The Multi-million Dollar Question: SHOULD You Franchise?

Dan Rowe

What do concepts like City Wok, 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 or international franchise brands.

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

Do you and your concept have what it takes to make the same journey that these national chains did? Measure your concept against the six factors listed here. In our experience—Fransmart has sold more than 2,500 franchises for the brands in our portfolio— the conclusions you draw will help you decide if franchising is the right way for your concept to expand and, if it is, whether you're ready to take the next step.

1. Your Concept and Its Longevity. Longevity refers to the potential life of a concept. 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 was inspired by World Wrapps, but its founders realized that jumping onto the wrap bandwagon meant jumping onto a fad, not a trend. Qdoba quickly adopted a strategy aimed directly at the “fresh Mex” trend. It's now a 150-unit chain. World Wrapps is a 15-unit chain.

2. The Management. Over time, the right people do the right things and the wrong people do the wrong things. Surround yourself with the best, brightest, most energetic, most 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 no longer are running a restaurant, you are running a franchise business, and you must think of everything from food quality to getting your franchisees financed.

Create and maintain a concept that's interesting to customers-forever. Franchisees must provide training and support throughout the life of their franchises to condition the behavior and image that the franchisor brand is trying to maintain. The ability to think creatively and to constantly evaluate the needs of the concept will keep you from falling behind or growing beyond your control. A franchisor and its management team have to have strong business and restaurant sense, as well as plenty of experience from which to pull.

3. Systems and Training. Good systems are complete, easy to understand, easy to teach, and they 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 as it's 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, you're still delivering the same guest experience you did when you first opened? How do you ensure that your franchisees actually make money with their restaurant?

It all comes down to systems. You'd better have a system or a franchisee will invent his 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 you preach and not one that telegraphs: “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.

4. 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 that you are in 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 be profitable even if a franchisee misses his or her sales target by 20 to 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 will be the right investment to make. Therefore, sales-to-investment ratios and expense items such as cost of goods, labor, occupancy costs and fees to franchise 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 $800,000 to $1 million in sales. Concepts like Qdoba, Camille's Sidewalk CafÈ, Zyng Asian Grill and Chipotle average more than $800,000 to $1 million in sales and only cost $300,000 to $500,000 to open. For the cost of one Burger King, a franchisee could open three Chipotles and do $3 million or more in sales versus the $1 million he would have done with a Burger King. It's no wonder that this segment is growing so fast in the restaurant industry.

5. Franchisees. You can have the greatest system in the world with the best unit economics in the marketplace, but if you pick the wrong franchisee, you'll never maximize your potential in that franchisee's market.

Your franchisees must have solid business experience because even if they don't have actual restaurant experience,-they will understand why it's 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 that 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 to become successful restaurateurs. That includes not only how to flip the burger, but how to run a produce order, how to hire employees and how to bring in customers.

Just as the restaurateur has to become a franchisor, an individual must learn not only how to be a franchisee, but how to be a restaurateur, as well. Do your best to pick franchisees who will be successful with your growing and evolving concept five years from now. If you're uncertain, don't sign them because they'll be more trouble than they're worth.

6. Timing Is Everything. There's 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 driving investors to look elsewhere to make money. Team that information with the awareness that more people are eating away from their homes than ever before, and that franchising can be a viable money-making alternative. According to the National Restaurant Association's 2004 forecast, there will be a 4.6% increase in full service restaurant sales and a 3.9% increase in quick service restaurant sales. The restaurant business is a good business.

As the founder and c.e.o. of Fransmart, Dan Rowe has led the development of 10 brands and sold more than 2000 units. Fransmart, founded in 2001 by Dan Rowe and Chris Bright, provides franchise development, real estate support, legal guidance, purchasing and distribution economies, operations and training systems, as well as strategic advisory services. Its current portfolio includes Camille's Sidewalk CafÈ, City Wok, Crescent City, Firkin Pubs, Five Guys Burgers and Fries, Italian Pie, Rockin Baja Lobster, San Francisco Oven, ZPizza and Zyng Asian Grill. Rowe previously was president and cofounder of Franchise Development Corp. Call him at 888-482-5332, ext. 172 or e-mail [email protected].