September 19, 2005
Startups to go | Mainers like Jeff Allen find buying a franchise the best way to get a business off the ground
By Taylor Smith
When Jeff Allen opened his Portland FiltaFry franchise in June, he says the most difficult part was landing his first customer. He already owned the yellow FiltaFry van. He had a full complement of the specialized hoses and vacuums needed for cleaning and filtering the oil from restaurants' deep fryers. And he had spent plenty of time learning how the business works from a regional representative of the Filta Group, a U.K.-based company with U.S. headquarters in Orlando, Fla.
But trying to convince a potential customer to let him demonstrate how FiltaFry works? Well, that wasn't exactly covered in the FiltaFry franchisee playbook. "I was petrified to begin with," says Allen. "I used to work in the service department at a car dealership, but there the customer came to you."
Despite his nervousness during those first sales calls, Allen says he's honed his pitch during the past few months. Since June, he's signed up roughly a dozen regular accounts, from a handful of T.G.I. Friday's restaurants to Becky's Diner on Commercial Street in Portland ˆ enough regular customers, he says, to keep him working 10- to 12-hour days during the week. "It's not a hard sell like insurance or selling a new widget," he says. "It's something that's unique and really does make sense for the right establishment."
Allen wasn't necessarily looking to get into the oil filtering business before he bought into the FiltaFry family. Instead, he says he was looking for a franchise that made sense ˆ a business that he understood, and one that gave him expertise in exchange for his investment. He's been down the entrepreneurial road before, having run a towing company that he sold to a former employee a few years back, and says he's managed to stay self-employed during the bulk of his working life.
After a stint as a delivery driver in greater Portland for food distributor Sysco, Allen figured he wanted to return to being his own boss. But he didn't want to make the next move alone. The answer, as he saw it, was to buy into a franchise. "I'd rather work with a wheel that's been invented than invent my own," he says.
By deciding to enter the franchising world, Allen joined a population of other Mainers who supplement their entrepreneurial leanings with the kind of emotional and financial backing that comes from linking with a larger organization. While franchise-specific data is hard to come by ˆ the state doesn't track how many businesses in Maine operate as franchises ˆ anecdotal evidence suggests that franchising is a significant part of Maine's economy. Just drive down the Main Street of most any town in Maine and you're bound to run into a franchise, whether it's a McDonald's restaurant, a Coldwell Banker real estate agency or a Curves for Women health club.
According to Terry Hill, spokesperson for the Washington, D.C.-based International Franchise Association, nationwide demographic trends are driving the growth of franchises, from the convenience factor of a Jiffy Lube service center for a busy working couple to health care franchises that target the aging baby-boomer population. An IFA report released last year noted that Maine franchises employed more than 35,000 workers and carried a payroll of $785 million. It also reported that the economic impact of franchising in Maine was more than $4.7 billion.
Trends aside, franchising can be an enticing option for many entrepreneurs. For starters, franchise experts say hooking up with a proven company takes a lot of the guesswork out of starting a new business. "The advantage is that the franchise system is already set up," says Tim Bryant, an attorney specializing in franchise law at Portland-based Preti Flaherty. "They're providing you with a brand that already has recognition and, presumptively, they've tested what works."
Still, Bryant says franchising isn't a panacea for entrepreneurial risk. Though government regulations during the past few decades have made life considerably more difficult for fly-by-night hustlers posing as legitimate franchise operations, it's still buyer beware in the franchise world. And once you've bought into that ideal franchise, experts warn that there's no guarantee of success just because of the sign on your front door. "We always try to encourage people to look at a franchise like you would a small business," says Hill. "There's a tendency for people to look at a franchise and see it like a cookie-cutter business, but it's not risk-free. It takes a lot of hard work."
Checking references
Jeff Allen says he wasn't scared off by the prospect of hard work when he decided to become a franchisee. In fact, he says he spent a lot of time researching different franchises, initially using the Internet to whittle the universe of offerings down to a group of two or three that he considered seriously. The IFA's website, www.franchise.org, operates as a virtual clearinghouse of franchise-related information, allowing users to sift through a database of franchises by investment size, industry or location. And many other websites offer message boards with page upon page of franchise-related chatter ˆ one online discussion features franchisees venting about a franchisor's lack of advertising support, for example, while another delves into the profitability of a particular sandwich franchise.
But while the Internet may offer a good start, experts say that potential franchisees need to dig deeper to research a new business venture. "The biggest thing I tell my clients is to make sure you get all the information available to you," says Bryant. "And then follow through on that information and do your due diligence before you buy."
The first place to look, say Bryant, is at a franchisor's uniform franchise offering circular, a document any company offering a franchise is required by law to make available to franchisees. (Third-party websites offer UFOCs for a fee ˆ hundreds of dollars in many cases ˆ but the documents are available for free from each franchisor, often in exchange for signing a nondisclosure agreement. Bryant says if a company balks at offering its UFOC, a potential franchisee should consider that a red flag.)
Each UFOC contains information on 23 items about a particular franchise, ranging from detailed figures regarding a franchisee's initial investment to an explanation of how franchise territories are determined. Bryant says UFOC readers also should keep an eye out for warnings signs such as outstanding lawsuits against the franchisor and whether the franchisor or any of its officers have ever filed for bankruptcy ˆ both of which are required to be listed in the document. (According to Bryant, the initial impetus for regulating the amount of information disclosed by franchises dates back to the 1950s, when organized crime profited by peddling bogus franchise deals.) "When you're done reading the offering circular, you'll have a good sense of who you're dealing with," he says.
Allen found plenty of useful information in the FiltaFry UFOC, particularly a list of current and former FiltaFry franchisees across the country. Allen called franchisees and peppered them with questions about their FiltaFry business, including how much support they got from the company and whether the numbers calculated in the UFOC ˆ including initial investments, allocations for travel and training, and other costs ˆ made sense. He focused on FiltaFry franchisees in areas with geographic and demographic similarities to Portland, including Missouri, Colorado, North Carolina and Wisconsin. "I didn't really want to talk to someone in San Francisco," he says. "I wanted something I could compare to Portland, Maine."
According to Hill of the IFA, the franchisee list is one of the most valuable sections of the UFOC because companies are required to list both current and former members of their franchise systems. As a result, a prospective buyer might get a glowing endorsement from one franchisee followed by an earful from an unhappy ex-owner. "The government demands [the UFOC be] structured so franchisors can't just pick the top people in the system," says Hill.
And though every UFOC covers the same 23 items, Bryant says no two filings will read alike. Unlike an initial public offering prospectus that contains an entire section about risk factors, the UFOC doesn't contain one specific section that details the risks involved for potential franchisees. Instead, it's a matter of parsing through the UFOC looking for red flags. Bryant recommends assembling a team of experts well-versed in franchise matters, including a lawyer and an accountant, to help wade through the legal jargon and financial particulars. "Read everything you can get your hands on, read it thoroughly and consult with your people," he says. "You might pay $2,000 or $5,000 to consult with those people, but you also might be paying $50,000 to open a franchise."
Independent ownership
Once the due diligence is done and the franchise agreement is signed, experts say franchisors are quick to lend a hand. After all, it's in the company's best interest to make sure the startup goes smoothly. "You're only as strong as your weakest link," says Jack Crawford, CEO of Maine Course Hospitality Group, a Freeport-based company that operates a number of hotel and restaurant franchises in Maine. "The name on the sign might be the same, but if you run [a franchise] in Augusta and someone isn't doing a good job in Saugus, Mass., it hurts your credibility."
Crawford says shoddy work in one franchise not only affects other franchisees, but also reflects poorly on the parent company. And these days, that's become more of a concern to Crawford. Though he operates franchises, Crawford also recently took on the role of franchisor: Last summer, Crawford and more than 60 other Ground Round franchisees ˆ MCHG owned three Ground Round restaurants in Maine and New Hampshire ˆ banded together to purchase the brand from its bankrupt parent company. Following the deal, Crawford took the reins of the Ground Round Independent Owners Cooperative and moved its headquarters to Freeport. As a result, Crawford is experiencing the industry from the franchisor's perspective, and he says it's helped reinforce the idea that strong leadership at the brand level is the hallmark of a successful franchise company.
Ron Lydick, a second-generation McDonald's franchisee who owns McDonald's restaurants in Yarmouth, Gray and Damariscotta, is president of the Maine McDonald's co-op, a 16-member group of franchisees that represent the interests of the state's 63 McDonald's franchised restaurants. The co-op handles its own marketing independent of the parent company, but also benefits from company-wide advertising efforts. "You represent McDonald's International, but you have some freedom within that as well," he says. "That's really what I think is exciting about what I do. I'm part of a larger system. I think of myself as an interdependent businessperson rather than an independent businessperson."
While the thought of being dependent on a parent company or other businesspeople might rankle small-business purists, the situation is tailor-made for other entrepreneurs. David Giguere says that he and his wife, Deborah, opted for a franchise after figuring that the amount of corporate oversight from the parent company would allow David to keep his job as a boat salesman at Port Harbor Marine in South Portland. But Giguere says he was wrong: Just a few months after opening a MaggieMoo's Ice Cream & Treatery in South Portland near the Maine Mall, Giguere's working at his franchise full time. "As it turns out, it's not simple at all," he says. "There's a lot to it."
Support, with limits
Though there's more work involved than he expected, Giguere says he's received plenty of help from MaggieMoo's International. Giguere says representatives from the Columbia, Md.-based firm's head office were quick to answer questions about everything from dealing with subcontractors to equipment leases. Before the store opened, Giguere had a direct line to a MaggieMoo's representative whose only job was to support franchisees during buildout; another MaggieMoo's staffer traveled to South Portland to help train Giguere and his 18 employees the week before the store opened. But Giguere says he and his wife ran into trouble when it came to writing a business plan for their first franchise. "I expected more support from MaggieMoo's," he says. "It was a hard thing to do. It took me and my wife between 100 and 200 hours to write up our business plan." (For more on the Gigueres' experience, see "A sweet story," p. 17.)
Bryant says that's not uncommon. Franchisors are willing to hold franchisees' hands through much of the process of getting a franchise up and running, and franchisees can expect plenty of support along the way, from advertising and marketing help to assistance with day-to-day operations. But according to Bryant, that doesn't mean companies want their franchisees to be on auto-pilot. "At the end of the day, it's not a lot different than opening a mom-and-pop store in that you need to make it work yourself," he says. "It's truly in the hands of that owner."
When Jeff Allen spoke with FiltaFry franchisees around the country, he saw just how much of the business was put into the hands of each operator. Each franchisee had a different strategy: Some had a fleet of trucks and a staff full of employees, and spent their time managing their crews from a home base. Others were one-person crews who managed the business between restaurant visits.
These days, Allen still isn't sure how he wants to grow his FiltaFry business: He says he's struggling with the question of how to expand without overextending himself. A new staffer would mean extra accounts, but also more time working on the books and more money earmarked for costs such as workers' compensation and insurance. Meanwhile, keeping his business as a one-man operation doesn't give Allen much breathing room. "What if something happens to me or I get sick?" he says. "I've got several demonstrations signed up for next week, and it's like, oh boy! But it's also like, oh boy. I want to get more, but I don't want to get overwhelmed."
But trying to convince a potential customer to let him demonstrate how FiltaFry works? Well, that wasn't exactly covered in the FiltaFry franchisee playbook. "I was petrified to begin with," says Allen. "I used to work in the service department at a car dealership, but there the customer came to you."
Despite his nervousness during those first sales calls, Allen says he's honed his pitch during the past few months. Since June, he's signed up roughly a dozen regular accounts, from a handful of T.G.I. Friday's restaurants to Becky's Diner on Commercial Street in Portland ˆ enough regular customers, he says, to keep him working 10- to 12-hour days during the week. "It's not a hard sell like insurance or selling a new widget," he says. "It's something that's unique and really does make sense for the right establishment."
Allen wasn't necessarily looking to get into the oil filtering business before he bought into the FiltaFry family. Instead, he says he was looking for a franchise that made sense ˆ a business that he understood, and one that gave him expertise in exchange for his investment. He's been down the entrepreneurial road before, having run a towing company that he sold to a former employee a few years back, and says he's managed to stay self-employed during the bulk of his working life.
After a stint as a delivery driver in greater Portland for food distributor Sysco, Allen figured he wanted to return to being his own boss. But he didn't want to make the next move alone. The answer, as he saw it, was to buy into a franchise. "I'd rather work with a wheel that's been invented than invent my own," he says.
By deciding to enter the franchising world, Allen joined a population of other Mainers who supplement their entrepreneurial leanings with the kind of emotional and financial backing that comes from linking with a larger organization. While franchise-specific data is hard to come by ˆ the state doesn't track how many businesses in Maine operate as franchises ˆ anecdotal evidence suggests that franchising is a significant part of Maine's economy. Just drive down the Main Street of most any town in Maine and you're bound to run into a franchise, whether it's a McDonald's restaurant, a Coldwell Banker real estate agency or a Curves for Women health club.
According to Terry Hill, spokesperson for the Washington, D.C.-based International Franchise Association, nationwide demographic trends are driving the growth of franchises, from the convenience factor of a Jiffy Lube service center for a busy working couple to health care franchises that target the aging baby-boomer population. An IFA report released last year noted that Maine franchises employed more than 35,000 workers and carried a payroll of $785 million. It also reported that the economic impact of franchising in Maine was more than $4.7 billion.
Trends aside, franchising can be an enticing option for many entrepreneurs. For starters, franchise experts say hooking up with a proven company takes a lot of the guesswork out of starting a new business. "The advantage is that the franchise system is already set up," says Tim Bryant, an attorney specializing in franchise law at Portland-based Preti Flaherty. "They're providing you with a brand that already has recognition and, presumptively, they've tested what works."
Still, Bryant says franchising isn't a panacea for entrepreneurial risk. Though government regulations during the past few decades have made life considerably more difficult for fly-by-night hustlers posing as legitimate franchise operations, it's still buyer beware in the franchise world. And once you've bought into that ideal franchise, experts warn that there's no guarantee of success just because of the sign on your front door. "We always try to encourage people to look at a franchise like you would a small business," says Hill. "There's a tendency for people to look at a franchise and see it like a cookie-cutter business, but it's not risk-free. It takes a lot of hard work."
Checking references
Jeff Allen says he wasn't scared off by the prospect of hard work when he decided to become a franchisee. In fact, he says he spent a lot of time researching different franchises, initially using the Internet to whittle the universe of offerings down to a group of two or three that he considered seriously. The IFA's website, www.franchise.org, operates as a virtual clearinghouse of franchise-related information, allowing users to sift through a database of franchises by investment size, industry or location. And many other websites offer message boards with page upon page of franchise-related chatter ˆ one online discussion features franchisees venting about a franchisor's lack of advertising support, for example, while another delves into the profitability of a particular sandwich franchise.
But while the Internet may offer a good start, experts say that potential franchisees need to dig deeper to research a new business venture. "The biggest thing I tell my clients is to make sure you get all the information available to you," says Bryant. "And then follow through on that information and do your due diligence before you buy."
The first place to look, say Bryant, is at a franchisor's uniform franchise offering circular, a document any company offering a franchise is required by law to make available to franchisees. (Third-party websites offer UFOCs for a fee ˆ hundreds of dollars in many cases ˆ but the documents are available for free from each franchisor, often in exchange for signing a nondisclosure agreement. Bryant says if a company balks at offering its UFOC, a potential franchisee should consider that a red flag.)
Each UFOC contains information on 23 items about a particular franchise, ranging from detailed figures regarding a franchisee's initial investment to an explanation of how franchise territories are determined. Bryant says UFOC readers also should keep an eye out for warnings signs such as outstanding lawsuits against the franchisor and whether the franchisor or any of its officers have ever filed for bankruptcy ˆ both of which are required to be listed in the document. (According to Bryant, the initial impetus for regulating the amount of information disclosed by franchises dates back to the 1950s, when organized crime profited by peddling bogus franchise deals.) "When you're done reading the offering circular, you'll have a good sense of who you're dealing with," he says.
Allen found plenty of useful information in the FiltaFry UFOC, particularly a list of current and former FiltaFry franchisees across the country. Allen called franchisees and peppered them with questions about their FiltaFry business, including how much support they got from the company and whether the numbers calculated in the UFOC ˆ including initial investments, allocations for travel and training, and other costs ˆ made sense. He focused on FiltaFry franchisees in areas with geographic and demographic similarities to Portland, including Missouri, Colorado, North Carolina and Wisconsin. "I didn't really want to talk to someone in San Francisco," he says. "I wanted something I could compare to Portland, Maine."
According to Hill of the IFA, the franchisee list is one of the most valuable sections of the UFOC because companies are required to list both current and former members of their franchise systems. As a result, a prospective buyer might get a glowing endorsement from one franchisee followed by an earful from an unhappy ex-owner. "The government demands [the UFOC be] structured so franchisors can't just pick the top people in the system," says Hill.
And though every UFOC covers the same 23 items, Bryant says no two filings will read alike. Unlike an initial public offering prospectus that contains an entire section about risk factors, the UFOC doesn't contain one specific section that details the risks involved for potential franchisees. Instead, it's a matter of parsing through the UFOC looking for red flags. Bryant recommends assembling a team of experts well-versed in franchise matters, including a lawyer and an accountant, to help wade through the legal jargon and financial particulars. "Read everything you can get your hands on, read it thoroughly and consult with your people," he says. "You might pay $2,000 or $5,000 to consult with those people, but you also might be paying $50,000 to open a franchise."
Independent ownership
Once the due diligence is done and the franchise agreement is signed, experts say franchisors are quick to lend a hand. After all, it's in the company's best interest to make sure the startup goes smoothly. "You're only as strong as your weakest link," says Jack Crawford, CEO of Maine Course Hospitality Group, a Freeport-based company that operates a number of hotel and restaurant franchises in Maine. "The name on the sign might be the same, but if you run [a franchise] in Augusta and someone isn't doing a good job in Saugus, Mass., it hurts your credibility."
Crawford says shoddy work in one franchise not only affects other franchisees, but also reflects poorly on the parent company. And these days, that's become more of a concern to Crawford. Though he operates franchises, Crawford also recently took on the role of franchisor: Last summer, Crawford and more than 60 other Ground Round franchisees ˆ MCHG owned three Ground Round restaurants in Maine and New Hampshire ˆ banded together to purchase the brand from its bankrupt parent company. Following the deal, Crawford took the reins of the Ground Round Independent Owners Cooperative and moved its headquarters to Freeport. As a result, Crawford is experiencing the industry from the franchisor's perspective, and he says it's helped reinforce the idea that strong leadership at the brand level is the hallmark of a successful franchise company.
Ron Lydick, a second-generation McDonald's franchisee who owns McDonald's restaurants in Yarmouth, Gray and Damariscotta, is president of the Maine McDonald's co-op, a 16-member group of franchisees that represent the interests of the state's 63 McDonald's franchised restaurants. The co-op handles its own marketing independent of the parent company, but also benefits from company-wide advertising efforts. "You represent McDonald's International, but you have some freedom within that as well," he says. "That's really what I think is exciting about what I do. I'm part of a larger system. I think of myself as an interdependent businessperson rather than an independent businessperson."
While the thought of being dependent on a parent company or other businesspeople might rankle small-business purists, the situation is tailor-made for other entrepreneurs. David Giguere says that he and his wife, Deborah, opted for a franchise after figuring that the amount of corporate oversight from the parent company would allow David to keep his job as a boat salesman at Port Harbor Marine in South Portland. But Giguere says he was wrong: Just a few months after opening a MaggieMoo's Ice Cream & Treatery in South Portland near the Maine Mall, Giguere's working at his franchise full time. "As it turns out, it's not simple at all," he says. "There's a lot to it."
Support, with limits
Though there's more work involved than he expected, Giguere says he's received plenty of help from MaggieMoo's International. Giguere says representatives from the Columbia, Md.-based firm's head office were quick to answer questions about everything from dealing with subcontractors to equipment leases. Before the store opened, Giguere had a direct line to a MaggieMoo's representative whose only job was to support franchisees during buildout; another MaggieMoo's staffer traveled to South Portland to help train Giguere and his 18 employees the week before the store opened. But Giguere says he and his wife ran into trouble when it came to writing a business plan for their first franchise. "I expected more support from MaggieMoo's," he says. "It was a hard thing to do. It took me and my wife between 100 and 200 hours to write up our business plan." (For more on the Gigueres' experience, see "A sweet story," p. 17.)
Bryant says that's not uncommon. Franchisors are willing to hold franchisees' hands through much of the process of getting a franchise up and running, and franchisees can expect plenty of support along the way, from advertising and marketing help to assistance with day-to-day operations. But according to Bryant, that doesn't mean companies want their franchisees to be on auto-pilot. "At the end of the day, it's not a lot different than opening a mom-and-pop store in that you need to make it work yourself," he says. "It's truly in the hands of that owner."
When Jeff Allen spoke with FiltaFry franchisees around the country, he saw just how much of the business was put into the hands of each operator. Each franchisee had a different strategy: Some had a fleet of trucks and a staff full of employees, and spent their time managing their crews from a home base. Others were one-person crews who managed the business between restaurant visits.
These days, Allen still isn't sure how he wants to grow his FiltaFry business: He says he's struggling with the question of how to expand without overextending himself. A new staffer would mean extra accounts, but also more time working on the books and more money earmarked for costs such as workers' compensation and insurance. Meanwhile, keeping his business as a one-man operation doesn't give Allen much breathing room. "What if something happens to me or I get sick?" he says. "I've got several demonstrations signed up for next week, and it's like, oh boy! But it's also like, oh boy. I want to get more, but I don't want to get overwhelmed."
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