Case Study: Hooked On Expansion

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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.

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