Looking to start a business? A franchise may be your best bet

Starting a new, independently-owned business is hard enough in good years. It’s even tougher during bad times. That’s why owning a franchise remains a popular option, even though this part of the entrepreneurial sector has taken its share of lumps during the recent economic slump.

Business in a Box If you’re itching to get your feet wet with a new business, owning a franchise may be an easier way to get your feet on the ground. By Jason Dehart Originally published in the Aug/Sep 2010 issue of 850 Magazine

Starting a new, independently-owned business is hard enough in good years. It’s even tougher during bad times. That’s why owning a franchise remains a popular option, even though this part of the entrepreneurial sector has taken its share of lumps during the recent economic slump.

“Florida has been a difficult market for every brand during the last two or three years,” said Drew Ritger, senior vice president of business planning and purchasing for Sonic, the popular drive-in restaurant with franchises all over Northwest Florida. “But the Panhandle and Tallahassee perform better (for Sonic) than South Florida. Northwest Florida is a great market.”

Even deep-pocketed local investors are cognizant of the risk of tackling new business ventures during this less-than-robust economic climate.

“Financially, things are challenging for everybody right now,” said Chad Kittrell of Hunter & Harp Holdings, a Tallahassee real-estate development company captained by Kittrell, Frank Whitley and J.T. Burnette. “There’s a reason why not everybody is (opening new restaurant franchises), because of the risk side of it.”

Together, Kittrell, Whitley and Burnette co-own Tallahassee’s new Hotel Duval, and they recently partnered with Trey Gardner and Jamie Langley to open the first Genghis Grill restaurant in Florida, also located in Tallahassee. Genghis Grill is a “Mongolian stir-fry” franchise based in Dallas; the company has about 40 locations in 11 states, with more to come.

Investors such as Kittrell’s group — which also makes big bucks in construction projects for the federal government — certainly have the clout to successfully take on new ventures in times like these. But across the nation, others haven’t been as lucky, according to the International Franchise Association, which lays claim to being the largest and oldest collective voice for business franchises worldwide.

Franchise growth seemed to do nothing but go up a decade ago. As with other business sectors, growth came to a virtual standstill in the face of the recession, but franchise insiders hope 2010 marks the start of a recovery.

“The U.S. economy is expected to experience slow growth in 2010 as the nation begins to recover from the recession,” said Drew Lyon of PricewaterhouseCoopers’ National Economics & Statistics practice. “Our forecast is for output of all franchise business sectors to expand modestly in 2010 as the recovery takes hold.”

The Franchise Business Economic Outlook for 2010, created by PricewaterhouseCoopers LLP, predicts only a 2-percent increase in the number of “business format” franchises in the United States. That amounts to a gain of nearly 18,000 businesses. By contrast, the number of franchises grew on average by 5.6 percent a year from 2001 to 2005, while the number of jobs grew 3.7 percent during that same time.

The franchise sector lost 400,000 jobs in 2009 but is expected to grow by 0.4 percent, or 36,000 jobs, in 2010. A big reason for slow growth is the tightening of credit, which is crucial for new franchisees to get started.

“We are pleased that the 2010 outlook for franchise businesses is projected to be more positive than 2009, but access to credit remains a major hurdle to increase jobs and economic output at levels we have seen during past recoveries,” said International Franchise Association President Matthew Shay. “An expected $3.4 billion shortfall in lending to franchise businesses in 2010 will result in 134,000 jobs not created and $13.9 billion in economic output lost.”

 

Franchising 101

A franchise is not an independent business per se, but a link in a network of conforming businesses. The franchisee buys a license, which grants him or her the opportunity to run a business based on the franchisor’s proven brand name and track record. When a franchisee buys the brand, he agrees to follow the franchisor’s business-practice template. In return for a licensing fee or ongoing royalties, the franchisee gets a business with a deep support network, ensuring a good chance of success.

Despite the prediction of sluggish growth, franchises are still considered fairly stable business investments. Their advantages are many. The franchisee has a model to go by, and in many cases the hard work of conducting marketing analyses and studying local demographics has already been done by the parent company. Franchises are also attractive to those who want to run a small business but aren’t willing to risk opening a “mom and pop.”

“People buy a franchise business because of the reputation, brand recognition and a proven system,” said Sonic’s Ritger. “You probably will have a little better success if you follow the playbook that exists for you.”

Douglas McMurray, who has owned a Pak Mail franchise for 12 years in Tallahassee, went with a franchise because “the failure rate of small businesses is astronomical, in my opinion. Going with a franchise, you can cut that down because you’re basically buying a license to operate a business that’s already worked in many countries, counties and different states.”

Based in Colorado, Pak Mail opened its first location in 1984 and now has as estimated 500 stores in the United States, Canada, Mexico and Japan.

“With the real estate, the financial debacle going on, we decided to look at something that is more stable and we could grow with and build,” said mortgage company owner and developer Duane Clark of Mary Esther. Clark and his wife, Pam, now own two Tropical Smoothie Café restaurants, one in Panama City Beach and the other in Pensacola.

Tropical Smoothie is a healthy, all-natural alternative to fast food with proven name recognition — and with that comes stability.

“Right now, we don’t know where the financial world is heading,” Clark said. “That’s the reason we’ve ventured down this path.”

Kittrell, of Hunter & Harp Holdings, said he and his partners have experienced, and in some ways combined, the best of both worlds. They have their own independent business with Hotel Duval, but they own two franchises as well. The partners put an upscale Shula’s 347 steakhouse franchise in Hotel Duval. Shula’s 347 is based in Miami Lakes and owned by the father-and-son team of Don and Dave Shula. And while Shula’s caters to a more sophisticated crowd, Kittrell and his team plan on setting up two additional, easier-on-the-wallet (meals run around $10 to $12) Genghis Grill restaurants in Florida.

“We’ve been on both sides of the fence,” Kittrell said. “I’ll tell you from our experience that franchise concepts have zero learning curve.”

By that, he means the franchisor — the company that grants the franchisee a license — steps in and gives the franchisee an operating manual to run the business. Owners of independent businesses have to go through the time and expense to create their own operating manual, with no outside corporate help. Kittrell said that approach takes a “ton of work, and a lot more risk.”

“But franchisors, they’ll give us information, like what our back-of-the-house labor costs should be. If we didn’t have that number, it’d take us three or four months looking at the numbers to work out what would be proper,” he said.

Most franchises are fairly similar, Pak Mail franchisee McMurray explained.

“They’ll select the site for you, do some market research and study the demographics of the area,” he said. “They have a model that should work anywhere. So if you get the right demographic in an area, your store will survive — as long as you’re not stupid. You’ve got to work still. But when you buy a license, you’re buying training, buying support … you’re buying their infrastructure, name, the whole nine yards.”

And in down times, the continued support offered by a franchisor becomes invaluable, according to Robert Wicker, chief marketing officer for Homes & Land Affiliates, the largest real estate advertising magazine franchise in the nation. Homes & Land publishes 60 million magazines annually in more than 30,000 communities in the United States and Canada.

“I think that’s one of the reasons why we have done pretty well in terms of keeping our network in place,” Wicker said from the franchisor’s headquarters in Tallahassee. “We try to keep close tabs on our franchises that either ask us specifically for help or we perceive to be not in the best position. We reach out to them and ask what we can do to help.”

One franchisor — Ron Green, founder of breakfast café chain Another Broken Egg of America — said close supervision during the start-up phase is important to ensuring quality control over the franchisee. That translates to success right out of the gate.

Green started his popular breakfast restaurant franchise in Louisiana, but it quickly spread to places such as Sandestin and Destin on Florida’s Emerald Coast.

“Another Broken Egg’s approach to support begins with our detailed involvement with site selection and restaurant/facility design and continues throughout the development phase with continuous direction and guidance,” Green said.

Like other franchisors, Green emphasized that his support doesn’t end once the business begins serving hungry customers.

“Our corporate team assists in the strategic and operational questions that come up after the grand opening,” he said. “Our job is to encourage, coach and support business and team development with every franchisee and help the franchisee establish and grow a profitable business.”

Homes & Land offers the same high level of support to its franchisee publishers, Wicker said. It’s especially important considering that real estate itself was one of the business sectors hardest hit by the recession.

Wicker said Homes & Land has, unfortunately, lost some franchisees due to the recession, but most have persisted, thanks to support from the home office in Tallahassee.

“Most of our publishers have hung in there, and you know, when the market turns down, that’s another real strength of a franchise network,” he said. “You have a corporate office to rely on in terms of advice on how to manage the downturn, and you also have — and this is big — the expertise and support of other franchisees.”

Ritger said that Sonic also has a “suite of services” available to the franchise owner.

“We have a training program, a construction and real estate team that works with you on the selection of property, the permitting, the design of your Sonic, all the things you do to build,” he said. “What you will find is, almost all restaurant brands have field support teams — we call it a market leader — who works closely with you on how to run your Sonic.”

The golden arches of McDonald’s also provide a great support system, according to Tracy Johnstone, whose family owns and operates four of the iconic fast-food restaurants in Panama City. She said the chain is friendly toward families who want to run a franchise — although it’s not an easy road to go down.

“My husband has been in the franchise for 35 years — he bought it from his father when he retired, and I started in the business when we got married 20 years ago,” she said. “It’s an arduous and strict process to become a franchisee, even if you are the spouse of a franchisee.”

Johnstone said the famous franchisor is, by its very nature, family-oriented, and that attitude applies to helping out licensees. She said there are second-generation, and even third-generation, franchisees today, children of owners who are now coming into the business themselves.

“There is a structured system in place to support that family mindset,” Johnstone said. “You know, as big as McDonald’s is, that (sense of family) hasn’t been lost.”

McDonald’s also offers a women’s operator network that provides female franchisees the opportunity to have a voice in the system.

“That part has been rewarding,” Johnstone said. “As a woman in business, I have a place in this huge brand. I am being recognized and supported.”

 

Staying Power

Does this mean franchises are more immune to tough economic times? Not necessarily, but they do stand a better chance of success because of consistency, economies of scale and communications. Those are major recruiting points.

“You have to have the mindset of yes, you are an entrepreneur. But part of the success is the hamburger tastes the same whether it’s Panama City, Fla., or Panama City, Panama,” Johnstone said about McDonald’s.

Green, the founder of Another Broken Egg, said that the franchisee is protected by an umbrella corporation whose size and reputation can be of great benefit.

“A potential franchisee comes under the umbrella of a well-established and branded name with a proven support system,” he said. “Because of our size and buying power with various distributors, they will certainly benefit from our economies of scale.”

McMurray said he has confidence in his Pak Mail franchise because of the solid lines of communication between owners and the franchisor.

“I think we’re a little more solid because we have support,” he said. “We have a group collective that has ideas, and we draw on each other. We have an intranet that we communicate with, and they’re constantly working on our behalf to get better discounts, good ideas, different vendors.

“I think a lot of the time, mom-and-pop standalones don’t have a support system, so I think that goes a long way,” McMurray said. “We’re probably a little more immune to (economic slumps), but we are not immune. Franchises have gone out of business, but I think we’re a little more resistant.”

There are other stabilizing factors. Real estate sales may have tanked during the recession, but a specialty product like that offered by Homes & Land remains a stable commodity because people always love to look at real estate, Wicker said. That makes the real-estate advertising magazine franchise fairly stable in its own right, whether the market is up or down.

“People haven’t stopped picking up the magazines,” he said. “We publish about 60 million magazines a year. They’re still getting picked up; there’s no slowdown there. A lot of people are picking up the magazine to see what their house is worth, what the prices are, but they are still picking them up, and we are still getting a lot of traffic to the website.

“And that’s one of the nice things about this business,” Wicker said. “You’re in an industry that people like to talk about, that they are engaged by. As opposed to some of the franchises that are maybe not as influential.”

Food and dining are also influential factors in deciding on what franchise to opt for. Duane and Pam Clark said the time was right to open their Tropical Smoothie Cafés because people wanted to eat healthier “to go” meals, and had less money to spend at the same time.

“People are moving away from more expensive restaurants as they downsize their budgets,” Duane Clark said. “The opportunity is right now. That’s why we’re pushing ahead fast, because now is the time to jump into the business.”

Apparently, this approach is working for them in the current economy.

“We opened in Panama City Beach in October 2009 and then immediately started looking for another location to do another Tropical Smoothie,” Pam Clark said. She noted that the drive distance is not an easy obstacle for them to overcome, but at the same time, “you have to go where the market has a need, and that’s what we’ve done.”

Johnstone, too, said her family’s McDonald’s franchises have done well in the recession and pull in $9 million in sales a year.

“We definitely have been on the ‘good’ side of the recession because people eat cheaper today, and we are that alternative,” she said.

Supply and demand drives the world of franchising just as it does the realm of independent enterprise.

“The demand has to be there,” Pak Mail’s McMurray said. “Just because it’s a franchise that works in some areas doesn’t mean it’ll work in all areas. But yes, there has to be a demand for it or it won’t fly, no matter how much money you put into it.”

In the example of Genghis Grill, Kittrell and his partners are hoping demand remains high for the new stir-fry restaurant. Success depends on connecting with a cross-section of the community — specifically, a cross-section of wage earners.

“What we’re focusing on now with the Genghis project is such a price-point deal that it hits everybody, from top wage earners down to minimum wage,” Kittrell said. “Genghis in Tallahassee has a nice customer mix which includes students all the way up to legislators, so it’s a unique mix. We really like that product right now with the economy the way it is.”

Early success convinced the investors to eye other properties around the state.

“As soon as we saw the success of Genghis, we worked with corporate to secure a large portion of Florida,” Kittrell said.

Again, one advantage of owning a franchise is made clear. The hard work has already been done. All they have to do is find an abandoned Bennigan’s building and remodel it, as they did in Tallahassee. Those costs will now be a known factor.

“The great thing about the Genghis concept to us is now that we’ve done one, it’s pretty easy for us to go out and find these Bennigan’s buildings that have failed in other markets and recreate the construction process,” he said. “We have a template built. We can go out, and I know HVAC is going to cost this much, this is what booths are going to cost. There’s a model I can go to.”

 

Looking for the Right Fit

Becoming a franchise owner takes more than the right amount of capital, although that can’t be overlooked. In most cases, the prospective franchisee needs gobs of cash to even start the process. Meanwhile, he or she has to look inside and ask the questions: Am I right for this particular job? Do my skills match what’s required of me? Also, am I willing to follow the franchisor’s business model and give up a certain amount of profit to pay the license fee?

Wicker, of Homes & Land, said that when he talks to a prospective franchisee, he wants to find out why that person wants to own a real-estate magazine franchise. That information helps him determine the extent of the applicant’s knowledge — because it’s important to understand that more is required than simply publishing a magazine.

“What prospective franchisees need to make sure they’re doing is matching their skill set with the skills that are needed to succeed in this particular franchise,” he said. “For example, in this franchise, ideally they have sales skills. And sometimes we get people in here who surprisingly don’t understand that. They think more in terms of being a publisher, of putting out the product and distributing the product and designing the ads. None of that is happening if someone is not networking.”

Accepting the limitations of owning a franchise is another thing the potential franchisee has to come to terms with.

“You can’t do what you want to do,” Pak Mail’s McMurray said. “You have to stick to your model. They want you to stay within that realm. It’s your identity. When you open up (a Pak Mail), you’ve got to have a copier. You’ve got to have mailboxes. The beauty of a franchise is they have the fixtures set up, they have all the vendors set up. I won’t say it’s all turnkey, but the concept is turnkey.”

From a franchisor’s perspective, “what we are looking for first and foremost is a good operator that shares the same enthusiasm and passion for the restaurant business, as well as our philosophy and commitment to exceptional food and exemplary service for our guests,” said Another Broken Egg’s Green.

There is also the money to consider.

“You have to have a fair amount of liquidity and capital to build and operate Sonics in the early phase,” Ritger said. “You need to invest in people; you need adequate cash reserves to build stores, train people and build your infrastructure while you launch your Sonic business.”

The prospective owner also has to understand that there is a symbiotic relationship between the franchisor and franchisee.

“Oftentimes there is confusion about the franchisor-franchisee relationships,” Wicker said. “Ideally, and this is what prospective franchisees should look for, the relationship between the franchisor and franchisee is a strategic partnership. What they are doing is working together to attract and retain customers. When they are unified around that concept, then you’ll have a successful business model.”

 

The Flexibility Factor

Although franchisors are sticklers when it comes to following their model, sometimes a little flexibility is granted to the franchisee, depending on the circumstance.

McMurray said Pak Mail is probably one of the more lenient franchisors around, because in his case he is allowed to control the type of the books and cards his shop sells at the counter. It’s a small consideration, but something that works for his particular shop.

“Most franchises, you stick to their model, you work their hours, you wear their uniforms,” he said. “How it was set up, you do it. If you don’t you lose your license, and a lot of money to boot. But this (franchise), I love it. The sense I got from them at the beginning was they were fairly liberal.

“We sell Christian books, which is probably a big no-no in a lot of franchises, but to me the books go with the cards we sell, and they’re both positive things,” McMurray said. “But if (the franchisor) came in for an audit and saw a toilet bowl, or I’m selling concrete slabs or whatever, there would be some issues. But they give us a little bit of room to do some things. Overall, this franchise is great.”

Flexibility is something that can be a great asset to a company. But Kittrell said that in the case of the Shula’s 347 franchise, it took a lot of upfront negotiations to be granted some creative leeway.

“One thing that has been challenging is, we know what we believe will work in markets we understand, as far as appearances, and so you have to find a franchise that is flexible with build-out,” he said. “The Shula’s 347 in (Hotel Duval) looks nothing like any other Shula’s 347 concept in the country.”

Kittrell said that Shula’s 347 is really more of a sports bar, but he wanted something a little more upscale to fit the Tallahassee location and clientele.

“We knew we wanted to be the best steakhouse in town, so we had to have our finishes mirror that attitude, and so there was a lot of negotiations between myself and Dave Shula and our designer on how to make our space unique from any other Shula’s,” he said. “And at the end of the day, they allowed us to. They were very flexible, to the point that now, they love our finished product, and they’re going to use it for some of their new 347 concepts.”

Kittrell said the partners’ Genghis Grill franchise also was granted some latitude in its size.

“It’s the biggest in the franchise. There are 200 seats in there,” he said.

Flexibility is a good thing, but expect to fight for it, Kittrell cautioned.

“It’s not an easy thing. It’s a negotiation from day one,” he said. “You have to go into it with the understanding of what your market wants. We did our own market research so we could understand what the need was, where the voids were. Turns out there is just not a high-end product in town. When the Silver Slipper (restaurant) went out of business, it really opened the door. You’ve got to get down to what does Tallahassee want.”

 

Controlling One’s Destiny

Although a franchisee may be a link in a chain, prospective owners are drawn to it because of their desire to take control of their future, both financially and personally, said Green, the Another Broken Egg founder.

“Many people today want to exit the corporate world and take ownership and control of their destiny,” he said. “Franchisees can make a very good living while at the same time having some say in their future. Because (Another Broken Egg is) a breakfast, brunch and lunch concept, it allows for evenings off to spend with family and friends while at the same time owning a lucrative investment.”

Pak Mail’s McMurray said he is one of those corporate-world refugees who wanted to break away from the corporate rat race and spend more time with family.

“Retail management was my background. I worked for Gayfers department store, which was great,” McMurray said. “It was a good company, but when you start having kids, and you’re working six days a week, 10 to 12 hours a day, it gets tough.”

For two years or more, he looked at every type of franchise under the sun, from ice cream to cleaning to packing. He always had a certain set of criteria in mind. That is, he wanted something that didn’t involve working nights or weekends.

“This was probably the main reason I kind of came to this one — it has regular business hours,” McMurray said.

“If you don’t know exactly what to do, a franchise is the way to go,” McMurray said. “In my case, I knew good and well my success would be bound to a franchise.”

Also, if you’re an aspiring small-business owner, trying for a well-known franchise will go over better down at the bank. That’s a great help in a recession when credit is tight, Sonic’s Ritger said.

“If it’s a known entity, you can see its history, its structure and guidelines,” he said.

 

Franchise Fact

By 2001, there were 767,483 business establishments in all domestic franchise systems (either owned by franchisors or franchisees), which employed almost 10 million people, with direct output close to $625 billion and a payroll of $230 billion. These establishments account for a significant percentage of all establishments in many important lines of business: 56.3% in quick service restaurants, 18.2% in lodging, 14.2% in retail food and 13.1% in table/full service restaurants. — franchise.org

 

Startup Costs

Franchise fees and startup costs vary widely between companies. Here is a sampling of what one can expect:

 

Tropical Smoothie Café
Franchised units: 275
Startup cost: $100,000–$150,000
Total investment: $254,000–$385,000
No in-house financing; special franchise fee discounts for veterans.

FastSigns
Franchised units: 529
Startup cost: $75,000
Total investment: $169,000–$295,000
Financial assistance offered; special franchise fee discounts for veterans; participates in minority program.

The Melting Pot
Franchised units: 139
Startup cost: $325,000–$400,000
Total investment: $877,000–$1.5 million
Financial assistance offered; special incentives; international opportunities.

Supercuts
Franchised units: 1,025
Startup cost: $115,000–$243,000
Total investment: N/A
Financial assistance offered; special incentives; special franchise fee discounts for veterans; rebate on first franchise fee.

Home Instead Senior Care
Franchised units: 893
Startup cost: $95,000–$105,000
Total investment: $39,000
Financial assistance offered; special franchise fee discounts for veterans; international opportunities.

Handyman Connection
Franchised units: 163
Startup cost: $83,000–$156,000
Total investment: $83,000–$156,000

Financial assistance offered; special franchise fee discounts for veterans; franchise fee varies according to sizeof market.

Source: franchise.org

 

Here’s a fun thought for potential franchise owners:

Baby boomers are starting to retire, and they (along with older senior citizens) will need services that can be provided by imaginative franchises. According to SmallBizTrends.com columnist Joel Libava, 2010 is the year to consider hopping on the inside track of franchises devoted to recreation, golf, fitness, mobility, medical and non-medical services.

Meanwhile, the food sector carries on. Libava reported that Five Guys Burgers and Fries is coming on strong; the 25-year-old frozen yogurt chain TCBY is freshening up its brand; Qdoba Mexican Grill will remain popular.

Trend watchers are also encouraged to keep an eye out for franchises in the fields of supplemental education and tutoring, as well as energy-efficient “green” technology.