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FRANCHISES

Case Study: Hooked On Expansion

Marc Shuman was determined to expand fast. Then a quarter of his franchisees started to struggle. Was shutting them down the best solution?
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Marc Shuman couldn't bear to open another e-mail. Hunkered down in his office in Syosset, New York, the president of GarageTek was reviewing the financial statements of his company's 57 franchises. It was fall 2003--three years after he'd launched his garage makeover business--and he was starting to worry.

A quarter of GarageTek's locations were losing money or barely breaking even, and complaints from disgruntled franchisees were pouring in. Meanwhile, Shuman and his corporate team were struggling to create operational systems that would help the unprofitable franchises get back on track. It had begun to feel like a losing battle. As Shuman analyzed one disappointing financial statement after another, he started thinking about shuttering the failing locations altogether.

GarageTek had seemed like a no-brainer when Shuman founded it in 2000. He got the idea when he and his father, with whom he outfitted department store interiors, designed and built a set of slotted wall panels with moveable shelves for a retail client. When several of his employees began using the panel systems to organize their own garages and basements, Shuman realized he had a potential hit on his hands. And the timing seemed perfect: The housing market was heating up, garages were getting bigger, and closet organizers were all the rage. Shuman decided to sell the display business and open GarageTek.

Rather than simply selling the panels at home-improvement stores, Shuman decided to build a garage-makeover business. GarageTek would perform in-home consultations, then design and install the systems--complete with shelves, cabinets, bike racks, and work benches. Homeowners, Shuman figured, were likely to pay a premium for the service. The biggest risk was competition. After all, anyone could have the same idea. But if Shuman could establish a foothold in markets around the country, GarageTek had a better chance of survival. Franchising seemed like the best way to pull off such an ambitious expansion.

In early 2001, Shuman placed an ad soliciting franchisees in The Wall Street Journal, and phone calls poured in. His attorney advised him to choose carefully. But Shuman, eager to get started, approved anyone with a business background, a $25,000 franchise fee, and $200,000--which, according to Shuman's calculations, was enough to purchase supplies, buy newspaper ads, and turn a profit within 18 months. Each franchise would pay GarageTek 8 percent of annual sales, a portion of which would help fund national advertising campaigns. In exchange, they received three days of basic training and a manual written by Shuman. "If they had the money and they had a strong sales and marketing background, we felt they were qualified," Shuman says.

At first, everything seemed to go according to plan. In the first half of 2001, GarageTek franchises opened in Connecticut, New Jersey, and New York. By 2003, 57 franchises had sprung up in 33 states, and annual revenue at the corporate office was on track to top $12 million. That summer, however, Shuman began to realize that while many franchises were thriving, 15 were struggling. One franchisee in California begged Shuman to send executives out west to train his staff. Another complained that GarageTek's suggested marketing method--ads in local newspapers--was ineffective, costing as much as $500 per lead. Desperate for help, Shuman enlisted iFranchise Group, a consulting firm in Homewood, Illinois, to help him develop a strategy. Meanwhile, the corporate team tapped franchisees for tips on which sales tactics worked best--a move that frustrated many of the struggling franchisees, who began to wonder why they were paying GarageTek at all.

Determined to get a handle on the situation, Shuman and his managers compiled a spreadsheet with information on every GarageTek franchise--including the size and demographics of each territory, overhead costs, pricing models, management assessments, and the amount of capital being invested by owners. The data revealed a distinct trend: The failing franchises were either underfunded or being run by nonowner managers hired by hands-off investors.

Shuman was torn. On the one hand, it was his fault for green-lighting those franchises in the first place and providing inadequate training and support. But he couldn't help blaming the struggling franchisees. After all, most GarageTek locations were doing well with minimal handholding. Shuman, who prides himself on being tough, was leaning toward folding the failing franchises--a decision supported by his management team and iFranchise.

But his lawyer warned him that things could get messy. GarageTek's contract stipulated that the corporate office could shut down franchises that failed to meet specific sales goals. However, the attorney warned, disgruntled franchisees could still file lawsuits and ensnare GarageTek in costly litigation. Shuman also worried about GarageTek's reputation. If he shuttered a quarter of the company's locations, it was bound to hurt the brand, especially if angry franchisees griped to customers or the press. "I envisioned a bloodbath," Shuman says.

The Decision

One afternoon in November 2003, Shuman strode into the conference room at GarageTek's headquarters for the company's annual meeting. The eight members of GarageTek's franchise advisory council sat at a large table, unaware of the major shakeup that was about to happen. Shuman ran through a PowerPoint presentation that explained why certain franchises were failing. He also outlined how corporate profit would improve if they were shut down. "We sold the idea of folding the failing locations to the council as a matter of courtesy," he says.

As Shuman clicked through slide after slide, some members of the council began to realize that their days were numbered. There were no arguments or heated exchanges, but the room was tense. "We were all kind of stunned," recalls one franchisee from California, who asked not to be named. The successful franchise owners, not surprisingly, were more at ease. "People who were successful were comfortable with [Shuman's plan]," says Peter Belman, who now runs GarageTek locations in Washington, D.C., and Atlanta. "I think people who were less successful were probably mixed."

Rather than shutting down the failing locations immediately, Shuman gave 15 owners about six months to turn things around, calling low performers regularly to quiz them about their financial problems and suggest improvements. During 2004, Shuman's watch list increased to 19 owners. Three franchisees bounced back, but 16 others continued to struggle. Shuman and his team turned up the heat on the failing franchises that summer. In early 2005, he began to call business brokers to quietly line up buyers for locations in the most promising of those markets. By late 2005, 14 of the owners on Shuman's target list had left. Two others sold their franchises. "Some guys were left with some pretty hard feelings," Shuman says.

He and his team moved quickly to correct their mistakes. The first step was to create more stringent criteria for new franchisees. To pass the initial screening, candidates now need a net worth of $1 million, with at least $250,000 in liquid assets; their proposed territories must boast at least 250,000 single-family homes, occupied by owners. They're also required to run the franchises themselves. GarageTek also decided to administer a 350-question personality test, looking for candidates with traits similar to GarageTek's top performers, who tend to be enterprising and not overly accommodating--a sign of independence. Finally, all candidates fly to New York to meet with Shuman and his corporate team. To identify problems early on, he installed software that enables him to track each franchise's financial performance.

In addition, all new franchisees attend a two-week sales and accounting session at GarageTek's headquarters. Sales, marketing, and operations experts then visit each new location, troubleshooting and offering pointers. GarageTek also arms new owners with a seven-volume training manual, a marketing kit filled with sample advertisements, access to GarageTek's intranet, which has more marketing material, and a database of prospective buyers. Newcomers are required to participate in monthly conference calls and regional and national franchisee meetings. Shuman is also teaching by example. He recently bought GarageTek's Atlanta franchise, which will be run by co-owners and serve as a flagship store.

So far, the strategy seems to be working. In 2005, GarageTek's sales jumped 33 percent, to $20 million, even though the company had 21 fewer franchises than in 2004. Now that he has a streamlined system in place, Shuman plans to add 55 new franchises during the next few years, for a total of 100. But he admits that he has more to learn. "We're not, by any stretch, done," he says.

The Experts Weigh In

Refreshingly frank
Shuman's direct and honest approach probably saved his company. He had the audacity to confront his problems head on. Now he should keep in mind that although quick growth is possible, he needs to continue fleshing out systems to be truly successful. Learning on the job takes time and money, but Shuman is off to a good start. Tracking financial statements, in particular, is a great exercise because red numbers tell a story long before major trends emerge.

Steve Hockett
President
FranChoice
Eden Prairie, Minnesota

On the right track
Shuman gave his franchisees a way out. That was a wise move. I've seen franchisers go out of business because they don't take steps to trim locations that they can't handle. Sometimes that's the only way to survive. Shuman is also putting much more time and energy into selection and training, which is a good thing. If he had done that from the beginning, some of his losses could have been averted.

Francine Lafontaine
Professor
Ross School of Business
University of Michigan

His ego got the best of him
Shuman dug his own hole when he became greedy and aggressively sold franchises to the group that he now refers to as underperformers. His franchise owners trusted him. In return, he gave them low-level training and mediocre support. He should have shown good faith by returning the franchise fees and any related out-of-pocket expenses. Instead, he showed ego. Now it appears that he is growing too aggressively again. He hasn't learned much.

Steve Bergenholtz
President
Franchising Ventures Group
Plano, Texas

What do you think? Was shuttering the failed franchises the right move for Shuman? Sound off at casestudy@inc.com.

Last updated: Mar 1, 2006




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