Franchising

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To Franchise or Not to Franchise

By Joe Irvin

For Collette Howell, the epiphany arrived in 2004 while watching her 2-year old grandson work on her computer. “It’s OK, ‘Hamma, it’s just loading,” he burbled.
    It was enough to persuade her to abandon early retirement to start a franchise business in computer education. “These kids today embrace it and are leaving us behind,” she says, noting even kindergartners are learning word processing and spreadsheets. “They look at email as behind the times!”
    After two years in business, Howell’s disciplined path to choosing the right franchise business provides a realistic roadmap of what it takes to secure franchise success while minimizing financial risk.
    Franchises are enjoying an unprece-dented growth spurt. Nationally, the trends show no signs of slowing, with nearly 800,000 franchised businesses on record in 2006, according to the International Franchise Association. A new franchise will open somewhere by the time you finish reading this article. And franchises swing a big bat when it comes to creating jobs. They account for nearly 14 percent of the nation’s private-sector employment.

California Leads
California tops the list in virtually every column: the most franchises headquartered: 130, including three in the Sacramento metro area; the most franchised businesses located: 80,340; and the most economic output created by franchising: $187.4 billion.
    Expect those numbers to keep growing. Greg Roquet, president of the Franchise Network, says when investing in a franchise operation, “You’re buying into a proven business system — it’s cheaper and less risky.” Franchisees typically enjoy some instant benefits, from built-in brand recognition and leveraged advertising to accounting templates, a customer call center, and other support tasks that might bog down a do-it-yourselfer.
Franchises aren’t failure-proof, but due diligence will narrow the risk. Here’s a glimpse into Howell’s relentless pursuit of the right fit for her franchise of choice.
    Long before the thought of starting her own business tugged at her sleeve, Howell embarked on what would be a three-decade career at Pacific Bell, working her way up from an after-school job as an operator (“Yes, I sat on one of those high stools and connected calls”) to a regional vice president. As the phone sector divided and conquered, she rode the golden parachute to an early retirement of leisure, travel and golf.
But the urge to take on a new challenge caught up to her again. Eight years later and bored, Howell first enlisted the aid of a franchise broker, who helped identify her skill set, goals and life priorities, followed by a battery of business options.
    “I came down in the area of children’s education,” says Howell. Nearly two years into the search, she had winnowed her options down to two, an arts program for kids and Houston-based Computer Tots/Computer Explorers, a home-based computer technology education program for preschool through eighth-grade students.
Howell was captivated by the computer franchiser’s long view, from the indispensable role of computers in education to an evolving product line and strategic marketing plans. When she asked tough questions, she got a fair share back. “It was like I was interviewing them while they were interviewing me,” recalls Howell.
She did her share of franchise law research. “Franchising for Dummies” took up a prominent place on her nightstand. She consulted with an attorney to help with the fine print in the company’s offer letter. She cautions that at first blush, the letter known universally as the Uniform Franchise Offering Circular seems to demand everything and give nothing. Franchises, for example, by law may not state any earnings claims.
Steeled from her years in the corporate arena, Howell wasn’t discouraged by the “strictly business” tenor. “They are giving as much as they can, legally. And remember, they can’t be successful if I’m not successful. So it’s really a fairly powerful dynamic that gets set up.”
    Howell also got in touch with existing franchisees, using the roster required in the company’s offer package. She quickly learned about the intrinsic value of networking with other franchisees and gained an appreciation of the success ethic resulting from such collaboration. Her neighboring franchisee in Lodi, Yvonne Carlisle, has run her CompTots business for more than a decade and generously shared insight about her experiences. Howell admires Carlisle’s unflinching commitment to the cause of child education and today considers her not only a colleague but a friend.
    When it was time to take the plunge, Howell elected to pay a majority of the purchase price with her own funds. The balance she financed through the company’s zero percent loan program.

Thy Monthly Nut
Not unlike the home budget, franchise operations mean something’s due to someone else on the 10th of each month, including advertising fees, revenue shares and maintenance support. Record-keeping isn’t for slackers, since franchisers expect to receive year-end profit-and-loss statements and a tax statement to substantiate the franchisee’s income claims. Howell says she’s also obligated to attend the annual company conference and other periodic training sessions.
    Two years into her new venture, Howell has a cadre of staff fanning out to her customers — private schools, daycare facilities — and building a solid base for repeat business, along with a reputation.
She also got elected to her franchise’s advisory council, where she can influence collective advertising decisions and meet new owners.
    As her business grows, Howell is returning the favor by way of a scholarship program helping deserving children gain access to after-school technology clubs. It’s part of her business ethic, she explains, to give back to the community that has helped her succeed.

Storm Clouds
While statistically less risky, franchises can go south no matter how diligent the franchisee may be. Cases in point include big brand names Quizno’s and Krispy Kreme. Both have had their share of bad publicity of late.
A squadron of Quizno’s owners is as hot as pepperoncinis over the inflated pricing structure for ingredients and supplies only available from the company store. They argue that the corporation forces them to sell its retail products at unprofitable prices, all in the name of “building brand recognition.”
    Justin Klein of Marks & Klein, a lawyer for the plaintiffs, says the company has “a one-sided relationship with its franchisees, in which the company makes money and the franchisees go out of business in short order, lose everything and are replaced with another franchise.”
    Meanwhile, the lines have disappeared outside Krispy Kreme Doughnut stores, and franchisees in several markets have filed suit over issues ranging from territorial fights to corporate overcharging for equipment and supplies.
    A territorial dispute is also at the center of a dust-up between the Sacramento region’s La-Z-Boy stores and the corporation. Local owner Jim Reego and his partners had already secured a lease in Rocklin for a fifth store when they learned that a La-Z-Boy boutique would be located inside a new R.C. Willey superstore less than a mile away. Reego claims that his licensing agreement (similar to franchise clauses) gives him exclusivity for such displays.
    “La-Z-Boy is a good company, but sometimes you disagree and you have to go after it,” says Reego. “We’re pretty confident our point of view will prevail.”
    Reego says it’s important to know the franchiser’s overall direction. “You need to know the bigger market picture, not just what you want to accomplish.”
    Aside from territorial disputes, other potential conflicts that can arise include limitations on whose goods and services must be used, the quality of those goods, aggressive profit-sharing demands, revenue expectations and advertising strategies.

Get Help
Part of a nationwide network and one of six in the region, the Sacramento Business Development Center is loaded with business savvy, from customer research and personnel advice to contract procurement and finance opportunities useful to any business owner or franchise pursuer. And it’s free to anyone who walks in the door, thanks to federal and state economic development grants.
    The center’s director, Molly Stuart, says one of its chief goals is to serve as a reality check. “We try very hard not to presume we know anything is a good or bad idea – crazy ideas often turn out to be great.”
Using market and demographical data available at the center or from its stable of consultants, “We help to create a picture of factual reality so (clients) can make a more educated decision on how they want to proceed.”
    Debbie Awil’s experience was less about corporate disputes and more about life lessons. Well into a corporate career, she got the bug to run her own business and invested in an executive-recruiting franchise.
“It was a good fit for me initially, a low-risk, high-reward proposition,” says Awil. “I think it’s important to realize that the investment doesn’t necessarily dictate what the revenue could be,” noting that she was highly successful in her first year.
    With more attention to her business plan, higher working capital and stronger support from the franchiser, she might still be a franchisee today. Instead, she’s returned to her corporate niche and the benefits to her family beyond the steady paycheck.
    From her file of lessons learned, Awil advises that prospective franchisees be clear about the size and dependency of their security blanket. “If you’re the kind of person that likes to have the building blocks done for you, that’s the way to go. If you’ve got an entrepreneurial spirit, that’s a different story.”

The Fine Print
Todd Norris, a senior associate attorney for Bullivant, says franchisees need to scrutinize the small print before signing an agreement. “The devil is in the details (in the agreements) — you need to know what you’re signing before you sign.”
    He says disputes over where and from whom the franchisee can get supplies is a common issue, but the franchiser has the right to make sure there’s a consistent product across the board. “Anyone that walks into a store finds the same product on the East Coast as the West Coast,” says Norris. Franchisees may find that unfair, he says, but “the truth is dictated by the agreement, and typically the courts will back that up.”
    Another red flag flies over an agreement’s expiration date. Norris says renewal agreements have drastically altered his clients’ bottom line. “We wish they had come to us before the problem arose — frankly, before they signed the agreement. We’ve had clients that were 20 years into the business, then signed a new agreement without checking with us.” 

Homegrown Company Cleans Up

The Sacramento region is home to just three master franchise companies. The newest one is Executive Business Maintenance Corp., which has enjoyed 11 years of growing success for Tammi Cataldo and her business partner Klaudia Gonzales.

Their company focuses on providing janitorial services for commercial clients, such as office buildings and schools. They find the jobs, secure the contracts, and then hire independent janitorial companies — whom Cataldo calls their “clients” — to perform the work.

Well into developing a solid business in the region, Cataldo and Gonzales had been peppered with “how do I get into your business?” questions from people drawn to their ability to be successful while always keeping time for family and friends. They found the most effective path to expansion would be through franchising. Now they believe they have a winning business model and are poised for a new round of expansion, starting in the Western U.S.

“The number one business opportunity is cleaning,” insists Cataldo. “But most of the small, mom and pop companies have a hard time marketing their services, or can’t compete with larger companies for jobs. But they’re hard working people who just want a shot.”

In addition to landing the accounts and matching up their clients with cleaning jobs, EBM provides other back-office support as part of their services. “We help with quality control and supplies, and take care of billing, accounts receivable and collection,” says Cataldo.

Even though Sacramento is saturated with janitorial franchises, Cataldo insists, “We’re doing really well, and have a great group of people working for us. We have the same clients as when we first opened.”

Cataldo and Gonzales believe their success flows from the unique business niche they fill, as well as their reliable work crews honed over years of building trust. “We don’t underbid, we take really good care of the people we work with, and we are going to train the new franchisees to provide the same thing.”

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