to create a separate marketing campaign.
          There are times when it is appropriate to be flexible, but this is not
     one of them. This kind of situation is one that threatens the very
     strength and fabric of your brand. Remember, your business model is
     already proven. That is why franchisees buy into it. They do not have
     to waste their time and money building a model that works. You have
     already done that for them. If they still want to strike out on their own,
     they probably are not destined to become top performing franchisees,
     and maybe should not be franchisees at all!
          Still, as Shuman discovered in the early years of his operation, peo-
     ple may not take the franchise agreement seriously. Or for some reason,
     are convinced that their actions are acceptable. Or, perhaps they forget
     or do not understand that the franchise agreement clearly spells out how
     to handle all aspects of the business. In fact, Shuman says, franchisees
     have gone ahead and spent tens of thousands of dollars creating web-
     sites, advertising campaigns, and hats adorned with logos—all of which,
     if implemented, would have compromised the brand. Shuman told these
                                        franchisees in no uncertain terms that
                                        such collateral materials may not be
     Do not permit franchisees to
                                        used under any circumstances, and if
     use the brand in any way other
                                        they were used it would be in violation
     than the franchisor’s approved
                                        of the franchise agreement. “We own
     manner. Otherwise you will com-
                                        the brand,” Shuman points out.
     promise your system.               Franchisees “are licensed to use it in
                                        our approved manner.”

24      Part I   •   Why Franchise?

The Unhappy Franchisee
Often, franchisees who stray from the approved methodology believe
they are doing so in the best interest of the company. But there is
another kind of potentially dangerous unit owner: the unhappy fran-
chisee. Shuman says he wound up shutting down one individual who
tried to sabotage the GarageTek brand by bad-mouthing Shuman and
his management team, as well as criticizing the company. Word got
back to Shuman, who recognized that such slander could set a climate
where “you can’t expand and build a brand,” he notes. In these situa-
tions, communications help. Shuman dealt with this person individu-
ally and was able to diffuse the potential crisis.

Learning from the Past
Shuman says he is now experienced enough to recognize and discour-
age the potentially problematic franchise candidate from ever pur-
chasing a unit. To uncover the gems, he has developed a rigorous
screening process.

Lack of Funds
Most small businesses that fail do so because they are undercapital-
ized. As a franchisor, you must make certain that the franchise com-
pany is well capitalized, and you must make certain that your fran-
chisees have the financial wherewithal to stay in business. In the
beginning, it is quite possible that both franchisor and franchisee are
pulling themselves up by the bootstraps—and if neither of you is well
funded, it can serve as a recipe for a disaster.
    In addition, franchisors may accept a franchisee simply because
they can write a check; they see it as a quick way to becoming that
national brand—a very seductive notion. Tempting as it is, do not get
blind-sided—start working with the wrong franchisee candidate, and
your plans to expand may become quickly derailed.
    Do not enter this venture if you lack the capital and make certain
that your franchisee has sufficient funds so as not to wind up in over

                                                Chapter 3   •   Not All Roses   25

                                           his or her financial comfort level. Yes,
     Any new franchisor who                this might mean putting plans on
     believes that he or she will fund     hold while waiting to find a better-
     this venture with initial franchise   suited franchisee, but in the end,
     fees is headed for failure. There     patience is usually a good thing.
     are many new franchisors
     strewn all over the roadside who
                                           Not the Right Concept
     tried to fund growth this way. It
                                       It is entirely possible that the concept
     is not the way to succeed and
                                       may not be the right one after all.
     not the way an entrepreneur
                                       Consider the experience of Dina
     should view franchising.          Dwyer-Owens, chief executive and
                                       chairperson of The Dwyer Group, a
     Waco, Texas, organization that owns six franchised companies provid-
     ing residential and light commercial services. At one point, the com-
     pany tried its hand at a karate concept that seemed very promising,
     given the current fitness trend. The idea was to provide a profession-
     al environment in which families would learn Tai Kwon Do. The con-
     cept, which was targeted at black belts, “did well for a period of time,”
     says Dwyer-Owens. But, as it turned out, the black belts were “great
     at instructing” and not all that business minded. “They wanted to
     teach,” she recalls. “It was not a good business for us. We’re good at
     home service franchises.”
          Franchising—even for wildly successful franchisors—is not always
     a rosy path. So do your homework and proceed with caution.

     When considering franchising,
     make sure the concept works.
     Prove it first before taking some-
     one else’s money. If you cannot
     make it work, why would you
     believe that a franchisee could?

26      Part I   •   Why Franchise?

                             IN SUMMARY

If you have never franchised before, you will find that it is an industry like
no other. The rewards are certainly attainable, but you will have to work
hard for them. And because there can be so many unpredictable
aspects—from wayward franchisees to challenging yourself in a way you
never have before—you must analyze the next step objectively. The best
way to do that is by understanding what you need to know before you
begin franchising.

Fortunately, there are plenty of seasoned franchisors and experts in the
field who are happy to share their wisdom so that newcomers can suc-
ceed. Throughout this book, we will continue to examine the strategies of
experienced franchisors and other experts so that you can avoid mishaps
and approach franchising proactively rather than reactively: As anyone
who has run a business knows, a proactive entrepreneur is much more
likely to grow an organization, while the reactive business owner spends
far too much time putting out fires.

Would-be franchisors must bear in mind that

    ✓ they must be 100 percent satisfied that their system works
      before selling a single unit.

    ✓ they will work very hard for the royalties they collect.

    ✓ they must be patient and sell only to those franchisees who
      are indeed truly qualified.

    ✓ both the franchisor and franchisees must be well funded or
      the system as a whole will be on shaky ground.

    ✓ they must make sure that franchisees follow the system pre-
      cisely or risk compromising the brand.

                                                      Chapter 3   •   Not All Roses   27

Shared By: