Making the Most Out of Multiunit Franchising

Because the corporate layoffs of the 1980s, there were increasing numbers of people approaching franchising as big business. Learn how they’re succeeding.

In 1966, Florine Mark, a mother of five small kids, spent $500 — all of the money she had — for an individual Weight Watchers franchise in Detroit, Mich. Today, she owns a Weight Watchers empire that runs 3,000 classes weekly in 12 states, Mexico and Canada.

In 1974, the late Norm Slaymaker took a flyer and opened an individual Sizzler Steakhouse franchise in Anchorage, Alaska. Today, his sons manage a restaurant company with revenues of $60 million a year and also have even started their own franchise system.

In 1990, Mahendra Nath, a Minneapolis property developer and manager, found two troubled Burger King franchises and turned them around. Now he owns 133 Burger Kings, plus 12 Denny’s and several hotels.

When it first emerged as a business option in the 1950s, franchising was designed as a single-owner enterprise, with mom and pop working 100 hours weekly to keep a fast-food restaurant, convenience store or print shop running.

A lot of the country’s 500,000 roughly franchises remain run by single operators, but because the corporate layoffs of the 1980s, there were increasing numbers of people approaching franchising as big business, says Jeff Elgin, president of FranChoice, a Minneapolis franchise-referral network.

"Rather than running units themselves," says Mr. Elgin, "they purchase multiple units and hire managers to oversee them. Most franchisors encourage this, because it’s a model that works perfectly for them too."

Purchasing Multiple Units

Many of these multiunit companies, like RTM Inc. of Atlanta with 710 Arby’s Roast Beef Sandwich units, are bigger than lots of the restaurant chains they compete keenly against. Others, like PJ America, a big Papa John’s Pizza franchisee, are public companies. But most, just like the four cited above, remain in the hands of their now wealthy founders.

Florine Mark was broke in 1966, "and too fat to have a job," she says. "I’d lost the same 50 pounds nine times, and had a need to work because my hubby was ill. I’d found out about Weight Watchers, but I lived in Detroit and the only classes were in NY." Jean Nidetch, then president of the brand new weight-loss company, decided to let Ms. Mark attend a week’s worth of classes in NY also to fly back monthly for weigh-ins and support, as opposed to the mandatory once weekly, until she slimmed down.

Ms. Mark lost 40 pounds and was so impressed she sent off $500 and signed a $25,000 loan to be the first Weight Watchers franchisee in Detroit. She rented the auditorium of a nearby private school and taught the high grade herself. "The first week we’d 30 people, another week 60 and soon I was getting calls from churches, synagogues and stores around town to conduct classes at their facilities."

Ms. Mark developed an employee by hiring only other Weight Watchers graduates, then started buying up other franchise territories in the Midwest, using money she’d earned from her Detroit classes. By enough time she was prepared to buy territories in Massachusetts and Rhode Island, local banks were happy to lend her the amount of money. Today, she’s 3,500 to 4,000 employees running 3,000 classes weekly.

Eric Slaymaker of Salt Lake City says that the 36 restaurants that define the Slaymaker Group he runs along with his brother Scott, generate revenues of almost $60 million a year. The brothers were teenagers when their father, who hadn’t experienced the restaurant business before, "took a leap of faith" and made a decision to open Sizzler Steakhouses in Alaska, where his own brother was then living. They did so well that Norm Slaymaker opened more in the low 48, plus seven Chi-Chi’s, which he later sold at a profit.

At that time, Eric and Scott were addicted to franchising too, plus they now own 14 Tony Roma’s and five T.G.I. Friday’s. In 1993, the Slaymakers even started developing their own franchise system, called Wingers — An American Diner, which specializes in Buffalo wings. Units are smaller sized than other casual-dining models, and fit nicely into smaller markets like Moscow, Idaho, he says. Up to now, they’ve sold 16 franchises and operate 11 themselves, and also a trio of Italian eateries. "We’re making good money," says Mr. Slaymaker, "but we’re investing the majority of it back into the business enterprise."

Mahendra Nath of Bloomington, Minn. was an effective property developer when he was drawn to two troubled Burger King restaurants in Minneapolis. "I’d built my company by acquiring underperforming assets and improving them. I purchased the restaurants as a challenge to see easily will make them profitable," he says.

Once he’d succeeded, he bought 21 more, and by 1997 had 133 Burger Kings in six states. Like many multiunit operators, Mr. Nath then made a decision to diversify. He bought 12 Denny’s franchises and two hotels, an excellent Inn in Minneapolis and a full-service hotel in nearby Roseville, that he’s renovating into an upscale Radisson.

"This is not rocket science," Mr. Nath says. "I’ve no outside investors no pressure to expand at a particular rate. I make an effort to plow profits back rather than get greedy."

Financing Is Difficult to find

Financing for franchisees is tighter now, says Jeffrey Rosenfeld, managing partner with Kessev Finance in Minneapolis. Securitized lending — pooling franchisee loans with similar characteristics and selling them into secondary markets at better rates that drove franchisee expansion through the 1990s — is drying up, he says.

The IPO option is effectively closed to multiunit franchisees now and the reduced stock prices of several publicly traded franchise companies imply that franchisors have less overall open to help finance their franchisees’ expansions. Banks, too, are receiving pickier, Mr. Rosenfeld says, and want franchisees to have at least five units running profitably before trying to get a loan to get more.

Despite these obstacles, franchisees remain expanding and their franchisors are cheering them on. A multiunit business is better and earns additional money for the franchisee and, ultimately, the franchisor who’s paid a royalty, usually 4% to 10% of most franchisee revenues, says Mr. Elgin of FranChoice. The franchisees generally in most hair cutting, auto aftermarket and sign shops are multiunit operators, for instance, he says.

Multiconcept Operations

Many franchisees, like Mr. Nath, are multiconcept operators aswell, owning units from several noncompeting restaurant chains, or two unrelated systems, like hotels and property companies. Mrs. Fields Famous Brands, in Salt Lake City, offers a menu of cookie, pretzel and frozen yogurt concepts that franchisees can open within the same mall, and Hilton Inns of Beverly Hills, says the prospective customers because of its new lodging franchises are seasoned multiunit franchisees from other systems.

With financing difficult to find and property so expensive, Mr. Rosenfeld says that potential franchisees dreaming of creating multiunit empires today might look at less capital-intensive businesses they are able to run from your home or in rented facilities, like rug cleaning, bookkeeping, pet food delivery, or Internet services.

"Find something you can fall deeply in love with," advises Ms. Mark, who made her first purchase in 1966. "I knew in my second week of conducting Weight Watchers classes that was my life’s calling."

From StartupJournal.com Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved

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