How to fast-track your franchise

Long Island Business News, Jun 23, 2009 by Claude Solnik

Bob Titus - who with his father co-founded Minuteman Press in 1975 in Plainview - has since built an army of more than 900 franchised stores and 27 support offices. But Titus said the challenge of growing a successful franchise can be as daunting as those when starting up.

"You've got to communicate with them on a regular basis," he said of the need to help hundreds of franchisees run smoothly. "It's pushing and guiding franchisees in the right direction."

While startups may struggle to recruit their first operators, big franchises are growing rapidly despite the economy. And they're facing expansion-related challenges.

Canton, Mass.-based Dunkin' Brands, which operates Dunkin' Donuts and Baskin-Robbins, a few weeks ago opened its 15,000 unit, up from about 14,850 at the end of 2008.

And franchises in new and growing sectors - such as high-end burger restaurants - are finding they need to be creative in finding investors when large loans from banks are tough to get.

A concept brand called Smashburger, focusing on providing a "better burger," attracted $15 million in private equity from Consumer Capital Partners.

"Our growth strategy is focused on opening close to 40 restaurants this year," said Smashburger Chairman Dave Prokupek.

Franchise paradise

Long Island, with its large population, has a history involving large franchises as well as startups. Avis, now based in New Jersey, operated here for many years. Syosset-based hair salon franchise Lemon Tree, Melville-based restaurant Sbarro, Farmingdale-based Minuteman Press and Westbury-based Nathan's remain here. And Syosset- based GarageTek has grown to 75 franchises nationwide since opening in 2000.

"GarageTek was something unique," said Harold Kestenbaum, a franchise expert who is of counsel at Ruskin Moscou Faltischek in Uniondale. "Nobody was doing garage reorganizations until that came along. It caught on."

While a unique concept can be a ticket to rapid growth, Kestenbaum said the ability to serve a huge need in a fragmented market can help. Lemon Tree grew to more than 80 stores in the tri- state area, letting entrepreneurs take a cut of the barbering business.

"Everybody has to get their hair cut," Kestenbaum said. "It's an inexpensive cost of entry. It's not like a restaurant or anything with inventory; there's no inventory here."

The right people

While a startup franchisor may think a strong system and low barrier to entry are secrets to success, experts said big franchises can't rely only on process. "You've got to have good people around you that believe in the same things you believe in," Titus said. "Not just a good system. It takes hard work."

While start-up franchisors may worry about simply signing on franchisee, big franchisors need to stay in touch with franchisees, a challenge as the system expands. The worst thing isn't dissatisfied franchisees, but franchisors unaware that they're not happy, Kestenbaum said.

"If the franchisees are unhappy and you don't know they're unhappy, you've got a problem," he said. "They're paying royalties. They want something in return."

Big franchisors need to be careful they don't simply sign on franchisees for the sake of growing. Paul Facella, a franchise consultant, said franchisors need to sign on people they believe will do well - and not simply to obtain fees.

"It's obvious that the stronger the franchise brand, the stronger the franchisee," Facella said. "But the stronger the franchisee, the stronger the franchisor. A franchise organization is a partnership."

Gary Occhiogrosso, vice president of Manhattan-based Tru Foods, which operates various brands including Arthur Treacher's, Wall St. Deli and Ritters Custard, said bad franchisees cause problems for big firms.

"It's tempting to take checks from people you know aren't qualified," Occhiogrosso said. "But that will come back to haunt you."

He said, despite lots of interest in big franchises, franchisors need to help find financing due to the weak economy. Although lending overall is down, "the cost of money is cheaper," he said of the upside to a down economy.

Franchisors also need to review contracts, try to pass on savings and encourage franchisees to seek rent reductions, Ochiogrosso said.

"The same way restaurants are hurting, so are landlords," he added. "It's an opportunity to go back and renegotiate."

Kestenbaum said "landlords would rather reduce rent than see a dark space." And Steven Beagelman, a franchise consultant, said landlords have been lowering rents.

Others such as Howard Tatz, a partner at East Meadow- based CPA firm Raiche Ende Malter, said tough times are an opportunity to do an "operational financial review" and cut waste.

"They think if their sales are doing well, they're doing well," Tatz said of successful franchisors. "It's not always the case."

He said franchisors can help franchisees reduce rent, insurance and contracts. But he said reducing franchise fees creates a dangerous precedent.

"It's time to provide a little more service," said Tatz of franchisees in trouble. "Maybe hunker down and improve your system."