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The MultiMillion Dollar Question Should You Franchise

Written by: Katie Magers

Article Overview: Your concept is hot, your margins are great and you are ready to grow- but should it be through franchising? Here's advice on figuring the fit" Dan Rowe, president and CEO of Fransmart, had a feature article published in the June 2004 edition of Restaurant Hospitality Magazine. In his article, Mr. Rowe pinpoints six factors that should be evaluated before you franchise a restaurant.

The MultiMillion Dollar Question Should You Franchise

What do concepts like McDonald’s, Subway, Baja Fresh and Krispy Kreme have in common? They all started out as single unit concepts and have since grown into national and in some cases international franchise brands.

Franchising is a business of systems and the people who create, implement and follow them. What separates the stronger franchise concepts from the weaker franchise concepts is how well they wrap GREAT systems and people around GREAT concepts. Ideally, 500 Baja Fresh restaurants will be consistent with their look and feel and food and operations. To make that happen, Baja Fresh relies heavily on systems and people for their consistency and predictability.

Do you and your concept have what it takes to take the same journey that these national chains did?

Concept and its Longevity

Longevity refers to the potential life of a concept and restaurants that follow trends have a longer life than those that follow fads. Look at the “wrap” versus the burrito. Years ago wrap concepts like World Wrapps were the hot concept of the moment and they were just that, there for the moment. One of the first fresh Mexican concepts, Qdoba, actually started out inspired by World Wrapps but realized jumping onto the wrap bandwagon meant jumping onto a fad and not a trend. Qdoba quickly adopted a strategy aimed directly at the “Fresh Mex” trend and as a result is now a 150 unit chain while World Wrapps is a 15 unit chain.

The Management

Over time, the right people will do the right things and the wrong people will do the wrong things. Surround yourself with the best, brightest, most energetic and experienced people you can find. It takes a variety of people performing a multitude of tasks, cohesively and consistently, to make a franchise company run well.

One of the biggest transitions you must go through in creating a successful franchise is transforming from a restaurateur to franchisor…from an entrepreneur to a company. As a franchisor you are no longer running a restaurant, you are running a franchise business and you must think of everything from food quality to getting your franchisees financed.

The management must create and maintain a concept that is interesting to customers forever and they must provide training and support throughout the life of their franchisees to condition the behavior and image the franchisor brand is trying to maintain. The ability to think outside of the box and constantly evaluate the needs of the concept will keep you from falling behind or growing beyond your control. The franchisor and its management team have to have a strong business and restaurant sense as well as plenty of experience to pull from.

Systems and Training

Good systems are complete, easy to understand, easy to train and hold people accountable. Most of all, they ensure consistency and predictability. Consider building a model of the perfectly replicable restaurant unit. How do you build your restaurant so it looks like it is supposed to and cost what it should cost to build? How do you operate with the highest quality food and ensure that the tastes and plating are what you want? How do you make sure that in five years, when the restaurant has cycled through hundreds of employees that you are still delivering the same guest experience you did when you first opened? How do you ensure franchisees actually make money with their restaurant? It all comes down to systems and you better have a system or a franchisee will invent their own.

Training is really training about the systems and conditioning the behavior you want projected to your customers. When franchisees come to headquarters to train they should be trained in an environment that practices what they preach and not “do as I say, not as I do.” The trainers you send to help your franchisees open their businesses have to be experienced not only in the restaurant business but in training others about the restaurant business.

Unit Economics

Plain and simple…franchise businesses must be profitable. You should spend a good portion of your time trying to maximize your franchisees profitability so they want to build their businesses. Or in other words, open more franchises. Never forget this is called the restaurant business and while it’s important to have all the other elements in place, your concept has to make money for its franchisees. It should even be profitable if a franchisee miss his/her sales targets by 20-25%.

Whether they know it or not, prospective franchisees have an internal matrix in their head that evaluates your concept against others. Before they sign a check and jump in with both feet they want to have a pretty good idea that investing $500,000 with your concept is the right investment and that money wouldn’t be better spent investing in another concept. Therefore, sales to investment ratios, expense items such as cost of goods, labor, occupancy costs and fees to franchisor all have to be competitive and compelling. Concepts such as Burger King, Arby’s, Wendy’s and Denny’s cost a franchisee $1.5 million or so to open and average somewhere around $800-$1 million in sales. Concepts like Qdoba, Camille’s Sidewalk Café, Zyng Asian Grill and Chipotle average more than $800-$1 million in sales and only cost $300,000 - $500,000 to open. So, for the cost of one Burger King a franchisee can open three Chipotle’s and do $3 million or more in sales versus the $1 million they would have done with a Burger King. It’s no wonder that this segment is growing so fast in the restaurant industry.

Franchisees

You can have the greatest system in the world with the best unit economics in the market place but if you pick the wrong franchisee you will never maximize your potential in that franchisee’s market. Your franchisees must have solid business experience because even if they don’t have restaurant experience they will understand WHY it is so important to hire the right unit level team. Your franchisees have to understand WHY your concept is positioned as it is and how to execute to the standards of the franchisor. Capital right now is cheap; don’t be lured to the wrong franchise group because they have enough money to open your concept. Franchisees must have the same business sense, motivation, and desire to succeed that the franchisor does. Franchisees buy into a formula but they have to remember the systems cannot run on their own and that becoming a franchisee is becoming a business owner.

It is the franchisor’s responsibility to train his franchisees in becoming successful restaurateurs. That includes not only how to flip the burger, but how to run a produce order, hire employees and bring in customers. Just as the restaurateur has to become a franchisor, an individual must learn to not only be a franchisee, but a restaurateur as well. Do your best to pick franchisees that will be successful with your growing and evolving concept 5 years from now. If you are uncertain, don’t sign them up because it will be more trouble than it is worth.

Timing is everything

There is no time like the present to grow a franchise system or to become a franchisee. Low interest rates, real estate overvaluation, stock market uncertainty and corporate displacement are all factors driving investors to look elsewhere to make money. Team up that information with the fact that more and more people are eating away from their homes and franchising becomes a viable money making alternative. According to the National Restaurant Association’s 2004 forecast there will be a 4.6% increase in full service sales and a 3.9% increase in quick service sales. All this information shows that the restaurant business is a good business.

Fransmart is the largest franchise development company in the world and was started three years ago by Dan Rowe and Chris Bright. Fransmart and its founders, throughout their careers, have sold over 2,500 franchises for the brands in its portfolio. Fransmart provides franchise support through franchise development, real estate support, legal guidance, purchasing and distribution economies, operations and training systems, as well as strategic advisory services.

The Fransmart portfolio currently includes: City Wok, Dominic's of New York, Firkin Pubs, Mr. Greek, Rockin Baja Lobster, San Francisco Oven, Vapiano and zpizza

Related Articles
  Question Your Franchise Decision Making
  FAQs about Franchises
  Seven Questions to Ask when Starting a Franchise
  Franchising with all its Success
  About 60% of all franchise opportunities have less than 50 units.

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