Franchisors alter recruiting, target high-income, low-risk franchisees

Franchisors alter recruiting, target high-income, low-risk franchisees

ORLANDO FLA —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

But at the 48th annual International Franchise Association [3] Convention held earlier this month at the Marriott World Center here, many of the restaurant franchisors among the nearly 3,000 conventioneers attending the four-day show said the days of recruiting career-switchers, the downsized, affluent retirees, college grads and mom-and-pop teams to franchising opportunities are largely over. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Instead—whether respondents represented a 40-year-old brand like Columbus, Ohio-based Donatos Pizza or First Watch, a Bradenton, Fla.-based concept offering breakfast and lunch that is starting to franchise after 25 years in business—franchisors said they are aggressively recruiting high-net-worth individuals or experienced industry operators, such as multiconcept franchisees, who need little training beyond the proprietary operating intricacies of the new franchise. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Restaurant franchisors, lenders and franchise consultants at the conference agreed that the initial investment costs and related business startup expenses—especially for real estate acquisition and renovations—have soared beyond the economic capabilities of average people interested in franchising. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Even if those costs had remained flat, franchise experts noted, the main sources of wealth historically tapped by franchise candidates to open franchises have been decimated by the subprime-mortgage fiasco, steep slides in the stock market, the extinction of pensions, and the devaluation by trillions of dollars in home equity values and 401(k) accounts. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

“Things are just far more complex than they were 40 or 50 years ago,” said Bob Bauer, vice president of restaurant development and supply chain management for 200-unit Donatos Pizza. “Once upon a time it was just affordable for someone to quit their job and pick up a restaurant franchise.” —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Stressing that he was not necessarily expressing the official franchising policy of his chain, Bauer added: “Few chains have the infrastructure these days to train franchisees, and if you look at the cost of starting up a franchise, few people have that kind of invested capital they can easily convert into cash to make a deal. But you look at a multiunit franchisee, they often already have the human resources, real estate, accounting and field infrastructure to take on a new brand.” —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Donatos requires franchise candidates to have a net worth of at least $300,000, $150,000 in liquid savings or investments, and the ability to pay a franchising fee of $25,000 per restaurant and 5 percent of weekly net sales as a licensing fee. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

While the 29,000-unit Subway [4] chain, which is 100 percent franchised, maintains at its website that its low startup costs—a $15,000 initial franchise fee and $94,000 to $256,000 in total investment costs depending on location—makes it affordable for average individuals, it nonetheless notes that 70 percent of all new stores are opened by incumbent, multiunit franchisees. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Paul Steck, president of the Saladworks [5] chain in the Philadelphia suburb of Conshohocken, Pa., and a roundtable discussion leader at the convention, said Saladworks is operated by individuals from all walks of life, many of modest wealth, and that the company intends to continue to court such candidates. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Saladworks, which has about 90 units, has several dozen new units committed to buy new franchisees in the coming years, Steck said, noting that he is proud the company has lowered its build-out costs by 20 percent to make it affordable for smaller franchisees. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

But he revealed that Salad-works just signed its first master franchise agreement to a veteran, multiconcept restaurant franchisee who was awarded the entire state of Florida. A similar area-development deal with another experienced multiunit operator is in the works for the San Diego market, he said. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Steck described both deals as virtual experiments, to be closely watched, since the company has no experience dealing with franchisees that franchise unrelated concepts. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

“Our franchisees come from all walks of life, just average folks, moms and pops,” he said. “But we do see the enticement of getting involved with multiconcept franchisees, and we think we are going to do more. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

“My fear, of course, is that when you deal with a large, multi-concept franchisee will he always put his best foot forward to focus on his new business, given all the other things he is juggling. That’s the beauty about moms and pops—they’ve got their 401(k)s, their homes, their heart and soul in being successful in this business.” —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Forty years ago, veteran franchise industry players recall, a McDonald’s [6] franchise could have been had for $2,000 and the royalty was 2 percent. Today, assuming McDonald’s would even want to sell a single-unit franchise in the United States, the total investment in the new store is $650,000 to $1.2 million, of which $45,000 is the initial investment and the royalty is 12.5 percent. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Despite the shift in franchise candidate preferences, Matthew Shay, president and chief executive of the IFA, said franchising has never been more successful in his state of the industry address. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

In reviewing the highlights of the association’s annual report, Shay reported that the 909,000 franchisors and franchisees included in the study generated $880 billion in sales and $2.3 trillion, or about 11 percent, of overall economic output in the nation’s economy, for the year ended 2005, the most recent year for which data is available. He drew applause when he noted that the franchising industry employed 11 million people in 2005, the largest number in private industry. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

In addition, the 209,900 quick-service and full-service franchised restaurant businesses represented in the report generated $202.5 billion in sales in 2005, the highest sales of the 11 franchised industries tracked, and employed 4.2 million people. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Many restaurant operators pointed to the numbers from the IFA’s annual report as evidence that the industry has learned to wean itself off of small operators. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Hosting a roundtable discussion on the business challenges new franchisors confront—one of nearly 100 roundtable examinations of various business issues in franchising—Leo Tudela, chief executive and managing director of the 75-unit Daily Grind Unwind, a coffeehouse concept based in Winchester, Va., told a table of peers that even entrepreneurs should be viewed cautiously. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

“Entrepreneurs are renowned for being creative and go-getters,” he said. “They don’t make the best candidates for taking orders.” —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

But not all of franchisors at the IFA convention were looking for big-money operators. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Attending his first IFA convention to learn from the big boys and to network, Keith Dudek, president and chief executive of Silver Mine Subs, a 26-unit fresh-made sandwich concept based in Fort Collins, Colo., said his four-year-old chain began franchising two years ago, primarily to small operators. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

He said bus drivers, retirees, working-class individuals who want to work for themselves, pizza franchisees and members of minority groups are his preferred candidates. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

But Robert Stidham, president of Franchise Dynamics, a Chicago-based consulting company that functions as an outsourced franchising department for chains, said the short-term economic forecasts do not bode well for franchisors like Silver Mine Subs. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

Stidham said cost pressures on new franchisees make it too risky for franchisors to sign up neophytes to the business. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

“You just don’t see middle- and senior-management types leaving jobs with the kinds of pensions and severance packages that their peers even 10 years ago might have tapped to open a franchise,” he said. “So newcomers don’t have that kind of capital to even open a single outlet. So established franchisors are looking at multiconcept franchisees, tempting them with the opportunities of brand extension, knowing that they will get a higher-quality individual at much lower risk. —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.

“Plus, the economies of scale tells us that it takes just as much service to support one guy who can do 10 units as it does to support 10 guys with one store each.” —For decades restaurant franchisors have offered an open door and a hearty handshake to small-business people with the desire, intelligence, work ethic and money to become franchisees.