Would You Like a Franchise With That?
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J. Wellington Wimpy knew all along that burgers had an undeniable appeal. Better known as the burger-loving character from the Popeye cartoon, Wimpy's ardor for the dish was so well-known that a burger franchise in the United Kingdom bears his name. But even before Wimpy, hamburgers had been gaining popularity. As far back as the 13th century, nomadic Mongols came up with the concept of a meat patty. A hundred years ago, at the St. Louis World's Fair, the burger was presented to the masses-more than 18 million fair attendees. Fast forward to today: The burger has nestled its way into the hearts and stomachs of Americans and people all over the world, providing not just an indulgent meal, but also business opportunities galore.
Scores of franchises have popped up serving the beloved American cuisine. Drive down any main thoroughfare, and you'll find competitors lining the streets-never mind that they're offering essentially the same principal product. But as individual as the taste of each person craving a burger, so are the franchises-in cost, menu and size, for starters. The dizzying array of options can be a bit overwhelming for anyone looking to invest in a franchise-even for those who have narrowed their course of action to the burger route. So with the myriad of burger franchises to choose from, how do you decide on one? We've picked the brains of those intimately involved in the franchise process to hear what advice and insight they have for prospective franchisees. With all the factors to consider, even Wimpy would need some time to decide which burger to go with.
Sizing Them Up
So you've reached the point where you're ready to commit to a life of hamburgers. Now the real elimination process begins. Much like a bachelor or bachelorette surrounded by inviting prospects, you have to look beyond what may first catch your eye and dig a little deeper. Only then will you find your match for life-or in this case, at least for the duration of the contract you'll sign.
The first matter most prospective franchisees contend with is whether to go with a larger, well-known brand. Obviously, consumers will probably know of McDonald's or other well-established franchises, but does that mean those are the ones to go after by default? Not necessarily. The big guys have national and sometimes international exposure, but don't underestimate the smaller guys' power of regional dominance. Kevin Hogan, president of Houston-based Liberty Development Consulting LLC, who works with the Whattaburger franchise, says it's false to think one brand is always going to make more money than another. "It's a matter of individual location, brand awareness, marketing power and media efficiency," he says.
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Dan Rowe, president and CEO of franchise development firm Fransmart in Alexandria, Virginia, which counts the Five Guys burger franchise among its clients, recommends taking local favorites into consideration when deciding. He points out smaller operations like Culver's, which is known for its ButterBurgers. The franchise has a similar menu, design and target public to McDonald's, but has 20 percent higher annual sales averages-all while remaining under the radar for most. "It's got a local cult following," Rowe attests, adding that customers in Wisconsin, where Culver's is based, "absolutely line up in droves."
Sam Fangary definitely agrees that smaller, local franchises are where it's at. He opened a Farmer Boys burger franchise in San Bernardino, California, in 2003. He was drawn to the company, which had only been franchising since 1997 and had seven franchises open at the time. Though most of the applicants for jobs at his store didn't even know what Farmer Boys was, Fangary learned that consumers in the surrounding communities did. With three other locations within a 10- to 15-minute drive, the local popularity of Farmer Boys got Fangary's store off to a good start. Since first opening his doors, business has been great. But why did he take a chance on a relatively small franchise when he could have gone with a bigger, more established one? "I'd rather invest in a company that's growing-not a company that's already huge-so I have a chance to grow with them," says Fangary, 44. "When Farmer Boys gets as big as some of the big franchisors out there, I can have 20 stores-that's my goal." For now, he's opening his second location in Hemet, California, and hopes to take the brand to other states in the future.
Importing that success to another area where there's no name recognition could be difficult. In terms of marketing, Rowe says, "For you to buy a [California-based franchise] in Chicago, you're not going to get much marketing support. But if you bought one in Temecula, California, you're smack-dab in the middle of their media campaigns. You're going to get some value, some return on your franchise fee and your royalties." He sums up his strategy: "I'd try to jump into the waves, so to speak, and ride whatever's hot." But he and other experts agree that there are several more factors to mull over.
What to Look For
Analyzing unit economics is key to understanding what kind of business you'll be investing in and what to expect. "The numbers don't lie," says Rowe. He suggests that rather than getting swept up in your emotions, you should objectively determine whether a specific franchise is a good bet for you. "Get out the ruler, and make a chart. [See] what the per-unit sales volume has been for the last five years. Then extend that line out a couple more inches, and get a sense of where it's going. Is the food cost going up or going down? Is the check average going up or going down?"
Also, take a look at how many stores have opened and closed in the past several years to get an idea of the franchisor's expansion efforts and how other franchisees have fared. "A really good indication that a brand works is [that] there are multiunit franchisees," Rowe points out. "To get rich in the franchise business, you never do it on one store; you always do it on multiples. You're building a franchise company." Even if you're not ready to begin thinking about constructing your own burger empire, it's still helpful to see that existing franchisees in a particular system are able to achieve those heights of success.
You would be remiss to decide on a franchise without speaking to existing franchisees. "I love picking up the phone and calling franchisees, and just asking, 'Hey, if you had to do this all over again, would you?'" says Rowe.
Most people looking to invest in a franchise know it's critical to pick the brains of existing operators to get an insider's view, but make sure you hear both the positive and negative. Fangary did so with all seven of the Farmer Boys' franchisees. Davia and Eric Stevenson, 42 and 41, respectively, did the same with current Wendy's franchisees before purchasing their Wendy's franchise in 2002. "I encourage people to hear even the things they don't want to hear," says Eric. "If a franchisee is disgruntled, or you don't like their style and think you can do better, make sure you really understand what their issues were because they didn't get to their position overnight. They all started out as optimistic as any new franchisee would."
Hogan finds that most candidates do speak to other franchisees and typically ask questions like, "How much money can you make? How long did it take you to break even? What are my risks? What are my downsides? What could happen to me negatively?" But be sure to also ask, "How good is the company from a support standpoint? Do they provide good training, support and all the technical aspects?"
Training was what led the Stevensons to Wendy's, since they had no prior experience in retail or fast food. "[Wendy's] had, by far, the most extensive training program-mine was over seven months," says Eric. "For the amount of money you spend [to become] an owner, you want to make sure you know what you're doing."
However, Hogan maintains there are still other core points that many prospective franchisees never touch on, like the company culture. While the financial aspect of the business is very important in evaluating a franchise, Hogan believes one of the most overlooked factors is the long-term relationship you have with the franchisor-undoubtedly influenced by sharing common goals, values, beliefs and objectives. "Many people don't do enough research digging into what the company is about, what they believe in, what they're trying to accomplish, and whether they will fit into the culture," he says. With franchise agreements spanning anywhere from 10 to 30 years, an ill fit from the outset will be that much more painful to endure. In dealing with hundreds of franchise companies, Hogan has found that turnover isn't always based on financial matters; it's often due to dissatisfaction with the relationship.
Consequently, getting to know the franchisor and what it stands for is a must. While you can ask many of the same questions of relatively young franchisors, you'll uncover a more detailed history from established companies-which may give you greater assurance that the franchise you're investing in is stable and secure.
As the CEO of Dunkin' Brands Inc. in Canton, Massachusetts, Jon Luther knows the ins and outs of franchisee-franchisor relationships, handling the parent operations for such brands as Baskin-Robbins, Dunkin' Donuts and Togo's. As Luther sees it, "You want to be with firms that have won the marathon, as opposed to the 10-yard dash-those that have been around and been tested through the economic times, through the competitive set, to make sure they can stand and grow."
Whether you're leaning toward a large or small system, Luther offers the following advice to franchisees looking for the right franchisor:
- Find a franchisor that's committed, dedicated and proven to build the brand-and that accomplishes that through awareness, store volume, customer love and loyalty. Luther warns, "If you don't have a brand that's going to do that, they just want your royalty payment, and that's it."
- Find a franchisor dedicated to your growth, beyond just same-store sales. Luther recommends looking into whether they provide infrastructure services, supervisory training and help growing the business. Find out what their marketing department and development teams look like. "What have they done lately that has really won the day?" asks Luther. See whether the franchisor helps single-unit operators become multiunit operators.
- Find a franchisor committed to the concept's integrity. "Are you going to find when you join that [the concept is] in supermarkets, on the shelves, on candy bars, in gas stations, and the franchise has no discipline over how it grows?" says Luther. He adds that "dropping your brand everywhere-diluting it-makes it lose its value." Luther stresses that critical components of concept integrity and execution lie within the franchisor's commitment to ensuring standards, emphasizing great customer service, and offering a polished concept.
- Find a franchisor that innovates. Luther believes an ideal franchisor should be doing all of the above and incorporating innovation into each aspect: "The best mystery shopping program, IT polling systems, product development and real estate ideas; and new store concept ideas that keep the concept and brand alive and vibrant-if you're my franchisee, I want to make sure you understand we have your interests at heart by providing these [components]."
Take a Second Look
Take a Second Look
When you've reached the point where you're seriously investigating one franchise, Luther suggests spending two to three days in a store to get a feel for what it will be like to run one. If a franchisor balks at the idea, be suspicious, says Luther. Meet with the franchisor's leadership team by visiting its headquarters. Note the energy of the people and their feelings toward the brand. "Are people smiling and excited?" asks Luther.
And be sure to pay a visit to the company's legal department. Find out how many lawsuits it's involved in, and find out why. If the company is focused on evaluating and improving standards, says Luther, "franchisees should look at that as a good thing" because it shows the franchisor's commitment to upholding its concept. Ultimately, the deeper you go in examining your choices and evaluating franchisors with an objective eye, the greater your chances are of entering into a business marriage that's for better, not worse.
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|RED LIGHT, GREEN LIGHT|
Before you put your franchise plans into high gear, learn what to watch out for.
Red Light/Green Light is not just a kids' game-it's a universally understood signal system meaning stop/go. Investigating a franchise promises excitement and opportunity, but if you don't pay attention to the signals, you're just playing in traffic.
Red Light: You make an impulse decision based on an exciting franchise sales presentation.
Green Light: You focus on your interests, read a lot, research the opportunities presented to you and ask questions. Realize that selecting and evaluating a franchise is a double decision: You're selecting a business that will engage your energies for a long time to come, and you're choosing a partner in the franchisor. This is too important to allow yourself to be sold; you want to pursue a franchise opportunity because it meets your predetermined needs and desires.
Red Light: You dash through the internet to see what strikes your fancy, believing the hype.
Green Light: You use the internet to browse and collect information, but as you narrow the search, you contact each company and gather information directly. There's a rather high hype-to-fact ratio on the net, especially on franchise promotion sites.
Red Light: You toss the Uniform Franchise Offering Circular (UFOC) into your file or, worse, in the trash, and never crack it open, figuring "Who needs all that legalese?"
Green Light: You understand what's in the UFOC and wouldn't dare toss it aside. This remarkable document gives you a decided advantage compared to other types of investments. The UFOC actually spells out in plain English (there is no legalese allowed, except in the contracts) all the "material" (read: important to you) information about the franchise, the franchisor, the franchise system and the financial dynamics of the investment.
There are three main components of a UFOC: a 23-item narrative description, including contact information on current franchisees and those who left the system in the past year; audited financial information about the franchisor; and the forms of contracts you'll be asked to sign.
The narrative description of the offering is most helpful. It reviews, in summary form, the franchisor's background (business, litigation and bankruptcy); the fees you'll pay the franchisor; estimates of your total investment in the franchise; your inventory and other purchasing requirements; financing provided by the franchisor; the contractual service obligations of the franchisor; trademarks/copyrights/patents; renewal/transfer/termination provisions; earnings claims information; and statistical summaries of the entire franchise system.
Red Light: You do a full review of the UFOC all by yourself.
Green Light: You have the audited financials prepared by an independent CPA. Once you get independent insight into the financial health of the franchisor, you can judge whether the company is rock-solid or financially wobbly. If you're uncomfortable reading those numbers, by all means hire an accountant or business advisor who can interpret them for you. The same "green light" applies to hiring legal assistance with the franchise agreement. This is not the place to pinch the nickel until the eagle screams. Think of it as investment insurance-professional advice on your franchise is money well-spent.
Red Light: You don't want to impose on current franchise owners-they must be so busy.
Green Light: You are eager to talk to as many current franchisees as you can. This is your best source of candid views on the investment opportunity. Make an appointment and visit. A current franchisee can give you the clearest signal of all.