SPECIAL REPORT FRANCHISING
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The Ritz of Doggie Day Care
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Before You Ink That Contract...
Two Men and a Lot of Trucks
Slide Show: Four Hot Franchises
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For entrepreneurs who have found success, turning their business into a franchise system can be tempting. For those eager to keep growing -- and fast -- the franchise model promises the potential of rapid, national expansion without much risk. But building a successful franchise company means more than just handing over the keys and waiting for the royalties to roll in. Challenges wait at every stage, from creating the right template and training programs at the outset, to continuing revenue growth even after reaching sales territories across the country.
Here are looks at three franchises at three very different crossroads -- Cool Daddy's, PostNet, and American Leak Detection -- to see where they've been, where they plan to go, and what they've learned along the way.
Bringing Up Cool Daddy's
Sean Dacey wasn't your average bar worker. Not long after graduating from Georgia Tech, he began working at Fat Tuesday, a chain of New Orleans-based frozen-drink bars, and climbed the ranks quickly. In 1990, when the company decided to start selling margaritas, piña coladas, and the like at concerts and festivals, it picked Dacey to head the project. An engineer by education, Dacey found he had a special knack for the logistics required to churn out 2,000 frozen concoctions an hour in 100-degree weather.
In 2000, after 10 years of managing Fat Tuesday's off-site division, Dacey left to create Cool Daddy's, a company that rents and sets up frozen-drink machines for private parties as well as bigger concerts and festivals. And now that he and his wife, Cheryl (who serves as president), are working some of Atlanta's biggest events for companies including Home Depot (HD) and Turner South, they want to expand into new territory. How? The couple decided the best way would be to franchise.
Franchising fit their needs because it would allow them to keep focused on their main territory, greater Atlanta, and let others tackle new areas. Having lived in the region for so long, the Daceys attribute much of their success -- some 50% to 60% average revenue growth each year -- to contacts they've developed over the years. And the theory is that the brand can grow in other cities at the same clip where franchisees have similar local footholds.
But starting out, they're planning for two major challenges. First, they need to figure out a way to teach franchisees the business quickly and easily. To solve that, the Daceys decided that the new franchises will focus on private parties and skip selling at the more complex concert/festival level. They plan to charge a $25,000 franchise fee, 6% royalties on revenue, and 1% advertising rate.
Being completely new to franchising, however, they also need to learn how to pick the right franchisees. Too often, entrepreneurs select franchisees who are too much like themselves, says Don Boroian, CEO of Francorp, a company in Olympia Fields, Ill., that helps develop young franchises. "A good franchisee isn't an entrepreneur," Boroian says. By nature, he says, entrepreneurs tend to follow their own rules and try to make their own solutions without the rest of the company.
While the Daceys expect to clear the final legal hurdles this month and officially launch their franchising program, they'll continue to rely on their primary business and take growth slowly, at least for now. While many franchising companies roll out dozens of outlets from the start, the couple only plan to add betwee 5 and 10 franchise operations by yearend. Says Sean: "We want to work out the kinks of the process, build a strong system, and only then, open the flood gates."
PostNet: Running with the Giants
The flood gates are already open for PostNet, a chain of mailbox, printing, and office-supply stores based in Henderson, Nev. When Steve Greenbaum and Brian Spindel started PostNet in 1983, they found success as one of the few packaging and shipping stores around. Now, the market is cluttered with big names like FedEx Kinko's (FDX) and UPS Store (UPS).
Though PostNet wanted to stay closely held and avoid taking on debt, it saw it needed to grow fast to keep pace with the bigger names and stay relevant. "Our desire to grow is not a financial desire right now," says Greenbaum, PostNet's CEO. "We need it to create and keep awareness of our brand."
While franchising aggressively wouldn't ensure the profit levels organic growth might, it has enabled PostNet to grow much faster. It began franchising in 1993 and has continued to add more stores since. It opened 93 outlets in 2004, and is on track to add 120 locations this year, bringing the nationwide total to more than 600, concentrated mostly in the West.
Greenbaum feels if PostNet, an outfit with only 30 employees at its headquarters involved in finance and organization, weren't a franchise company it would have been impossible for it to achieve such growth. Unlike Francorp's Boroian, Greenbaum believes franchisees can -- and should -- be entrepreneurial. PostNet, he says, is attractive because franchisees can feel like entrepreneurs, whereas the owner of, say, a UPS Store may feel more like the employee of a behemoth company.
"Most employees don't have a majority of their life-savings invested in their job," Greenbaum says. PostNet charges a competitive $29,500 franchise fee and a royalty rate of 4% of revenue (plus a 2% advertising contribution) -- a point below the 5% that many companies charge.
A successful franchising push is very much an exercise in branding, and going head-to-head with operations like the UPS Store, which presides over several thousand locations, spurs the need to differentiate. PostNet recently redesigned its stores to distance itself from the "linear, monotone" look of its major competitors. Departments are arranged with big multicolor signs designed to mimic the navigation of a Web site -- big categories listed in large font, with specifics explained underneath. Shoppers are greeted with upbeat music that Greenbaum says "gives the feel of trendy retail stores."
Given the tough competition, Greenbaum and Spindel have broadened PostNet's offerings to include office supplies and an Internet-enabled data center, along with the typical copying and packaging. And in January, it used its increasing clout to sign a partnership with shipping service DHL -- another fast-growing company nipping at the heels of the big boys.
How ALD Maintains Its Edge
Those who run American Leak Detection, a franchise that has been around since 1974, think it has grown enough in the U.S. -- at least geographically. Based in Palm Springs, Calif., ALD, which supplies its franchisees with proprietary technology for detecting and fixing leaks in pools and pipe systems, has a franchise in every major U.S. market. Founder and CEO Richard Rennick decided he would rather keep his existing franchisees happy -- and profitable -- than encroach on their operating territories by adding new franchises.
Supporting the existing 144 franchisees, which are responsible for specific territories, has been a key to ALD's success, says Sheila Bangs, director of franchise sales. Don Boroian of Francorp agrees. "American Leak Detection is a model company," he says. Too often franchisors run their companies like a feudal lord, he says, when a collegial approach is much more effective.
Nobody knows the strengths and weaknesses of a system like the franchisees, and it's important to use that feedback. ALD, Boroian says, "has a CEO who wants everyone to win, and he has bent over backwards to listen to his franchise owners and be responsive."
In addition to respecting each existing franchisee's territory, ALD hosts training and refresher courses for new hires throughout the year, as well as an annual intracompany convention to take suggestions from franchise owners, collaborate about the future, and just plain relax.
Even though ALD isn't adding many new U.S. franchises doesn't mean it isn't on the move. It's still expanding internationally, with close to 30 franchises in Brazil, Saudi Arabia, Australia, and other countries. Domestically, ALD is finding growth by treating its corporate headquarters as a research and development lab for the franchisees with the aim of helping them stay ahead of the competition with new technology.
Soon ALD will also roll out a retail leak detector that consumers can buy and install in a pool by themselves. Will it undercut the franchise-owners? Hardly. The model will have ALD's 800-number printed on the front. So when a leak is detected, the customer will call a ALD franchisee to come fix it.
Tomorrow: Tips on starting your own franchise.
Friday: An inside look at Two Men and a Truck, the nation's largest franchised moving company. By Burt Helm in New York