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Franchising your success
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September 1, 1999: 8:02 p.m. ET
Duplicating your success through others can be a tricky, complicated undertaking
By Jane Applegate
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NEW YORK - When Sheila McCann traded in her pinstriped suit for a baker's apron, the former public defender didn't know much about baking the low-fat, American-style bread that launched House of Bread in San Luis Obispo, Calif.
"I asked myself, 'What need in the community could I fill?' " McCann said. "Then, I thought, 'We have no good bread.' "
So she hired a baker to teach her a few basic bread recipes. She apprenticed without pay at other bread bakeries while maintaining her full-time law career. She made mistakes along the way -- buying equipment that was too large, and botching many batches of dough. But when McCann opened her doors in November 1996, she exceeded her sales projections on her first day and hasn't looked back. In February 1999, she internally financed a second shop called "House of Bread Junior."
When sales took off, she began to explore franchising as a way to expand.
"With a manager, you have to get them to care," said McCann, whose bakeries were attracting franchisee interest from the beginning. "With an owner, they care because it is their business."
The popularity of franchising continues to grow, with hundreds of people opening new franchises around the world every day.
"The beautiful thing about franchising is that it solves the two most difficult challenges of owning a business -- the people and money problem," said Don DeBolt, president of the International Franchise Association, based in Washington, D.C.
"The franchisee provides the money and the personnel," said DeBolt. "You also benefit from the passion for the business that a franchisee brings to the table."
A tremendous commitment
But franchising your business requires a tremendous financial, legal and emotional commitment. First, DeBolt said, you must determine that your business will work as a franchise. For most people, it pays to hire a franchise consultant, which McCann did.
"You have to have a successful store, but it can't be successful just because of you," said McCann. "The best Italian restaurant in town can't be duplicated."
McCann said two new franchised House of Bread shops will open this November. She also has a letter of intent from a third franchisee. Meanwhile, the company is opening two additional stores, which they plan to convert into franchises.
The cost of buying a franchise ranges from a few thousand dollars to millions. It costs $24,000 to buy into House of Bread, not including the cost to build, buy or lease your store, purchase equipment and other start-up costs.
McCann, who opened her first store with $180,000, estimates it costs her franchisees between $70,000 and $199,000 to go into business.
In addition to the franchise fee, she collects 6 percent of her franchisees' gross sales. In 1998, sales at McCann's two company-owned stores totaled $300,000.
Finding good franchisees is critical to success, according to Jim Evanger, who with his wife, Michelle, owns Designs of the Interior, a Barrington, Ill.-based franchiser of interior-design studios.
"With a franchise, you have someone who cares as much about the business name and image as you do because they own it," Jim Evanger said.
DOTI (pronounced "Dottie") started as a single store that Michelle Evanger, an interior designer, purchased from its original owner. Rapid success lead to the opening of a second studio in January 1996. By January 1997, Michelle Evanger was trying to manage three company-owned studios in the Chicago area.
"It was very difficult to manage employees and provide a high level of customer service," said Jim Evanger, who left his full-time job in the corporate world to manage the franchising end of the business.
Strategy for expansion
The Evangers also believed there was a market for DOTI's unique approach to interior-design services beyond the Chicago area. So, they opened a fourth company-owned store in Denver at the end of 1998 with the intention of licensing the business to a local owner.
"We realized each studio had to be locally owned," Jim Evanger said. "We fell into franchising as the only way to maintain our standards."
The Evangers launched a media campaign and advertised their concept in trade journals. In March 1999, their first franchisee signed on in Austin, Texas, and the Denver store was subsequently franchised. They now have two more stores in Wisconsin.
In 1998, DOTI's three company-owned stores booked $1.2 million in sales. Although he can legally make no promises, Evanger estimates that a franchised store should do about $300,000-$400,000 in annual sales. DOTI's initial franchise fee is $15,000, and the company collects 6 percent of franchisees' gross sales.
The company also provides financing for qualified franchisees, he said.
A different function
Before you consider franchising your business concept, consider this: Your main function will be to provide the necessary support to your franchisees. You must produce training materials and operational manuals, conduct training classes, and make sure you provide the marketing assistance your franchisees need to succeed.
"The value in a franchise brand is consistency," said House of Bread's McCann, whose operating manual is 2,000 pages long. "People know what they are getting, that's why they come in. You have to set strict guidelines and pick good franchisees who will follow the system. A franchise is only as good as your weakest link."
Michelle Evanger said she spends most of her time training new owners and evaluating prospective franchisees. She only works as a designer for a handful of clients.
"Our role is to support, train and facilitate," said Jim Evanger. "The network isn't successful unless each individual studio is, so we do everything in our power to help them."
The Federal Trade Commission has imposed strict laws to protect franchisees. To comply with these laws, you will be required to disclosure volumes of information regarding your company history, finances, officers, any past litigation, fees and costs.
"There are 20 disclosures you must make," explained the IFA's DeBolt. In addition, 13 states require franchise operators to register their operations in what's called a "Uniform Franchise Offering Circular."
Legal fees to set up a franchise can run into thousands of dollars.
"The agreements that you sign with your franchisees must be state-approved and are tightly written to protect the franchisee," Jim Evanger said.
(Reporting by Robin Wallace.)
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