Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
When it first emerged in the 1950s, franchising was designed as single-owner enterprise. But since the corporate layoffs of the 1980s, there have been more and more people approaching franchising as big business.
In 1966, Florine Mark, a mother of five small children, spent $500--all the money she had--for a single Weight Watchers franchise in Detroit, Mich. Today, she owns a Weight Watchers empire that runs 3,000 classes a week in 12 states, Mexico and Canada.
In 1974, the late Norm Slaymaker took a flyer and opened a single Sizzler Steakhouse franchise in Anchorage, Alaska. Today, his sons manage a restaurant company with revenues of $60 million a year and have even started their own franchise system.
In 1990, Mahendra Nath, a Minneapolis real estate developer and manager, picked up two troubled Burger King franchises and turned them around. Now he owns 133 Burger Kings, plus 12 Denny's and a couple of hotels.
When it first emerged as a business option in the 1950s, franchising was designed as a single-owner enterprise, with mom and pop working 100 hours a week to keep a fast-food restaurant, convenience store or print shop running.
The majority of the country's 500,000 or so franchises are still run by single operators, but since the corporate layoffs of the 1980s, there have been more and more people approaching franchising as big business, says Jeff Elgin, president of FranChoice, a Minneapolis franchise-referral network.
"Instead of running units themselves," says Mr. Elgin, "they purchase multiple units and hire managers to oversee them. Most franchisors encourage this, because it's a model that works very well for them too."
Purchasing Multiple Units
Some of these multiunit companies, like RTM Inc. of Atlanta with 710 Arby's Roast Beef Sandwich units, are bigger than many of the restaurant chains they compete against. Others, like PJ America, a large Papa John's Pizza franchisee, are public companies. But most, like the four cited above, are still in the hands of their now wealthy founders.
Florine Mark was broke in 1966, "and too fat to get a job," she says. "I'd lost the same 50 pounds nine times, and needed to work because my husband was ill. I'd heard about Weight Watchers, but I lived in Detroit and the only classes were in New York." Jean Nidetch, then president of the new weight-loss company, agreed to let Ms. Mark attend a week's worth of classes in New York and to fly back once a month for weigh-ins and support, rather than the mandatory once a week, until she slimmed down.
Ms. Mark lost 40 pounds and was so impressed she sent off $500 and signed a $25,000 loan to become the first Weight Watchers franchisee in Detroit. She rented the auditorium of a nearby private school and taught the first class herself. "The first week we had 30 people, the next week 60 and soon I was getting calls from churches, synagogues and shopping malls all over town to conduct classes at their facilities."
Ms. Mark built up a staff by hiring only other Weight Watchers graduates, then started buying up other franchise territories in the Midwest, using money she'd earned from her Detroit classes. By the time she was ready to buy territories in Massachusetts and Rhode Island, local banks were very happy to lend her the money. Today, she has 3,500 to 4,000 employees running 3,000 classes a week.
Eric Slaymaker of Salt Lake City says that the 36 restaurants that make up the Slaymaker Group he runs with his brother Scott, bring in revenues of almost $60 million a year. The brothers were teenagers when their father, who hadn't been in the restaurant business before, "took a leap of faith" and decided to open Sizzler Steakhouses in Alaska, where his own brother was then living. They did so well that Norm Slaymaker opened more in the lower 48, plus seven Chi-Chi's, which he later sold at a profit.
By then, Eric and Scott were hooked on franchising too, and they now own 14 Tony Roma's and five T.G.I. Friday's. In 1993, the Slaymakers even started developing their own franchise system, called Wingers--An American Diner, which specializes in Buffalo wings. Units are more compact than other casual-dining models, and fit nicely into smaller markets like Moscow, Idaho, he says. So far, they've sold 16 franchises and operate 11 themselves, plus a trio of Italian eateries. "We're making good money," says Mr. Slaymaker, "but we're investing most of it back into the business."
Mahendra Nath of Bloomington, Minn. was a successful real estate developer when he was attracted to two troubled Burger King restaurants in Minneapolis. "I'd built my company by acquiring underperforming assets and improving them. I bought the restaurants as a challenge to see if I could make them profitable," he says.
Once he'd succeeded, he bought 21 more, and by 1997 had 133 Burger Kings in six states. Like many multiunit operators, Mr. Nath then decided to diversify. He bought 12 Denny's franchises and two hotels, a Quality Inn in Minneapolis and a full-service hotel in nearby Roseville, that he's renovating into an upscale Radisson.
"This isn't rocket science," Mr. Nath says. "I have no outside investors and no pressure to expand at a certain rate. I try to plow profits back in and not get greedy."
Financing Is Hard to Find
Financing for franchisees is tighter now, says Jeffrey Rosenfeld, managing partner with Kessev Finance in Minneapolis. Securitized lending--pooling franchisee loans with similar characteristics and selling them into secondary markets at better rates that drove franchisee expansion during the 1990s--is drying up, he says.
The IPO option is effectively closed to multiunit franchisees now and the low stock prices of many publicly traded franchise companies mean that franchisors have less money available to help finance their franchisees' expansions. Banks, too, are getting pickier, Mr. Rosenfeld says, and want franchisees to have at least five units running profitably before applying for a loan to buy more.
Despite these obstacles, franchisees are still expanding and their franchisors are cheering them on. A multiunit business is more efficient and earns more money for the franchisee and, ultimately, the franchisor who is paid a royalty, usually 4% to 10% of all franchisee revenues, says Mr. Elgin of FranChoice. The franchisees in most hair cutting, auto aftermarket and sign shops are multiunit operators, for example, he says.
Many franchisees, like Mr. Nath, are multiconcept operators as well, owning units from two or more noncompeting restaurant chains, or two unrelated systems, like hotels and real estate companies. Mrs. Fields Famous Brands, in Salt Lake City, provides a menu of cookie, pretzel and frozen yogurt concepts that franchisees can open within the same mall, and Hilton Inns of Beverly Hills, says the target customers for its new lodging franchises are seasoned multiunit franchisees from other systems.
With financing hard to find and real estate so expensive, Mr. Rosenfeld says that potential franchisees dreaming of building multiunit empires today might look at less capital-intensive businesses they can run from home or in rented facilities, like carpet cleaning, bookkeeping, pet food delivery, or Internet services.
"Find something you can fall in love with," advises Ms. Mark, who made her first purchase in 1966. "I knew within my second week of conducting Weight Watchers classes that this was my life's calling."
Copyright Â© 2003 Dow Jones & Company, Inc. All Rights Reserved
For reprints and licensing questions, click here.