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5 keys to successful franchise ownership.

While there's no such thing as the ideal franchisee, here's what franchise companies look for to make their operations thrive.

The backbone of a strong franchise company is its network of owner/operators. A cohesive, focused and well-trained network of franchise owners can become a potent sales and distribution force for a successful franchise company. On the other hand, franchisees who inconsistently manage and market their products and services, or who don't share the goals of the franchise company and their fellow franchise owners, are destined for failure. Poorly selected franchisees put both the profitability of the franchise company and the operations of other franchisees at risk. For these reasons, successful franchise companies are meticulous about who they sell franchises to, carefully screening candidates. It is literally a life-or-death decision for their companies.

There is no such thing as the perfect potential franchisee, since different types of franchises require owners of diverse skills, backgrounds and financial status. However, if you are interested in owning a franchise, there are five basic characteristics deemed by BLACK ENTERPRISE to be key to successfully doing so. To see if you have what key takes to own a franchise, ask yourself the following questions:

1 Am I financially prepared to pursue franchise ownership? In addition to the initial franchisee fee and capital expenditures needed to get the franchise off the ground and running, franchisees must pay regular royalty and marketing fees to franchisors. Start-up costs alone for the 1992 BE FRANCHISE 50, which lists franchise companies by the most black-owned units in their systems, range from $2,495 (D&K Enterprises Inc., personalized children's books, Dallas) to as much as $1.4 million (Shoney's Inc., restaurant chain, Nashville). Many franchise companies also have minimum net worth requirements for potential franchisees. "Franchisers are looking for people who are bankable," says Aaron Shingler, president of Shingler-Hollis Investment Group Inc., a Washington, D.C.-based consulting firm that advises potential franchise buyers.

Franchise companies want people who can raise capital privately or qualify for financing, says Shingler. "Generally, most franchises are in two areas--service and retail, which are not easy to get financing for," he asserts. "In retailing, bankers sense the failure rate may be high. In service, the real asset is the person operating or managing the business."

Shingler says some potential franchisees often either don't have enough collateral or don't have the type of collateral, such as real estate or securities, that will make a banker feel secure. And contrary to popular perception, most franchisors don't provide direct financing or stand behind the loans of their franchisees, Shingler says. Bluntly put, if a would-be franchise owner can't get financing, a franchisor will consider him or her a waste of time.

Solid financing is necessary because franchise start-up costs can be prohibitive. For example, to buy a franchise from Donut Inn Inc.--a 17-year-old, Woodland Hills, Calif.-based company that sells donuts, bagels, other baked goods and coffee--start-up costs can be as high as $150,000, depending on the location, according to Stephen Blum, the company's vice president for marketing and sales. Prospective owners must supply at least one-third of the total start-up cost from their own resources--typically $40,000 to $50,000 upfront--and be able to borrow the balance. Initial expenditures include $80,000 for equipment and fixtures and $20,000 to $40,000 for construction, with the balance going for franchise fees and inventory, Blum says. Donut Inn has more than 100 outlets in California and plans to expand to the Middle East and Mexico.

Charles A. Edwards, 41, used $70,000 in personal savings and secured a $145,000 bank loan to purchase an existing Donut Inn unit in Burbank, Calif., in 1990. A former area business manager for General Electric Co.'s Plastic Business Group, Edwards says he wishes he had more funds in reserve. "Though the risk and capital requirements were lower," he says, "I ran into some things like equipment problems."

However, Edwards was lucky because his store produced a steady stream of income right away with no negative cash flow period. "I tell others to try to understand the working capital requirements of the business they are looking into," he says. "Be as conservative as you can be and give yourself an extra little kitty, especially if you are not experienced in that business."

In addition to the usual overhead costs, Edwards says he pays weekly fees to the franchisor, including a 5.5% business development fee and a 3% marketing fee, both of which come from gross sales.

2 Have I done my homework? Potential franchise owners must take pains to consider the type of franchise they'd like to own, based on what they can afford, and their personality, experience and enthusiasm for a given business area. Take time to examine the disclosure documents supplied by the franchisor (and required by law). Talk to former and current franchise owners. Be certain to discuss your findings with a franchise lawyer.

Twins Rodney and Roger Wagner, 28, know the value of research when it comes to seeking franchise ownership opportunities. The brothers relied on their experience as former basketball players at Centenary College of Lousiana as a guide to open their first I Can't Believe It's Yogurt franchise in Dunkinville, Texas, in August 1988. "When you are in school, you have to do homework to pass a test. And like basketball, you have to prepare for the game," says Rodney Wagner. "You've got to have a game plan when you want to do something. You have to have good people to go to for advice."

Their older brother, Gary, a manager of an I Can't Believe It's Yogurt outlet, was the perfect person to help them get started. "He introduced us to the system," says Roger. "We did a substantial amount of research. I looked at every yogurt company you could dream of. We called franchise owners and inquired about the business. I went into the stores without pay to learn the system and to make sure this is what we wanted to do."

Their brother not only had good advice, he had the necessary facts, the twins recall. "He had every piece of information we needed, including budget proposals," says Rodney. They also got demographic information--such as the number of people in the area and their average income--from the landlord at the location they were interested in.

By the time they were ready to talk to bankers, they were confident, say the twins, who used a combined inheritance of $25,000 and a small business loan of $85,000 to purchase the franchise. "We never thought we would not get the money," Roger explains. "We knew we had everything that we needed. We knew how to sell ourselves."

Their hard work paid off. Today, in addition to their Dunkinville location, they have two outlets in Lovefield Airport and another shop in downtown Dallas. They pay franchise fees of 6% on their Dunkinville store and 7% on the other stores.

The upfront information gathering as exemplified by the Wagners is an important key to franchise success, says Susan P. Kezios, president and founder of Chicago-based Women In Franchising Inc., a trade group that trains minorities and women interested in franchising.

Although franchise companies are regulated by federal and state laws and must provide a Uniform Franchise Offering Circular, which reveals financial and other details about a franchise company, Kezios says, potential franchisees should proceed as if they are buying a franchise from scratch. "Not all the information is contained in the circular and contract," she says. "You have to visit and talk with current and former franchisees."

In addition, Kezios says potential franchisees should complete a comparative analysis of three companies in the area of interest. For example, if you are interested in a fast food franchise, Kezios says, "You might review documents from McDonald's, Burger King and Hardies. You want to compare capital investment, litigation history, training and support services. Do they all give territorial protection? What is the return on investment?"

Kezios says most franchisors will not provide historical operating information. "Some franchises have as much as a 30% failure rate and some have little as 1%," she says. With this information, Kezios explains, "You've got a frame of reference. You have to know the gross sales of franchisees, so you know what royalties are coming in. You should go in knowing the limits of what you can expect."

Most important, Kezios says potential franchisees should be prepared to spend about $1,000 on an experienced franchise attorney. "Remember," she cautions, "documents are written for franchisors."

3 Am I committed to salesmanship? The ideal franchise owner is comfortable dealing with customers. You must be enthusiastic and capable of communicating that enthusiasm to your customers. Ultimately, you, not the franchise company, will be responsible for the success of your franchise outlet.

With a background in marketing for General Electric, Charles Edwards proved he had what it takes to sell his business to new customers. He spent nearly 10 months investigating Donut Inn before deciding to take the plunge. Since the purchase, he has nearly doubled his revenues at his Burbank Donut Inn from $21,000 to $40,000 a month. Under the old owner, the 25-year-old store, located in a shopping center strip mall near studios for MCA Universal Studios, NBC and Warner Brothers Inc., had an established clientele, but sales were no longer growing. Edwards decided the shop had greater potential. "The previous owner wasn't exploring the commercial aspect of the business," Edwards asserts. "I said to myself, I can do $250,000 in sales (annually). How do I get it to be $500,000 in sales? I could only do so much with the physical space. I had to get them to buy the product somewhere else."

He started with a list of places that might want the product. He targeted convenience stores, the nearby movie and television studios, a zoo, amusement parks-all places, Edwards says, with large numbers of people who might have a taste for a morning donut. "One store owner bought, then the thing mushroomed," he says.

Today, Edwards donuts are sold daily to an airline that distributes them in its terminal waiting area along with complementary cups of coffee. The studios purchase $3,000 to $4,000 worth of donuts a month. "We are set up to handle the volume," Edwards says.

Edwards was personally involved in landing these accounts. He has opened Donut Inn Showcases in local 7-Elevens and employee cafeterias. Recently, Edwards purchased a second already existing unit in Pasadena, Calif., financed out of the cash flow from his first shop.

As a promotional tool, Edwards' store has photos of well-known actors--from such shows as Beverly Hills 90210 and Melrose Place and movies including Falling Down--eating his donuts. But to Edwards, all of his customers are stars. Sprinkled in among the rich and famous are photos of his regular donut-eating customers. "That's my contribution to the business," he says.

Edwards is an exemplary franchisee, says Donut Inn Vice President Blum. "He committed to growing the business through sales," says Blum.

4 Am I committed to good management? Franchisees must be good rule followers. Their strength is in implementation, not innovation.

Franchises, unlike many start-up operations, don't thrive on creative fly-by-the-seat-of-the-pants entrepreneurs, says franchise consultant Aaron Shingler. "They are looking for the type of person who can work successfully within a structured or regimented environment and who can take instruction," he says. "They don't want someone who wants to redesign their system, they want people who want to become part of a system and follow procedures and policies that have been successful."

On the other hand, Shingler says franchisees must be certain that they are able to work with the management of the franchise company. A franchise contract can run from 5 to 20 years. "In the beginning, you will rely heavily on the franchise company," he explains. "When you have more experience, you will ask: Why am I paying them this sum of money? Some franchisees think they are overpaying. They forgot the whole system was not their idea, but an idea developed by the franchisors."

Successful franchise companies appreciate and reward strong management. For example, Fred M. Addington, director of development for I Can't Believe It's Yogurt, was willing to promote the Wagner brothers because of their shrewd business practices. "They watch their dollars, they minimize risk," Addington says. "The Wagners watch their books, plan their cash flow and focus on the issues better than most people do."

Because of their business acumen, Addington suggested that, when an opportunity arose, the duo open an I Can't Believe It's Yogurt shop in Lovefield Airport. "We were dealing with a major food supplier with contracts all over the country," says Addington. "The company was looking to diversify its stable of vendors, and we thought the Wagners fit the bill perfectly. We called and offered them the deal."

5 Am I committed to working long and hard to make the franchise succeed? "Franchise owners can't be distracted by victory or defeat. They have to be driven," says C. Stephen Lynn, chairman man of the Washington, D.C.-based International Franchise Association. "They must have tremendous endurance, commitment and enthusiasm. Being an entrepreneur is hard work."

Becoming self-employed can be an all-consuming proposition, and franchising is no different, says Aaron Shingler. He says it is typical for many business owners to work 60 hours a week without a profit. "Some people can do it and some can't," he explains. "You have to be a confident person who can deal with the fact that first of all, you don't get a paycheck every two weeks. You make what is left. Sometimes a lot is left, sometimes nothing. Sometimes you might even have to pay additional money."

The Wagners say their experience in starting the franchise is a perfect example of the rigors of business ownership. "We'd get there at 8:00 in the morning and leave at 11:15 at night the first eight months. Then, we started leaving at 9 or 10. You can have automatic 12-hour days. That hasn't changed," says Rodney. "The one thing people have to realize when going into franchising is that there are no more weekends off, no more holidays."

Clearly, they'd do it all over again if they had the chance. Successful franchising can be its own reward--if you have what it takes.


The following organizations and publications can provide further information on opportunities in franchising:

* The International Franchising Association (IFA), 1350 New York Ave. NW, Suite 900, Washington, DC 20005-4709; 202-628-8000. The IFA publishes The Franchise Opportunity Guide ($15), an annual publication featuring thorough profiles of franchise companies.

* FRANDATA, 1155 Connecticut Ave., Washington, DC 20036; 202-659-8640. FRANDATA is a research and consulting group that maintains data of interest to franchise companies as well as individuals pursuing franchise opportunities. The organization maintains files of the Uniform Franchise Offering Circular (one of franchise disclosure documents mandated by law) of most franchise companies. Individuals can secure information on specific franchise companies for between $75 to $100 per company, depending on the amount of data available.

* The Sourcebook of Franchise Opportunities, 1993 edition, by Robert and Christopher Bond (Business One Irwin, Homewood, Ill., $35) is one of the most reliable and up-to-date publications on the franchising industry. To order, contact Business One Irwin, 1818 Ridge Road, Homewood, Il 60430; 800-634-3966.
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Sturgis, Ingrid
Publication:Black Enterprise
Date:May 1, 1993
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