BOTH PEOPLE AND BRANDS CAN BENEFIT FROM A GROWING FRANCHISE OPERATION
By Julie Bennett
Operating one franchise can provide a good living; operating several can make you rich. According to Franchise Times magazine of Minneapolis, Minn., the country’s 10 largest franchised restaurant groups all have annual revenues above $400 million. Franchisees of nonfood concepts, from car repair to day-care centers, can become millionaires when they open multiple units.
There is no simple formula for multi-unit success, but industry experts say that you need three things – people skills, business skills and access to capital-before you get started. Darrell Johnson, chief executive officer of FRANdata, a research and consulting company in Arlington, Va., says, “Unlike operating a single unit, where you can check on things every day, a multi-unit operation requires you to rely on others. Look at yourself in the mirror. Do you have the ability to hire people you can trust, then delegate to them positions of accountability and responsibility?”
Franchisee Lloyd Sugarman, of Providence, R.I., ran the first two of his 17 Johnny Rockets restaurant franchises himself when he opened them in 2000. But when he started to open more, “I had to trust someone else to run my five Rhode Island stores,” Mr. Sugarman says. “I try to promote from within and communicate from the beginning that I want to hire people capable of doing more than one job, so I had a strong general manager I could put into that position.”
“If you are intending to grow quickly, you need basic business skills,” says Mr. Johnson. “You don’t need an MBA, but you do need to know how to set up an operations system, how to hire and fire personnel, keep track of inventory and manage all the financials. If you’ve never run a business, get involved with someone who has and learn the range of things you have to do.”
Eliud and Steven Garcia had their business skills in place before they opened their first Gold’s Gym in Laredo, Texas in 2006, because, Steven says, “Our sisters Teresa and Cynthia also work with us and we all have business degrees from Texas A&M University along with management experience in different types of companies.” The siblings now operate six Gold’s Gyms in southern Texas and plan to open more.
“WITHIN SIX MONTHS, WE KNEW WE WANTED TO MOVE FORWARD.”
Their father, a retired banker, provided their access to capital. “Our dad knew how to prepare loan packages,” says Eliud, “and had collateral.” The siblings obtained a traditional loan from a regional bank and began building Gold’s Gyms, which cost between $1 million and $3 million, depending on size and location.
If you hope to build a multi-unit restaurant empire, you should have access to about $7.5 million, says John Gordon, principal of Pacific Management Consulting Group in San Diego. The cost of a typical restaurant buildout, Mr. Gordon says, is between $500,000 to $1 million, and if you want to build five quickly, you need about $5 million, plus another $2.5 million in working capital. You won’t spend all that money at once, he says, but you should have investors and/or lines of credit ready when you need it.
SAVINGS AND LOANS
Ben and Melanie Eidson used their savings and a Small Business Administration guaranteed loan when they purchased existing Shane’s Rib Shack restaurant franchises in Newnan and Peachtree City, Ga. in 2008. “The more money you can put in, the more likely you are to be approved fora loan,” says Mr. Eidson. “Within six months, we knew we wanted to move forward with more locations, the ultimate goal being 100 restaurants,” he says, “but we waited until 2012 to open our third. By then, the economy was improving and we felt we had the team necessary to expand successfully. Corporate never pushed us to expand and lets us sign new franchise agreements each time we are ready to open a store.”
Tim Hicks, the senior vice president of franchising and international for Gold’s Gym in Irving, Texas, says Gold’s, too, will allow you to build one gym at a time in less populated areas. “But if you hope to build gyms in a city, let’s say Boston, we’ll map it out, decide the minimum number of units we want there and ask you to sign a development agreement to build that number within a certain number of years. We typically ask you to pay us $10,000 for each location we’re holding for you, then pay the rest of the franchise fee whenever you sign a franchise agreement to open another unit.”
Other franchisers may ask you to pay all franchise fees upfront when you sign a development contract, Mr. Gordon says, and then give you a discount on royalties as you build new units.
Finally, Mr. Gordon says, if you want to be a multi-unit millionaire, avoid the largest franchise companies “and find hungrier franchisers that want to grow quickly and will negotiate with you, by offering lower fees or discounts on multiple units.”
Julie Bennett is a freelance writer specializing in franchising.
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