How to Succeed in Franchising Your Business
Franchising can sometimes seem like a game: Match the right concept with the right systems, growth plan and marketing strategy, and you'll end up with a hit. But in reality, it rarely works that way.
Most of the 3,000 or so franchise systems in North America are ephemeral, with hundreds winking into and out of existence every year. Only a handful make it to the national or international big leagues.
For an industry that believes strongly in standardization and replication, you'd think someone would have developed a foolproof formula for franchise success. But even though the best franchises work with machine-like precision, getting all the pieces to come together is more akin to alchemy than business planning. It takes a great concept, effective leadership, capable franchisees, impeccable timing and the right consumer climate to build a franchise system with staying power.
Iconic brands like McDonald's, Subway and Marriott clearly got the formula right. And there are plenty of newer brands that are on the right track. We talked to several insiders to get their thoughts on what great franchises do to rise above the competition, and what emerging franchises need to do to become the gold standard.
Concept and systems
A franchise can't succeed without a concept that connects with consumers. But it also has to be something that is easily implemented. Dan Rowe, CEO of Fransmart, which enabled Lorton, Va.-based Five Guys Burgers and Fries to grow into one of modern franchising's most successful brands, says there was no way he could have helped the company expand to its high number of units if the concept hadn't been right.
"When I first started working with them, Five Guys had these horrible locations, but they still did huge volumes. There were always lines out the door," Rowe explains. "I don't deserve any credit for that line. All we did was use our vendors and real-estate connections to help scale the model. I always tell franchises that systems and marketing are important, but there's nothing more important than that line out the door."
Franchise Foundry CEO Paul Segreto agrees that concept is key but recommends refining it as much as possible before entrusting it to franchisees. "If a franchise system's No. 1 goal is to simply sell franchises, they are going to have problems down the road," he says. "They need the right systems in place from the beginning, with the right design and unit economics so franchisees can succeed."
He points to Shelly Sun as an example. Sun is co-founder and CEO of BrightStar Care, a senior-care franchise based in the greater Chicago area. "She put so much emphasis on developing BrightStar's systems. She even personally wrote the operations manuals," Segreto says. "So many franchises get involved in sales before they develop their systems. Develop the right culture and the right communications platform, and then you'll be positioned for solid growth."
When Joel Libava, founder of Franchise Selection Specialists and author of Become a Franchise Owner, met Sun, he quickly became a believer in BrightStar Care. "I looked her in the eyes and talked to her and her husband, J.D., and I liked and trusted them," he recalls. "We talked for five minutes, and I said, "This one is a winner.' I knew they would rock."
His instincts were right. In a little more than a decade of franchising, BrightStar has grown to 250 units. Sun was named the International Franchise Association's entrepreneur of the year in 2009, and her book, Grow Smart, Risk Less, is required reading in the franchise world. Sun's clear-headed decisions and passion for her brand are what put BrightStar in the top tier of franchises.
That's no accident. The founder's personality and drive sets the tone for a system and affects high-level strategic decisions—but also trickles down to how franchisees and employees think about their company.
"The personality of the leadership is very important. A lot of would-be franchisees miss that," Libava says. "I advise franchise candidates who go to a discovery day to sit down with the top executive and see what he or she is really like. Are they laser-focused on the business, or are they ego-driven? I have met some really cranky franchise founders, and they have their franchisees running scared. I think candidates should talk to other franchisees who have already invested in the system to see what they think, too."
Eric Stites, founder of Franchise Business Review, which measures franchisee satisfaction, agrees that leadership is instrumental to a franchise's success, adding that powerful and unique personalities with vision are behind the most successful brands.
"Historically, it's people like Ray Kroc, who founded McDonald's; Howard Johnson; Bill Rosenberg, who founded Dunkin' Donuts; Colonel Sanders; Dave Thomas of Wendy's; or J. Willard Marriott—all of whom were founders who put their franchisees first," he says. "There are people out there certainly like that today. [Their franchises] may not be the size of McDonald's yet, but I see a huge opportunity for them."
However, having a passionate founder onboard is not the only way a franchise can succeed. Any manager with a strong vision can fit the bill. "For instance, I really like [CEO] Catherine Monson at FastSigns," Stites says. "She came onboard later, but she's providing great leadership and is on a five-year mission to double franchisee profitability. It's a great example of what a leader can do."
Segreto points out that a couple of decades ago, the auto repair industry dominated franchising, led by AAMCO, Meineke and Midas. But when the automotive industry began to change, those concepts took too long to adapt; all have struggled to keep afloat and stay relevant.
"Even McDonald's, which has been the gold standard for franchising forever, lost some of its luster recently because of decreasing store sales," he says.
That's because to remain successful, a franchise must keep tabs on customers' changing needs and tastes and constantly reinvent itself. Very few companies have succeeded in the long term by providing the same product or service decade after decade. Stites points to PostNet. The Denver-based company began life as a shipping specialist, but as competition became more intense, it revamped into a full-service business center.
"They've gone through a huge transition over the last five or six years," he says. "Now their units require a much higher investment and have much more complex operations. Some franchisees were up to the task, and some were not. But everything changes, and some franchisors, like PostNet, do that well, and some do not."
Most experts agree that what distinguishes a great franchise brand is its focus on franchisees.
"I think it was Bill Rosenberg at Dunkin' who said you can't be successful as a franchisor if your franchisees are not successful," Stites says. "Over the last decade or so, that thinking has been lost in a number of brands. Sometimes they've gone public or had private equity get involved; then they have to answer to investors. Sometimes franchisees take a back seat to other priorities."
Libava agrees. He believes in selecting the right franchisees from the start, and that means being picky. "Probably out of any franchisor I've ever worked with, Great Clips turns down more prospective franchisees," he says. "They have the courage to do that. A millionaire may come in wanting to buy a franchise, but they'll say, "Sorry, you're not a fit for our culture.'"
That, Libava contends, is why the Minneapolis-based salon franchise has 3,500 solid units, though it took decades to reach that point. "I've talked to too many young franchisors who say they're going to have 100 units in two years," he says. "But if they grow that fast, they are not going to be able to do it right, and they won't be able to support 100 units. It's not only about being picky, but about being realistic at the beginning. The franchisors that have the courage to turn down a $30,000 franchise fee get it. They may just be starting out and may really need that money, but a good franchisor can see that in two years, this franchisee is going to be a nightmare."
Stites believes that transparency with prospective franchisees is paramount. "I think it's obvious to anyone in business that it's all about making a reasonable profit and being passionate about what you do. But a lot of people have the assumption and it's bolstered by industry marketing—that buying a franchise is easy. It's great if you buy a franchise and make a living and have an asset at the end of the day, but it's a lot of hard work.
"Companies that offer franchisees realistic expectations from a financial standpoint and don't paint franchising as a get-rich-quick scheme will do well," he adds. "But companies that don't will have problems. It's hard to turn those relationships around if a franchisee has unrealistic expectations."
Rowe says a brand will learn pretty quickly whether or not a part of its system is out of whack.
"The concept will grow only as fast as it can," he says. "If they hire bad managers or pick bad sites, customers will tell them with low sales, and they won't make enough to continue expanding stores. The customer is the one who votes whether you grow or go out of business."
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