How Will I Know?
You have a great business, but is it franchise-worthy?
After more than a year of planning and dreaming, in March 2001, Paul Zorich and Cindy Castelli opened the doors to Seekers Coffee House, a Middleburg, Ohio, café, gathering place and music venue. Two days after their grand opening, Zorich and Castelli were asked if they'd ever consider franchising their concept.
Their curiosity sparked by this inquiry, the partners set about not only establishing their initial coffeehouse, but also building a franchise company, taking all the necessary steps like contacting lawyers and accountants and creating a Uniform Franchise Offering Circular. In August 2002, the first Seekers franchise opened in Dyer, Indiana.
"We had our logo on a sign hanging on the back of our stage and in passing, we said, 'Wouldn't it be cool if someday these were around the country?'" Zorich says. "It was a joke. There was never serious thought [about franchising]; there was never, 'Let's do this one right, then we'll do another one.' It basically just happened."
While franchising wasn't the path Zorich and Castelli initially envisioned for their company, this concept is picking up steam. Two Seekers currently has two locations, with an additional two planned to open this year and six to eight more in 2004. "We had no experience [with franchising]. We didn't know exactly what we were getting into," Zorich explains. "You look at McDonald's, Burger King, some of the big ones, and you think, 'That doesn't look too hard,' but now that I've been in it a little longer and we have more people signed, I'm realizing it's a little bit more complicated than I initially thought."
No matter how much experience a business owner has, there's still an incredible learning curve involved when moving from a strictly corporate operation to franchising. Is this the right move at the right time for your company? To get the insider's tips for taking those first steps toward franchising, Franchise Zone spoke with Michael Seid, managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry, and co-author of Franchising For Dummies (IDG Books).
How would entrepreneurs know if they should franchise their concept?
One thing they have to do is take a step back from their entrepreneurial burden to say, "I want to franchise." They have to make that assessment first. We use a feasibility process, where we take a look at about a dozen criteria that determine a company's franchisability. The criteria have to do with the economics of the existing businesses and whether they're going to provide a return on investment that's acceptable to potential franchisees and also for the franchisor. We look not only at whether there's a population willing to become franchisees, but whether there are enough of them to make economic sense.
Also, are there any regulatory burdens? Is the process trainable in a reasonable period of time? What is our ability to market the franchise? Does the business have the right organizational strength? Do you have enough capital to get it done? Do you own your own brand? There's a whole host of things that need to be tested around the feasibility issue. You need a third party to come in and do a real feasibility study.
What are the benefits of franchising a brand?
It depends. In some cases, you shouldn't. A lot of people jump into franchising for all the wrong reasons. But if it's the right strategy, it allows you to have some disciplined expansion that requires less capital than if you were using your own money. It allows you to leverage someone else's labor. It allows you to expand without diluting the equity in your business. It allows you to capitalize on the fact that the franchisee is part of his community and therefore may do a better job or have a better relationship with the community. You're using somebody else's finances to expand your brand and somebody else's human resources to manage that business, to recruit new staff, to make decisions. And a franchisor typically has a smaller headquarters and field staff, so his cost base is lower than a company-owned system. The span of controls is much different in a franchise model than a company-owned model.
Why would it be smart for a large, known brand to go into franchising?
Because there are things they can do in a franchise setting that they probably can't do in a company-owned. For example, years ago we developed a strategy in cooperation with Kidder Peabody and Price Waterhouse called retro-franchising. Typically back then, as a reorganization strategy, retail companies had gotten into trouble, retail companies, and the classic route of reorganization was to sell off the locations, reduce liabilities on the real estate and rent and shrink the company. That resulted in very weak companies.
Retro-franchising was a strategy in which we repositioned those companies to take advantage of their assets-the retail locations-and created a franchisor out of a non-franchisor.
Over time, businesses were no longer just looking at retro-franchising as a strategy to use when things are bad; they used it as a strategy to make things better. Franchising allows companies to sell to franchisees the markets in which it has less critical mass than it needs, making the brand stronger in that market. The company can then take the money it earns, put it into other markets and make critical mass in company-owned markets. We actually consider that treating your retail and service locations as inventory. We reposition the inventory and create a franchise, a franchise relationship.
Some companies look within their own pool of managers or corporate people to find new franchisees. Is that a good place to start when you're first franchising?
It's an outstanding way to go. It creates a good feeling in the company and has a tremendous human impact on the system. In the early days, you may know how to run a business but not know how to franchise-there's a period of time where you have to learn how to be a franchisor. You can take the pressure off yourself a bit by having franchisees who are experienced, because they don't need the same level of service as a new green grass franchisee who has never been in your business.
How would a smaller, lesser-known concept know if they should franchise?
It depends on the person's experience, but for us, what a franchisor brings to the table is his experience. One of the things a franchisee is buying, in a very soft way, is that the franchisor has made mistakes and survived it.
The franchisor understands seasonality. Companies come to us and say, "We just started and we spoke to this company in Chicago that thinks our concept is the next McDonald's," and we'll say to them, "What happens in the fall when it's back to school?" and they'll say, "We don't know." If you don't what you're doing, if you don't have experience, you're guessing. But if you open a location where you're at, open a location the next market over, two, three, four locations in different markets, run them for a year or two, and then franchise, that franchisor can answer franchisees' questions based on experience rather than guessing. If you're not quite certain, run your business a bit longer, because when the immature franchisor comes up against the multiunit, experienced franchisee, that franchisor can't answer questions and is going to lose an opportunity that will never, ever present itself again.
What are some good indications you should start franchising? Just because someone says, "I want to be your franchisee" doesn't necessarily mean this is going to be a good franchise concept.
Certainly someone coming to the door and saying, "I want to be a franchisee of yours" is a good indication that you have a loyal base of customers, are making money and can attract good employees. Other good indications are if you have your operations manuals in place so you know you can replicate cleanly, and if you've opened your second and third location and are getting pretty good results. But there are lots of concepts in the dust bowl of history that looked good on paper or did well in their first location but turned out to be purely location driven.
How close should a company stay to its current base when first franchising?
The rule of thumb is 300 miles. Generally, 300 miles is a safe distance, because I can generally get there by plane in an hour or two, so I can handle that type of territory.
Some of these new franchises are entrepreneurial businesses with hands-on owners. How soon after franchising should the owner get out of the store and focus only on the corporate side?
If they're marketing franchises, they should be out of it already. They need to understand that they're now a franchisor-that's a different business. They have to build an infrastructure. They should be operating, supporting, training their franchisees-that's their business now.
Is it possible to be a good businessperson and not be a good franchisor?
It happens all the time. If you're a control freak, you should never be a franchisor, because you're not going to get the same control in a franchise setting as in a company-owned setting. If your personality is, "Do it my way or the highway," don't be a franchisor. If you are a miserable human being that dominates people, don't be a franchisor, because franchisees are independent businesspeople and they're paying to join your system, but they're not your slaves and you're not their dictator. On the other hand, if you're a malleable person and don't have any original ideas, don't be a franchisor, because franchisees will drive you crazy on each of their individual issues. You have to be a businessperson who thinks on a macro level. You can see the big picture and sometimes sacrifice the little picture to make sure the chain is whole. A good franchisor is a very solid individual who understands the business and also how to be a leader.
If you really believe in your concept but think that you wouldn't be the right person to try to franchise it, when should you think about handing control off to someone else?
Day one. Working with a good consulting group will lead you to that conclusion quickly. You should always have a third person to come in and look over your shoulder and tell you what you need to do, because you're too close to it. Cocooning's a problem. When you build this franchise organization, bring in people who have the discipline and skills you need. If you are not the type of person who can run this franchise system, then be smart enough to become a figurehead. If you can't run the business but you love to be on TV, you love to be the spokesperson, there's nothing wrong with that. Find somebody who's either an employee or willing to be your equity partner and give that person the rights to run the business.