Ten years ago, Sandy and Rod Rockwell took a cold look at their future. Sandy was a homemaker and young mother in Fremont, Nebraska, and her husband, Rod, was working at a nearby meat packing plant that had just announced big pay cuts for all employees. They were worried that there wouldnt be enough money to make ends meet once Rods salary was reduced.
The couple had two friends who had just bought a cleaning franchise called Steamatic, which gave them license to perform everything from household cleaning to clearing away fire or water damage from commercial buildings. They came and cleaned our sofa and did a great job, Sandy recalls. It got the couple thinking. Soon they decided to buy a Steamatic franchise and move to Columbia, South Carolina, where a territory was open. Today the pair run a successful family business with seven employees, annual revenues of about $300,000, and a first-rate reputation for quality. Earlier this year, for example, when a fire struck the South Carolina governors mansion, their Steamatic franchise was called in to clean things up.
The Rockwells are just one of tens of thousands of families who have found that the best outlet for their entrepreneurial instincts is the ownership of a franchise. By purchasing a franchise, these families can hook up with a business that is a proven winner.
Franchising is growing steadily in the United States. Some 7 million workers are now employed by more than 200,000 franchises, a large percentage of which are family businesses. The rise in numbers has been accompanied by a rise in power in Washington; in February the American Franchisee Association, the first group of its kind, was created to lobby Congress on the behalf of franchisees.
For a family, starting and operating a franchise can be attractive. The family is buying name recognition and a formula for success. But in addition to the usual headaches of a family businessthe encroachment of work life on home life, family rivalries, succession issuesfamily franchisees must also grapple with a unique challenge: They lack full control over their company. Although franchisees have considerable freedom, they do pay substantial fees to the franchisor and do have to operate according to a general method the franchisor sets out. Whats more, the overall growth of the parent company, and the actions of fellow franchisees, bear on how well the family will succeed.
There are compelling reasons for a family to want to run a franchise. One of the biggest advantages is that franchises are particularly well suited to family participation. Its an excellent combination, says Gerald Marks, an attorney in RedBank, New Jersey, who published his own book, A Buyers Guide to Franchising: What You Need to Know About Buying a Franchise. In order to be successful, a franchise requires a lot of hard work and dedication. If you have a family that can be involved you have a much greater chance for success.
Companies that sell franchises recognize this edge, and look favorably upon families that want to join the corporate gang. Herren C. Hickingbotham, president of TCBY, the nations largest chain of frozen yogurt shops, says he has found that, Families who care enough to be in business have a commitment to being successful.
Sandy Rockwell, the Steamatic franchisee, puts it another way. You would have to pay someone an exorbitant amount of money to get the level of commitment to the business that you get from a family member.
But hard work is a given in any family business. The real issues of importance for family franchisees concern the control they do and dont have over their fatethe time and expense required to start and run a franchise, the degree of help they receive from the parent company and the royalties or fees they must pay in return, and the flexibility they have in running their own show. How families handle these added constraints are illustrated in the stories below of three family franchisees and their parent companies (which all happen to be family businesses, too).
The process starts with an inquiry from a potential franchisee. If a suitable geographic area is available, information and an application is sent by the company. When it is returned a review is made of the applicant that includes a financial check. If the potential franchisee is qualified, he or she is invited, at his or her expense, to the companys headquarters in Little Rock, Arkansas, for a half-day meeting to discuss the business.
If an agreement is reached, the applicant pays a $20,000 franchise fee and begins looking for a site for the business. The franchisee also undergoes a 10-day training program at Yogurt University in Little Rock, paying for airfare and hotel expenses.
The franchisee is expected to pay any other costs associated with setting up the new business, such as building a building or leasing equipment. When the store is ready to open, usually three to six months after the initial inquiry, the total investment has typically reached $90,000 to $135,000. The franchisee then pays a royalty each year of 4 percent of revenues to the parent company, plus another 3 percent which goes into a corporate pool for national and local advertising. The franchisees annual revenues will average $200,000, but many outlets reach as much as $300,000.
Parent company president Hickingbotham began his career working with his father, the company founder, in the first store in Little Rock. He is bullish about the role of family in his corporation: We have made it a point since the very beginning to emphasize family. In addition to the half-dozen members of the Hickingbotham family that work for the parent company, he says the companys literature frequently refers to the corporate and franchise family that makes TCBY successful.
But that family has not been without its quarrels. Three years ago an uprising took place which was featured prominently in newspapers. A group of dissatisfied franchisees claimed the company was not doing enough to help them make money. They complained about the price the company charged for its yogurt mix, the level of advertising support they received, and other things. The group took its case to court, but later settled, after questions arose in depositions about some of the groups claims, according to Hickingbotham. Although the claims were made by only a small number of TCBYs franchisees, the uproar and publicity hurt TCBYs reputation and sales. It also served as a wake-up call to franchisees: They must be vigilant in looking out for their best interests.
That is exactly what John Lawrence did. Lawrence and his family own seven TCBY stores in Memphis, Tennessee, together with another family, the Joplins. Three years ago Lawrence saw his sales start to drop 15 to 20 percent. After paying royalties, he barely broke even.
Instead of folding up and saying we couldnt afford to advertise or upgrade our stores, we did everything we could to make our stores more profitable, Lawrence says. Using the freedom franchisees have to choose their location, Lawrence moved two of his stores. There was nothing wrong with where they were, but we thought we could do better, he says.
He was right. One of the stores, which was grossing about $225,000 before the move, is now earning $300,000. A similar gain was seen at the other store, which was simply moved across the street so a drive-up window could be accommodated. Lawrence says the parent company was supportive of the moves. They realize we know our market better than they do, he notes.
Hickingbotham says that within the obvious constraints of a franchise, he likes such entrepreneurship. Even though individual families are part of a franchise, they are independent business people and we encourage them to be entrepreneurial.
Once a deal for a franchise is signed, the franchisee is free to set up a corporation which he or she or the family wholly owns. Shares in the company are created and distributed at the owners discretion. John Lawrence and his partner, John Joplin, formed a corporation called J&L Yogurt Inc. Each man holds slightly less than half the shares, and the corporation holds the remainder. If either partner should die, the corporate shares revert to the survivor, giving him operational control but leaving the deceaseds family with minority ownership. Each partner can distribute his own stock within his family in any way. And like most franchisees, the two partners are free to pass on their business without approval from Little Rock. In general, franchisors are quite flexible about who owns a franchises stock, and who takes it over, as long as the parent company is kept informed.
Universal Art operates its franchises a bit differently than most. The company calls churches across the country, with an offer to assemble a photographic directory of the membership and provide a free copy of the directory to each member family of the congregation. When a church agrees, Universal Art calls one of its franchisees to travel to the congregation to take the photos. Once the photos are taken, the franchisee attempts to sell additional prints of portraits to each family that was photographed. Neither the families nor the church are obliged to purchase anything.
The work is particularly well suited to couples because a great deal of traveling is required. Norman Perreault, who operates a Universal Art franchise in Lynden, Washington, with his wife, Diana, says they are on the road 12 to 16 days a month. By working together they can avoid long separations. He adds, however, Its not a good business for a couple with small children. Each franchisee covers a territory of up to 300 miles from their home.
Using sophisticated video imaging technology, Norm and Diana take several portraits and are able to let each family choose the portrait they want in the directory right after the photo session is finished. If they like the portrait, families are given the chance to buy additional prints for their personal use. Typically, 25 percent of the people buy nothing, 50 percent buy an order of about $50 or $60, and the other 25 percent spend over $100, says Norman. Thats exactly the formula that the company told us to expect.
After only two years, the Perreaults are grossing just over $200,000, which Norman says is enough for he and his wife to live comfortably and pay their overhead, which includes travel and the salary of a photographer who travels with them (theyve chosen to handle the on-site sales but not the photography).
The franchisees duties are fairly simple; the parent company does all the marketing and guarantees each franchisee at least 4,000 portrait sittings a year, and usually delivers more. The franchisee is simply told which church to go to and when, with the number of members in the congregation determining whether the undertaking will takes just one day or as many as three.
There are two catches. First, the franchisee pays a fee up front for each sitting; typically, this amounts to roughly one-third of the sales made at the site. Second, the franchisee is at the beck and call of Universal Art. Norm Perreault admits, There are times Id rather be somewhere else. But he adds that the company is flexible about giving him and Diana time off when they need it, as long as they give Universal Art enough advanced warning. A franchisee is obligated in its agreement with the parent company to fulfill all the sessions that Universal Art sets up.
Scott Mooring III, Steamatics chairman and chief executive, estimates that two-thirds of his franchisees are family owned. Our business lends itself very well to being passed on to future generations, says Mooring, whose father was a co-founder of the company. The biggest asset we have is the continuity of the family.
Mooring draws a clever analogy between the relationship shared by franchisor and franchisee and that shared by parent and child. When a franchise starts out the owners are like kids who know nothing, he says. Then when theyve been doing it a little while theyre like adolescents who know more than you. Then as they become like adults you work together to make them grow.
Sandy Rockwell has seen this maturation take place, too, but from a different perspective. A few years ago, she says, she and her husband felt they were not getting the support they needed from Steamatic. I dont think we were a high priority and they seemed to be losing track of us, she says. The result was that when she called with a question, she didnt always get a good answer.
We started raising our voice and stamping our feet and said that they had to pay attention because we wanted to make this business successful, she recalls. Her efforts worked, and today she says Steamatic keeps up its end of the bargain.
One big part of that bargain is that Steamatic shows franchisees how to work with insurance companies to get big cleanup jobs. Sometimes these jobs appear to be too big for an individual franchisee, as was the case with the governors mansion in South Carolina earlier this year. When this kind of opportunity comes along, the parent company will send people from headquarters in Fort Worth to help, so a franchisee can guarantee completion of the job. Its the kind of cooperation that marks a successful relationship between franchisor and franchisee, and provides growth for both parties.
The Rockwells have more responsibility than many franchise owners. They handle all their own marketing and hire and train employees to do their cleaning. Sandy does the personnel work and some marketing, while Rod focuses on developing contacts in the insurance business.
Steamatic demonstrates a good quality in a franchisor: slow and steady growth. Were not out for numbers, were out for quality, says Mooring. The right match between franchisee and franchisor is the critical issue, he says. We have a terrific moral and ethical obligation. Its not just a matter of taking peoples money.
Not all franchisors live by that code. Some do indeed care more about how fast they grow than how well individual franchisees fare once they open up shop. Some have been accused of collecting franchise fees and moving on, leaving franchisees to fend for themselves.
That is one reason for creation of the American Franchisee Association. There also has been a recent spate of state and federal legislation designed to give franchisees more power in their relationships with franchisors. The association has endorsed three bills introduced in July that would make franchisors more accountable. They are the Federal Franchise Disclosure and Consumer Protection Act (H.R. 2596), the Federal Fair Franchise Practices Act (H.R. 2595), and the Federal Franchise Data and Public Information Act (H.R. 2593). The North American Securities Administrators Association is also studying whether franchisors should be required to report more details on their earnings; as it stands now, many of them do not even have to report gross sales. The Federal Trade Commission, too, is expected to endorse newly proposed state laws which would require franchisors to give more details about expected earnings to prospective franchisees.
Attorney and author Gerald Marks encourages these trends, but also says potential franchisees had better take it upon themselves to ask lots of questions to ensure they are doing the right thing (see Before you buy a franchise, page 32). He notes that franchisors are required to provide a prospective franchisee with a Uniform Franchise Offering Circular, which lists all current and former franchisees in that persons area. It can be a valuable resource.
A well-run franchisor will not shy away from questions. As Scott Mooring of Steamatic says, We want the questions. The better prepared a potential franchisee is, the better off well all be.
Stephen J. Simurda is a freelance writer in Northampton, MA.
BEFORE YOU BUY A FRANCHISE
|Ask the franchisor:||Ask current franchisees:|
About Buying a Franchise, by Gerald Marks.