Franchising and Family Businesses: How Everyone Can Win
By Jennifer M. Pendergast, Ph.D.
When family business and franchise are mentioned in the same sentence, most people think of the family as the franchise owner. Many families have built businesses that leverage an existing brand through franchising. Some of the largest auto dealer franchises are family owned. Juanita and Gregory Baranco, a husband-and-wife team, have built the Baranco automotive group in the Atlanta area. Started in 1978, the group now owns four dealerships. Juanita serves as chief operating officer and her husband as co-owner and president. Another example is Rush Enterprises, the largest network of heavy- and medium-duty truck dealerships in North America. Founder Marvin Rush, now chairman, and his son Rusty Rush, president and CEO, oversee the business, which also includes a John Deere construction equipment dealership. Beyond transportation, families have also built businesses of franchised restaurants, fitness centers, hotels and many other categories.
Franchising is a popular way to get into business because the franchise owner, or franchisee, is able to access an established brand with a proven business system, supported by an existing company that has been successful in at least one location (the franchisor). So it is not surprising that many family businesses began as franchisees. We’ve all heard the term franchising, but what is the technical definition of a franchise business? According to the International Franchise Association, a franchise is an agreement or license between two parties giving a person or group (the franchisee) the right to market a product or service using the trademark or trade name of another (the franchisor).
Franchising is more prevalent than you might expect. There are an estimated 1,500 franchisors in the U.S. and 750,000 franchisees. More than 75 industries use franchises to distribute goods and services. In fact, one out of every 12 businesses in the U.S. is a franchise. Again, it is not surprising that families own many of these businesses. But what may surprise you is that families are franchisors as well as franchisees. Many family-owned businesses have turned to franchising as a way to grow their brands without having to raise significant capital to support expansion.
Peterbrooke Chocolates is an example of a family business that is using the franchise model to support its growth. Founded in 1983 by Phyllis Geiger, Peterbrooke sells high-end European-style chocolates to the American market. The company is named for children of the founder, Peter and Brooke Behringer. Peter is the company’s president and Brooke is the real estate development manager for the franchise division. The company grew to eight stores in the Jacksonville area before it turned to franchising as a method of expansion. In 2005, Peterbrooke sold five franchises in the Orlando area within two weeks of offering them. “We originally had plans to go national with our franchises,” Peter Behringer said. “But at the end of all our talk, we thought a slower buildout that focused on Florida would work out best in the long run.” After expanding to Orlando, the company focused on the Tampa area because there were a number of Tampa customers ordering online. Peterbrooke will expand out of state for the first time, into the Atlanta area, later this year.
Because the franchising model allows a family business to grow using other people’s money, it can be very attractive. In addition to paying an up-front fee to develop a franchise, the franchisee pays an ongoing percentage of revenues to the franchisor, typically in the 4 to 6 percent range. However, creating a franchise does require significant investment by the franchisor and is not without its risks. So families need to plan carefully before venturing into franchising.
An example of a family business that did its work up front is the father-son duo of Bob and Jeff Weiss, founders of the Uptown Gourmet sandwich shops in the Atlanta area. When they decided to franchise, the Weisses knew it would be difficult to trademark “Uptown,” so they hired a branding specialist to come up with a name for the business. The result was Rising Roll. Because they did not have experience with franchising, they hired someone who did. Mike Lassiter, president of Rising Roll, was at one time the second-largest area developer of Schlotzky’s sandwich shops and also founded Franchising Concepts LLC, a company that helps grow franchise businesses. With Lassiter’s help, the Weisses redid the store design and the logo, updated the menu and began franchising in seven markets in the Southeast and West.
Big Boy restaurants are a well-recognized family business franchise. The business has its roots in Samuel Frisch’s Café, opened in Cincinnati in 1905. Frisch passed the business on to three of his nine children, Dave, Reuben and Irving, in 1923. Dave became the CEO and is considered the founder of Big Boy, which grew out of Frisch’s Café. Jack Maier joined the business as a part-time carhop and married Dave’s youngest daughter, Blanche, in 1947, the year before the first restaurant opened under the Big Boy name. The business also started franchising around that time. In 1970, Jack Maier succeeded Dave Frisch as CEO. Craig Maier, the eldest son of Jack and Blanche, became CEO in 1989. The family business retains the name Frisch’s Restaurants, which is publicly traded today. Descendents of Samuel Frisch still control one-third of the voting stock. And Blanche, Craig and Karen Maier (Craig’s sister) sit on the board. Adding an interesting twist to the story, Frisch’s Restaurants became a franchisee as well as a franchisor in 1998, when the company secured a licensing agreement to build Golden Corral restaurants in Ohio and Kentucky.
Families have built successful businesses around the franchising model, as both franchisors and franchisees. However, families who want to use franchising as a method of growth should understand the investment required to succeed. Just ask Kirk Perron, founder of Jamba Juice, which he started as Juice Club in 1990. By 1994, Perron had signed on 16 franchises. Despite the franchise fees and royalties paid, he didn’t have the capital required to build a strong training program and a team to oversee franchise quality, two keys to success. Perron could see that he wouldn’t be able to grow as rapidly as he would like under the franchise model. So he turned to venture capital. Bob Kagle, one of the most successful venture capitalists in California and a general partner in Technology Venture Investors and Benchmark Capital, discovered Jamba Juice on his way to lunch one day in 1994. Seeing a line extending out the door, he saw potential in the company and offered to invest $3 million. Some of the money also came from Howard Schultz, chairman and CEO of Starbucks, who joined Jamba Juice’s board in conjunction with the investment.
Based on Perron’s experience and that of other successful franchisors, here are some of the keys to success:
Build a model that ensures a win-win for the franchisor and the franchisee. Franchisors are in competition with a lot of different brands, so they need to provide good value to the franchisee. This includes support in site selection, purchasing, personnel training, marketing and development of technology systems, among other factors.
Develop a strong recruiting process. The franchise system is only as strong as its franchisees. They will represent the brand to the broader public. So ensuring that franchisees invest in the brand, understand and embrace the franchise culture, and have strong quality controls is important.
Create a system for monitoring franchisees. This system should include mechanisms for collecting data from franchisees as well as a team to visit franchisees and support their growth and development. Both a carrot and a stick are involved. Franchisors need to ensure that franchisees adhere to quality standards. Franchisors should also find ways to support the franchisee’s growth. If the franchisee grows, everyone wins.
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