CEOs looking to franchise their concepts must make sure it’s the appropriate next step of growth.
By Julie Knudson at QSR Magazine
As the economy slowly strengthens, founders of successful eateries may be considering franchising as a growth model, but experts say CEOs must approach it with caution and do their due diligence to make sure it’s appropriate for their brand.
The first step, experts say, is to explore the viability of their brand on a bigger scale.
“A business has to have great legs [to franchise],” says David Manero, chief concept officer and co-managing member at BurgerFi International, a Florida-based fast casual. “It has to be scalable and it has to have wide appeal to the national market. It’s got to be different, it’s got to have a lifespan, and it’s got to be something that’s not currently offered in that same fashion in the marketplace.”
Scott Gittrich, president and founder of Whitewater, Wisconsin–based Toppers Pizza, says CEOs thinking about franchising should know their concept from the top down to successfully expand it.
“I can’t imagine franchising before we had opened a few stores ourselves and proven that it worked in a few different areas,” he says. “There’s so much to franchising, and it’s one of those things [where] the more you know, the more you realize you don’t know.”
Chief executives must also gather the right expertise around them to achieve franchising success, says Scott Shane, Mixon Professor of Entrepreneurial Studies at Case Western Reserve University and author of From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Business.
“Franchising is based on legal agreements, and there are specific laws that govern franchising, both federal laws and then varying state laws,” he says. “You really need legal expertise. That means that you need franchise attorneys. In my opinion, anybody who tries to put together a franchise contract themselves without legal expertise is really asking for trouble.”
Manero says the services of an experienced franchise attorney are imperative but that external resources may be helpful.
“The way a lot of people go is to bring in a franchise consulting company that comes in and sets them up with one of the top franchising attorneys, and also sets up all of their initial … documents and really consults with you on what it means to get into the franchising business,” he says.
Executives also should have a marketing department, real estate department, operations department, and sales department in house when they dive into franchising.
“There’s so much to franchising, and it’s one of those things where the more you know, the more you realize you don’t know.”
Gittrich says he tells people interested in franchising to study both the restaurant industry and the franchising industry. He says the International Franchise Association is a valuable resource for would-be franchisors, and he recommends CEOs gather as much information as possible before making a decision.
“You [should] certainly go into franchising with your eyes open and understand what’s going to be required financially and systems-wise,” Gittrich says.
Franchise policies should be developed early in the life of a franchise, Shane says. “You don’t want to think about franchising unless you have … thought through what policies you would put in place, and how your business would be run under franchising before you do it,” he says.
Because franchise agreements are difficult to change mid-stream, Shane says, potential franchisors should carefully evaluate how they want franchised stores to operate and what facets of the relationship they want to retain control over. He says executives should identify the core strengths of their brand and keep tight reins on it.
“That key intellectual property, you want to make sure that you control it,” Shane says.
Many warn that the amount of control a franchisor gives to franchisees is a careful balance. When Gittrich’s franchisees were given the option to choose from six pizza ovens, most just turned to the leadership team to find out which one they should pick. He says this shows that most franchisees expect the franchisor to point them in the right direction.
“They don’t want to have to go and figure out every operational procedure,” he says. However, Gittrich says franchisee input can be a valuable tool in making good decisions. He says CEOs should be sure to partner with franchisees whose opinions they trust, and then reinforce that trust by hearing them out.
“We work together with our franchise advisory council to look at issues that affect all of us and to make decisions together,” Gittrich says. “Of course, we have the final decision … but we invite franchisees in to understand all the issues and to hear their feedback before we make those decisions.”
Manero says the initial documents executives file for their franchises are a good opportunity to establish what amount of control they have over franchisees. “Your franchise disclosure documents should be all-encompassing, that you have full creative and proprietary control over every single item of food, every single marketing piece, every piece of the interior design, everything about that franchise that you’re selling,” he says.
Above all CEOs should “want to be in the franchise business,” Manero says, because it’s different from being in the restaurant business.
“You’re not selling food anymore,” Manero says. “Now you’re selling businesses to people who want to get into business.”
