Buying, Selling? A Short Course On Franchising
HUBBARD, Ohio -- Those who succeed in obtaining a franchise should have it easy. After all, the individual signs a contract with the franchisor in which he agrees to run the business the way the franchisor dictates. He stands back and watches customers come in, because they know the brand, and spend their money.
Indeed, “57% of every dollar you spend goes to a franchise,” says David P. Hillman, owner and president of Franchising Unlimited, Canfield, who has been a matchmaker 34 years for those who want to open a franchise and franchisors. Whether one is staying overnight in a chain hotel, buying a new car, buying groceries, eating out, at an electronics store or fixing up his house, chances are he’s patronizing a franchise.
Think Holiday Inn-Boardman (where Hillman recently held a seminar for prospective franchisees and franchisors); any new-car dealership; Sparkle supermarkets and independent Giant Eagles; Springfield Grill, Carrabba’s Italian Grill, Arby’s, Pizza Hut, Burger King and McDonalds; Radio Shack; and Window World.
Not only that, “93% of franchises are successful after five years,” Rick Stevens, a vice president at First National Bank of Pennsylvania, told those who attended Hillman’s seminar.
“It’s likely your franchisees will be more successful than you,” Hillman informed those looking to franchise their products and services.
Among Hillman’s rapt listeners was the Rupert family, who want to take their single Brain Freeze frozen yogurt stand in Howland, opened last September, and franchise it. The president of the company, Jim Rupert, says he’ll open a second stand in Champion Township in May.
Since founding his “boutique development firm” 34 years ago, Hillman says he’s worked with 693 companies seeking to sell franchises and brokered more than 3,000.
“We turn down as many [would-be clients] as we accept,” he said, and noted the types of companies that don’t come immediately to mind, such as Broke Ass Phones, soon to open in Boardman. He sold its first two franchises. “There’s absolutely nothing that can’t be franchised,” he remarked.
Broke Ass Phones works with electronics stores such as Best Buy, Verizon, Radio Shack and AT&T and its employees can repair an iPad in 12 minutes, Hillman said. And, The Wrecking Room, an enterprise that fills a room with obsolete computers, charges admission for the time a customer chooses for so he can swing a hammer and relieve his stress.
It all sounds so simple, that money can grow on trees (and there’s a franchise that offers such trees). “People who buy franchises are lazy,” Hillman says, “until they start to work it.”
That’s when they discover they can’t work hard enough, or spend enough hours in their enterprise, if they hope to succeed, panelists and Hillman agreed.
At the Franchising Unlimited seminar were Bill Liberato, franchisor of Belleria National Franchise Corp., which has 17 Belleria pizza shops; Paul Pinto, franchisor of ImageOne uniforms; Pat Moran, a franchisee and multi-unit operator of Window World; Gary Lasko, a commercial real estate agent with Kutlick Realty LLC; and Stevens.
While Belleria was born in 1957 when Liberato’s mother and aunt started selling pizza, Franchising Unlimited did not enter the picture until 1996, the franchisor said. The family has opened shops across northeastern Ohio but there was a lack of uniformity and discipline.
With Hillman’s “guidance and knowledge,” Liberato learned what’s needed makes a franchise succeed and “sold seven franchises in the first six months and four more (for 11) in the first year. … Today there are 17 locations, all doing well.”
Liberato learned how to screen people who wanted to own and run a Belleria pizzeria. He found the relationship between a franchisor and franchisee “is almost like a marriage.”
Those who think they want to obtain a franchise or franchises come from all backgrounds and experiences and have the most realistic and unrealistic expectations, Liberato and Hillman said. Some know food and some are businessmen looking to enter another field. Those most likely to succeed have experience in both.
“I met a guy who wanted the whole state of Indiana,” Liberato recalled, “and he’d never opened a restaurant. … I’ve taken people who were plumbers and a head chef who thought they could run a restaurant.”
One key to running a successful franchising operation is a contract that spells out in great detail the responsibilities of both parties, Liberato, Pinto and Moran agreed. If the business runs smoothly, the franchisor and franchisee rarely refer to or review to the contract, Hillman and Liberato said.
“The agreement is for when things don’t go well,” Liberato said, recalling “a couple of instances of noncompliance” where he had “to get them back on track or disenfranchise them. Dave helped.” The franchisees tried to reduce their expenses by using cheaper ingredients, Liberato explained. “For us, our life is our recipe, [his mother] Rose’s sauce.”
Because the Belleria franchise contracts were airtight, Liberato said he won the lawsuit he filed against a violator and the other was resolved without going to court.
The successful franchisor visits his outlets regularly and makes himself available to answer questions, Liberato advised. He makes it a point to visit all of his franchise shops at least once a week.
Pinto and his wife founded ImageOne in their garage in North Jackson in 2001 and found their uniform service growing faster than they anticipated. They hired her sister but that proved inadequate to meet demand. So, because “people wanted to invest,” Pinto explored franchising.
“He was the most apprehensive person to ever enter our office,” Hillman recalled in introducing the owner of ImageOne.
“Franchise owners have good ideas,” Pinto said. “They brought as much value to our organization as I’ve brought to them.”
His first franchisee, a friend, repaid the franchise fee within six months, Pinto said, and has done so well that he is free of debt. He has paid off his mortgage on a fairly large house and paid cash for his vehicle.
Moran offered the viewpoint of a franchisee.
He and his father today are the third-largest franchise of Window World with revenues of more than $15 million a year, he said, and an annual advertising budget of $1.5 million. In addition to Youngstown, the Morans have Window World franchises in Pittsburgh, Cleveland, Steubenville and Toledo.
Among the advantages of having more than one franchise, Moran said, are the ability to get volume discounts on the materials bought and brand awareness across the franchisee’s markets, which results in more effective advertising. In addition, customers have more trust in the franchise owner because “You can tell your customers you’re a nationwide company,” Moran said, “not a mom-and-pop store.”
Window World is based in North Carolina although, Moran allowed, many in the Mahoning Valley perceive his and his father running the headquarters here.
As Pinto noted, franchisees consult with each other to learn what’s working and what isn’t. Window World franchisees, Moran said, meet annually in Florida every August and compare notes. “It’s like a family reunion,” he said. “It’s not just installing windows. It’s running a business.”
Those who want to obtain a franchise must have a physical site where customers can buy their goods or services, Lasko noted, and they likely will need a bank to finance their operations and deposit their receipts, Stevens said. Hillman has worked closely with Stevens during his career as a business banker so franchisees can start or expand their enterprises, both said.
“The chances are you’ll lease,” Lasko informed those who want to secure a franchise. “You need good real estate,” which means the cheapest rent is not the way to go. “You will have to spend $20,000 in advertising tell people where you are anyway,” he said, and the franchisee doesn’t want to be too distant from the most-traveled and most-visited commercial sites.
If the franchisee chooses to buy a site priced lower, he’ll likely need to spend more on development costs. “It costs $150,000 to develop an acre of land, the parking, the drainage, the signage,” Lasko said.
If a person rents, he should know that commercial rents cover more than the store space. They include taxes and commons areas.
Because “Kutlick works mostly with franchises,” Lasko said, the agency it is knowledgeable about traffic patterns, zoning ordinances that regulate signage and related issues.
Before a franchisee comes to terms with a landlord, Lasko advised that he drive by the address at night to learn how the volume of traffic and customers might differ from daytime patterns.
It may take as long as six months to find a location with the attributes the franchisee wants and can afford, Lasko said. He shouldn’t rush into signing a lease.
In an economy that is slowly recovering and a central bank that is keeping interest rates low, “You could almost pay for a building what you would lease it for,” Stevens observed.
Bankers who grant mortgages on commercial real estate, he said, want a 20% down payment even if they allow less than that amount on residential real estate.
Those who secure a franchise find it easier to borrow from a bank than those striking out on their own, Stevens said, because of the value of the brand behind most franchises, whether KFC or McDonalds, and the assumption the owner of the franchise will have guidance from the franchisor should the former run into difficulties.
With success, franchisees tend to become cocky, Belleria’s Liberato noted. “At the beginning, they rely on you totally. After six months, they get comfortable because things are going smoothly. After a year they think they invented pizza.”
Copyright 2013 by The Business Journal, Youngstown, Ohio.
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