Franchisors Do It Because
Printed in USA Today
by Nancy Rathbun Scott
Murray Mead believes that franchising will hack Quik International to the top of the worldwide web. And why not? At the moment, internet access is provided by 200,000 decentralized, disorganized entities-no match for an army of franchise owners equipped with routers and modems that seamlessly hook users to Quik's state-of-the-art computer facility in Irvine, California.
It's the same formula that's been used to sell everything from hamburgers to real estate: namely, a solid centralized system that uses local talent and capital to swiftly penetrate far flung markets. As Mead puts it, "Quik franchisees can spend 80 percent of their time selling and marketing, because we handle everything else."
A better mousepad underlies the Quik dream. "Quik service is six times faster than the nearest competitor and we're the first internet service provider to offer the customer a video-on-demand service called Quik TV. We started franchising last year in April and sold our first franchise in July. We now have twenty U.S. access sites open and running, and one in Guatemala. With a $35,000 investment, I see at least 600 locations in this country."
No wonder expansion-minded companies think franchising when they think growth. The formula has worked for an endless variety of products and services. Ron Rezetko, president and CEO of Batteries Plus, has a theory about why franchising fares so well. "Franchise owners have the three Cs: Character, Capacity and Capital. Franchising is the best way to get a national presence. It's just too costly to open corporate stores around the country. And there's another thing. Most of our franchised stores do better than our corporate stores because the franchise owner has a vested interest."
A plan that bears repeating
Some franchisors have found the system so successful that they do it again (and even again!). When Steve Bursten began franchising Decorating Den interior design services in 1969, he drove in uncharted territory. "Decorating Den was one of the first service industries to franchise. That differs from a retail business because the owner must go out to the customer. The owner must know how to find customers, close sales, provide a high level of customer service, follow-up, and build consistency."
In less than 30 years, though, Decorating Den mushroomed to 1,300 franchisees. Ninety days ago, Bursten launched a new concept: Decorating Den Painting & Home Improvement.
The franchise wilderness has more landmarks than it did 30 years ago-particularly regulatory and legal. But Bursten doesn't complain. "Regulation of the franchise industry came about only in the early 70s, just after we had started franchising Decorating Den. We were one of the early members of the International Franchise Association and one of the first to develop disclosure documents. Every year new regulations have come in and it's more and more difficult to begin franchising now. But in the early days there also was abuse of the system. Quality franchisors have always welcomed reasonable regulation of the industry."
Franchise sales strategies have changed, too. "For the first four or five years after we started Decorating Den, we were approaching carpet and furniture stores and offering them Decorating Den as an add-on diversification. Then we noticed that each time we ran an ad for a decorator, we had 20 or 30 responses. In 1976, when 1001 Decorating Ideas ran a story about Decorating Den, we received hundreds of inquiries about franchise ownership. That's when we went into national advertising."
Then and now differ in other ways, too. "This is the first time since the franchising of real estate companies that a franchisor has undertaken a large conversion licensing program. That means Decorating Den Painting & Home Improvement owners must be qualified, experienced business people, already licensed. Our job will be to train these professionals to our standards and teach our way of doing business."
Bursten acknowledges that other companies have tried conversion licensing and failed, but he remains confident. "We have an advantage over anyone who has tried it because Decorating Den already has a great name. Among our customers, who are upscale homeowners, 70 percent already know who Decorating Den is."
Franchises grow at home and abroad
Bike Line is one of two companies that franchise bicycles and fitness equipment. The company has been selling franchises since 1991 and now has 75 stores in 18 states. Another 15 to 20 stores sit poised on the 1997 drawing board. "Our plan is to have 200 to 300 stores in all the major U.S. markets. That may take five years or so," says director of franchising, Jim Palmer.
But growing at just 20 stores per year, where will those 300 new sites come from? "What typically happens is that existing people open a second, third, fourth store, so that each year the growth rate grows."
Families get involved, too, Palmer says. "We have one owner in the Midwest who is looking at opening a location in Florida. He's thinking he can go to the warmer climate in the winter and either hire a manager or family member for the other location. Having one or more family members involved in the franchise is very popular."
Palmer says Bike Line would rather have 200 stores with 100 owners than the other way around. "Actually, we prefer to work within the family, so to speak. Control is better, communications are better; it simply works better all the way around."
Other companies, like the rapidly growing Payless Car Rental Systems, Inc., have intensive investment requirements and far reaching horizons. "We've been franchising for 25 years, but we were sold in 1990 to our current parent company," says executive vice president, Joe DiNicola. "For the first four years, we took some slower growth, while we were restructuring. But we've been franchising oversees very aggressively the past two years. We currently have 53 U.S. locations and 42 international. We're projecting 25 new locations this year."
DiNicola acknowledges that the car rental business has unique financial criteria. "We're looking at serious credit worthiness: leasing companies, franchised auto dealers, used car dealers and entrepreneurs with some current financial strength."
Franchising shows the money
Money is a big reason companies decide to franchise-other people's money, that is. John H. Campbell, director of franchise development
at ProForma, which brokers printed business products, puts it this way, "When we began franchising in 1986, we had a good history in Cleveland. One option would have been traditional growth by hiring sales reps, but we needed capital to fund the growth. We were a small company-$5 million a year. ProForma's founder, Greg Muzzillo, had heard of franchising, but had never heard of any company like ProForma-a distributor-franchising. It seemed like a good idea to have somebody else capitalizing the growth. Plus franchise owners are more motivated."
The infusion of capital that comes with franchising serves the franchisee in the long run, Campbell notes. "We realized we wouldn't have a lot of money left over after developing the regulatory documents-back then the standard cost to get started was about $100,000-but we decided it was worth it to go with a franchise attorney who specialized in franchising. We did what we could to make it work, begging and borrowing time and money where we could. You just have to pay to do it right."
No doubt, franchisors can't do it for free. Some estimates place the cost of franchising a business concept at about $150,000. The mandated Uniform Franchise Offering Circular runs about 500 pages, not to mention the cost to draft of intricate franchise contracts. Campbell concludes, "Even though we've had no problems with pending or past litigation, legal fees are still an ongoing expense, just for document renewals. Yes, it's expensive, but the cost actually creates a barrier. It keeps out the franchisor who thinks this is a good method of getting rich quick-and that's a good thing."
Research by Kabir C. Sen, assistant professor of marketing at Lamar University in Beaumont, Texas, suggests that it's not any single attribute, but rather the bundled package of franchisee capital, management talent and onsite operational oversight that draws companies to franchising. But, after they've grown with other people's money and talent will franchisors suck up franchised stores and run? Some earlier studies did hypothesize that mature franchise systems, flush with capital, managerial talent and a trained labor pool, would gradually convert to company-owned. Recent research, however, indicates a more likely mix of franchised and company-owned units, achieved as franchisors convert some stores, sell some stores and start up some company-owned units.
Nobody does it better
Some business experts say franchising is not an industry, but a marketing and capital gathering system. As a business method, franchising provides available funds, managerial talent, trained manpower and a source of local market intelligence. In some situations, franchising is used as a strategic devise to both boost output and preempt competitive entry. Moreover, the franchising system-with its intricate operating standards-gives the franchise company considerable control over franchise owners, who, unlike employed managers, are personally committed to the success of the enterprise.
Jim Palmer, director of franchising at Bike Line, explains why companies that want to grow rapidly turn to franchising. "We grew from one store to about 15 company-owned stores in ten years. Frankly, there are only so many times you can go back to the bank to borrow money. Finding capital and finding qualified managers and staff can be difficult. Franchising puts the owner/operator in the driver's seat and also allows Bike Line to grow with Other People's Money. Also, there's nothing like having the owner on the scene, six or seven days a week. Nobody cares like the owner cares. At times, I've gone to visit owners, expecting to take them to dinner at 7:00 p.m., but at 9:00 we were still in the store. When everything is at stake-even life savings-customer service becomes very important and owners don't see things in black and white. That's what you get with a franchise owner/operator."
Ron Rezetko, president and CEO of Batteries Plus, agrees. "Whether it's corporate or franchised, the system is the same, the process is the same. What's different is the person managing the store. Franchise owners tend to be more educated, more mature, more enriched in business and life experience. And, by the time somebody is ready to buy a franchise, they've already experienced considerable success at something else."

® copyright 1999 Nancy Rathbun Scott
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