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FRANCHISES

The Smartest Franchisees in America

An in-depth look at a new wave of franchisees who are using their entrepreneurial smarts as true company builders.
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Armed with fresh ideas -- and the freedom to use them -- a new wave of competitors is emerging from an unlikely sector. You have more to learn from them than you think

Generally speaking, the world is divided into two types of entrepreneurs: those who wear paper hats, and those who don't.

More than fashion sense separates the two. The fact is, some entrepreneurs are serious about company building, while others -- well, they wear what they're told to wear. And folks who regard themselves as genuine risk takers think of the ones with the paper headgear -- franchisees -- as overpampered and underexposed to the harsh realities of the marketplace. After all, true company builders sweat out their best ideas late at night, while franchisees need only leaf through the latest company manual. Franchisees stick to a proven formula; company builders, even if they believed such a formula existed, would have trouble following it. They just aren't much good at following -- which is the only skill that franchisees, sometimes derided as "entrepreneurs in a box," need to succeed.

Or is it?

Back in the golden age of the Golden Arches, franchising largely attracted business neophytes lured by the promise of big bucks in return for an effort that required more brawn than brains. In exchange for emptying out their kids' college funds, they could rely on the mother company to ferry them over the choppy start-up waters until they reached financial safety. To get there, their wisest strategy was to operate well within the confines of their franchise covenants, doggedly heeding instructions from headquarters.

It still happens that way -- once in a while. But with more than 570,000 franchised units in the country, and some 42,000 starting up this year, franchisees can't afford the luxury of waiting for the corporate honchos to think them out of their latest competitive jam. Their very survival is at stake. Timothy Bates, an economics professor at Wayne State University, in Detroit, reports in a recent study that only two-thirds of the roughly 1,200 franchised units he surveyed in 1987 survived under the same owner four years later. And if you doubt that some segments of franchising are oversaturated, consider this the next time you drive through a bustling commercial district: does the world seem to lack for places to make a quick copy or grab a fast bite?

It's a trick question. Because if that copy store offers the hottest technology, or the burger joint features a rock-and-roll band, it can find a healthy niche -- and some franchises have done so, as you'll read here. But those kinds of creative maneuvers aren't lifted from any company playbook. These days successful franchisees stay sufficiently inside "the box" to satisfy the fundamentals, like maintaining uniformity of product and style, but they venture sufficiently outside it to test new techniques in sales, marketing, operations, and other key areas. They're not renegades out to buck the system. Instead, they take the best advice their franchisors can provide, carry it to the nth degree, and then jump to a still higher level on the strength of their own ideas.

More and more, in other words, it's what's under that paper hat that counts.

What makes these franchisees so brainy? It's no coincidence that many of these folks -- by most estimates, at least one-third -- are corporate refugees who left voluntarily or were dumped overboard in midcareer as giant companies reorganized. Armed with severance cash and management skills, they are less subservient than their predecessors, and they aim to build substantial enterprises by applying what they know.

"These are highly educated people who have money, ambition, and the initiative to start a business," says Jerry Wilkerson, president of Franchise Recruiters Ltd., in Crete, Ill. "Five years ago you'd see more people at the trade shows and 'discovery days,' but they didn't have all those ingredients. These guys and women who come now, they're going to do something. It's just a question of where they'll pull the trigger." Robert Gappa, president of Management 2000, a consulting firm in Houston, estimates that "80% of the candidates our client franchisors are seeing have management experience. They might be smelling that they are going to be right-sized -- or they've been right-sized."

Jerry Shultz and Kathy Miller are typical examples. Shultz spent 23 years with IBM as a manufacturing manager. When Big Blue began stumbling in the late 1980s, he seized on a generous buyout deal -- two years' salary plus $50,000 -- and decided to open his own business. "I lacked the confidence to run a company without some help," he admits. Now, six years later, Shultz owns three Play It Again Sports stores in Arizona and California and has plans to open two more outlets of that franchise, which sells used athletic equipment.

Kathy Miller put in 17 years with NCR and AT&T, ending up as an East Coast sales director. Tired of traveling, she bailed out in May 1994 to run a Primrose School educational child-care center.

The $1 million required to build the school didn't faze her. "When you come from corporate America, you're not intimidated by a million-dollar investment when you're used to a budget of $25 million," Miller says. "I was convinced the numbers would work, and they have." In business only a year, her school in Cary, N.C., is filled to capacity, and she has broken ground on a second school.

Miller, Shultz, and others like them are revolutionizing the franchising scene, and not just on a unit-by-unit basis. To lure and keep such demanding desirables, some franchisors are rethinking, for instance, the support services they offer and how they share the wealth. (Mini profiles of three savvy franchisors appear below.) "There's a relationship change under way," observes Leonard Swartz, director of franchise services for Arthur Andersen & Co., the giant accounting firm. "In the 1960s and 1970s, the franchisor was the king. Now you have advisory councils of franchisees and more teamwork. Good franchisors know that the best ideas come from the folks at the cash registers, and they listen to them."

Some listen harder than others. Taco John's International, a fast-food franchisor based in Cheyenne, Wyo., went so far as to rip up its basic franchise agreement and start over, working with its franchisees to design a document that management hoped would appeal to the new sophisticated crowd of potential franchisees. (See "The Collectively Bargained Franchise Agreement," [Article link].) Taco John's and franchisors like it understand that in a saturated and competitive marketplace, their best weapon consists of franchisees who understand technology, marketing, and people management, and can beat out their rivals -- be they other franchisees or independent businesses -- by executing everything better.

"The franchisees are the ones facing the customers every day, and they've got to come up with the ideas," says George Naddaff, former chairman of Boston Chicken Inc., the now 770-unit restaurant chain. "As a franchisor, you can't have everybody changing the decor or adding something of their own to the menu, but you also can't ignore something that increases sales. When that happens, you should go out and investigate it. That's the smart thing to do." (For more of Naddaff's vision of what makes for a successful modern franchise operation, see "The Next Big Thing," [Article link].)

Following are some of the sharpest ideas to come from the new breed of franchisees who are committed to injecting fresh ideas into as many aspects of their businesses as they can.

They're not necessarily the biggest franchisees or the richest. Yet. But no matter what you think of their logo-covered wardrobes, their creativity will surprise you -- and force you to think hard about the ingenuity you could be bringing to your own business, whether it's a franchise or not.

* * *

Sales and Marketing
One weekend a month Forrest ("Woody") English gets up on a flatbed truck and shouts at total strangers. A rabble-rousing preacher? Close. English sells used cars.

Last year he hit upon a novel way to market his autos not just on his own lot near Indianapolis but to buyers up to 70 miles away. Once a month, usually on a Thursday night, he hauls 50 to 60 cars to an outlying town and parks them in a retail setting, often in Wal-Mart parking lots. Over the next two days the cars are showcased in a kind of used-car bazaar. Banners fly, a country band jams on a flatbed truck decked out like a stage, and a local deejay does a "live remote" from the site. While English works the crowd like a carnival barker, his sales crew and "bankers" operate from a trailer. "On Saturday night we just fold our tent and go home," he says. "We're like a circus."

It's an unlikely role for an electrical engineer who was once General Electric's top international salesman, dealing in heavy power equipment. In 1990, in an odd career switch, English bought a franchise of J.D. Byrider Systems and opened up in Avon, Ind.

Byrider specializes in cars three to six years old. Such vehicles account for 70% of all cars on the road, but on a used-car lot they are mechanically suspect and tough to finance. Byrider is "basically a financing operation," English explains. "We recondition the cars and back them with a warranty, and then we offer affordable terms through our own finance company, the Car Now Acceptance Co. Every Byrider dealer owns a finance company, and the availability of credit is a powerful sales weapon."

Establishing a Byrider franchise costs upwards of $1.5 million, which covers the dealership and real estate, the start-up auto inventory, and seed funding for the finance company. That kind of investment demands a good return, and although English's road shows lack a certain dignity, they pay off handsomely. Each one costs him about $5,000 but typically yields 20 to 30 sales in two days. Since the road shows started, a year ago, average monthly car sales have jumped from 28 to 48, and English's accounts receivable, $1.2 million in 1994, are up $600,000. Business is so robust, in fact, that he's opening two more locations.

Ryan DeVoe, director of development at Byrider's headquarters in Indianapolis, applauds English's ingenuity. "These small towns can't support a multimillion-dollar used-car operation," he says. "The volume isn't there. But there's definitely enough business to justify a regular visit, and a lot of our people are now copying Woody's strategy."

Karen and Bernie Marshall didn't need a circus act to draw attention to their business, but they did need flashy marketing materials. When they started their Takeout Taxi franchise, in 1992, the menu suggested by the franchisor was a flimsy trifold. "We thought it looked like trash," says Karen, who decided they needed an attractive menu booklet for the affluent working couples in their market area -- Arlington, Va., and nearby Washington, D.C.

"Bernie and I were the first ones to publish something with a nice design and quality paper," she says. "It has since become a 56-page book, with a color cover, which we update as we add restaurants."

Takeout Taxi's slogan -- "We bring the restaurants to you" -- captures the company's concept. On a typical day orders flow in by phone and fax to a half dozen customer reps at the Marshalls' command post, in Arlington. Dispatchers in turn fax the orders to the restaurants, and uniformed drivers are then dispatched by radio to pick up the meals and deliver them to homes, hotels, businesses, and government agencies. The restaurants give discounts of 30% to 35% to Takeout Taxi, whose customers pay the regular prices plus a $3.50 delivery charge.

Last year the Marshalls -- both of whom previously worked at big companies -- posted sales of $1.8 million, and they're on track for $2.5 million in 1995, putting them in the top 5 of Takeout Taxi's 100-plus franchisees. The menu booklets, Karen says, are big growth drivers. For Arlington, their most established market, they print 50,000 menu books twice a year. The current edition features a four-color cover with food photos -- burgers, salads, steaks, even a sushi dish. A two-page review provides thumbnail sketches of the 45 restaurants for Arlington customers, followed by their menus.

The Marshalls distribute the books through drop-offs to hotels, businesses, and subway stations, and through mailings -- their customer database includes 12,000 names. Earlier this year, when paper prices began skyrocketing, the Marshalls switched from slick paper to newspaper-type stock. "We were nervous," says Karen. "But I guess it didn't matter, because sales went up 20%."

Even so, this is not cheap marketing. It consumes some 3% to 5% of revenues, a big bite out of what Marshall describes as "an already slim margin." The results are so strong, though, that the menu booklets have been adopted systemwide. Any advantage helps, the franchisor reasons, what with an estimated 1,000 competitors out there.

Sometimes competitors aren't the problem; a tricky-to-sell product is. For example, when John Maxwell steps into a restaurant, he wants a strategically located table: the one closest to the kitchen drain. That's because Maxwell isn't looking to stuff his face. He's hoping to demonstrate the appetite of the fat-eating bacteria he carries with him.

Maxwell is a franchisee of Environmental Biotech, a company based in Sarasota, Fla., that manufactures and markets various strains of environmentally safe bacteria capable of converting fatty compounds into such harmless by-products as water and carbon dioxide to prevent drains from clogging. Bill Hadley, a former Century 21 franchisee, founded the company in 1990. For Hadley, the hard part hasn't been coming up with the bacteria, but figuring out how to sell them. Maxwell, whose territory consists of eastern Tennessee, tried peddling the bacteria out of his Volvo, making as many as 50 cold calls a week. But prospects were not wildly enthusiastic. How did they know the product worked? It was, after all, microscopic.

Then Maxwell hit upon an idea that has worked for generations of vacuum-cleaner salespeople before him: a trial offer. Prospective customers get a 28-day no-obligation test run. For a trial, Maxwell installs $300 worth of pumps, tubes, and containers that feed the solution to trouble spots -- drain-line intervention, he calls it. It's a financial gamble, Maxwell admits, but nearly 90% of the prospects sign up for the regular $95 monthly service.

The sales-closure rate so impressed Hadley that the free trials have become a systemwide marketing staple. "We thought we needed engineers as franchisees, but we were wrong," he notes.

With the fast-food segment about as clogged with competitors as the average restaurant drain is with grease, Hardee's franchisee Bob Faeth turned to the only fellow he knew would not let him down: Elvis.

In June 1993 Faeth opened a rock and roll Hardee's in Springfield, Ill., complete with a Wurlitzer juke box, neon lighting, a "Fat Boy" motorcycle, and an old gas pump in the dining room. The walls are festooned with pictures of James Dean, Marilyn Monroe, and of course, the King. On weekends Faeth features live entertainment on a $30,000 covered stage built in the parking lot. "Once you get into the rock business, you've got to keep at it," he says. "We bring in bands, Elvis impersonators, dancers. We have amateur nights, a karaoke machine -- a lot of things don't cost us anything. It's an entertainment center with a Hardee's inside."

Faeth has 14 Hardee's stores, but this is his largest, a $2-million number with seating for 200 and parking for 180 cars. The "rock" portion of the restaurant added about $200,000 to the cost, he says, but the increased volume makes it worthwhile. He declines to give sales figures but says, "We built it to be unusual, and it pulls in a lot of traffic."

Upstate, in Chicago, Royce Simpson tried nothing so dramatic. He owns four Wendy's restaurants, each averaging $900,000 a year, but he's seen sales soften in the face of Burger King's Pocahontas marketing blitz and Taco Bell's Batman Forever campaign.

He fights back by harping on the basics. "If I can provide what we call a share-stealing experience -- maybe the fries are a little hotter, the people a little friendlier -- customers will come back," he says. Neighborhood marketing also helps him through tough patches. "I get out into the community and build relationships," he says. "I donate to block clubs and civic groups. Last summer we did something called Cool Summer Jam with a local radio station. The station went around to 18 Wendy's restaurants, including one of mine, and broadcast live from the parking lot. The message was to have a safe, violence-free summer. No matter what kind of merchandising someone else does, these things will always have their place, and they're remembered in the community."

* * *

Business Operations
In retrospect, it's clear that Sir Speedy needed a franchisee like Bill Tallent. Just four years into the business, he's been instrumental in transforming the conventional quick-print and copy operation into an electronics-based business, capable of providing so-called print on demand. "I didn't get into this business," Tallent says, "to get ink under my fingernails."

Tallent had big ambitions in 1991, when he set up shop in Nashville. He computerized all design work, a sharp departure from the Sir Speedy norm, and soon topped the chain's growth charts, posting sales increases greater than 30% for 21 straight months.

In Laguna Hills, Calif., Sir Speedy's high command couldn't help taking notice. "They saw we'd positioned ourselves as a high-tech leader," Tallent says. "Using electronic bulletin boards, we'd built a digital network to communicate with customers. We put our software right on their computers, so when they have a job ready to go, they just go to their PC screen and double-click on our icon, and it's automatically transmitted to our store. We print the job and deliver it to their desktop."

Impressed, Sir Speedy's top brass recruited Tallent for an "image redesign" task force. "The old image was out-of-date, from the logo and colors to the business itself," Tallent says. Then came two more task forces: one to design an electronic network, and another to link Sir Speedy to the Internet.

The upshot? Sir Speedy is moving into the electronic age, using digital networks to link its nearly 900 locations. "Traditionally, you create something, you print it, and you send it off in trucks," Tallent says. "It's now create, distribute, and print. I can take an order in Nashville and send it to six other Sir Speedys around the country, which print the product where it is destined to go anyway. The customer has only one person to deal with -- me -- and I make the job of getting the product to six cities easy, but I use electronics rather than Federal Express."

Now running a couple of Sir Speedy locations, Tallent will gross a combined $1.6 million this year, nearly twice the industry norm for two stores. Not surprisingly, Tallent reinvests 80% of earnings in new technology. "There are very few printers in the country as far along as we are in technology," says Tallent, "and nobody our size in Nashville is even close."

Whereas Tallent integrated his business with technology to save money for customers, Paul Schulte and Steve Borgmann designed their company to save money for themselves and control as much of the business as possible. Their strategy of vertical integration has helped them amass a highly profitable group of 46 Super "8" economy motels.

Schulte and Borgmann, both of them building contractors, pretty much backed into their franchise. In 1976 Borgmann's construction company built a Super "8" in Nebraska. The owner showed him the pro formas and persuaded Borgmann and his friend Schulte to become Super "8" franchisees themselves. They built their first one in Preston, Iowa, two years later. "The formula worked, so we built motels one at a time after that, financing them with limited partnerships," says Schulte. The partners found that they could build more cheaply than their competitors, who relied on outside contractors.

By 1990 they had 27 Super "8" properties and two companies under the umbrella of their Simplex Motel Group: Motel Developers Inc., which builds the units, and Spartan 8, which owns them. Simplex Motel Group manages the units. "We're one of the few motel developers in the country that can do it all -- the feasibility studies, the site selection and acquisition, the construction, and then operating them once they're open," says Schulte. Last year he and Borgmann took the company -- now called Supertel -- public, raising $17 million to fuel expansion.

Their strategy of vertical integration makes for healthy financial results. Despite a severe downturn in the lodging industry during the early 1990s, Supertel's revenues have grown at a compound annual rate of 14.8% over the past five years, while operating revenues have expanded by 20.4%. In 1994 the company reported sales of a little more than $25 million, with a pretax operating margin of $6.5 million, or 26%. By comparison, margins in their sector -- limited-service budget motels -- average 5.8%, according to Smith Travel Research.

Cost Control
Every month, franchisees face a sobering reminder of how important it is for them to preserve their margins. If they don't keep costs under control, they risk mailing away their profits when they write the check to the franchisor. Monthly royalties and marketing fees, after all, typically range anywhere from 2% to 10% of gross sales, not profits . That puts added pressure on an operator like Bill Hall, who owns 55 Dairy Queens in Texas.

Hall is a former certified public accountant who spent six years with Arthur Young (now Ernst & Young). The challenge he faces day to day, he says, is controlling costs while getting enough of a return to justify the time and money he invests in the business. "The idea of increasing counter prices because my backdoor costs are up has gone by the wayside," he explains. "Today the competition determines what I can charge."

That's why he has teamed up with other Dairy Queen franchisees in Texas -- there are 200 of them, with some 800 stores -- to maximize purchasing power. For example, he and his Texas colleagues don't buy much product from Dairy Queen International. Instead, to obtain the best deals on everything from hamburger patties to paper cups, they've contracted with a company called Food Services Purchasing Co-op. The co-op negotiates on their behalf with all manner of vendors. Buying for thousands of restaurants, including KFC and Taco Bell nationwide, the co-op can cut better deals than Hall could on his own.

"We'd rather focus on the sales side than try to save every nickel we can on the purchasing side," he says. "But having the co-op gives us a comfort zone."

The co-op actually buys all the food and supplies, and then resells them to wholesalers for distribution. Obviously, the wholesalers need to make money, but here, too, Hall has a strategy. "In my opinion, if you split your business up between too many wholesalers, you won't be a big enough piece of their action to demand decent pricing and service," he says. He buys almost everything from a single wholesaler, McLane Food Service, which delivers to his stores.

"McLane knows that I can't raise my prices just because they raise the price to me, because guys like me will go out of business," he says. "If the vendor is your partner, he'll watch his own costs. It has a ripple effect."

Just as Hall controls costs by partnering with suppliers, Kathy Miller, the Primrose School franchisee in North Carolina, is building partnerships with her 25 employees. She's laying the groundwork for open-book management.

At monthly staff meetings she shares financial information in hopes of instilling a cost-conscious outlook. "I've made it clear," she says, "that we have finite dollars and competing choices to make. When they talk about overtime or absenteeism, I say, 'Look, your payroll is running me $12,000 every two weeks.' When they want equipment that costs, say, $1,800, I ask if it's smarter to spend the money that way or on an incentive plan for well-day benefits. Eventually, they start to comprehend how a business works. It's not that they're ignorant, it's just that they've never been exposed to this kind of thing before."

Miller's biggest problems are teacher absenteeism and turnover. "I'm setting goals for them," she says, "for example, no more than 15% absenteeism for the quarter. That lets them participate in driving down overtime costs." She is working on providing weekly progress reports and plans to pay quarterly bonuses to those who meet the goals.

* * *

People Management
Employee turnover, it's no secret, is notoriously high in retail in general and fast food in particular. But Pete Harman, whose company owns 265 KFC outlets, claims to have found a solution.

To attract -- and keep -- good managers, Harman has designed a program whereby individuals can own up to 30% of the stores they manage. Assistant managers can own up to 10%. Typically, the 30% stake is worth at least $40,000, based on the store's assets -- cash, retained earnings, the physical plant. "We help finance that for them," says Harman Management Corp. vice-chairman Jackie Trujillo. "We take them to the bank and guarantee a loan to buy the stock. They receive a salary and a percentage of the profits, and their equity stake grows as they grow the business. If they retire or leave, they have to sell the stock back to the corporation."

As a result, management turnover in the Harman group is 12%, one of the lowest rates in the industry, according to Trujillo. Employee turnover there is 110%, but 300% is common in fast food.

Franchisee Tom Budinick, who co-owns six Auntie Anne's soft-pretzel stores in midwestern malls, faced a similar problem. "A couple of my places are in wealthy suburbs, and the kids don't need to work," he says. "So unless you make it a satisfying environment, they won't stick around."

Employee surveys show that what people value most highly are recognition for a job well done and a clear view of their standing in the company, Budinick says, while compensation ranks third. So all his employees, even high schoolers making the minimum wage, get performance reviews every 90 days. Each review brings an opportunity for a raise -- a small one, but enough so that employees feel appreciated. To help cover the resulting higher operating costs, Budinick raised his prices from $1.39 a pretzel to $1.49. He says he met precious little resistance from consumers.

Not mind-blowing stuff, but it works. "Turnover in fast food runs in the hundreds of percentage points, but ours is more like 50%," says Budinick, who studied personnel issues in a previous incarnation as an executive headhunter. "It seems like we're reviewing a kid every time we turn around, but it creates an incentive for exceptional customer service." That, in turn, gives franchisee Budinick just the edge he needs in an environment where competition -- both franchised and independent -- grows fiercer every day.

"It's a whole new world out there," reflects Bill Hall, the Dairy Queen franchisee. "You literally go from year to year not knowing which direction your company will move in. The franchisor makes every effort to help you, because that helps them. But ultimately, success or failure rests on your shoulders. That's the challenge, and if you can meet it with some imagination, you'll be fine."

* * *

Research assistance for this article was provided by Karen E. Carney.


SMART FRANCHISORS

RE/MAX International, Englewood, Colo.

Boosting Productivity Through Technology

RE/MAX International's shrewd use of technology enables its 2,500 franchisees to focus on what really matters: watching TV.

Not that RE/MAX's real estate agents are glued to Coach reruns all day. They may be watching taped presentations given by celebrity motivators like General H. Norman Schwarzkopf or management guru Tom Peters. Or they could be taking in a Harvard Business School course on quality. Such fare is part of the six hours of daily programming that RE/MAX beams out to its franchisees over its own satellite television network, which features two-way interactive videoconferences enabling employees at 1,100 outposts to call in (À la Donahue) and ask questions of a panel of real estate experts or top salespeople back at the studio. "The best people deserve the best tools," says Daryl Jesperson, executive vice-president.

Those technological tools -- including the satellite hookup and a recently opened site on the Internet -- are all aimed at enabling franchisees to "handle more properties," Jesperson says. Back in 1992 RE/MAX embarked on a multimillion-dollar technological buildup prompted by the simple fact that "costs were going up and commissions weren't," Jesperson explains. In 1993 the company introduced electronic mail and a private bulletin board on CompuServe, which allows franchisees in more than 1,700 offices to trade marketing tips and referrals, post classified ads, and advertise.

Last year, in an effort to boost referrals, the company unveiled a CD-ROM that included a roster of all its agents. Franchisees can now download personal information about their peers -- including a color photo. "You don't get paid on a referral if you hook up a military vet with an ex-acid-dropping hippie," notes Jesperson. Agents' refer-ral income has risen "markedly," he claims.

So has productivity, thanks to proprietary software that allows franchisees to monitor accounts, schedule closings, and churn out feedback reports twice as fast as before. The software, claims Jesperson, "can knock off 30 man-hours per week." As a result, he says, RE/MAX agents average at least 20 transactions a year. That's twice the industry average, according to the National Association of Realtors.

Kwik Kopy Printing Corp., Cypress, Tex.

Franchisee Support and Involvement

here's nothing like a multimillion-dollar lawsuit to help a franchisor develop a deep and abiding appreciation for its franchisees.

And Bud Hadfield knows it. The founder of Kwik Kopy, a $400-million quick-printing empire, faced a franchisee mutiny in 1984. Back then he was too busy interviewing potential franchisees to pay much heed. One of the complaints: the royalties they paid on second units were too high. Hadfield won the suit but realized "we shouldn't be in the business of selling centers," he says. He loosely capped the number of franchisees at 1,000, vowing to make them "the best 1,000 we could possibly have."

Shortly afterward Hadfield started an employee stock ownership plan and added some inexpensive, homespun franchisee-support programs that have increased systemwide revenues by 15% annually in each of the past five years.

While franchisors typically wait for emergency calls, Hadfield's "Sweat Hogs," a group of 12 employees, phone franchisees monthly to check sales and margins and to garner feedback. Franchisee complaints or requests, which are tracked by computer, are typically addressed within 48 hours. When their copier died, Robert and Lee Smith, franchisees in Scottsdale, Ariz., received replacement parts within 24 hours and a better model in about 60 days. "They're great at following through on promises," says Lee.

Hadfield also taps franchisee know-how for the company's benefit. The Stars Program allows franchisees to mentor their peers by touring one another's shops, suggesting changes and submitting feedback reports to headquarters. Franchisees later file a report detailing the remedial steps they've taken.

As trainees, franchisees each spend five weeks at Kwik Kopy University. Continuing education, delivered monthly at headquarters and in various regions in regularly scheduled seminars, covers everything from basic accounting to taking advantage of new opportunities, such as providing mailing services. Kwik Kopy also tests new equipment for franchisees.

What's the cumulative effect of it all? Franchisees' average annual sales are $400,000, up 67% from a prelawsuit low of $240,000. Franchisees who are among the top 10% in annual gross sales attended 77 seminars in 1994, while those with anemic sales appeared at only 17. Says Lee Smith, "It's usually easy to blame your franchisor. But at Kwik Kopy they make it difficult."

Bruegger's Corp., Burlington, Vt.

Luring the Best Franchisees

Quick: what makes big-company types fall all over themselves to join smaller businesses? No, it's not the chance to answer their own phones. But it can be summed up in one word: equity.

That is exactly why Bruegger's Corp., seeking to attract fast-food veterans who could roll out its fresh-bagel concept speedily, decided to offer preferred stock in its parent company to a core group of franchisees. "We decided the best way to build a great company quickly was by partnering with the best people," explains chief executive Stephen Finn.

Bruegger's management first sketched a profile of a dream franchisee -- a fully capitalized operator of a multiunit fast-food chain -- and then identified 100 candidates. Of the initial 40 it contacted, 24 have joined, including a cofounder of Pizza Hut, the former chairman of Hardee's, and one of the country's largest Burger King franchisees.

Under the stock plan, franchisees agree to develop at least 10 stores in a given area over five years. A 10-store deal, for example, requires them to buy $350,000 in preferred stock ($35,000 per store): they pay $150,000 up front, and ante up the rest in annual installments over four years. Franchisees swap their management expertise for the chance to recoup their start-up costs -- about $270,000 per store -- and make plenty of extra dough (the green kind) if Bruegger's eventually goes public, at which time the preferred stock converts to com-mon stock.

The plan isn't for the cash poor, but those who can pay say it's well worth the price of admission to Bruegger's. "Preferred stock in your hand is much more than the typical franchisee has, which is normally a canceled check," says franchisee Dan Fitzpatrick of South Bend, Ind.

So far the elite franchisees have pledged to buy $17 million in equity; Bruegger's has received $8 million, which it can use to finance its 18 company-owned stores. Bruegger's now has 220 stores in 21 states. Its development plans call for a total of 270 outlets by the end of 1995. Sales of $145 million are projected, a 79% increase over 1994's $81 million.

And when will the company go public? According to Finn, a 1998 offering would not be out of the question.

-- Karen E. Carney


WHAT IT COSTS TO GET STARTED IN FRANCHISING

Company Name Franchise Fee Start-up Investment Working Capital Required

Sir Speedy $17,500 $120,000 $60,000

Play It Again Sports $20,000 $60,000 $30,000

Takeout Taxi $30,000 $71,000-$91,000 $10,000-$15,000

Environmental Biotech $40,000 $40,000-$50,000 not applicable

Primrose School $48,500 $800,000-$1 million $25,000

Wendy's $25,000 $525,000 (bldg.), not applicable

$200,000 (equip.),

land variable

Last updated: Nov 1, 1995




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