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Franchising sees fresh interest from eager operators, investors

Franchising sees fresh interest from eager operators, investors

Franchising inquiries have increased, so Scott Hinshaw, executive vice president of franchise operations and development for Domino’s Pizza, has hired more people to work in his department at the chain’s Ann Arbor, Mich., headquarters.

“I’m adding a couple of heads just to handle all the inquiries and calls and e-mails—lots of e-mails,” said Hinshaw of Domino’s, which owns 476 stores and is the franchisor of 1,200 units. “We want to be selective—not [partner with] someone who just wants a job change, but who can commit long term.”

The recession has increased the attractiveness of franchising as a growth strategy for many operators. Given layoffs, business closures and a tight labor market, more people are considering running their own businesses and preferring to invest in bricks and mortar, versus stocks and bonds.

With a wealth of quality candidates available, franchisors are ramping up franchise sales teams, doing more road shows and webinars, and hosting open houses in pursuit of the right partners to build and run more units. They also are providing more training, operations and even financial support, as funding remains the biggest hurdle for new franchisees.

“During an economic recession, the quality of applicants, in terms of business experience and financial resources, goes up to coincide with unemployment rates increasing, and that certainly is the case this time as well,” said Alisa Harrison, spokeswoman for the International Franchise Association in Washington, D.C.

Franchising interest has grown exponentially for Smashburger, a fast-casual “better-burger” concept that first opened in Denver in 2008, said president Scott Crane. The 23-unit chain has been signing franchise deals all summer and by the end of August had agreements for 200 stores to open in the next five years.

“Inquiries were once a week; we get seven to nine a day now,” Crane said.

One of the brand’s recent deals is with SunWest Burgers LLC, which has agreed to open up to 30 stores in the Phoenix market over the next seven years. SunWest is led by multiunit concept operators David Doty, Chuck Riske and Robin Yoshimura, who already own six Jerry’s Restaurants and six Black Bear Diners in Arizona and are involved in more than 30 other restaurants in six western states. Doty said he and his partners were looking for a fast-casual concept in which to invest when they discovered Smashburger.

“Fast casual had strong, long-term reasons for being a ready investment,” Doty said, “and we were looking to play in that segment.”

Fast casual generally has lower startup costs than casual dining, and the segment’s lower price points and perceptions of higher food quality are attractive to price-sensitive consumers, operators and industry observers say.

“Some people with newer brands and hotter things are not having near the challenge as the casual-theme chains,” said Frank Steed, a former operator and now president and chief executive of the Steed Consultancy in Kerens, Texas. “It’s where all the interest is. It makes economic sense. There is less risk.”

Dallas-based Wingstop, which claims to have had 24 quarters of consecutive comparable-store sales increases, has plenty of franchisee candidates to chose from, said Bruce Evans, vice president of franchise development for the fast-casual chain of 420 franchised units. To handle the interest, the company has begun holding more open houses and bringing in candidates to meet Wingstop executives and other franchisees rather than just relying on online leads.

“We will try to do some Facebook.com things and get involved in some guerrilla Internet advertising out there,” Evans said, “but nothing replaces getting in front of people and putting a hot chicken wing in someone’s hand and letting them taste and see what it’s all about.”

Applicants come to the corporate headquarters for “discovery days,” to learn more about the concept and meet face-to-face with the chain’s leadership team to determine if Wingstop is the right choice, he said.

“We want them to make the right decisions,” Evans said. “There are some who want to do this, come hell or high water, and we’ve got to say, ‘Whoa, let’s think this through and make the right decision for both of us.’ When you are investing half a million dollars in a business, it can ruin you personally and professionally if you fail.”

Increased selectivity in choosing franchisees also helps to protect the brand, operators note.

Jon-Michial Carter, a former newscast announcer who later started and then sold a Fortune 500 software firm, had been looking for a venture for the next stage of his life when he settled on the restaurant business in general and Einstein Bros. Bagels in particular.

“I had spent a long time on airplanes and in pinstriped suits with CEOs,” Carter said. “I wanted something very different.”

However, Lakewood, Colo.-based parent company Einstein Noah Restaurant Group, which only began franchising its 350-unit Einstein Bros. Bagel brand in 2007, requires operators to have restaurant experience. Carter’s only experience was as a customer. Although Carter agreed to hire experienced general managers, he felt some reluctance from ENRG executives before they finally approved a deal in August for Carter to open five Einstein Bros. Bagel shops in the areas of Houston and Sugar Land, Texas, over the next five years.

“When a franchisor is approached by a franchisee who is well-financed and says, ‘I want to open a store,’ most will jump on it,” he said. “But I could feel their hesitation because I was not an experienced restaurant operator. I felt like I had to do a little convincing.”

Like other franchisors, ENRG targets multiconcept, multiunit operators because they have experience and, usually, the finances to do a deal, said Kevin Kruse, vice president of franchising and development for ENRG, which is also the franchisor of Manhattan Bagels in the Northeast and owns Noah’s New York Bagels on the West Coast. With Einstein Bros. now the main focus for franchising and licensing, ENRG is seeing more interest from multiunit groups.

“Our number of inquiries has increased,” Kruse said. “It’s several things coming together. We’re well-positioned in this economy with consumers, good sites are available, and experienced restaurateurs are realizing now is a good time to be franchising and developing stores.”

Funding remains the biggest challenge for would-be franchisees, said Ned Lyerly, senior vice president of global franchise development for CKE Restaurants Inc., the Carpinteria, Calif.-based parent of 1,205 Carl’s Jr. restaurants and 1,915 Hardee’s restaurants. In the past two and a half years, CKE has signed 713 development commitments to build additional Carl’s Jr. and Hardee’s units.

Although funding is easier for experienced operators to obtain, new franchisees can still get financing—it just can take longer, Lyerly said.

“A year, a year and a half ago, if you could fog a mirror you could get financing,” he said. “Now, today you have to have a solid base financially for banks to lend you money. If you’re patient and don’t mind a few ‘Nos’ along the way, you can make it work. On the flip side, once you are able to qualify, the interest rates are very attractive these days.”

Some franchisors are providing financial assistance to franchisees, stopping just short of offering loans. Domino’s will offer incentives such as discounting or waiving advertising and royalty fees, Hinshaw said. Some existing franchisees looking to sell their stores will work out agreements where the franchisee that wants to buy it can put 20 percent down and make payments to the old franchisee for five years before making a final balloon payment.

Al Daniels, a Domino’s franchisee in St. Mary’s, Ga., eventually bought out the franchisee he worked for. He now has five stores in five southern Georgia counties.

Daniels also took advantage of Domino’s Delivering the Dream program, which offers minority franchisee candidates training and discounts on franchisee fees and assistance in securing loans.

“Domino’s has an infrastructure in place that gives a franchisee the chance to be successful,” Daniels said.

Domino’s also has launched Franchisee in Training, an 18-month program where candidates start off as assistant managers and work their way up to becoming store managers who can successfully run units. Then they can apply for a franchise. They earn a higher salary so they can save for their own store. They also receive $25,000 toward operating capital for their first store and discounts on fees and royalties.

College graduates, corporate executives and other people who have no restaurant experience, including a former New York banking executive whose entire department had been laid off, are currently in the program, Hinshaw said.

“It’s a very [rigorous] training program,” he said. “They are in the pizza store, working with managers and supervisors, learning the business. To throw people in quickly is a recipe for disaster.”

Not all brands require that potential franchisees have prior restaurant experience, and that may be helping to raise the number of franchise-related inquiries they are receiving, operators said.

“Our inquiries have gone up in the last four or five months, and we feel pretty good about the flow that is coming in,” said Jim Sheahan, vice president of franchising for CiCi’s Pizza “We’re seeing all kinds of people, and we have a history of those without restaurant experience being successful in our concept.”

Based in Coppell, Texas, CiCi’s has 250 franchised units and 20 company-owned stores.

To help inexperienced franchisees or investors, franchisors like Smashburger work out management agreements to run the franchised stores. The chain recently put together a management deal with pro-football players Leonard Davis and Marc Colombo for five of the 30 Smashburgers they’ve agreed to build in the Dallas area.

“It’s the best of both worlds,” said Smashburger founder Tom Ryan. “They get a business model for them when they retire from football, and we can run and operate the restaurants.”

Franchisors also are playing the role of matchmaker, pairing inexperienced investors with veteran restaurant managers who are now looking for their own businesses after being laid off from established casual-dining chains.

“When we went into the recession, we had a lot of operator people who had experience who now don’t work for other people,” said Tony De Salvo, vice president of franchising for Bar Louie Development Inc., the franchising arm of Bar Louie America Inc., parent of 51-unit Bar Louie Tavern & Grill based in Glenville, Ill.

“Now we’re getting people who have money and don’t want to invest in the stock market but want to put their money in bricks and mortar,” De Salvo said. “You’ve got to be a matchmaker of sorts.”— [email protected]

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