Multi-Unit Franchisee, 2011 Issue 2

PEOPLE n INVESTMENT INSIGHTS n CUSTOMERS COUNT see page 65

Multi-Unit n LAs VegAs APRIL 27-29, 2011

FranchiseeISSUE II 2011 Leaders of the Brands Multi-concept stars shine

Jeff Orlando Wingstop, Schlotzsky’s and Cinnabon

n MB50 Top 50 multi-concept operators by size and brand n FaB FaVES Industry insiders dish on franchise trends n PRIVaTE EqUITy Can investment partners help you grow?

muf2_cover(C1).indd 1 3/11/11 4:47 PM Source: ZIPS Franchise Disclosure Document issued April 30, 2010. No offer or sale of a franchise can be made except by an FDD first filed and registered with applicable authorities. The top 40% of ZIPS experienced member owned units had average gross sales above $1.4 million per unit from January to December 2009. See Item 19 of the April 30, 2010 FDD for further details. This is not an offer to sell a franchise. This offering is made by prospectus only. ZIPS Franchising, LLC, 7500 Greenway Center Drive, Suite 400, Greenbelt, MD 20770. ©2010 ZIPS. All rights reserved.

ad_zipsdrycleaners(1).indd 1 9/30/10 2:38 PM Add some muscle to your portfolio.

Looking for serious financial gains? Call 201.867.5309 or visit RetroFranchising.com for more information on this powerful investment opportunity.

*The top 10% of Retro Fitness clubs experienced average gross sales per unit of $1.9 million from March 2008-February 2010. Revenue per square foot is derived from average gross sales numbers published in item 19 of our 2010 FDD. This is not an offer to sell a franchise. Offerings made by prospectus only.

ad_retrofitness(1).indd 1 3/11/11 4:36 PM ad_dennys(C2).indd 2 6/23/10 11:04:20 AM FranchiseeMulti-Unit contents ISSUE II, 2011

Cover Story Brands on the run! 10 Multi-brand franchisees—Andy Lanz, Glenn Miller, Jeff Orlando, Pierre Panos, Randy Merrill, and Rick Huffman—grow by leaps and brands. BY JOHN CARROLL and DEBBIE SELINSKY

liStS Multi-Brand rankings 44 MB50: Multi-brand operators ranked by size and brands. FeatureS Playing Favorites 48 Franchise insiders dish on 2011’s best brands and sectors for expansion. BY KERRY PIPES

Private equity: is it right for you? 56 Weighing the pros and cons of bringing investors into your organization. BY EDDY GOLDBERG

Multi-unit FranChiSee Issue II, 2011 3

muf2_toc(3,4).indd 3 3/11/11 4:47 PM Multi-Unit Departments Franchisee Chairman’s note PuBlisher Steve Olson Plan to attend and Plan to Win 6 PresiDent It’s time for the Multi-Unit Franchising Conference! Therese Thilgen Ceo online Gary Gardner viCe PresiDent oPerations What’s online @ mufranchisee.com 8 Sue Logan viCe PresiDent marKeting Columns Kimberlie Guerrieri viCe PresiDent Business DeveloPment seCurity Barbara Yelmene Keeping hackers at Bay 80 Business DeveloPment exeCutives Jeff Katis Franchise networks are a favorite target Lorena Leggett BY DAVID ELLIS exeCutive eDitor Kerry Pipes site seleCtion managing eDitor Double agents 82 Eddy Goldberg Design & art DireCtion Is your agent really working for you? Peter Tucker BY DALE WILLERTON internet Content manager Benjamin Foley FinanCe suBsCriPtions & DataBase management Bank ability 84 Sharon Wilkinson Increase your odds for getting bank loans ProjeCt manager/ meDia suPPort CoorDinator BY STEVE LEFEVER Lyola Shybanova investment insights DireCtor oF Client serviCes Beverley Ellul inherit the Windfall 86 ContriButing eDitors Pass on your wisdom as well as your assets Carol M. Clark Darrell Johnson BY CAROL CLARK Mel Kleiman Steve LeFever Customers Count Jack Mackey Creating loyalists 88 Jim Sullivan Thomas J. Winninger Nurturing customers must be a key strategic goal Dean Zuccarello BY JACK MACKEY aDvertising anD eDitorial oFFiCes: Franchise Update Media Group exit strategies 6489 Camden Avenue, Suite 108 San Jose, CA 95120 m&a activity on the rise 90 Telephone: 408-997-7795 Is it time to make a deal? Fax: 408-997-9377 BY DEAN ZUCCARELLO senD manusCriPts anD queries aBout story assignments to: PeoPle [email protected] franchiseupdatemedia.com reference Checks 92 mufranchisee.com Getting effective responses from former employers franchising.com franchise-update.com BY MEL KLEIMAN multi-unit FranChisee magazine is FranChise marKet uPDate PuBlisheD Four times annually. Annual subscription rate is $49.00 (U.S.) Beyond the FDD 96 Call 408-997-7795 x202 Franchisees need—and should demand—more information For suBsCriPtions. rePrint inFormation, ContaCt BY DARRELL JOHNSON FosterePrints at 800-382-0808

4 multi-unit FranChisee IssUe II, 2011

muf2_toc(3,4).indd 4 3/11/11 4:47 PM Brand Protection Jack in the Box is widely acknowledged as an industry leader with our farm-to-fork food-safety program, earning praise from consumer groups and government agencies, including the U.S. Department of Agriculture, the Food and Drug Administration and the California Department of Health Services. Protecting the Guest Relationship • Product quality managed along entire supply chain guarantees quality excellence • 2004 Black Pearl Award recipient - industry’s highest food-safety honor • Daily Voice of Guest satisfaction surveys report on each restaurant’s service quality for continuous improvement

bRANd PROTeCTION. One more way Jack in the Box R&D Kitchen, Jack in the Box IT’S ONLY continuously adds value to our franchisees. INNOVATION Innovation Center • COST SAVINGS • ACTIONAble dATA WHEN IT • RelATIONShIP • PROTeCTION • effICIeNCy ADDS VALUE • COmmITTed leAdeRShIP • UNIT SAleS ImPACT

Multi-unit franchising opportunities available. Acquire company units. Develop new contiguous markets. Call 858-571-4738 or visit jackinthebox.com/franchise

ad_jackinthebox(5).indd 5 3/11/11 4:32 PM chairman’snote

BY CHARLes sMITHGALL Plan to attend and Plan to Win

y Dad once said, “Son, no matter life story inspired the movie “The Blind Side.” how good an opportunity you miss, They are going to hear Jim Sullivan, well- there will always be another one, known author of the book Multi-Unit Leadership, even better than the one you missed. talk about great ideas for successfully managing MJust make sure that you operate well, keep your multiple units. They are going to hear Gary Wal- eyes open, and keep a lot of cash.” That philosophy strom, founder of Culture Index, the best system served him well for 93 years. (Mom’s going to be we’ve ever come across for testing the behavioral 100 April 1, but that’s another story.) characteristics of potential general manager can- There are opportunities galore didates. These are a few highlights of a program today in the franchising busi- loaded with talent. ness, possibly more than there In addition, you will be rubbing elbows and at- have ever been. There are eager tending cocktail receptions with some of the best franchisors with fantastic brands and brightest franchisees in America. Beyond the in under-served markets. There formal program, the Exhibit Hall will have numer- are successful franchisees who ous successful franchisors touting new concepts, just want to cash out. There are and companies showcasing tools and services de- many successful concepts that can be franchised. signed to improve your business. And, believe it or not, there is a lot of money avail- Several franchisees have asked me “What can able to finance proven operators. (We are currently I expect to get out of the Multi-Unit Franchis- being courted by several large banks.) ing Conference?” My answer is always the same. It is a wonderful time to invest in a franchise “What do you expect to put into it?” I always plan business or to grow an existing business by: 1) what I am going to try to accomplish at the confer- acquiring other franchisees, 2) launching a new ence. I want to meet as many successful franchisees brand, or 3) simply opening more units of your ex- and franchisors as I can, attend as many sessions isting brand. as I can with subjects pertinent to my business, The ideal place to explore all of these options is and I am always on the lookout for those one or at the upcoming Multi-Unit Franchising Confer- two ideas that make my investment in the conference coming soon at a Las Vegas near you. The ence worth it. And it’s amazing, but every year I conference is being held at the fabulous Venetian find them—and that’s what keeps me coming back. Hotel April 27–29, and I can promise you that it’s Whether you think you can, or you think you going to be the largest and best ever. can’t, you are right either way. I am honored to be this year’s Conference Chair, In summary, the Franchise Update Media but I can assure you that I’m there to learn just like Group puts on one heck of a show, and I can assure everyone else. Many of my fellow Aaron’s fran- you that you won’t be disappointed. chisees have already signed up because they are P.S.—Did I mention the golf tournament? hungry for ideas on how to improve their existing operations, as well as exploring new concepts. They are going to hear words of wisdom from keynote speakers J. Patrick Doyle, President and CEO of Charles Smithgall Domino’s Pizza, and Sean Tuohy, an ultra-successful Chair multi-unit franchisee and NBA broadcaster whose 2011 Multi-Unit Franchising Conference

6 Multi-unit Franchisee Issue II, 2011

muf2_d_chairmansnote(6).indd 6 3/11/11 4:49 PM ad_jerseymikes(7).indd 7 1/18/11 5:28 PM MU Franchisee.com For this and more web-exclusive content, visit www.mufranchisee.com/q211/.

conferences Online edition 10th Multi-Unit Franchising Conference Now you can have everyday access to Multi-Unit Franchisee maga- A decade young and it just keeps getting better! Franchise Update zine on your computer, at home, or at work. This free online edition Media Group’s annual Multi-Unit Franchising Conference is roll- is feature-packed and fully searchable, printable, and downloadable. ing back into the city of high stakes, Las Vegas. Make plans now to Look for the Online Edition link on mufranchisee.com/. attend the conference on April 27–29, 2011 at The Venetian Las Vegas. Expect the best in the industry to be front and center at this Big Dreams year’s event. The sessions will be packed, the Expo Hall buzzing, and Indianapolis native Greg Willman and his friend Phil Salsbery were the discussions lively at the key event of the year for the multi-unit corporate types who didn’t know anything about restaurant franchis- franchising business. ing. But that didn’t stop them from signing on the dotted line in 1998. For a look back on the 2010 conference (including the presenta- “We dove right in,” says Willman. “It was either the smartest or tions) and a peek ahead to this spring’s agenda, speakers, and reg- the dumbest thing we ever did—it almost put us under. We were istration information, visit www.multiunitfranchising small with no restaurant experience, but it ended up working out well conference.com/. and those stores all continue to do well.” Willman, who believes in “sweating the details every day,” says there is no deep, dark secret to their success. “We’re not inventing anything or doing anything overly sophisticated—we’re serving food. We’re a meat-and-potatoes, blocking-and-tackling kind of organization,” he says. “We try to be brilliant at the basics every day in every store so that guests have a great experience. We pay a lot of attention to doing that.” www.franchiseupdate-digital.com/ Online franchisee/2011iss1#pg34/. Multi-Unit Community rankings Check out our new community-based mufranchisee.com web- Check out our annual rankings of top franchisees and their multi-unit site. Your exclusive look into the world of multi-unit franchising. Your brands and find out “who’s on first.”www.mufranchisee.com/ one-stop online shop to find: rankings/. • Exclusive articles • Interviews • News coverage • Perspectives Press Office • Interactive networking • and more.... “Don’t just survive, thrive!” Franchising.com 3.0 launched! Franchise Update Media Group’s Annual Franchise Development Re- port and Grow to Greatness book by Steve Olson offer invaluable tips The new Franchising.com is now ready for use by franchise buyers, for franchise sales success and unit growth in tough economic times. with new and faster ways to connect entrepreneurs with the right Visit www.franchiseupdate.com/afdr/ and www.franchise franchise opportunities through cutting-edge content and innova- update.com/growtogreatness/ for ordering information. tive online tools. Franchising.com is also now on Facebook at www. facebook.com/franchisingcom: click “Search” for instant ac- Quick click cess to more than 2,000 brands by industry, location, and invest- For a one-click link to any item on this page visit ment level. Watch for additional new services in 2011, including a www.mufranchisee.com/2q11/. businesses for sale directory, more franchise opportunity videos, and an “Ask the Pros” question where users submit questions and franchisors compete for the spotlight by answering them. Looking for a new brand? Industry news? Browse through our Franchise Opportu- nities, Education Center, Resources, Franchise Newsroom, and Video Spotlight at www.franchising.com/.

8 MUlti-Unit Franchisee Issue II, 2011 mufranchisee.com

muf2_d_online(8).indd 8 3/11/11 4:47 PM Franchise with DQ®! One DQ® brand. Two Great Concepts.

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By Kerry PiPes Expansion-Minded! Multi-brand franchising continues to gain

ulti-unit franchising is one Wisconsin into the world of franchising. He’s combined thing. Multi-concept franchis- concepts to cater to varied tastes—sub sandwiches, pizza, ing is something else entirely. bagels, and ice cream. His stores are grouped together M Nevertheless, it’s a place—and near where he lives in Wisconsin and marketed as co- a choice—that many franchisees love, branded units, which helps keep a handle on fixed costs. and where they excel. These determined • Glenn Miller came across the pond from the U.K. operators look for growth opportunities in 1996 as a consultant to a small group of distressed and potential across several concepts, Arby’s units in Illinois, applying his skills sometimes in wildly different sectors. The multi-con- as a British Chartered Accountant to turn cept franchising model offers power in numbers (units, the units around. The States suited him brands, territory, and income potential), as well as the and he relocated with his family. Today security of spreading risk across different concepts in a he operates 18 Arby’s and 4 McAlister’s diversified portfolio. delis with another about to open. Success in this realm requires an experienced operator • Jeff Orlando knows sandwiches and with a sophisticated approach to make wings. He has a Schlotzsky’s in a shop- all the pieces work together smoothly. ping center near his home in Central Texas, and a Wing- It demands skilled, knowledgeable pro- stop just three doors down. This year he’ll open another fessionals and team members who can Schlotzsky’s, co-branded with a Cinnabon, and continue operate under varying system require- to serve the troops going in and out of nearby Fort Hood. ments, market conditions, and consumer • Pierre Panos, a South African immigrant who demands. It’s not for everyone, but those moved to Atlanta with his family to escape the escalating who do it, and do it well, say the benefits violence in his home country, has made far outweigh the risks. his way in the U.S. thanks to his skills in This year we’ve updated our fourth annual “Multi- real estate and as a restaurateur. In addi- Brand 50” list with thanks to FRANdata for their latest tion to franchising (41 Papa John’s), he numbers on multi-brand franchising. We’ve also cre- has developed his own “fast fine” dining ated a list of the MB50’s 25 favorite brands. Restaurant concept, Fresh To Order, which he’s now brands, of course, continue to dominate at this level. Some franchising. of the most popular this year are Pizza • Randy Merrill is an Army veteran and Hut, KFC, Taco Bell, Burger King, and athlete who found his way into a fitness-related profes- Hardee’s. The list begins on page 44. sional career that’s taken him all the way from Atlanta to Los Angeles and back again. Today he operates franchises Six faces of success for Massage Heights, Cartridge World, and 14 units of a Big numbers are important as a sign of non-franchised tanning salon concept, Solar Dimensions. success, but more interesting are the • Rick Huffman has been developing shopping centers, human beings behind those numbers. hotels, apartment complexes, and afford- Each year we go in search of fresh faces to share their able housing for two decades. Now add personal experiences and struggles on the road to their four Value Place extended-stay locations, present success. 2 Hampton Inns, and a Hilton Conven- This year we tell the stories of six multi-concept option Center, Hilton Promenade and a erators in fields from food to technology to hotels. Their Hilton Garden Inn. Oh yes, he and his stories are unique—two are immigrants who built new partners also developed the hugely suc- lives in the U.S.—and we hope you enjoy reading each cessful $400 million Branson Landing one. Here’s a sample of what you’ll find in the pages ahead: mixed-use project in Missouri. • Andy Lanz went straight from the University of Now how’s that for a mix of multi-concept franchisees?

10 Multi-unit FranchiSee issue ii, 2011

muf2_cs_intro(10).indd 10 3/11/11 4:48 PM P O W E R PLAYERS By John Carroll

Developer Extraordinaire Measuring success by profits, not revenue

or more than 20 years Rick Huffman and his two partners— Sam Catanese and Marc Williams— F have been building things. They’ve developed shopping centers, hotels, apartment complexes, a large stock of affordable housing units, and Branson Landing, a $400 million mixed-use project in Branson, Mo. Now, they’re building a hotel franchise as well. The trio’s portfolio includes Hampton Inn and Hilton properties along with four Value Place locations— an extended-stay concept that has continued to thrive in a down economy by promising hotel convenience and apartment essentials. “It just made a lot of sense,” says Huffman. “If we could build something of apartment grade, at the bottom of the extended-stay market from an af- fordability/price point, we thought the model would be good.” Fine-tuning their business strategy, Huffman and his partners have been focusing on areas with military bases, like Ft. Leonard Wood in Missouri and Junction City in Kansas, minutes from Fort Riley. “The military has a lot of travel and a lot of extended stay involved with it,” says Huffman. “There are a lot of moving parts around a military base. The first Value Place we built was in Junction City, a huge military area with a lot of

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travel and a lot of construction going on. Huffman still believes are pretty strong core values,” he says. Construction workers also use extended “That’s what makes everything work.” stay places, and it worked quite well.” that the best way Like so many others involved in real Huffman feels right at home doing estate development, Huffman has felt the this kind of development work. The to communicate with chill winds of the economic downturn. 53-year-old helped put himself through But if you stick to your values and recruit college working construction, “pounding anyone is a good team of people who share them, nails and bidding a little plumbing and he says, you can get through anything. It doing a little electrical work.” So when face to face. also hasn’t hurt that the sour economy it’s time to break ground on a new Value has cut labor and land costs to the bone, Place, he knows how to bring a project Name: Rick Huffman trimming the cost of building a Value like that in on time and on budget. Place to less than $4 million. TiTle: CeO “I spend a tremendous amount of To get ahead in Huffman’s company, time reading reports and keeping in CompaNy: HCW LLC there are some ground rules, though. Be- tune with our projects,” says Huffman. No. of uNiTs: 4 Value Places, ing on time for meetings is essential for “My biggest strength has always been in 2 Hampton Inns, and a Hilton a manager who keeps Vince Lombardi the development side. I’ve kept in tune time: “If you’re five minutes early, you’re Convention Center, Hilton with construction and costs and means late.” And despite every new advance in and methods.” Promenade, and Hilton Garden Inn technology, Huffman still believes that He’s also kept in touch with his own age: 53 the best way to communicate with anyone values, which he likes to see reflected in family: Married 29 years, 5 kids is face to face. It’s all part of a down-to- the people who work for his company. “If earth game plan that depends on keep- years iN CurreNT posiTioN: 20 I find people who are family-oriented and ing things simple and straightforward. honest and can admit their faults, those years iN fraNChisiNg: 18 “There’s nothing special,” he says PERSONAL Key accomplishments: As a company we have developed more than 5,000 Favorite fun activities: I walk, golf. We have a houseboat on a lake nearby multi-family and condo units, and recently we won first place in the world for a that we enjoy, and we spend time at sporting activities with our kids. project that we did in Branson, Missouri: Branson Landing. It’s a 2 million-square- Exercise/workout: Not really. foot project with two Hilton Hotels, 500,000 square feet of shopping, and 200 Favorite stuff/tech toys: I’m a little bit tech-challenged. I do pretty well condos. We opened it in 2006 and won the International Council of Shopping with my computer, and my wife has an iPad and she loves it. I’m not a tech guy. Centers’ best project for the world. We still own and manage it. With technology you can sometimes screw up business. I like to meet people, Biggest mistake: I don’t think we’ve really made any mistakes in the fran- shake hands, and talk face to face. chise area as a company. We went into the single-family housing market in 2005 What are you reading? I just started a new book, The One Thing You Need and that was a mistake. The timing was horrible. to Know… About Great Managing, Great Leading, and Sustained Individual Suc- Smartest mistake: Branson Landing. When we started that project we had cess, by Marcus Buckingham. a lot of reservations. It was $400 million total and now that we’ve completed it, Do you have a favorite quote or advice you give? Not really. I that’s turned out to be a good decision. guess people who know me know I’m a little bit of a stickler on time. I’m on How do you spend a typical day? I have a home in Phoenix and in Lombardi time: If you’re five minutes early, you’re late. Branson. My partner Sam lives down the road from me in Phoenix. We’ve been Best advice you ever got: My very first boss, when I was 21 years old, looking at this market out here since it’s been so distressed. We believe this noticed that I would hang out with all my buddies and we were all broke, like ev- market will rebound. We’ll also continue to look for the smaller communities for eryone is when they’re 21. He took me down to a very influential restaurant and franchising, where the cost of land is reasonable. The Value Places cost under set up a charge account for me. He said if you want to make money, you’ve got $4.5 million, and you can do that in smaller, mid-tier markets. It’s a good time to to surround yourself with the right individuals. buy land right now, and we’re out there looking. Formative influences/events: The thing that influenced me the most was Work week: I like to get up in the morning and take a walk. We own a lot of having five kids. I realized I had better work my ass off and that’s what I’ve done. different companies and different partnership interests. Most of my day is looking They’ve all attended college, are successful, and scattered around the country for new deals and managing the partnerships. I’m sitting in front of the computer now. Family is the most important thing. 5 to 6 hours a day and financing is a huge part of the business. If you don’t have How do you balance life and work? It’s easier nowadays since the good financing, it just doesn’t work. I think financing has loosened up a little for banks aren’t lending money, so I can’t do as many projects. I’d like to be businesses, with new lines of credit, inventory loans. But the federal government busier. Having good people around you helps, and we do we have great has kept its thumb on real estate loans. people in our company.

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MANAGEMENT Business philosophy: We’re doing a lot more third-party management and to micromanage. I like for the people around me to tell me in 30 words or less have been phasing out of day-to-day management activities. I’m the youngest of what’s going on, because there are so many things we do. the three partners (they are 65 and 61), and we’re all kind of wanting to maybe Greatest challenge: The greatest challenge today is making sure that you’re not burn the candle at both ends any more. picking the right locations and making sure you don’t over-leverage yourself. Would you say you are in the franchising, real estate, or cus- How close are you to operations? Very. tomer service business? Why? It’s customer service. If you don’t have Have you changed your marketing strategy in response to the great customer service and a good product you won’t survive. Consumers are economy? How? Yes we have. We have eliminated a lot of print material and being a lot more conscious about how they’re spending dollars but still demanding are using more Internet. We also are having our sales reps follow up more with the same service. the consumer. What gets you out of bed in the morning? I just enjoy life and get- How do others describe you? Probably they’d say not too serious, but a ting up, and I love working. Work is probably the most fun that I have and that workaholic. motivates me. I also enjoy spending time with my wife every day—that’s more How do you hire and fire? I usually don’t. Our management team does that. important. How do you train and retain? That’s the management team and they do What’s your passion in business? I guess I’m a driver. I’m not a patient a great job. person with details. How do you deal with problem employees? As I said, the manage- Management method or style: I just look at the big picture. I don’t like ment team is in charge of that.

about his success. “I think it’s just get- “We’re a small from taking our money. But at the end ting up every morning, looking for deals, of the day there’s only that one percent treating people like human beings, just of people who are bad who will steal being honest. A friend of mine once said company, a pat on from you. Don’t worry about that one that we spend a tremendous amount percent, because they’re going to hell of money trying to keep the dishonest the back is important.” and you’re not.” BOTTOM LINE Annual revenue: I couldn’t tell you. lion, so that does make the Value Place model more attractive for developers. 2011 goals: To complete all the construction projects and make sure they’re If you put equity in, then you can go to a community bank. But for any sizable open on time. We’re working on a very large project in the Phoenix area and projects ($8 million, $10 million, $100 million), financing for new construction that’s a goal of mine. is nonexistent. Growth meter: How do you measure your growth? Profits. Not Is capital getting easier to access? Why/why not? A little, not much. revenue. I don’t care about revenue. Have you used private equity, local banks, national banks, Vision meter: Where do you want to be in 5 years? 10 years? I other institutions? Why/why not? Community banks, over the last six would like to be maintaining the same pace I am today, continuing to do business or seven months. They’re willing to lend more than the larger banks, although deals, continuing to grow, maybe to work a little less. they have their restraints. How has the most recent economic cycle affected you, your What kind of exit strategy do you have in place for your busi- employees, your customers? Are you experiencing economic ness? I don’t have one. My exit strategy is to continue what I do. I have one growth/recovery in your market? We’ve reduced staff by 25 percent, re- son in the business. I’m hoping he’ll step up to the plate and take some of the duced costs by 40 percent. We took a look at ourselves and realized that there are business. some things out there we don’t need. We looked under every rock to find a dollar, What kinds of things are you doing to take care of your em- and I would say we’re a much better company now having gone through this. ployees? Treat them great. The best way is to tell them when they accomplish What did you change/do differently during the recent tough things. Obviously we make sure they’re compensated, but they like to be recog- economic times that you plan to continue doing into the future? nized and told they’re doing a great job. We’re a small company, a pat on the Business in America has learned how to do more with less people. I’m not looking back is important. at hiring anybody soon. We can do the same work with less people. And I learned How are you handling rising employee costs (payroll, health- to be more conservative, even in my personal life, making sure I don’t lose what care, etc.)? Health care is the biggest problem. The rest of payroll costs we can I’ve worked so hard for. Through this recession my net worth has gone down handle fine. But health care is an unknown. It goes up every year. Until Congress about 40 percent. decides to get along with each other, I have no idea where we’re going. How do you forecast for your business during trying times? How do you reward/recognize top-performing employees? We Can you even forecast at all? No. Not until we know we can borrow are too small to single out one person. We try to reward everyone as a team. money. I think it’s too difficult to forecast. You have to take one day at a time. How is social media affecting your business operations? We are Where do you find capital for expansion? We’ve used smaller banks, using social media in our marketing, but have not felt the effects of it yet. It’s still where it has been easier to find capital. What works for Value Place is $3.5 mil- a learning process for us.

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One-Stop Shoperator Young multi-brand zee mixes concepts to expand locally

ndy Lanz got started in franchising right out of the Univer- sity of Wisconsin in Madison. A With the help of his parents, the newly minted economics graduate purchased a Cousins Subs franchise in nearby Verona. Then he added a Figa- ro’s Italian Pizza franchise as well as a Chocolate Shoppe Ice Cream operation, and put them all together inside his first 2,500-square-foot store. By combining concepts, he could cater to more than one taste or time, and was able to build steady traffic throughout the day. It just made sense, he says. Grouping franchises also helped his customers, giving them gourmet sandwiches and pizza for lunch and dinner and ice cream in the afternoon—an idea that worked well in the little town just outside of Madison. “Verona is one of the fastest-growing communities in the area,” says Lanz, “and I felt a little less competition than other places in the area.” Soon after, he started to branch out into other locations. Now Lanz owns five Cousins, two Chocolate Shoppes, one Big Apple Ba- gels, and a Figaro’s. Most of these brands are grouped together as co-branded locations, which also helps him cut back on his fixed costs. Choosing the right concepts to mix

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together took some research, says the “The restaurant tick to get a better idea of how they young multi-concept operator, who was will handle customer relations on the able to get a fast start on Cousins, a brand business is really front lines. he knew well as a customer. “Cousins was “Part of hiring is just having a feel always my favorite sandwich shop,” he more about the for people,” says Lanz, “finding out who says. “That’s how I got started looking will be outgoing and talk to your guests, at it.” After that he began surfing the people than the and who’s reasonably hard-working.” By Internet in search of complementary taking more time for job interviews, he’s brands, tracked down the Chocolate food.” been able to reduce his remedial work Shoppe and just kept going. with problem employees to a minimum. But the real key to his success, he Name: Andy Lanz Lanz just doesn’t talk the customer says, has been his ability to attract a TiTle: Owner service talk. He helps set the pace, and good group of employees to prepare provides an example by making sure CompaNy: Lanz Restaurants LLC and serve the food. After all, he says, he’s in one of his stores every lunchtime, No. of uNiTs: “The restaurant business is really more 5 Cousins subs, 2 serving food and talking it up with em- about the people than the food.” Just Chocolate shoppe Ice Cream, 1 ployees and customers. about anybody can make a good sand- Big Apple Bagels, 1 Figaro’s Italian Nights and weekends you can often wich, but if you want customers to keep Pizza find him at a local event, but he isn’t just coming back day after day, you need to age: 29 out to have fun. A real go-getter, Lanz have friendly, likable people behind the family: Nope. doesn’t wait for the business to come to counters. To do that, he budgets extra him. He goes after the market wherever years iN CurreNT posiTioN: time to get to know the people who he can find it, specializing in marketing are applying to work, probing them to 6.5 his food favorites at events in the area. find out more about what makes them years iN fraNChisiNg: 6.5 It’s a lucrative sideline, he says, which PERSONAL Key accomplishments: Going from work out nearly as much as I should. one store to four stores in six and a half Favorite stuff/tech toys: I’m not years has probably been my biggest ac- “This year we have really big into that, but I couldn’t live complishment. without my BlackBerry. Biggest mistake: I’ve made a lot of over 50 special events What are you reading? I read the mistakes. At certain points I’ve been a news about half an hour a day. little too optimistic and grown too fast. scheduled. And it covers Do you have a favorite quote or How do you spend a typical day? I advice you give? Adversity builds usually visit at least a couple of the stores. everything: the state hockey character. I work lunch in one of the stores. I do Best advice you ever got: Laugh quite a bit of paperwork every day. Book- at your mistakes, but don’t repeat keeping and setting up marketing, that tournament, fairs, firework them. kind of stuff. I’d rather be on the floor, Formative influences/events: working with customers. displays. I work with a local My parents have had a great deal of Work week: I do a lot of special events. influence on my life. My Dad owned an This year we have over 50 special events entertainment center and insurance agency for 25 years and my scheduled. And it covers everything: the parents had a large self-storage business state hockey tournament, fairs, firework we donate a percentage of when I was growing up, so I think that’s displays. I work with a local entertainment definitely where I got my drive to invest center and we donate a percentage of and build a business. sales back. We sell subs and ice cream at sales back. We How do you balance life and the events. work? I spend a lot of time with my Favorite fun activities: I love to go to sell subs and ice cream at business. At first I was much worse at Badger games, both football and hockey. it than I am now. I definitely learned And I have pet turtles. the events.” to force myself not to work and do fun Exercise/workout: I probably don’t things too.

16 Multi-unit Franchisee Issue II, 2011

muf2_cs_lanz(15,16,18).indd 16 3/11/11 4:48 PM OverOver $$ 1.6 1.6 MillionMillion inin AverageAverage UnitUnit SalesSales SwissSwiss Farms:Farms: America’sAmerica’s Drive-ThruDrive-Thru GrocerGrocer

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ad_swissfarms(17).indd 17 3/11/11 4:34 PM P O W E R PLAYERS

MANAGEMENT Business philosophy: In the restaurant business the most important thing Have you changed your marketing strategy in response to the you can do is have the best people, the friendliest people that you can find. Any- economy? How? We have done more discounts and specials than in the body can make a sub, but doing it in a way that builds relationships is always the past. However, great food and great service are still the best ways to retain loyal hard part. guests. Would you say you are in the franchising, real estate, or cus- How do others describe you? I’d like to think that other people think of tomer service business? Why? Definitely the customer service business. I me as a nice guy, but my employees know I have high expectations. bought a franchise, but taking care of customers is really the core of everything. How do you hire and fire? Firing? I don’t do very much of that at all. What gets you out of bed in the morning? I like to make little im- Usually if you hire the right people you never have to fire them. As far as hir- provements every day. If you make your business just a little better every day, ing goes, I use a couple of tools. The most important is a structured interview. over the long term it makes a huge difference. I ask a lot of hard questions that get them to open up. More than just “Tell What’s your passion in business? A lot of this goes back to people. I me about yourself.” love my regular customers and getting to know the people. How do you train and retain? I make sure that people start out with clear Management method or style: I’m a younger guy and I’m pretty relaxed. expectations. And the franchisors provide a lot of that as well. I think most of my employees have a good idea of what I expect and I make it How do you deal with problem employees? I guess all people are very clear. Aside from that, I tell my guys to have fun. different. It depends on the person. Of course I don’t have a lot of problem How close are you to operations? I have four stores. I get to an average employees, but when I do we just like to make sure they understand what the of a couple a day and I usually work lunch in one of the stores each day. So I’ll be expectations are and why they aren’t meeting them. If we can help them, great. in each of my stores at lunch once a week, on average. If we can’t, we part ways. Most things can be worked through.

has helped him weather the economic can build his revenue without adding downturn in his region. And he plans I like to make to his fixed costs. And he stays focused to keep on building up that end of the on making daily, incremental steps for- business in the year ahead. little improvements ward. For Lanz, winning at franchising “This year we have over 50 special takes long-term commitment, and he’s events scheduled,” he says. That way he every day. all in for the long haul. BOTTOM LINE Annual revenue: I prefer not to say. you even forecast at all? It’s tough. No one knows what will happen in 2011 goals: My biggest goals are to grow my event business and grow sales the next two years, or three or four or five. My goal this year is to have some overall. We’ve had a couple of tough years, like everybody, but I think things are kind of growth. starting to look up a little bit. We’d like to see things turn around. Where do you find capital for expansion? To be honest I haven’t Growth meter: How do you measure your growth? I measure looked in a couple of years. everything, maybe too much. As far as growth, I’d say same store sales is what Is capital getting easier to access? Why/why not? That’s obviously we want to see grow. a little tougher. Vision meter: Where do you want to be in 5 years? 10 years? Have you used private equity, local banks, national banks, I would imagine still running my restaurants. I imagine that I will have grown in other institutions? Why/why not? We’ve used local banks mostly. some ways, store-wise. I guess I’m a one-thing-at-a-time guy and now I’m focused What kind of exit strategy do you have in place for your busi- on growing the restaurants I have. ness? At this point I don’t really have one. It’s not a great time to leave a busi- How has the most recent economic cycle affected you, your ness and I don’t think it will happen anytime soon. employees, your customers? Obviously it’s been tough on everyone. Our What kinds of things are you doing to take care of your em- customers are a lot more cost-conscious than ever before and so are we. We pay ployees? We have incentive programs. Our corporate office mystery shops, attention to our bills more closely than ever. where they send people in to buy subs, find out if the service is good, is the Are you experiencing economic growth/recovery in your mar- restaurant clean. If an employee gets 100 percent, they get a $100 bonus. That ket? I think things are starting to look up and we’ve come through it. It could happens pretty often, and managers have a bonus system in place as well. have been a lot worse. How are you handling rising employee costs (payroll, health- What did you change/do differently during the recent tough care, etc.)? I don’t know if there’s a lot we can do to handle that, other than economic times that you plan to continue doing into the future? to make sure our restaurants are running as efficiently as possible. Before the downturn I was used to having consistent sales growth. It was easy How do you reward/recognize top-performing employees? The to let the little things go because rising sales fixes all problems. Over the last few bonuses are the most formal thing I do. A lot of it is making sure your employees years we’ve been very careful about every cost. I make sure we’re getting a com- know they’re appreciated. petitive deal from every vendor and I think in the long term that will be beneficial. How is social media affecting your business operations? Social How do you forecast for your business during trying times? Can media has not had an effect on my business at this point.

18 Multi-unit Franchisee Issue II, 2011

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ad_drivenbrands(13).indd 13 1/18/11 5:29 PM P O W E R PLAYERS By DeBBie SelinSky If the Brand Fits… Fitness industry entrepreneur seeks diversification

s a young man, Army veteran Merrill says. “I remedied that, in- Within a short period, I had three and athlete Randy Merrill fol- creasing the cash flow from $20,000 Super Bodies Tanning stores in the lowed his natural interests into to $60,000 a month per store. By the Atlanta area,” he says. A training and coaching at some time I left 18 months later, we had By 1996, Merrill had joined forces of the nation’s top fitness chains. The nine stores up and running in the with Alex Royter, whose strengths in- Atlanta native became one of the top Atlanta area.” clude daily operations. The result is producers for American Fitness Cen- After a stint in the Los Angeles Solar Dimensions, a chain of 14 up- ters (later bought out by Bally Total fitness scene, Merrill returned home scale tanning salons in the Greater Fitness) and then helped expand Aus- at the age of 29 to live in his father’s Atlanta area. While the salons were tralian Body Works, now known as basement and reexamine his goals. doing well enough, Merrill saw busi- LA Fitness, from five to 12 locations “A fellow approached me about buy- ness fall for the first time, in 2008 dur- in the Atlanta market. ing his tanning salon for very little ing the economic downturn. “It’s not “Australian Body Works had a great money. My younger brother lent me really a growth business anymore,” he product but no one strong in sales,” $5,000 and that was the beginning. says, adding that he takes pride in the

20 Multi-unit Franchisee iSSue ii, 2011

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fact that his businesses have always the 10 percent tax the new health care Name: Randy Merrill made money. plan contains) and increasing health TiTle: President Merrill says that in the tanning warnings about skin cancer, Merrill CompaNy: Merrill Co. business there is a constant need to became fascinated by the massage in- reinvent the wheel. “You have to look No. of uNiTs: 14 solar dustry, which was beginning to boom. at what your competitors are doing Dimensions (not a franchise), 1 “I liked the idea of using my skill set— and tailor your training on a regular Massage Heights (another set to helping people become healthier—and basis. Basically, you have to do every- open this spring), 1 Cartridge World Atlanta was very under-served in this thing yourself that you can get with age: 49 arena,” he says. franchising,” he says. family: Wife Mary, son Cole, 5, In 2007, while conducting due dili- He became a franchisee for the first and new baby due in April gence on the leading massage fran- time in 1995 with a Planet Smoothie years iN fraNChisiNg: 15 chises, he spent some time watching location (later sold), and in 2010 took years iN CurreNT posiTioN: 15 franchisee Tom Gustoff in action at the on a Cartridge World unit with a fam- (21 as a business owner) Massage Heights location in nearby ily member. Merrill says he was inter- Sandy Springs. “I was impressed by ested in finding a franchise that would the infrastructure and the business allow him to grow at a faster pace. model, which is membership-based. “After having seen my father, at A lot of the companies were simply the age of 57, lose his rental business, selling massages with no commitment I had become rather conservative in on the part of the individual customer. terms of risk and growth. My father I knew that wouldn’t work.” Massage came from the Depression Era, so he Heights offers clients a luxury mas- was afraid to borrow money to invest sage experience in a day spa setting in his business. By the time he lost the for a reasonable monthly fee. “With business, I’d been doing his books for 25 million more Americans each year years, and that resonated with me, so getting a massage than a decade ago, early on I tended to only grow as I the room for growth is limitless,” could pay for things,” he says. “On Merrill says. the other hand, my partner seemed By the time he went to a discov- to go too far the other way. He bor- ery day at Massage Heights in San rowed for everything. Now I see that Antonio, he felt he’d found the right there’s a happy medium, and I’m not fit. He joined the growing company, so risk-averse. I don’t have to pay cash which has been franchising since for everything.” Fortunately, he adds, 2004 and now has 70 locations open he’s been able to both self-fund and and 110 more signed. In addition to borrow from local banks. working with Gustoff at the Sandy As the tanning industry was affected Springs location, the partners’ sec- by the economy (he takes issue with ond area location is slated to open PERSONAL Key accomplishments: Building successful businesses while having plenty What are you reading? Freakonomics by Steven Levitt and Stephen of quality family time. Dubner. Biggest mistake: Not growing fast enough. Do you have a favorite quote/advice? Have a clear mind, an open Smartest mistake: Not growing fast enough. heart, and willing hands. How do you spend a typical day? Coaching, guiding, and helping. Best advice you ever got: Be bold and courageous. When you look Work week: With a new store, it’s 50 hours a week for 30 days. Then it’s back at your life, you will regret the things you did not do rather than the less, maybe 5 to 10 hours a week. ones you did. Favorite fun activities: Working out, family time. Formative influences/events: My father losing his business after Exercise/workout: I work out at least once a day. I ride the recumbent many years. bike for one hour and I lift weights. It keeps the endorphins going and my How do you balance life and work? My first commitment is to fam- mind fired up. ily. A strong family makes for a successful professional life. It also makes me Favorite tech toys: Wii a kinder, gentler kind of manager and helps us grow as an organization.

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MANAGEMENT Business philosophy: Be the best you can be, be a leader. more in big picture mode. Are you in the franchising, real estate, or customer service Have you changed your marketing strategy in response to the business? Why? Service, service, service—that’s what it’s all about. economy? How? No. What gets you out of bed in the morning? Life, baby! Personality: Intense, passionate, and kind. What’s your passion in business? To help others succeed. How do others describe you? The same. Management method or style: Coach up! Lead, follow, or get the hell How do you hire and fire? Hire on attitude and fire on accountability. out of the way. How do you train and retain? Train and retain on accountability. Greatest challenge: Being too intense. How do you deal with problem employees? Coach ’em up. How close are you to operations? Not very, on a daily basis. I’m

in the heart of the affluent Buckhead Having learned a lot from his ex- neighborhood this spring. Leases are “I’m nearly 50 periences as a business owner and being negotiated for the third and multi-unit, multi-brand franchisee, fourth Massage Heights, and Merrill years old now, Merrill suggests that young would-be has signed a contract for at least 15 franchisees go to work in the indus- units over the next five years. If that so I’ve got to try for a year before committing time goes well, he might consider doing and money to a unit. “At the end of the same in other states. that time, you’ll make a wiser deci- “I’m nearly 50 years old now, so go as fast as I sion,” he says. I’ve got to go as fast as I reasonably He also believes a strong mentor can can,” he says. “I have more experience reasonably can.” prove invaluable to a new franchisee. now, and I’m really excited about what “Tony de Leede, an Australian fellow Massage Heights is doing. Things are ing. I’ve already got more than I ever who ended up selling Australian Body looking good.” thought I’d have as a young man, so Works to LA Fitness for $27 million, At the same time, he and his wife my family is more of a driving force served that role for me. I tried to be Mary, an executive with Coca-Cola, for me now. When I was young and like Tony in business—but as a nicer have a five-year-old son and a new gung-ho and worked all the time, I guy,” he jokes. “Now I’m reinvigorated baby due this spring. “We live near my didn’t really understand people with by helping people with their health son’s school, and I’m more interested kids who didn’t want to do that too. and working with a company that has in walking him home from school Now I get it, and it’s made me a more great legs and is going to be growing than in spending all my time work- compassionate employer,” he says. for a lot of years.” BOTTOM LINE Annual revenue: $4.5 million Is capital getting easier to access? Why/why not? Yes, things 2011 goals: $5 million in revenues are looking better, though some banks still won’t lend to startups. Growth meter: How do you measure your growth? Bottom line. Have you used private equity, local banks, national banks, Vision meter: Where do you want to be in 5 years? 10 other institutions? Why/why not? Yes, we’ve used our own money years? In 4 years, I’d like to have 20 Massage Heights units. In 10 years, as well as money from banks. I’d like to be done. What kind of exit strategy do you have in place? We have great How has the most recent economic cycle affected you, your managers and are building great P&Ls for a potential sale. employees, your customers? Cartridge World has been strong, but What are you doing to take care of your employees? Offering tanning is down. benefits and an awesome work environment. Are you experiencing economic growth/recovery in your mar- How are you handling rising employee costs (payroll, health- ket? Absolutely. care, etc.)? My goal is to always make more money and take care of it What did you change or do differently in this economy that that way. If we stay focused on what we’re doing and make money monthly, you plan to continue doing? Staying tight. we can take care of these costs ourselves. How do you forecast for your business in this economy? We’re How do you reward/recognize top-performing employees? just driving for growth through service, service, service. With recognition and dollars. Where do you find capital for expansion? By living below our How is social media affecting your business operations? Not means and through loans. sure yet.

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muf2_cs_merrill(20,22,23).indd 23 3/11/11 4:47 PM P O W E R PLAYERS By John Carroll

British Brothers Take Illinois, Virginia “I don’t quite understand why people eat what they eat in the U.S.”

lenn Miller’s first look at the problems that needed fixing. “The loan was paid off and we re- the franchising business came “It was wrongly structured,” recalls financed with a local bank when I in the early 1990s, when the Miller, who says two loans had been came on board three years down the G British Chartered Accountant’s taken out that charged 15 percent and line.” The local Busey Bank was able brother, an attorney, wound up with 13 percent, and the debt payments to restructure the debt, and in 1996 six Arby’s in Central Illinois. It didn’t were dragging down the operation. Miller left the U.K. and made the trip take a rocket scientist to see some of “It took about two years,” he says. to the U.S., where he gradually took MANAGEMENT Business philosophy: We tend to run our company with the ideals of our particularly now that Arby’s has been thrown on the block. Scottish socialist father, who believed in a fair day’s work for a fair day’s pay. Have you changed your marketing strategy in response to the No prejudice, no bias. Our obligation is to our employees, who take care of economy? How? The economy has driven complacency out of our at- our guests. titudes towards our guest. Our four walls marketing must emphasize what is Would you say you are in the franchising, real estate, or important to the guest: great food, well served in a comfortable environment. customer service business? Why? We are in the customer service How do others describe you? (He laughs.) I would think “odd,” be- business. I think you can use a lot of the educational skills you’ve learned cause of my accent. I talk about politics too much. in formal education and deploy them running something better than anyone How do you hire and fire? I’ll hire and fire the director of operations. else. Our motto is to hold ourselves to a higher standard. Hopefully we have I will have some opinions on internal promotes. I do inspect all of the formal an open-door policy. appraisals that the area directors do for the general managers. We want to What gets you out of bed in the morning? Competing. We want to make sure the language is the same for all employees. build a better mousetrap. How do you train and retain? In terms of training, there’s seven What’s your passion in business? My passion is being the best hus- weeks training in McAlister’s and six weeks training in Arby’s. In Arby’s the band and father possible. director of operations assigns mentors to newer general managers who they Management method or style: Integrity and honesty. can rely on. We meet as frequently as we can with our managers in Virginia. Greatest challenge: I don’t quite understand why people eat what they Retention, I think, goes directly to the culture. This is a small company, still eat in the U.S. I wasn’t raised in this culture. I don’t understand the appeal. I growing, financially secure, and we like to have fun. If you want to be a gen- have no natural affinity for some of the things we sell. eral manager, we provide the mechanism to get you there. How close are you to operations? I think I’ve got a lot closer in How do you deal with problem employees? Our policy and proce- the last three years and I enjoy it. It just means you want more and more dures manual is pretty strict. If there’s no call, no show, you get written up. control. Franchisees are always disappointed with franchisors. You think you The second time you’re dismissed. We also do a newsletter once a quarter. know how to run the franchise better than the franchisor. That’s a source of And employees can raise concerns and complaints to the director of human frustration. When it’s your money on the line, you have to have a lot of faith, resources.

24 Multi-unit Franchisee ISSUe II, 2011

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ad_dunkindonuts(25).indd 25 3/11/11 4:34 PM P O W E R PLAYERS “I was in Richmond, Virginia, and went into a local Jason’s Deli one day and said, ‘Blimey, this place is packed!’”

over the operational end of the busi- was what Arby’s wants us to do. I said ness and later turned his thoughts to to have faith in the product and earn- expanding it. ings started moving up.” “I came on to do some consult- Once the existing operations had ing at the end of ’96 and got into it been restructured, Miller turned his more deeply in ’97. We knew what we attention to growth. “My first act needed to do by the end of ’97, and when I took over was to sign a five- I took over the running of it in ’98.” store development agreement with And there was more work to be done. Arby’s. We added three more in the “When I came on board in ’96, I September of the same year and then started with a five-year analysis with two more after that. We built it to 18 expenses and revenue,” says Miller, stores. That took eight years.” the managing partner. “We were ad- By the time 2007 rolled around, vertising free food. Plot number one: Miller and his brother had reached Let’s stop advertising free food. The the end of their development agree- gals who ran the company said that ment with Arby’s, as well as the end of PERSONAL Key accomplishments: Bringing the discipline of a London blue-chip firm business trips. You never get away from the business. It’s always at the back to a funny industry like franchising. You take a lower-risk business like fran- of your mind, but I’m lucky to be able to choose the time to work hard and chising and then you make the capital work hard. For most mom-and-pops, then ease off. if they made money they would spend it and not reinvest it. I’m doing the Favorite fun activities: Skiing once or twice a year. My brother and I things you learn in Citibank and Deloitte and applying it to franchising. It’s all tend to go golfing in Scotland once a year. And I have a sailboat for week- about following your numbers and keeping your ratios in line. It’s not about ends. making money; it’s about making the right money, to improve the quality of Exercise/workout: Oh, heck, you’ve got to do that. I go to a local gym earnings. three days a week for an hour and a half—45 minutes weights, 45 minutes Biggest mistake: Probably listening too much to people without opera- cardio. tional market knowledge. If I made mistakes, it was making some hiring Favorite stuff/tech toys: I’m an Apple man. I have the Mac Air and decisions that we had to fix later. Remote management is very difficult. my G5 and iPhone. I don’t need the iPad, but the Mac Air is the best product Smartest mistake: Never made a smart mistake, only dumb ones. on the market. How do you spend a typical day? We’re constantly refining what we What are you reading? I relax by reading novels and they tend to be do—whether that entails replacing the central accounting system or improv- whodunits. Usually authors of Celtic or Scandinavian noir and also Walter ing our bench. I look for any systemic issues arising from guest feedback and Mosley and Elmore Leonard to improve my understanding of parts of the U.S. how we respond to feedback from our guests or our employees. I discuss the Then I listen to podcasts of the Economist, BBC4’s Analysis, and NPR’s Fresh relative success of LTOs or new products and personnel issues with area direc- Air and Car Talk. tors. With opening new stores and replacing and remodeling stores in Illinois Do you have a favorite quote or advice you give? My father’s there are a lot of calls to architects, GCs, and kitchen and décor suppliers. We favorite: If at first you don’t succeed, try, and try again. (Robert the Bruce, talk a lot about our people and processes and how well we are positioned to King of Scots, 1306–1329) meet future need. Best advice you ever got: One of my bosses told me to learn how to Work week: We have started using GoToMeeting at least once a week. I say no. You have got to learn how to delegate, and if you can delegate you’ll find that we can cover a lot of preliminary work before quarterly meetings in be promoted. Otherwise you get burned out. Illinois and in Virginia. If I’m going to Illinois I try to time it for an anniversary Formative influences/events: I got a terrific put-down at age 16. I with one of the long-term employees and visit the stores. I sit on the Fran- was a conceited prig who failed almost all of my exams. I have never forgot- chise Advisory Committee for McAlister’s and some subcommittee working ten that lesson in humility. groups. GoToMeeting is becoming more widely used by McAlister’s and helps How do you balance life and work? I have such a fantastic life and eliminate some business trips. We are close with our management teams and wife and family. It’s easy. I love working with our people and it couldn’t be invariably entertain sometime in a visit. Last year my schedule included 14 better right now. Technology enables life and work to blend together.

26 Multi-unit Franchisee Issue II, 2011

muf2_cs_miller(24,26,28).indd 26 3/11/11 4:42 PM Red Mango Franchising is the real deal. Our franchise opportunity is designed to help you build a business and make a real difference.

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ad_redmango(C3).indd 3 1/18/11 5:30 PM P O W E R PLAYERS “What I would like to see is a much brighter economic future. I’d like to see the uncertainty go away.”

their growth opportunities for Cen- place is packed!’ I found out that Name: Glenn Miller tral Illinois. By then they had already McAlister’s was available in Virginia, started looking around to see how the TiTle: Managing partner and that was a very healthy option. second act of their franchising saga CompaNy: Miller Group LLC We went to a day of discovery at should begin. McAlister’s, liked the food, and said No. of uNiTs: 4 McAlister’s Delis “We needed to go to the next stage,” we would go for this. The majority of he says. That entailed trips to inspect in Virginia with a fifth opening this Virginia was open so we signed up.” Asian fusion concepts, chicken opera- spring; 18 Arby’s in Central Illinois Now the plan is to open up at least tions, and more. 15 more stores in their territory in age: 58 “We went through quite a number the state, with a potential to expand of other franchises we were consider- family: Wife and three children to a total of 30 to 35 locations. Along ing,” says Miller. “I was in Richmond, years iN CurreNT posiTioN: 15 the way, Miller can take time to see Virginia, and went into a local Jason’s how a possible third act of his U.S. years iN fraNChisiNg: 15 Deli one day and said, ‘Blimey, this franchising career might play out. BOTTOM LINE Annual revenue: On a full-year basis, $5 million for McAlister’s; $14 mil- How do you forecast for your business during trying times? lion in Arby’s Illinois. Can you even forecast at all? It’s not the economy, it’s the food. 2011 goals: To open the new store in Short Pump, Virginia. We think it’s We’re in the food game and the quicker we can have better food, food going to be successful. We’ll be settling new employees into our corporate people want to eat and can afford, we’ll see recovery. culture and then we’ll look for new locations. In Illinois, we’ve got to replace Where do you find capital for expansion? I don’t see us needing one of our stores, and receive handover on August 1. Keep trying to increase more capital for expansion for some time. We don’t carry a whole lot of debt. our bench strength. Is capital getting easier to access? Why/why not? No, not re- Growth meter: How do you measure your growth? We are ally. The federal government has tightened down on bank lending contrary to poised for some very positive changes in the McAlister’s lineup this year. In what is said publicly. Arby’s we don’t know where the recent change will take us. Thinking posi- Have you used private equity, local banks, national banks, tively, if Arby’s has a new management direction and a new menu, we could other institutions? Why/why not? We’ve stuck with Busey Bank for see positive comps on both brands. 15 years and we don’t go anywhere else. Vision meter: Where do you want to be in 5 years? 10 What kind of exit strategy do you have in place for your years? Play a bit more golf and probably take a time share in Scotland. business? My brother is happy that he and I are looking at 15 more years. I have no intention of retiring and going slow. What I would like to see is Other than that, I don’t particularly want to exit. One option is to eventually a much brighter economic future. I’d like to see the uncertainty go away. create a board of employees and they will run the company. And we plan to open more stores in Virginia and remodel our Arby’s stores What kinds of things are you doing to take care of your em- in Illinois. ployees? Now our directors of operations are looking at individuals and How has the most recent economic cycle affected you, your saying, How are you growing a specific part of the business? What are you employees, your customers? We’ve taken care of our employees. We doing for the local store? How deeply are you getting into the local commu- kept our pay increases, paid bonuses, and we’ve seen a reduction in traffic. nity? We want you to change your behavior. Smile more and do more, and I We’ve had poor leadership in Arby’s. We had to give up our 401(k) because think that will be more effective. government requirements were too expensive to comply with. How are you handling rising employee costs (payroll, health- Are you experiencing economic growth/recovery in your mar- care, etc.)? Waiting for the federal government to establish the rules— ket? We’re going to get a bounce in Arby’s and a bounce now in Virginia. much uncertainty. Last year we had the 100-year snowstorms in Virginia, and that didn’t help. How do you reward/recognize top-performing employees? Now everybody is being a lot more positive. Top employees could earn 10 to 15 percent of their pay from bonuses. What did you change/do differently during the recent tough How is social media affecting your business operations? Invest- economic times that you plan to continue doing into the fu- ment in social media needs to be permanent and sustained to ensure quality. ture? People are working harder for less money, which is just the state of We have yet to determine the appropriate level of commitment necessary to the nation. support a launch. When we do it, we will do it right.

28 Multi-unit Franchisee Issue II, 2011

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ad_ediblearrangements(29).indd 29 3/11/11 4:36 PM P O W E R PLAYERS By DeBBie SelinSKy Home-Based Keeping it local in a Texas military town

or years, Jeff Orlando has unbelievable homes and lifestyles,” says hard work and smarts it took for these read with fascination the ar- the Killeen, Tex., resident. However, operators to become so large, but he ticles in franchise and business he adds, it’s also nice to read about doesn’t really want 92 units—maybe F magazines about super-successful “regular guys like me,” who choose to 12 close to home. “I want to build entrepreneurs. “It’s amazing to read define their success in a different way. my success here in this community about these guys who have 87 Burger Orlando, with one Wingstop and and I’m spending many hours doing Kings and 92 Wendy’s units and these one Schlotzsky’s, says he admires the that. I don’t really want to spend so

30 Multi-unit Franchisee iSSue ii, 2011

muf2_cs_orlando(30-32,34).indd 30 3/11/11 4:42 PM P O W E R PLAYERS

much time traveling to units far from Orlando, who worked 10 years home,” he says. “I love the product as a manager for Blockbuster and His Schlotzsky’s is in a shopping other video stores, says he signed on center near his home in Killeen, an and the way with Wingstop because he loves the hour north of Austin. His Wingstop is simplicity of the concept. “I love the three doors down in the same shopping the company is product and the way the company center. The two brands (both under is set up, the way founder Antonio the Roark umbrella) work very well set up, the way Swad designed the packaging. It’s together, he says, because Schlotzsky’s just meticulous, perfect. I also really is a 70 percent daytime business, and founder Antonio liked the man behind the vision, and I Wingstop is a 70 percent evening had a lot of confidence in him. Some business. He plans to open another swad designed people have great concepts but they Schlotzsky’s co-branded with a Cin- can’t execute them. Wingstop just felt nabon (another Roark brand) later the packaging. right to me,” he says. this year in Harker Heights, three He opened a Wingstop in College miles down the road. It’s just meticulous, Station and then one in Austin, fol- Orlando, a self-described “Air Force lowing the Wingstop philosophy of brat” and youngest of four brothers, perfect.” locating units in shopping centers believes he has the best of both worlds. with video or grocery stores be- His first franchise experience—he and cause people go there several times his brother opened a pizza place that a week. His mother died unexpect- Name: lasted about 18 months when they Jeff Orlando edly the same day he opened the TiTle: were young—came in 1999 when he Owner Austin store, and Orlando decided opened the 10th store in the then- CompaNy: Wingstop & to sell the stores in outlying areas new Wingstop brand. schlotzsky’s franchises and bring another business home to “Everybody told me I was crazy,” he No. of uNiTs: 1 Wingstop, Killeen. “My stores were 100 miles recalls. “When we were growing up, 1 schlotzsky’s (opening a apart, and I was already tired of the nobody wanted the wing—everybody schlotzsky’s/Cinnabon in 2011) travel. Plus, it’s a struggle to find wanted the drumstick. We threw the age: 47 the right employees to leave those wings away.” Obviously, things have family: Married, no children; this businesses with,” he says. changed, he says, pointing to Super year we are going to have one In the process of doing his due Bowl Sunday, the busiest day of the and adopt one. diligence, Orlando learned that year for his store. “Wings and sports years iN fraNChisiNg: 12 Schlotzsky’s had been purchased out just go together.” years iN CurreNT posiTioN: 12 of bankruptcy by Bobby Cox, a major PERSONAL Key accomplishments: Starting my own business. some are low-tech? I’m more like no-tech. Biggest mistake: Not starting a family sooner. What are you reading? Mostly newspapers and business magazines. Smartest mistake: When I opened Wingstop 12 years ago everyone I miss reading books, though. I’m actually thinking about the Nook or the thought wings were a fad and said it wouldn’t work. Kindle. It would be so easy not to have to go to the bookstore anymore, and How do you spend a typical day? First, I drink my coffee and read I could always have lots to read with me at all times. the paper. I make projections on the day’s sales using previous years’ sales Do you have a favorite quote/advice? Organize, simplify, delegate, and trends for each manager. I’m on the phone a lot and stay busy running and verify. errands, doing maintenance, etc. Best advice you ever got: Go with what you know, don’t worry about Work week: My work week is seven days. Sometimes I feel like I’m what anyone else thinks. always thinking about it, and I’m physically in the stores nearly every day, Formative influences/events: My Dad. He is my hero. even working shifts with employees and filling in when needed. How do you balance life and work? I am actually out of balance— Favorite fun activities: Golf. I need to start playing again. too much about work. That’s where family will come in now. We would like Exercise/workout: Three days a week with a trainer. to have a baby and adopt one a little older. Since I’m “old,” this would give Favorite tech toys: None. You know how some people are high-tech and us a head start.

Multi-unit Franchisee Issue II, 2011 31

muf2_cs_orlando(30-32,34).indd 31 3/11/11 4:42 PM P O W E R PLAYERS “In the next few weeks, 14,000 troops are due to deploy, and for the first time, there are none coming back for six or seven more months. so it could be a tough summer.”

Blockbuster franchisee in Tex- of owning and operating res- as. “I had a whole new feeling taurants in a military town. of confidence in Schlotzsky’s, “Here in Killeen, we have Fort the deli with the funny name Hood Army base, which is the and the serious sandwich,” world’s largest military base. he says. “Bobby understood What that means, business- the value of the chain, that wise, is that we’re hurt when it had a great product and soldiers are deployed, because great name recognition and they go in huge numbers, not just needed fixing.” just a few here or a few there. About the same time, he For example, in the next few heard the 27-year Schlotzsky’s weeks, 14,000 troops are due to franchisee in his shopping deploy, and for the first time, center wanted to retire. He there are none coming back for bought that unit and hasn’t six or seven more months. So looked back. “It’s worked out it could be a tough summer,” great. Our biggest advantage he says. is that both my units are in 2011 is an important year the same shopping center, so in Orlando’s life for other rea- if I have a problem at one, I sons. He and his wife are hop- just walk down the sidewalk ing to have a baby and adopt a and get help. I can work both small child. “I’ll be honest—my the stores.” life is out of balance. I need to As he works on plans to make time for family. That’s just open the new Schlotzsky’s/ something I don’t want to miss Cinnabon, Orlando is mind- out on,” he says. “I’m 47 and ful of the constant challenge making decent money, and it’s MANAGEMENT Business philosophy: Keep moving forward. Have you changed your marketing strategy in response to the Are you in the franchising, real estate, or customer service economy? How? We are consistent at advertising constantly, mostly TV business? Why? Customer service. No matter what you sell, you’re in the but trying new things. customer service business. I keep a quote from Howard Schultz of Starbucks Personality: Business-like, community-oriented, hard-working. next to my desk: “We are not in the coffee business serving people, we are How do others describe you? Always moving fast, like George Jeffer- in the people business serving coffee.” son. I can do anything in the store faster than all these young guys. What gets you out of bed in the morning? Smell of coffee. How do you hire and fire? We interview and make a decision to hire What’s your passion in business? My customers. I love being in the based on previous work history. We have a good core set of employees at stores and talking to people. each store who have been with me for years. It’s always the fringe that keep Management method or style: Hands-on and direct. If I like what you’re coming and going. doing, I’ll tell you. If I don’t like what you’re doing, I’ll tell you that too. How do you train and retain? Training is done at the store level, and Greatest challenge: Being in a military town, we have to balance the we are very tough on newbies. If they can’t cut it after a day or two, there is constant deployment of troops to the Middle East. When they leave, it hurts, no use wasting any more time. We get them out and get a new one in who and when they come back, everyone is busy. The troop levels are always fluc- wants to work. tuating with deployments, soldiers in the field, gone for training, etc. How do you deal with problem employees? I believe everyone How close are you to operations? Right in the middle. If I’m not there, I deserves a fair shake, a get-out-of-jail-free card, if you will. After that it’s just talk to the managers in the stores about every two hours to check on sales. time to go.

32 Multi-unit Franchisee Issue II, 2011

muf2_cs_orlando(30-32,34).indd 32 3/11/11 4:42 PM ad_mrgoodcents(33).indd 33 3/11/11 4:36 PM P O W E R PLAYERS “I joke with my wife that, at my age, at least we’ll get the best parking spaces at our kids’ high school graduation.”

time to spend time building a family. lenges of running restaurants in a tight I joke with my wife that, at my age, at economy. “My best advice is do your least we’ll get the best parking spaces homework. Running your own business at our kids’ high school graduation.” is getting tougher all the time. Twelve Orlando, who says he’s learned a lot or 15 years ago, if you were a marginal from his failures as well as his successes, operator, you could make money. These often talks with his mentor, Charles days, with the cost of food, labor, and Loflin (see www.mufranchisee.com/ energy, you have to be a shrewd opera- article/749/), about the continued chal- tor to make it.” BOTTOM LINE Annual revenue: $2.05 million prices. All forecasts point to higher food costs for the next couple of years. 2011 goals: Build another store of each brand in the market—4 stores, Where do you find capital for expansion? Primarily self-funded. $4 million a year. Is capital getting easier to access? Why/why not? Yes, because I’m Growth meter: How do you measure your growth? Overlapping established in the community and have a good relationship with a local bank. last year’s sales and profit. Sales should always be up, even if it’s just a little. Have you used private equity, local banks, national banks, If your sales are down a little but your profit is flat or up, you’re still okay. other institutions? Why/why not? In the past, I’ve mostly used Vision meter: Where do you want to be in 5 years? 10 years? national banks because the relationship between the franchise and lending A lot of people dream of answering this with “retired,” but I’ll probably institutions is sometimes already established. Now I have a good relationship always work. I need to stay busy—it’s my character. When I’m 80, I’ll prob- with a local bank. ably be a greeter at Wal-Mart, just so I have a reason to get up and get out. What kind of exit strategy do you have in place? Nothing. I just How has the most recent economic cycle affected you, your want to build a nice little company that can support me till I’m ready, and employees, your customers? It has definitely changed the ballgame: that will be appealing enough for someone else to want it when I’m through. $3 a gallon for gas, higher prices on almost everything, people out of work. What are you doing to take care of your employees? We have You have to be one of the places that customers really want to go often. Be- a family atmosphere. Everyone knows everyone’s families and kids. We try cause of the economy, people have quit going to a lot of places, and I don’t to do company things together. It’s just a nice environment. It makes you want mine to be one of them. It all comes down to customer service. feel good when people say, “This is the best job I’ve ever had” or “I’m never Are you experiencing economic growth/recovery in your mar- leaving.” You know it’s not always true, but it’s nice to know, even for a mo- ket? We have been very fortunate all these years with the military base ment, that they feel part of the family. being the engine that drives our economy here. We haven’t felt the impact of How are you handling rising employee costs (payroll, health- the economy as much as other cities and states. care, etc.)? That’s been our biggest hurdle lately. The last minimum wage What did you change or do differently in this economy that increase cost about $30,000. Unemployment rates in Texas nearly tripled you plan to continue doing? I reevaluated all our contracts and services last year to replenish the dwindling fund. It’s going to be really tough in the to save money. Electricity, trash, chemicals, pest control, credit card fees, any- future. If we keep raising prices to offset every cost increase, we will price thing I could think of. I would rather cut anything but service and quality. We ourselves out of the market. switched our electrical contracts, which happen to be at the lowest electricity How do you reward/recognize top-performing employees? costs in decades. On just two stores we will save about $14,000 in energy We have a bonus structure for managers, assistant managers, and shift lead- costs this year. That’s huge. ers. Also, anytime we get a 95 or better on a mystery shop everyone on that How do you forecast for your business in this economy? By us- shift gets $20. ing last year’s sales and current trending for the last couple of weeks. It’s just How is social media affecting your business operations? Being guessing, but it’s amazing how the spikes in your business occur on the same a low-tech guy, I never thought it would come to this. But recently we did a days from year to year. If you don’t look at last year’s numbers and try to fore- gift card promo online through the local paper and I was amazed at the re- cast upcoming days, you could leave your store understaffed, and then you will sponse we got. We sold 250 gift cards in three days. We have also been the lose customers from longer waits and poor service. We have enough problems test market on a texting campaign for discounts and brand awareness. Even facing us with the economy, you don’t want to give your customers any rea- though I am “old school,” I think the future is in some form of other media. son to not come back. It’s really hard to get customers these days and really Television has always given us the biggest bang for our buck, but I think easy to lose them. Our biggest challenge coming up is going to be commodity that’s going to taper off.

34 Multi-unit Franchisee Issue II, 2011

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ad_fsbi(19).indd 19 1/18/11 5:27 PM P O W E R PLAYERS By DeBBie SelinSky Coming to America South African native builds a new life in Atlanta

ierre Panos, a South African & Lybrand accountant who’d followed gone through to get to a new world. native of Greek descent, leaves his father into the restaurant and real They’d chosen South Africa because little to chance. estate industries—wanted to emigrate there was a great economic boom in P When the violence in his to a country where he and his fam- the 1970s with gold, but because of country became too dangerous in the ily could be safe and settle for good. the crime and violence, we had to early 1990s, Panos—a former Coopers “Think of what my parents had leave,” says Panos. “We wanted to go

36 Multi-unit Franchisee iSSue ii, 2011

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ad_jimmyjohns(37).indd 37 3/11/11 4:32 PM P O W E R PLAYERS “If you win an argument with a customer, you always lose. Just don’t do it.” someplace where we’d never have to leave again.” The young restaurateur went about finding that place deliberately and methodically. He eliminated different countries for a variety of reasons, including their business and political climate, opportunities, and even the weather. In the end, the only country that fit the bill was the United States. After researching schools, crime, growth, and weather (his wife Alexandra hates the cold) at the U.S. Embassy, the couple narrowed their choice to 25 cities. “At the time, Delta offered a $300 pass that enabled us to fly anywhere in the States during a full month. We visited all 25, then narrowed it down to 10 and visited those twice, and then visited the final three cities once more PERSONAL Key accomplishments: Raising, with my beautiful wife, three accom- Exercise/workout: Five days a week (30 minutes every morning during plished, loving children in America. Emigrating from South Africa in 1994 the week). Cross-training activities always keep the workout fresh. with very little cash and building my first company, Stoney River Legend- Favorite tech toys: iPhone, Kindle. ary Steaks, within six years, to a point where it was sold to publicly traded What are you reading? I read almost every trade magazine electroni- O’Charley’s. Growing my new company to around 50 stores within the past 9 cally delivered. The rest I get on my Kindle, like Fortune, Forbes, and Forbes years across three brands and being in the position to double it over the next Life. My current fiction choice isLittle Face by Sophie Hannah, and nonfiction four or five years. is the George W. Bush autobiography Decision Points. Biggest mistake: There have been a lot, but none comes to mind right Do you have a favorite quote/advice? Get into what you truly love, now. stay in it until you become the best at it, and that’s when you make a lot of Smartest mistake: Selling an upscale steakhouse concept in May 2000 money. just before the tech crash when I really wanted to grow it. Best advice you ever got: If you win an argument with a customer, you How do you spend a typical day? Wake up at 6 a.m. and work out always lose. Just don’t do it. till 6:30, shower, drive the kids to school. I’m in the office by 8:30. I focus Formative influences/events: The work ethic learned from working in on the three big things in the morning that will drive our business forward be- my Dad’s restaurant when I was young. fore getting into email response mode and other distractions. Then there are How do you balance life and work? I am very diligent and super- lunch store visits or business lunches and meetings the rest of the day. I wrap focused at work and accept very few distractions, although I always answer up with email just before I leave. phone calls from my wife and kids. When I get home at night, I go to my Work week: Monday to Friday 8:30 a.m. to 6:30 p.m., but my phone is home theater with a glass of wine, put on some relaxing music and chill for always on, even on the weekends. about 20 minutes. This relaxes me so that I can be the best dad and husband Favorite fun activities: Working out with my son, snow skiing, and trav- I can be when the family has dinner and through the evening before the kids eling in Europe with my wife and children. go to bed.

38 Multi-unit Franchisee Issue II, 2011

muf2_cs_panos(36,38-40,42-43).indd 38 3/11/11 4:44 PM P O W E R PLAYERS In 1993, the Panos family settled in Atlanta. “Atlanta has been an incredible town for us. It’s a vibrant city, great for business.”

before our final selection.” Name: Pierre Panos business brokers because he “didn’t In 1993, the Panos family settled want to work for anyone.” Through TiTle: Founder, CeO in Atlanta. Panos says the decision the South African broker he selected, turned out to be exactly the right one. CompaNy: Qs America he met David Rowe, a U.S. real estate “Atlanta has been an incredible town No. of uNiTs: 41 Papa John’s developer who had opened a restau- for us. It’s a vibrant city, great for busi- Pizza; 6 Fresh To Order, 1 rant, the Brookwood Grill, to fill a ness. Hartsfield International Airport is vacancy in one of his shopping centers. the largest in the world, so we can get Brookwood Grill The restaurant, which he says was anywhere quickly, which makes it great age: 46 similar to the Houston’s chain, was for expanding our business,” he says. family: Wife Alexandra, son struggling. The broker thought Panos, Panos set out to build a thriving with his restaurant and accounting business in the same way he’d ap- Alexander, 15, daughters, Helena, background, would be perfect to fix proached finding his new home. Hav- 11, and Nastassja, 5 things. “Rowe wanted me to use my ing sold the fine dining restaurant years iN fraNChisiNg: 10 numbers background to make it more he owned with his brother in South profitable. That’s what I did,” he says, years iN CurreNT posiTioN: 15 Africa, he interviewed five different and eventually became a partner in MANAGEMENT Business philosophy: Always strive to see a deal from the other person’s format daily. I visit some of our Atlanta stores at least twice a week and am perspective—go for the win/win. Always have your moral compass on hand in direct contact with my direct reports daily. when making key decisions, or you may just go for the money instead of do- Have you changed your marketing strategy in response to the ing the right thing. economy? How? We have never been heavily into advertising except Are you in the franchising, real estate, or customer service for our Papa John’s business. However, even that business is trending more business? Why? Customer service. Everything is about people in this toward the social media platforms. We were very early adoptors of social me- world where almost every business is commoditizing very quickly, so your dia, even when a lot of people thought it was just a fad. This is paying off for only true differentiator is your people and culture. The rest can be copied. us at a time when most concepts are lagging in this discipline. What gets you out of bed in the morning? I love what I do and I Personality: Type A, but slightly introverted. I make the effort when really like our office environment. My office building is a one-minute drive needed, but I really prefer to be at home with my family rather than out in from my house, which makes it really easy to get out of bed and to work. a crowd. What’s your passion in business? I love creating and growing things How do others describe you? Intense, firm but fair. I do what I say I to a certain size. When the creativity stops because it is becoming a larger will do when I say that I will get it done. machine, I always hand it over to one of my top guys to execute from that How do you hire and fire? I don’t do much of that anymore as all our point onward. I know when it’s time to get out of the way and I have a top people have been with me so long. However, I coach them if they are super-talented top management team who are all very vested partners in the having trouble with a decision or terminating someone to ask two questions: different businesses and who have all been with me for a long time (10 to 1) Knowing what you know about this person now, would you hire them 16 years). again?; and 2) Has this person brought anything to the table that has added Management method or style: Find, train, and retain the best people, value to the business or that we didn’t think about ourselves? If the answer offer the right incentives with a clear line of sight to those incentives, and to both is no, move them on humanely. If the answer to either one is yes, then get out of the way and let them do their jobs. I am out there as much they are perhaps salvageable, so work with them for a limited time and let as I can be trying to enculturate our people during as many conversations as I them know they are on probation. We don’t want anyone who is ever let go can and letting them understand that, without our guests, we have no reason to be surprised when this happens. to exist as a company. We are extremely guest-focused, some may say to a How do you train and retain? Each concept has its own training guide- fault. lines and systems. I will just say that the better we hire and retain, the less Greatest challenge: Ideating and growing new concepts from scratch, we have to train, and that’s our goal. knowing what new concept the market needs at that specific point in time. How do you deal with problem employees? I don’t have any as I How close are you to operations? Very. I get summarized dash- only work intimately with four direct reports, and they have all been with me boards showing the different businesses from all angles in number and graph for many years. Our top guys take care of the rest.

Multi-unit Franchisee Issue II, 2011 39

muf2_cs_panos(36,38-40,42-43).indd 39 3/11/11 4:44 PM P O W E R PLAYERS “We bought our first units in Chattanooga, and then in North Georgia. Ten years later, we are one of their top five franchisees, with stores in four states.” BOTTOM LINE Annual revenue: We are a private company, so I prefer not to say. lot more activity come back into the market. That being said, the lenders are 2011 goals: Sign five multi-store franchisees for f2o with a combined com- being extremely picky in whom they work with and the reporting requirements mitted store count of 15 units, grow our Papa John’s business by 20 percent, are very different in this new economy. and buy some distressed commercial real estate. Have you used private equity, local banks, national banks, Growth meter: How do you measure your growth? Smart, profit- other institutions? Why/why not? Yes, local banks. We’ve used able growth is our mantra. We won’t grow just to get to a certain number of none of the others since we haven’t needed them, and I don’t want venture stores. All our stores are profitable and we want to keep it that way. partners in my business at this stage unless it is part of an exit or partial exit. Vision meter: Where do you want to be in 5 years? 10 What kind of exit strategy do you have in place? We have one, years? I don’t plan on retiring. I already tried that for a year when I sold including a very detailed succession plan if I wasn’t around for some reason. Stoney River. I will always be involved in the two businesses that I really I’ll leave it at that. The guys who really run the company in any event are my like—real estate and restaurants—as long as I partner David Steenekamp, who runs our Papa can make a difference. I do plan on scaling down John’s business, and managing partners Jesse the hours that I commit to the businesses within “We are very consistent Gideon and Matt Fairley, who run f2o and Brook- 5 years to focus more time on giving something with our people. They wood Grill, respectively. I could never do this (and back. I am not sure yet what form that will take, wouldn’t want to) without these guys. They are but I will have worked it out by then. always know what to the best at what they do in the industry. I would How has the most recent economic cy- put them up against any team out there and cle affected you, your employees, your expect from us, and want to give them all credit because of this. customers? We have been blessed to be more What are you doing to take care of profitable every year during the past three years this certainty is much your employees? Other than the profit-based than the preceding year even during the down- appreciated in these bonus programs, we are very consistent with turn, and the start of 2011 looks to be following our people. They always know what to expect that trend. Our guests are being more selective uncertain times. from us, and this certainty is much appreciated where they eat, and I feel that this has helped us in these uncertain times. This has resulted in our throughout our brands, spanning quick serve fast This has resulted in our turnover rate in the top ranks of our company casual and finer dining. We have a great value being almost zero, and less than half the industry proposition: people trust that they will get more turnover rate in the top average for our hourly employees. than they are paying for, and this always drives ranks of our company How are you handling rising employee business, especially when guests are looking for costs (payroll, healthcare, etc.)? Our perceived value. being almost zero.” people just need to produce more with the unem- Are you experiencing economic ployment rate out there. Bumping prices slightly growth/recovery in your market? We never really felt the downturn, also helps and cutting in any area that does not affect the guest is paramount. but since the economy has recovered slightly our stores are all performing well How do you reward/recognize top-performing employees? above industry averages. Our people are paid on a percentage of the store profits, from a manager to a What did you change or do differently in this economy that GM to area supervisors to district managers, so everyone is aligned. We obvi- you plan to continue doing? I’ve been a little more paranoid than usual ously have safeguard components in our bonus program that prevent them since I realize that things can change quickly. managing the business down just to have great short-term profits. Public recog- How do you forecast for your business in this economy? Care- nition of a job well done also always works. fully. As mentioned, we are not a public company so we don’t have to grow at How is social media affecting your business operations? Since any specific rate. We only want profitable growth in store count, and our busi- we were very early adopters, it is benefiting us more than our competitors. We ness revenue stream is pretty predictable. have grown with it as guests have started using it. And operationally, we have Where do you find capital for expansion? Internally with some incorporated it into our culture of responding to guest issues and marketing bank financing. Our 14-year bankers have continued to lend to us during this to them seamlessly. You can’t sweep anything under the carpet with social downturn. media. Everything gets out there and you have to be very responsive. We like Is capital getting easier to access? Why/why not? Yes, abso- that, it fits exceedingly well with how customer-centric and customer-focused lutely. Whereas only our bank was willing to finance initially, we are seeing a we are on guest satisfaction.

40 Multi-unit Franchisee Issue II, 2011

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Multi-unit Franchisee Issue II, 2011 41

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“I wanted to get out of fine dining and into something with smaller units and less risk.”

the restaurant. er-in-law David Steenekamp, to do Meanwhile, Panos came up with something on a larger scale with a an original concept, Stoney River strong national brand. Papa John’s Legendary Steaks, opening two local Pizza fit the bill, he says. “We bought restaurants. Six years later, the part- our first units in Chattanooga, and then ners sold the local restaurants and in North Georgia. Ten years later, we those under development in Chicago are one of their top five franchisees, to the publicly owned O’Charley’s. with stores in four states.” Panos was then looking to diver- In 2011, Panos, founder and CEO sify. “Even when we were growing of QS America, and his partner have 41 Stoney River, I wanted to get out Papa John’s, as well as the fine dining of fine dining and get into some- Brookwood Grill. But their U.S. suc- thing with smaller units and less cess story, which they attribute in no risk that we could grow more small measure to their early adoption rapidly than big units that could of social media, doesn’t end there. cost $3 million if you made a Always looking ahead, Panos devel- mistake,” he says. oped Fresh To Order (f2o for short), a Panos teamed up with broth- pioneering “fast fine” dining concept.

42 Multi-unit Franchisee Issue II, 2011

muf2_cs_panos(36,38-40,42-43).indd 42 3/11/11 4:44 PM P O W E R PLAYERS

Always looking ahead, Panos developed Fresh To Order (f2o for short), a pioneering “fast fine” dining concept.

“I’ve been in the fine dining realm for awarding franchises for the popular serving Hartsfield International and a long time and have always felt there new brand. another in Dallas/Fort Worth Inter- had to be a way to take fine quality “One of the main reasons we national Airport and the surrounding food and service and bring it down wanted to be great franchisees was area. Projections call for signing at in a sense to offer a quality meal for so we could be the best franchisor. least five multi-unit franchisees in under $10 in under 10 minutes,” he Franchisees like us because they see 2011 to open a combined 15 to 20 says. “We knew there was a huge mar- we’ve run our own units. We know stores within three years. By 2015, ket out there for what we’re offering.” the pain they’ve gone through, and Panos expects f2o to have 50 loca- In 2006, Panos partnered with franchisees do go through pain. It’s tions open nationwide and another his long-time executive chef Jesse hard, if you do it right,” Panos says. 50 in various stages of development. Gideon to open the first f2o, which “Because we’ve been through it, it’s “We’re in a position now, thank features American fusion salads, sand- easier to be a sympathetic guide for God, to double our size in the next wiches, and entrees such as Almond our franchisees. And you’ve got to be four or five years, because we’ve been Rosemary-Crusted Chicken Skewers sympathetic, because franchisees are aggressive in paying down our debt with Crunchy Asian Slaw, in Atlanta. not your employees. They’re indepen- and we have access to capital for sig- Daily lines out the door led them dent business people, and you have nificant growth,” he says. “We never to open five more, including one in to treat them with respect.” grow for growth’s sake. All our stores Chattanooga. In 2010, they began f2o has already signed two groups are profitable.”

Multi-unit Franchisee Issue II, 2011 43

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(by unitS)

2011 MULTI-BRAND QUIZNOS 51 BLOCKBUSTER 50 VIDEO 3 1 AAFES 766 SBARRO 46 WINGSTREET 1 BURGER KING 207 CHILI’S TOO 44 CHARLEY’S GRILLED SUBS/WHOLLY COW 98 WOLFGANG PUCK 37 13 UNITED STATES BEEF CORP. 265 SUBWAY 76 PIZZA HUT 35 ARBY’S 260 POPEYES LOUISIANA KITCHEN 69 TIM HORTON’S 35 TACO BUENO 5 TACO BELL 61 GREAT AMERICAN BAGEL 32 BASKIN-ROBBINS 51 CALIFORNIA PIZZA KITCHEN (ASAP) 26 14 SODEXO 259 MANCHU WOK 34 NATHAN’S FAMOUS 23 PIZZA HUT 74 CINNABON 28 BRIOCHE DOREE CAFÉ & BAKERY 22 CHICK-FIL-A 40 PIZZA HUT 28 ROY ROGERS 19 EINSTEIN BROS. BAGELS 39 BLIMPIE 15 CARVEL 16 BURGER KING 22 CHURCH’S CHICKEN 15 POPEYES LOUISIANA CHICKEN 16 TACO BELL 17 EINSTEIN BROS. BAGELS 14 TCBY 15 QUIZNOS 13 GODFATHER’S PIZZA 13 FAMOUS FAMIGLIA 12 KFC 9 TACO JOHN’S 13 KFC 12 A&W RESTAURANTS 7 CAPTAIN D’S SEAFOOD KITCHEN 10 GREAT STEAK & POTATO 11 BLIMPIE 6 SEATTLE’S BEST COFFEE 10 JOHNNY ROCKETS 10 GODFATHER’S PIZZA 5 A&W RESTAURANTS 8 GORDON BIERSCH 9 SBARRO 5 WINGSTREET 5 PHILLIPS FAMOUS SEAFOOD 7 LA SALSA 4 DUNKIN’ DONUTS 3 DUNKIN’ DONUTS 6 SUBWAY 4 GREEK ODYSSEY CAFÉ 3 A&W RESTAURANTS 5 KRYSTAL 2 NOAH’S BAGELS 2 COLD STONE CREAMERY 5 LITTLE CAESARS PIZZA 2 ARBY’S 1 MANCHU WOK 5 THE CURRITO/WRAP 2 JOHNNY ROCKETS 1 WENDY’S 5 BOLOCO 1 MANHATTAN BAGELS 1 BALDUCCI 4 CARL’S JR. 1 DICK CLARK’S BANDSTAND 4 DICKEY’S BARBECUE PIT 1 2 ARAMARK 687 EINSTEIN BROS. BAGELS 4 HOT STUFF FOOD XPRESS 1 CHICK-FIL-A 82 JODY MARONI’S 4 HOT STUFF FOODS 1 SUBWAY 73 T.G.I. FRIDAY’S 4 ROUND TABLE PIZZA 1 AFC SUSHI 72 AU BON PAIN 3 SMOOTHIE KING 1 EINSTEIN BROS. BAGELS/NOAH’S BAGELS 68 BAJA FRESH 3 WOW CAFE & WINGERY 1 QUIZNOS 52 CHICK-FIL-A 3 FRESHENS 45 MAX & ERMA’S 3 15 PILOT TRAVEL CENTERS LLC 257 JUMP! ASIAN EXPRESS 37 ON THE BORDER 3 SUBWAY 131 QUIZNOS COOLERS 29 PINKBERRY 3 WENDY’S 43 PIZZA HUT EXPRESS 25 UNO’S PIZZA 3 ARBY’S 42 PAPA JOHN’S PIZZA 20 YEUNG’S LOTUS EXPRESS 3 HOT STUFF FOOD XPRESS 14 DUNKIN’ DONUTS 16 CARRABBA’S 2 TACO BELL 11 BURGER KING 14 DICKEY’S BBQ 2 DAIRY QUEEN 9 TACO BELL EXPRESS 14 HÄAGEN-DAZS 2 PIZZA HUT 5 JUMP! ASIAN EXPRESS 13 HARRY’S TAP ROOM 2 KFC 2 JAMBA JUICE 12 LA SALSA 2 PANDA ASIAN EXPRESS 11 MACARONI GRILL 2 16 LOVES TRAVEL STOPS & COUNTRY STORES 248 PAPA JOHN’S PIZZA (DELIVERY) 11 OUTBACK STEAKHOUSE 2 SUBWAY 123 SBARRO 11 RANCH ONE 2 CHESTER’S 44 CHILI’S TOO 8 RUBY’S DINETTE 2 ARBY’S 41 EXTREME PITA 8 SUBWAY 2 GODFATHER’S PIZZA 15 KFC EXPRESS 8 TACO BELL 2 HARDEE’S 13 SUSHIC SUSHI 7 BLIMPIE’S 1 CARL’S JR. 8 MOE’S SOUTHWEST GRILL 6 BRUEGGER’S BAGELS 1 A&W RESTAURANTS 8 POPEYE’S LOUISIANA CHICKEN 5 CHOPHOUSE 1 DAIRY QUEEN 2 BLIMPIE’S 4 DAIRY QUEEN 1 BASKIN-ROBBINS 1 BEN & JERRY’S 3 DAMON’S 1 TACO BELL 1 KRISPY KREME 3 HOULIHAN’S 1 POLLO TROPICAL 3 GALLAGHER’S 1 17 KFC CORP. 234 COSÌ 2 KRISPY KREME 1 TACO BELL 147 DOMINO’S PIZZA 2 QDOBA MEXICAN GRILL 1 PIZZA HUT 87 EINSTEIN BROS. BAGELS/NOAH’S BAGELS (EXPRESS) 2 ROCK BOTTOM 1 MCALISTER’S 2 ROSARIO’S MEXICAN CAFÉ 1 18 MUY BRANDS LLC 225 WAHOO’S FISH TACOS 2 TONY ROMA’S 1 PIZZA HUT 151 ZIA JUICE 2 LONG JOHN SILVER’S SEAFOOD 30 A&W RESTAURANTS 1 6 ADF COMPANIES 357 LONG JOHN SILVER’S/A&W 18 BACKYARD BBQ 1 PIZZA HUT 331 TACO BELL 10 BEEF’O’BRADY’S 1 WINGSTREET 17 KFC 6 BURGER KING WHOPPER BAR 1 TACO BELL 7 KFC/TACO BELL 4 CAMILLE’S SIDEWALK CAFÉ 1 BENNIGAN’S 2 KFC/LONG JOHN SILVER’S 3 CHEEBURGER CHEEBURGER 1 PIZZA HUT/WINGSTREET 3 DENNY’S 1 7 BODDIE-NOELL ENTERPRISES 346 IHOP 1 HARDEE’S 337 19 BORDER FOODS COMPANIES 211 LONG JOHN SILVER’S 1 MOE’S SOUTHWEST GRILL 9 TACO BELL 102 NATHAN’S FAMOUS 1 PIZZA HUT 80 NOBLE ROMAN’S/TUSCANO’S ITALIAN STYLE SUBS 1 8 HARMAN MANAGEMENT CORP. 330 WINGSTREET 10 PETRO’S CHILI & CHIPS 1 KFC (incl. A&W, Taco Bell, Pizza Hut co-branded units) KFC 7 RAISING CANE’S 1 SONIC DRIVE-IN 7 TACO CABANA 1 9 KAZI FOODS 314 LONG JOHN SILVER’S SEAFOOD 5 WENDY’S 1 KFC 240 BURGER KING 28 19 JIB MANAGEMENT 211 3 TARGET CORP.* 676 TACO BELL 19 JACK IN THE BOX 185 PIZZA HUT 632 A&W RESTAURANTS 9 DENNY’S 26 TACO BELL 41 LONG JOHN SILVER’S SEAFOOD 9 CENTURY 21 1 PIZZA HUT 9 21 CG MANAGEMENT 206 H&R BLOCK 1 POPEYES LOUISIANA KITCHEN 75 HELP-U-SELL REAL ESTATE 1 10 BRIDGEMAN FOODS INC. 283 BURGER KING 44 WENDY’S 162 CICI’S 40 4 HESS CORP. 559 CHILI’S 121 GOLDEN CORRAL 37 DUNKIN’ DONUTS 261 DENNY’S 5 BLIMPIE 151 11 STRATEGIC RESTAURANTS ACQUISITION CORP. 280 T-MOBILE 5 GODFATHER’S PIZZA 143 BURGER KING 264 QUIZNOS 4 T.G.I. FRIDAY’S 16 22 COMPASS GROUP USA INC. 192 CHICK-FIL-A 42 5 HMSHOST 404 12 FUGATE ENTERPRISES 266 SUBWAY 28 BURGER KING 103 PIZZA HUT 193 PAPA JOHN’S PIZZA 25 CINNABON 52 TACO BELL 69 QUIZNOS 20

44 Multi-unit Franchisee Issue II, 2011

muf2_cs_multibrand50(44,46).indd 44 3/11/11 4:43 PM Where frozen assets are a good thing

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Multi-unit Franchisee Issue II, 2011 45

ads_fractional(41,45,47,51,53,55,61,63,89,94).indd 45 3/11/11 4:33 PM P O W E R PLAYERS

EINSTEIN BROS. BAGELS 16 QUIZNOS 3 PIZZA HUT 16 RODEWAY INNS 3 46 CHRIS & NATHAN SERRANO 81 SALSARITA’S FRESH CANTINA 13 HOWARD JOHNSON PLAZA HOTELS, HOTELS & LODGES 2 SUPERCUTS 73 BLIMPIE 11 KNIGHTS INN 2 COST CUTTERS 4 SBARRO 11 SBARRO 2 PRO-CUTS 4 AU BON PAIN 10 A&W RESTAURANTS 1 TACO BELL 10 BLIMPIE 1 46 NORTHWEST RESTAURANTS 81 O’NATURALS 9 CINNABON 1 KFC 35 WENDY’S 7 TACO TIME 1 KFC/A&W/LONG JOHN SILVER’S/TACO BELL/PIZZA HUT 28 CARIBOU COFFEE 6 TACO BELL 18 JAMBA JUICE 6 31 V&J HOLDINGS INC. 153 KFC 6 PIZZA HUT 64 48 RESTAURANT MANAGEMENT GROUP LLC 80 NAKED PEAR CAFÉ 5 BURGER KING 36 HARDEE’S 42 BURGER KING 4 AUNTIE ANNE’S 32 LITTLE CAESARS PIZZA 38 CHICK-N-GRILL 4 COFFEE BEANERY 15 DUNKIN’ DONUTS 4 HÄAGEN-DAZS 6 49 D&D FOOD MANAGEMENT 73 NOBLE ROMAN’S/TUSCANO’S ITALIAN STYLE SUBS 4 KFC 45 TIM HORTON’S 4 32 COVELLI ENTERPRISES 148 KFC/A&W 19 PANDA EXPRESS 3 PANERA BREAD 145 KFC/TACO BELL 4 PEET’S COFFEE 3 O’CHARLEYS 3 KFC/LONG JOHN SILVER’S 3 PIZZA FUSION 3 KFC/PIZZA HUT 2 A&W RESTAURANTS 2 33 VALENTI MANAGEMENT LLC 129 BEN & JERRY’S 2 WENDY’S 119 50 ENN LEASING COMPANY INC. 65 CALIFORNIA PIZZA KITCHEN 2 CHILI’S 10 HAMPTON INNS/INNS & SUITES 34 COMMUNITY COFFEE 2 HOMEWOOD SUITES BY HILTON 9 FAMOUS FAMIGLIA 2 34 DESERT DE ORO FOODS 117 RESIDENCE INN BY MARRIOTT 9 JUICEBLENDZ 2 TACO BELL 68 COURTYARD BY MARRIOTT 5 PAPA GINO’S PIZZA 2 PIZZA HUT 40 SPRINGHILL SUITES 3 RED MANGO 2 TACO BELL/LONG JOHN SILVER’S 6 HILTON GARDEN INN 2 UNO DUE GO 2 TACO BELL/PIZZA HUT 2 COMFORT INN, SUITES, AND HOTELS 1 ARGO TEA 1 TACO BELL/KFC 1 EMBASSY SUITES HOTELS 1 ATOMIC WINGS 1 HILTON INNS 1 AUNTIE ANNE’S 1 35 THE BRIAD GROUP 111 BACK YARD BURGERS 1 T.G.I. FRIDAY’S/FRIDAY’S GRILL 68 *NOTE: Brands operating inside Target stores are not owned CHEEBURGER CHEEBURGER 1 WENDY’S 43 by Target. COLD STONE CREAMERY 1 D’ANGELO’S SUBS 1 36 CIRCLE K STORES 110 SOURCE: FRANDATA, FRANCHISE UPDATE MEDIA GROUP DENNY’S ALL NIGHTER 1 HOT STUFF FOOD XPRESS 52 GODFATHER’S PIZZA 1 SUBWAY 22 Methodology: All companies in this year’s Multi-Brand 50 HÄAGEN-DAZS 1 BLIMPIE 17 list were contacted by phone or email to update their data JERRY’S SUBS & PIZZA 1 HOT STUFF FOODS 5 from last year; others were updated from the company’s own MANCHU WOK 1 QUIZNOS 5 websites and from third-party sources. Despite repeated NATHAN’S FAMOUS 1 NOBLE ROMAN’S/TUSCANO’S ITALIAN STYLE SUBS 4 attempts, several companies that appeared on last year’s SECOND CUP COFFEE 1 CHESTER’S 2 MB50 list did not respond by our deadline. Rather than YOGURTLAND 1 CHURCH’S CHICKEN 1 WOW WINGERY 1 DUNKIN’ DONUTS 1 omit them, we used their data from last year’s list. If your PANCHERO’S 1 multi-unit franchise company is not included here, or if 23 JRN INC. 188 your numbers and/or concepts need updating or correcting, KFC 173 37 THE TWINS GROUP 105 please contact us at [email protected]. TACO BELL 8 PIZZA HUT 64 LONG JOHN SILVER’S SEAFOOD 4 TACO BELL 39 A&W RESTAURANTS 1 KFC 2 LA QUINTA INN/LA QUINTA INN & SUITES 1 PIZZA HUT 1 38 DALAND CORP./WILLIAM WALSH 103 TOP 25 BRANDS OF THE PIZZA HUT 95 24 THE PANTRY INC. 186 WINGSTREET 8 SUBWAY 140 2011 MULTI-BRAND 50 DAIRY QUEEN 11 39 JAN CO CENTRAL INC. 101 UNITS CHURCH’S CHICKEN 10 BURGER KING 98 QUIZNOS 9 POPEYES LOUISIANA KITCHEN 2 1 PIZZA HUT* 2,284 HARDEE’S 7 KRISPY KREME 1 2 BURGER KING 954 KRYSTAL 5 HOT STUFF FOODS 2 40 BERGEN ENTERPRISES 95 3 TACO BELL* 818 BOJANGLES’ 1 PIZZA HUT 93 4 KFC* 721 CHEVRON U.S.A. 1 SONIC DRIVE-IN 2 5 SUBWAY 635 25 INTERFOODS OF AMERICA 184 40 THOMAS & KING INC. 95 6 WENDY’S 411 POPEYES LOUISIANA CHICKEN 165 APPLEBEE’S NEIGHBORHOOD GRILL & BAR 89 BURGER KING 19 JOHNNY CARINO’S ITALIAN 6 7 HARDEE’S 399 8 ARBY’S 398 26 PALO ALTO INC. 169 42 DOHERTY ENTERPRISES INC. 90 PIZZA HUT 89 APPLEBEE’S 60 9 POPEYES LOUISIANA KITCHEN 372 TACO BELL 51 PANERA BREAD 25 10 DUNKIN’ DONUTS 291 KFC 22 CHEVYS FRESH MEX 3 WINGSTREET 4 JOHNNY CARINO’S ITALIAN 1 11 CHILI’S/CHILI’S TOO 231 LONG JOHN SILVER’S SEAFOOD 3 EL POLLO LOCO 1 12 BLIMPIE 206 27 AMERICAN RESTAURANT PARTNERS LP 167 43 W2005/FARGO HOTELS REALTY LP 90 13 LONG JOHN SILVER’S SEAFOOD* 203 PIZZA HUT 135 FAIRFIELD INN/INN & SUITES 36 14 QUIZNOS 186 LONG JOHN SILVER’S SEAFOOD 20 RESIDENCE INN BY MARRIOTT 26 KFC 10 COMFORT INN, SUITES, AND HOTELS 13 15 JACK IN THE BOX 185 WINGSTREET 2 COURTYARD BY MARRIOTT 12 16 GODFATHER’S PIZZA 177 SLEEP INN 2 28 QUALITY DINING INC. 162 COUNTRY INNS & SUITES BY CARLSON 1 17 PANERA BREAD 170 BURGER KING 114 18 CHICK-FIL-A 167 CHILI’S 48 44 MORGANS FOODS INC. 89 KFC 69 19 APPLEBEE’S NEIGHBORHOOD GRILL & BAR 149 29 BR ASSOCIATES INC. 158 KFC/TACO BELL 10 20 EINSTEIN BROS. BAGELS/NOAH’S BAGELS 145 LONG JOHN SILVER’S SEAFOOD 113 TACO BELL 5 WENDY’S 31 PIZZA HUT 4 21 CHARLEY’S GRILLED SUBS/WHOLLY COW 98 DENNY’S 14 TACO BELL/PIZZA HUT EXPRESS 3 22 T.G.I. FRIDAY’S 88 KFC/A&W RESTAURANTS 1 30 TRAVELCENTERS OF AMERICA 158 KFC/PIZZA HUT EXPRESS 1 23 CINNABON 83 POPEYES LOUISIANA KITCHEN 40 24 HOT STUFF FOODS/FOOD EXPRESS 75 SUBWAY 36 45 BURGER BUSTERS INC. 87 PIZZA HUT 31 TACO BELL 67 25 SBARRO 75 TACO BELL 25 TACO BELL/PIZZA HUT EXPRESS 11 DAYS INN 6 TROPICAL SMOOTHIE 5 *Co-branded concepts from Yum Brands, so totals may ARBY’S 4 TACO BELL/KFC 3 be inflated.

46 Multi-unit Franchisee Issue II, 2011

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Multi-unit Franchisee Issue II, 2011 47

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Experts shed light on current franchise trends

he Great Recession has shifted the sess franchise trends, sectors, and brands, as well as consumer thinking and behavior of consumers, behavior. Key growth areas these experts have identified—in- forcing franchise brands to respond cluding the country’s aging population, which is creating the with changes of their own as they try to demand for health care-related services—include sectors related keep up with the new normal. Indeed, no discussion of fran- to technology, childcare, food franchising, and more. chise trends in 2011 and multi-unit operators’ favorite brands can begin without a nod to the recent eco- the value proposition nomic turmoil and its residual short- and “Consumers are In today’s market, the dollar reigns for con- long-term effects. sumers. Consider food franchising. “Value “There’s no question that coming out has become the name of the game for food of the recent recession, lower price-point very sensitive to consumers during the past year or so,” says brands are more popular right now with Johnson. “Consumers are still going out to consumers,” says Darrell Johnson, FRAN- risk right now.” eat, but they’re trading down, say to fast data president and CEO. “The other big —Peter Rose food, and looking for lower price points.” trend we’re seeing is growth in brands that Peter Rose, senior vice president and Tcater to personal needs, like healthcare.” director, western region at The Futures With the economy now breathing deeply Company, agrees. “Consumers are very and exhibiting signs of a sustained recov- sensitive to risk right now. There’s a desire Favoritesery, this is a good time to take inventory to minimize their exposure to it wherever of the current franchising marketplace as they can.” Rose, whose company conducts it begins to turn back upward. Which sec- consumer attitude and behavior research tors, concepts, and brands are maintaining and publishes the results in its Yankelovich position—or better yet, gaining? Where do Monitor, says that when it comes to eating you want to be in the next 12 to 24 months, out, consumers “don’t mind trying some- and beyond? Which brands in which sectors thing new, but they want to know some- are more likely to help you achieve your thing about the brand and order from a strategic and growth goals? What consumer menu that provides choice, but not at the and market trends are affecting consumer expense of value.” behavior, and how can you respond? “There’s no question that consumers have We turned to a bevy of industry research- by and large traded down from, say, steak ers and analysts who track, measure, and as- Peter rose to burgers,” says Darren Tristano, execu-

48 Multi-unit Franchisee Issue II, 2011

muf2_f_brandfaves(48-50,52,54).indd 48 3/11/11 4:43 PM tive vice president of Technomic, a research operators seeking to expand. company that tracks the food industry. “This could be the Eric Stites is president and CEO of Fran- “Customers are dining out less and be- chise Business Review, a market research ing more conservative when they spend,” start of a longer- firm that measures franchisee satisfaction. agrees Steve Romaniello, managing director “Senior care has been on the hot list for the of Roark Capital Group, the Atlanta-based term trend that last five years now and this need will remain private equity firm invested in 19 different for many years to come,” he says. It’s why, he franchise brands, and always on the lookout says, senior care franchises including Right for more. “Perhaps more importantly, I think consumers are At Home, Home Instead, BrightStar, and this could be the start of a longer-term trend Synergy Homecare are all good models that that consumers are becoming more selective becoming more should remain in demand. in their spending and more aware of value.” Research indicates that today’s seniors Essentially, he says, “Consumers want value, selective in their seek to remain in their homes as long as consistency, and quality, and they want fran- possible. Further, says Stites, senior care chise brands that scream this.” spending and more franchises offer a relatively low cost of en- This value-based shift has affected most try, low overhead, and can offer high rev- other franchise sectors as well. As you might aware of value.” enue potential—although, he cautions, it’s a expect, demand has waned for the less “essen- labor-intensive, often 24/7 business. How- tial” franchise concepts (travel, pet services), —steve Romaniello ever, real estate expenses are generally not which have taken a hit as consumers have a part of the equation when considering a been forced to tighten their belts. However, health care-related brand, he says. “These basic services (home repair, maintenance, concepts can often be operated without cleaning) are poised for growth and will having to purchase land or real estate.” likely be strong players in the new economy. Here’s the skinny. Service, value, consis- Food tency, and quality are recurring themes for People have to eat, like to eat out, and con- most consumers these days and should be at tinue to spend on takeout food when pressed the core of the franchise brands you operate for time. And even if they trade down or go or are considering. Following, gleaned from out less often, food will always be a part of our discussions with industry and business the foundation of franchising. Pizza, better experts, are some key areas and opportunities burgers, and wings should remain strong to consider adding to your “favorites” list as franchise concepts, says Tristano. He also you look ahead to an improving economy. says that brands requiring or allowing a smaller space (500 to 3,200 square feet) health and senior care steve romaniello are great low-cost entry points. Health care for an aging population has Tristano says better burger concepts, been on the radar screen for years now. The trend has far- such as Five Guys Burgers and Fries, Smashmouth Burgers & reaching effects. There are some 40 million senior citizens in Pizza, and Mooyah Burgers & Fries, offer a step down from the U.S. right now, a figure estimated to double in the next pricier restaurants, but a step up from fast food burgers. “Bet- two decades as Baby Boomers age. That’s creating a huge op- ter burger concepts are successful right now because they have portunity, only some of which can be filled by the numerous a narrowed menu focus. They just stick to burgers, a premium franchise brands that have arisen to serve this growing, rela- focus, and quality products,” he says. tively affluent population. Pizza, says Tristano, a perennial franchise staple because of “There are a couple of different sectors we’re examining its steady consumer demand, offers franchisees “a lower cost for opportunities right now,” says Romaniello, “and healthcare of capital investment compared with full-service and larger and wellness is definitely on that list.” units.” Wings, he says, also remain in high demand. “The seg- “People want to monitor their health more closely than ever,” ment is experiencing growth based on flavor profiles and great says Rose. “They desire to be tuned into their own wellness, takeout opportunity.” Some traditional casual dining is strug- and many have a do-it-yourself mentality about their health.” gling, he says, in part because of years of over-expansion: “too He says franchise brands that cater to the mental and physi- many options in upscale casual dining (above) and fast casual cal health of the aging population are great opportunities for (below),” he says.

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Stites says food franchising remains a cleaning up. Seven of the top 10 fastest-grow- good business for many, but points out that Favorites“Better burger ing brands on the most recent Entrepreneur it tends to be complex and expensive to get magazine’s Fastest-Growing Franchise list into. “Some of the brands that have gotten concepts are are in the commercial cleaning business. It’s high franchisee satisfaction scores in our a sector worth investigating (see page 52). surveys are Auntie Anne’s, Papa Murphy’s, Bruegger’s Bagels, and Einstein Bros.” successful right Other trends Romaniello says when Roark considers In addition to the economic and demographic investing in food franchises today, the com- now because changes discussed above, franchise brands pany is looking in the “fast casual” sector also should be sensitive to the underlying with its eye on “environment, food quality, they have a social and cultural trends that are driving value, and brands that allow consumers to change across all market sectors and the customize or build their own.” He says to- narrowed menu brands that compete in them. day’s health-conscious consumers are also • Technology. Advances in technology a factor because they are looking for fresh focus. They just keep marching on—a good thing, since these and healthy food alternatives. developments generally help save time and stick to burgers, increase efficiencies. Nowhere is this more children evident than in brands that cater to consum- Franchise concepts that cater to the needs ers’ technology needs. of children have become quite popular, in- a premium focus, Romaniello says Batteries Plus is an ex- dustry watchers agree. Dual-income family ample of a brand in a perfect position for demands continue to squeeze parents for and quality sustained growth. “With the proliferation time, yet they still want to provide oppor- of electronics and gadgets that are battery- tunities for their kids. As a result, we’ve seen products.” driven, this place is a one-stop shop for con- an influx of franchise concepts that provide —Darren Tristano sumers,” he says. Other concepts fill similar basic childcare, educational, and youth sports niches, such as Cartridge World and CMIT and fitness opportunities. Solutions. Technology-based and computer- Stites says working parents today are related repairing, training, and consulting desperate for help in caring for and educat- should remain strong for years to come. ing their children. “More and more schools Beyond brands that deliver technology have cut back on their recreation programs solutions are those that make effective use and facilities, making children’s services of technology to deliver other kinds of even more in demand,” he says, adding products and services. that franchise brands such as Mathnasium, “Gen X and Y are tech-savvy, and they JumpBunch, and TGA Premier Junior Golf want to be served and do business with com- are solid performers in this sector. panies that can meet them on those terms,” “The education sector is an area we cer- says Stites. “Look at how smartphones have tainly have our eye on,” says Romaniello. changed the way people do business, and we still are just on the edge of how brands home improvement and services can use social media tools to benefit their Coming out of the Great Recession, many business.” Brands actively using technology people are happy to stay put in the old Darren tristano effectively include Tasti-D-Lite, Jack in the homestead. Maybe just a new coat of paint Box, and BrightStar, he says. here, or a minor remodel there, and all is well. That’s why Tristano agrees that brands incorporating technology ef- franchise brands that provide home improvement services, fectively gain an edge. “Takeout and delivery are becoming painting, electrical, plumbing, etc., should be another sector more prevalent with online ordering and technology-enabled for sustained franchise growth. Says Johnson, “Home services marketing, coupons, ordering, and locations on most phone is a sector that should be strong. More people are saying, ‘Let’s apps,” he says. Look for brands that are technology leaders, or just keep the old house and fix her up a bit.’” that use it to help expand their brand. • Conversions. This increasingly popular method of grow- commercial cleaning ing a brand’s unit count allows independent business owners Based only on the numbers of new units opened during the past to hitch their wagon to a franchise system, with the result that year in this sector, commercial cleaning franchises are, well, everyone benefits. The business owner gains instant brand

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ads_fractional(41,45,47,51,53,55,61,63,89,94).indd 51 3/11/11 4:33 PM PLAYING Favorites “More and more schools have cut back on their recreation programs and facilities, making children’s services

even more in demand.”—eric stites

eric stites

recognition, marketing support, and buying power, and the franchisor gains an instant royalty stream from an experienced operator with a customer base. When You’re Hot You’re Hot Typically, conversions are easier to finance than new units Here’s a look at the top 10 brands in Entrepreneur because of their existing revenue stream and the brand rec- magazine’s 2011 Fastest-Growing Franchise ognition and proven model of the franchisor. Some of the rankings (based on the number of new franchise units trendsetters in this segment have been Gold’s Gym, 7-Eleven, added in the U.S. and Canada from 2009 to 2010). Checkers/Rally’s, Maaco, and Meineke. • Mobile food. Perhaps it was only a matter of time be- Startup Costs fore our fast-paced, on-the-go culture began demanding that food join them. That’s just what Rose has been seeing in the 1 stratus Building solutions Los Angeles area. “The popularity of mobile food trucks has Commercial cleaning $3,450 – $57,750 just exploded out here,” he says. “I think this is just another 2 Jan–Pro Franchising international function of our mobile culture. I think franchisors and franchisees should be asking themselves, ‘Am I everywhere I need Commercial cleaning $3,145 – $50,405 to be?’” He says social media tools are a great way for these 3 subway mobile-based services to let their customers know where they Subs and salads $84,300 – $258,300 are any time of day. This mobile trend can also alleviate the need for real estate 4 cleannet usa and other significant brick-and-mortar costs. Watch for more Commercial cleaning $6,655 – $92,950 mobile food concepts like Sauca, out of Washington, D.C., and 5 anago cleaning systems ZooHoo’s Eatery in Vermont. • Co-branding. Be it in the same facility or next door, co- Commercial cleaning $8,543 – $65,406 branding is a smart strategy and should remain effective in the 6 Pizza hut years ahead. Tristano says this strategy can be a smart decision Pizza, pasta, wings $302,000 – $2,149,000 because it spreads risk and provides additional marketing and day-part opportunities. “You can save rent, among other things, 7 liberty tax service when you couple a sandwich shop like Subway with a dessert Individual & online tax prep $56,800 – $69,900 destination like Cinnabon.” • Green is here to stay. Though not new, green/ 8 Vanguard cleaning systems organic/recycling-based franchising initiatives are likely Commercial cleaning $8,200 – $38,100 to remain solid and continue to grow. There’s a strong 9 Bonus Building care cultural demand for environmentally friendly products Commercial cleaning $9,020 – $41,919 and services. Subway, a favorite franchise on numerous lists for years now, has begun serving salads in partially 10 system4 recycled salad bowls, and uses redistribution centers that Commercial cleaning $5,460 – $37,750 bundle the supplies franchisees need more efficiently so full truckloads can deliver them. SoUrCe: EntrEprEnEur maGazIne

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Making your move Multi-unit franchisees eager to pull the trigger on Tracking the Future expansion and growth are likely in a good position Jim Carroll keeps his finger onFavorites the pulse of the to do so, the experts agree. Many have the capital to world around him, particularly its future. He is, after structure the financial ends of the deals, and they usu- all, a futurist who identifies business and cultural ally have the infrastructure to run a larger operation. trends ranging from technology and business If they can self-fund, their options are a little model changes to innovation, global challenges, more open, says Stites. Otherwise, “It’s still a little and growth. Carroll’s client list includes Northrop tough to get money out there, which can explain why Grumman, Visa, Rockwell Collins, Lincoln Financial, many new and established franchisees are looking and the Walt Disney Corp. for lower-investment franchise opportunities.” If they don’t have the capital needed to build new units In advance of his April 28 keynote speech at or acquire additional units, many are considering a the Multi-Unit Franchising Conference, we asked private equity partner (see page 56). Carroll for his take on the fast-evolving consumer, technology, Beyond looking for brands that offer consumers and franchise business environment. He outlined five key areas good value, says Tristano, “Look for a concept that’s for multi-unit franchisees considering new brands to add to not well-established in your area or territory.” He their organization’s portfolio. says franchisees should be looking for strong sales

1) Paying attention. Consumers today face more stimuli competing for their attention than at any previous time in “It’s still a little tough to get history—computers, the Internet, cell phones, video games, etc. Carroll says today’s interactive world demands franchisees money out there, which can be engaged in all media. “Marketers must work harder than ever to capture the attention of the consumer and make a explain why many new and connection. Brands must keep up with the pace of consumer established franchisees are change in order to stay relevant,” he says. 2) changing family dynamics. There’s a new definition looking for lower-investment of family in the United States and it’s no longer nuclear. Successful franchise brands must respond to today’s changed franchise opportunities.” marketplace. “Hyper-nicheing is the new brand reality as the —eric stites market becomes more specialized and fragmented. Marketers can no longer rely on preconceived segmentation strategies, performance by sector, “and, more importantly, but rather need to think differently about who they are trying to unit growth that will indicate niche opportunity in reach and how to reach them.” smaller sectors like better burgers, fast-casual Ital- ian, and bakery-cafe.” 3) under the influence. Celebrities and peers are Rose says that today’s consumers want open, honest influencing consumers more than ever in this age of social communications, and he emphasizes the importance networking, and are looked to increasingly for advice and of transparency. “Take Domino’s, for example,” he brand recommendations. “Social networks are the new brand says. “They’ve used their latest marketing efforts to influencers, and marketers must find ways to connect with show consumers exactly what they’re doing. What consumers who are highly influential in their peer groups.” you see is what you get. Look for brands that have this appeal.” 4) shifting behavior. Socioeconomic shifts are affecting Says Stites, “When you’re considering other consumer behavior as tastes and preferences continue to brands, you want to know how the existing franchisees evolve. “Faster-paced preference change is the new reality, are doing and how the franchisor treats the existing and brands must be nimble to keep up with consumer franchisees.” Is there a cooperative and supportive demand.” culture among the franchisor and its franchisees? 5) rapid deployment. New products and innovation are Critcal food for thought, he says. being brought to market ever more rapidly, often with the help It’s important to keep your finger on the pulse of “crowd-sourcing” from their customers. Brands, products, of trends through trade publications, industry and and services must keep up or be left in the dust. “Time to financial news sources, and demographics experts, market and corporate agility are the new capabilities to focus says Tristano. But as Stites reminds us, “It’s just as on,” says Carroll. important to find something you enjoy doing, that you’re passionate about.”

54 Multi-unit Franchisee Issue II, 2011

muf2_f_brandfaves(48-50,52,54).indd 54 3/11/11 4:43 PM 20 Year Proven Track Record Comprehensive Classroom and Instore Training World Class Advertising and Marketing Best in Industry Lead Generation • Ongoing Operational Support

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ads_fractional(41,45,47,51,53,55,61,63,89,94).indd 55 3/11/11 4:33 PM By Eddy GoldBErG Is Private Equity Right for You? FAQs for multi-unit operators seeking capital in 2011

ou might not know it from reading the news, but equity market, the pros and cons of taking on a private inves- there’s a lot of money out there looking for a good home, tor partner, and the tradeoffs involved. The answer, of course, Yand high-performing multi-unit franchise companies is, “It depends.” The financial terms of the deal are an obvious have become targets for private equity investors. Estimates of critical consideration, but more important, say many, is the re- available private equity peg the pent-up funds at about $500 lationship between the operator and the investment company. billion, more than enough pie for most multi-unit franchisees Is there an alignment of goals? Can an independent-minded to get a slice—if they have what it take to appeal to investors. operator get along with an active board during a partnership Developments in the mergers and acquisition universe, that can span five years or more? along with the growth in large multi-unit organizations and a How will a capital infusion help achieve a franchise compa- stabilizing economy in 2011, have combined to produce what ny’s goals over the short, medium, and long term? Is it needed experts predict will be a favorable environment for franchise for expansion within a territory or brand? Strategic acquisi- sellers with the right stuff: a strong national brand; a positive tions? An initial step toward an exit in 5 or 10 years? Or, for cash flow for the trailing 12 months; an infrastructure able to food and lodging brands, a way to pay for expensive remodel- leverage the investment; and an organization large enough to ing obligations? make the deal worthwhile in terms of the costs and time in- For most private equity players, the goal is to find a reason- volved for both buyers and sellers during the due diligence/ ably safe, high-return vehicle for investors to park their money courtship process, which can take six months to a year or more. in for a limited time and make a profitable exit. Following the Real estate assets are a big plus as well. (For more on the 2011 end of the high-flying M&A years of 2005–2007 (see graph, M&A outlook, see page 90.) page 57), many investors were disappointed by their returns Even as the economy writhes its way toward recovery, how- in recent years, and are still fairly cautious about doling out ever, getting your hands on the money—and your mind around funds—except to those with a positive cash flow and a track the ramifications of taking on a private investor partner—is record of success backed by solid management practices. Bal- another story. Yes, interest in high-performing franchisee or- ancing their investors’ demands to find opportunities for their ganizations by private equity firms is rising, but is this a good pent-up capital, private equity firms are climbing back on the option for multi-unit operators in need of capital? Is the cost bull in 2011, wary of waiting too long or seeing valuations rise. of money—an active partner, accountability, loss of autonomy On the franchisee side, the stagnant market of the past 3 to investors that typically seek a controlling interest—worth it years has created a backlog of franchisees seeking to sell their to a franchise operator used to calling their own shots? business, whether to exit or to make a profit and take a second We asked a dozen players—franchisees, attorneys, and bite at the apple. These operators have spent the slow years deal-makers of various stripes—to tell us what multi-unit cleaning up their act, trimming costs, shedding fat, and mak- franchisees should know about the current state of the private ing operations as efficient as possible—in other words, prim-

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muf2_f_privateequity(56-59,60,62,64).indd 56 3/11/11 4:41 PM ing their organization for a sale when the economy recovered. What are the upsides? Their time is now, say experts. Multiples are rising, but not to Private equity is a tool that can be used for many reasons: exit/ the excessive levels of the boom years, making succession, partial exit, strategic acquisitions, to the current environment a potential win-win op- meet a development schedule, remodeling, or portunity for both sellers and buyers. as the answer to a distressed operator’s prayers. A growing understanding on both sides of For the right operator at the right time, it can the buy-sell equation—private equity “getting bring many advantages. it” about franchisees, and operators educating “You get people who understand professional themselves about the private equity market— management and in many cases are finance ex- combined with the “perfect storm” of pent-up perts who will work with your CFO to use capi- capital seeking investments and operators seeking tal efficiently,” says Dennis Monroe, cofounder capital for growth as the economy tilts upward and chair of law firm Monroe Moxness Berg. for the first time since 2008—looks to make 2011 “In many cases these are smart people, so their an exciting year in the multi-unit franchising management input is good.” arena. Here, in FAQ form, is what our ad hoc “Private equity firms generally are smart, so- panel of experts has to say about the year ahead Dennis Monroe phisticated, knowledgeable, and tend to bring with for multi-unit franchisees considering taking on them operating partners,” says Cheryl Carner, a private equity partner, or simply selling out who joined GE Capital, Franchise Finance as and heading for their favorite fishing hole, golf senior vice president, private equity originations course, or new venture. in June 2010. “A private equity firm has better access to capital—their own, and the ability to What is private equity? get debt—to grow and remodel more easily than Private equity is a “hodgepodge,” says Harry a smaller, individual investor.” And, for the fran- Loyle, managing director of Cybeck Capital chisee, she adds, “Where a private equity firm is Partners, and it comes in all shapes and sizes. making an investment on other people’s behalf The simple definition, he says, is “private money and is accountable to other investors, it sets the that involves equity transactions, but under that bar even higher.” there all kinds of opportunities.” “Efficiencies of scale with a private equity “Private equity comes in a myriad of forms, cheryl carner group equals access to greater resources, profes- fashions, and has different criteria important to sional or legal advice, synergies, IT, and shared them,” says David Stiles, senior vice president at Trinity Capital, services across different businesses or restaurant companies,” which recently served as financial advisor to multi-unit firm says Rick Ormsby, a partner at NDA Inc., an investment bank- Breads of the World in its sale of 20 Panera Bread restaurants in Ohio to Covelli Enter- u.s. Private equity Deal Flow by Year prises. “There are private equity interests out there to match whatever you require.” And it can take on lots of different forms, depending on the agenda of the multi-unit franchisee. In terms of scale, most franchisee deals are small potatoes in the private equity world. From the $1 million or less that Cybeck provides (see page 62), it’s not uncommon to see private equity deals in the hundreds of millions and well into the billions. And franchisee companies have been involved in larger deals over the years. The largest now in the news would involve Goldman Sachs’s GS Capital Partners buying Apple American Group from Weston Presidio Capital for what likely will be several hundred million dollars if the deal closes. Apple American owns and operates about 270 Applebee’s and reported sales of $665 million in 2010. Source: PitchBook, AnnuAl PrivAte equity BreAkdown 2011

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ing firm in Lousville focused on buying and sell- and that’s my problem. If it’s someone else’s ing restaurants for franchise companies with up money, that’s not necessarily bad,” he says, to 200 units, valued from about $5 million up to but it is profoundly different from being your $35 million. own master. For now, he’s choosing to expand A capital infusion brings not only money, ex- without bringing on a private equity partner. pertise, and new beneficial relationships, but also Two other factors could also be a problem a freedom that allows franchisees to concentrate for the seller. While private equity investors on what they do best: growing their business. It are generally smart, sophisticated business can also add an element of professionalism, such people, that could turn into a problem when as accounting, that might help save tax dollars, reasonable minds differ on strategy or tactics. suggests Monroe. “They may think they know more than they “Too often, management gets involved in things know and interfere” with a successful operation, that don’t drive profitability,” says Kevin Burke, Rick Ormsby cautions Monroe. “They want to be involved, managing director at Trinity Capital. “Private eq- with monthly calls, updates, and detailed fi- uity firms are generally led by very bright people nancial information.” who can tinker with and improve an organization’s There’s also a change of psychology and en- efficiency. They can take a lot of financial pressure vironment that comes with taking on a partner, off, and bring in a very skilled board of directors,” especially one with the purse strings and its enabling the franchisee to “intensify their focus own set of expertise and expectations (as well and drive profitability.” as investors they must answer to about ROI). “A private equity partnership brings a team of “You may be giving up economic control,” says analysts, attorneys, real estate experts at levels be- Rod Guinn, industry coverage leader for res- yond our capabilities, agrees Aziz Hashim, president taurants at FocalPoint Partners, which advises and CEO of National Restaurant Development, operators seeking to bring in fresh capital. “But which operates about 50 units, including Popeyes, if it’s a really smart partner and you’ve done Checkers/Rally’s, and Subway. “They are larger a good job in choosing them, you won’t give firms with more talent and more people.” Kevin Burke up operating control. However, if your busi- On the money side, he agrees that partnering ness starts to slip off plan by a certain amount, with a private equity firm “brings a huge balance you’ll have to sit down and account for what sheet. You have a lot of capital, can do what you you’re doing.” like, and don’t have to run around to banks,” he There also could be timing issues, with says. “It’s a huge advantage in having the finan- franchise agreements and development sched- cial backing, especially in today’s financially chal- ules running up against the requirements of lenged time.” the funders. “A private equity firm generally has a pretty set investment horizon, generally What are the downsides? about 5 years and a couple additional to har- On the other hand (and there always is one when vest investments,” says Carner. “They’re not money is involved), the price of money may be too going to be involved in the system for 20 years. high for independent-minded business owners. They make money by selling companies, not “Maintaining control is something the operators keeping them.” Aziz Hashim are comfortable with. They’re used to being their own boss and operating with unfettered discretion,” Why now? says Riley Legason, a partner at Davis Wright Tre- As noted above, the timing is right for both maine, which typically represents the operators in sellers and buyers. “I get calls all the time, restaurant brands that are taking on investments. looking to invest in the franchisee side,” says Partnering with private equity represents a Monroe. “Part of it is that there’s so much de- “change in philosophy,” says Hashim. “In that model, mand, pent-up capital, and at some given point the management team—me—is an employee per they have to deploy it.” se of the private equity company. There’s some- “The market is incredibly robust, with thing antithetical about that and the entrepreneur, more supply than demand, more dollars chas- where I’m the owner and make my own decisions.” ing loans,” says Carner. This creates a favor- Since he became a franchisee, says Hashim, “I able environment for both the borrower and never had to report to anyone, or do a presenta- the private equity firm, as well as the lenders tion. I could have a really bad year, lose money, Riley Legason and deal-makers. “Last year was a very active

58 MuLti-unit FRAncHisee Issue II, 2011

muf2_f_privateequity(56-59,60,62,64).indd 58 3/11/11 4:41 PM year for us following a very quiet 2008 and 2009. We saw the rebound in M&A activity and a willingness of buyers to buy and sellers to sell.” So, is it a good time to sell? “Yes, I would say so,” she says, “but it depends on franchisee performance and the sector they’re in.” “Traditionally, private equity groups were just interested in franchisors,” says Burt Yarkin, managing director of the San Francisco branch of The McLean Group, a private investment firm. Yarkin was CEO of Cartridge World in 2007 when the company was purchased by a private equity fund. “These days there are so many private equity firms with so much money out there, so they’re willing to move up to large multi-unit franchisee firms.” As Yarkin sees it, “There is going to be a lot of activity for the next couple of years. The money that’s out there is not going to find a home very quickly.” If someone is thinking of selling, he says, the next two years will be an oppor- tune time. Historically, private equity interest in franchising has been mostly on the franchisor side (although a number of players have invested in large franchisee Burt Yarkin organizations). One reason is a lack of understanding or appreciation of the franchise model. Another is simply size: most of the multi-unit organizations a decade ago simply weren’t big enough to attract investor interest. However, as investors’ understanding of franchising grew, so did multiples, which made deals less attractive to investors seeking a high return on their investment. Today’s lower multiples for franchisee companies following the peak years of 2005 to 2007 are another factor driving M&A activity in 2011. “With multiples down, there really is an opportunity for upsides, because multiples will come back,” says Monroe. “They’re not terribly low, but they are low enough for some upward movement.” When multiples got too high, private equity investors found it difficult, if not impossible, to justify investing in high-performing franchise firms. The real key for private equity, says Monroe, is to find a good operator with real estate rights and the capacity to grow, so they can leverage their investment for a good return, and sell. Monroe notes that most of the private equity firms that invested in franchising did so in the early 2000s, so exits should be starting to appear now.

How important is the relationship? The relationship is the most important element of a private equity transaction, says Legason (see sidebar, page 60). After all, seller and investor are going to be partnered closely for years. “Is the group a good fit in terms of how the relationship will potentially play out? That piece is often very difficult to

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ascertain. Everything sounds good going into it.” When per- “Their vision of what they want for the private equity com- formance is less than expected or growth is slower, especially pany could conflict with the vision of the franchise company.” because of unforeseen challenges, how well will the parties Thus it’s critically important for both parties to “fully vet work together under pressure? any opportunity, do due diligence as much as they possibly “The key thing is the relationship,” agrees Monroe. “Do can,” says Legason. “The more the parties get to know each they really understand the operator? Are they patient, don’t other and understand their respective goals, the better. It’s rare micromanage, and let you do what you do best? The franchisee to see a deal go quickly.” has to be able to control the operating decisions. Most private equity groups agree with that.” In fact, it’s why they were in- What are your goals? terested in the franchisee in the first place. Just as private equity comes in many shapes and sizes, so do “Private equity has kind of a mind of their own,” says Stiles. the ways it’s deployed. What is the motivation of the opera-

he says. “They’ll want membership on the board and to weigh in on important decisions. When you have Two Critical Factors someone new at the table voting on the decisions, iley Legason is a partner at the law firm Davis many operators are not accustomed to that; some are Wright Tremaine and leads the firm’s national comfortable and have done it before, others are not.” restaurant industry practice group. “Our firm R life after the deal typically represents the operators in restaurant brands that are taking on investments,” he says. “We help When a business is making money, everyone is them when somebody wants to invest in them and incredibly happy, says Legason. When it fails to meet guide them through the process.” expectations, “That’s where things can get pretty Although his focus is on restaurants, he says that complicated when you have a number of people with for any multi-unit franchisee organization considering authority at the table.” taking on equity partners for growth (as opposed to As an attorney advising restaurant operators an exit or sale), a successful private equity deal comes seeking private capital, Legason has been involved down to two core issues: in deals that later turned out good, bad, and ugly. 1) is the investment fair in terms of the “We’ve seen a number of investments that have pricing? That is, is the amount of money the private worked out very well,” he says. “We’ve also seen the equity group invests for the percentage they get other side of the spectrum.” reasonable, or are there better alternatives for the When it works (the good): “We’ve seen some very franchisee group? The answer to these questions, he good outcomes with some clients. There’s a group says, varies from group to group, but the issue the invested in one of our clients that has management franchisee group always wrestles with is: Is this the in place that really connects with our client and their best option in terms of our growth plan? industry. They’ve played a very valuable role— Related issues include: What does the investment mentorship, strategic, and advisory.” look like on the payback schedule? Are there certain When it doesn’t (the bad): “Often clients have preferences attached to the percentages that will make agreed to terms that in hindsight don’t seem so fair it difficult for the business operator to continue to exist economically. It felt like a great fit moving in, but when as they have in the past, i.e., depending on the terms, they get down to working together the relationships do the investor group will get a certain amount of capital not work out so well. The investor wants to wield more paid back before the operators do. Sometimes this influence, there are differences in strategy—it exhausts makes great sense, sometimes it doesn’t, he says. both sides and makes the experience of being in 2) is the relationship moving forward business less enjoyable.” a good fit? Perhaps even a bigger—and more When it really doesn’t (the ugly): Assuming important—issue operators wrestle with, he says, is the the business is still viable, he says, the deal often relationship with the people who have invested in them. ends with a buyout, with one party staying or both In other words, can you play well with others, or do you moving on. “Like in marriage, divorce is never easy, need to maintain your autonomy and remain in charge? and never inexpensive. The damage has been done, “The partner will have a vested interest in being and it’s not always easy to recover. Sometimes sure their investment is put to good use,” says Legason. another group will want to step in and take over Whether they have a majority or minority interest, from the investor,” he says. Sometimes it’s too late, equity investors are not inclined to be silent partners, so do your diligence.

60 Multi-unit Franchisee Issue II, 2011

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Multi-unit Franchisee Issue II, 2011 61

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draw that,” says Ikirt, adding that operators should at least consider private equity as a source for growth Choose Your Partner Well capital “in these times when banks aren’t lending. n July 2009, John Ikirt signed on as a ComforCare I’m also not so sure if the banks were lending that I Senior Services franchisee in Dayton, Ohio. He wouldn’t consider an equity partner.” I did it with the advice and funding of a private investment company with a unique approach: use your equity wisely investing for the long term as a 50/50 partner, rather Since one of the most challenging decisions an than the typical 80/20 deal with an exit written in entrepreneur has in their lifetime is capital construction stone some 5 to 7 years later. (what kind, what terms, when), Loyle says he has a Ikirt approached Harry Loyle, managing director “little speech” he gives to potential clients. “You must of Cybeck Capital Partners in Dayton. “Banks weren’t be sure you’re expending that equity at the right point really lending money unless you had collateral, and in your development. If you can accomplish your this is a service industry so Harry was an option.” goals and aspirations without private equity, don’t do Ikirt, who spent 16 years in sales management with it; don’t spend your valuable currency and interject Johnson & Johnson, saw the homecare business as a another person into your company.” good fit after he left J&J voluntarily. “On the pharma The biggest point in any private equity transaction, side, there was lot of right-sizing and downsizing says Loyle, is to “understand that equity is your most going on, I traveled a lot, which just got old, and valuable currency. So do your due diligence and be I always wanted to be my own boss and business sure the partner you’re choosing is consistent with your owner.” values and aspirations.” As it turned out, Ikirt already knew Loyle through In a typical private equity transaction, he says, the networking, and was spared the private equity firm picks up 80 percent time, uncertainty, and due diligence and the franchisee keeps 20 percent. of searching for a private source of “I have an MBA, “Our transactions are 50/50 equity, we funding to start his business. “If you do structure a true partnership,” says Loyle. seek outside help like I did, interview but there’s “Because of that, we spend a lot more people so you find somebody who’s time understanding the individual than a good match and who understands nothing like the transaction.” what you’re trying to accomplish,” says For Loyle, it’s all about who you are Ikirt. “I think it’s important to interview having a partner partnering with. “You have to be very different people. I didn’t have to do that, comfortable that you have mutual values I was very fortunate, and we were a who’s living in and culture.” If you do, he says, “Twenty good fit for each other.” percent of a $100 million company And in terms of the operations, the real world.” is better than 100 percent of a $1 being a 50 percent stakeholder, says —John Ikirt million company.” Bringing in an equity Ikirt, “I still have control.” But beyond partner, he says, “is not inherently bad, that is the relationship. “The nice but it is inherently challenging.” One of thing is that it’s not just I can find capital if I need the most successful deals he’s done took a company it, but I have somebody who has really extensive from $200,000 in revenue to $15 million in 5 years. business experience,” says Ikirt. “I think it’s a unique For Ikirt and Loyle, the partnership seems to relationship. I don’t know that if the bank gave me be working well, with the business growing from money I’d have that.” $400,000 when he started to $600,000. And, says Cybeck, says Loyle, is a boutique private equity firm Ikirt, “I think it can be much more.” specializing in operating partnerships. Besides putting Ikirt says he’s already thinking about expanding money into the deal, Cybeck provides management into other areas, and that’s where Cybeck and Loyle consulting, financial expertise, even coaching. “We will come in again. “Even if it’s a franchise or some play in a very small end of the market,” he says. But kind of startup business you’re getting into, there’s a lot with the credit crunch, “We’re getting more calls than of trial and error. With Harry, he’s been there before. we can handle.” Traditional banking relationships are It takes some of the pain out of some of the growth not working, he says, and small businesses no longer we’ve gone through, and he also paints a picture of have access to capital. where you’re going in the future,” says Ikirt. “I have an “Because I have a good relationship with Harry MBA, but there’s nothing like having a partner who’s and Cybeck, if I need money to cover payroll, I can living in the real world.”

62 Multi-unit Franchisee Issue II, 2011

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tor? To expand through the acquisition of new units or terri- “There is a slowly increasing number of private equity tories? Fulfill their development schedule when banks aren’t shops that will look for multi-unit franchisees rather than the lending? Have capital available when an opportunity arises? franchisor; or will look for multi-unit franchisees alongside a Remodel or upgrade their units (an expensive proposition if franchisor,” says Guinn. He says investors generally set two a significant number of their restaurants or hotels are due conditions: for a facelift)? Make the first step toward the exit through 1) Cash flow. “A few will look at multi-unit franchisees who a deal that requires the operator to stay on for a number of have $5 million in annual cash flow, but more will look at $10 transitional years? Family succession? Or simply to sell the million and up.” company and retire? 2) The brand(s). “Every investor I’ve spoken with who has In some deals, says Stiles, operators can do partial cash- looked at multi-unit franchisees has limited the concepts they outs and stay on as they phase themselves out. “If they want would look at to the ‘tier 1’ national concepts, for example, a to take some chips off the table in terms of a distribution, cluster of Taco Bells or Pizza Huts,” he says. “The reason is some private equity firms are okay with that.” Is it time to pretty logical because these private equity investors never input the kids through that Ivy League college? Finally buy tend to own the business forever and want to be able to turn that vacation home by the lake? Travel with your spouse, it around in four to five years after they work what they think now that the kids have moved out? The shape of the deal is their magic.” really depends on the stage of your business and your goals over time. What about the franchisor? “For the next few years in our business lifecycle, what is the The last (or possibly first) piece of the puzzle in a private eq- trajectory? Do we want to supercharge or put it on steroids? uity deal is the franchisor. Examining your franchise agreement Do we give up control, majority ownership, as the price to and the FDD is essential. Obstacles to a deal might include pay to play in the big leagues?” Hashim asks. As for whether the time horizon, personal guarantees, noncompetes, and ap- or not to take on a private equity partner to achieve his goals, proval of transfers. “It’s a business decision for me, the emotional part is not criti- “We counsel our clients that before even engaging with cal to me. I have not written it off by any means. I continually private equity, they understand what their FDD says about review our business plan.” it,” says Ormsby. For example, if a 50-unit Denny’s operator is approached by a private equity firm with a fund that’s in year are you big enough? four of seven, and the operator’s FDD says any private equity The answer to this depends on the size of the fund, its focus has to be in for five years, no deal is possible without flexibility (restaurants, service, B2B), the time horizon on their capital, on the part of the franchisor. and, often, personalities. Opinions vary on how big a franchise The franchisor also might balk over the issue of personal company has to be for a private equity deal. Here are some guarantees. For example, if the operator is obligated for $5 thoughts from the experts. million in personal guarantees, says Ormsby, “The franchisor With the cost of due diligence (time, energy, money), private has to understand how that payment will be guaranteed. The equity firms often need revenues of $10 million, $20 million, operator may be obligated to guarantee it, but with a private or $30 million to make the deal worthwhile, says Loyle. “We equity firm, it’s not the same.” always had some pretty large multi-unit operators out there “The franchisors are learning that dealing with a private but nobody understood it. Now they do.” equity investor, a substantial institutionalized investor, limited “Franchisee deals are very small for these guys,” says Hashim, partners, and hundreds of millions of dollars, is very different and the opportunity costs of getting in bed with franchisees from dealing with an owner-operator,” says Carner. However, are a factor. “They can place $200 million deals at the drop of she says, the issue of personal guarantees is not insurmountable. a hat. You have to get to a point where it makes sense for them “We have heard franchisors have recognized that fact, that it to entertain smaller deals.” doesn’t make sense, and see the sense of having professional Most private equity deals on the operator side have been investors involved in their system.” in the $3 million to $15 million range, says Monroe. “In most “Normally most franchisors can work through that, particu- cases it’s been smaller players looking to hook up with signifi- larly if the operator is on the hook,” agrees Monroe. cant operators.” “A lot of franchisees aren’t paying royalties on time now, Private equity firms won’t buy something with 5 units, and are struggling with hard-set remodeling dates. Some they want large transactions in good brands that they can operators can’t borrow the money to do it, so how do you scale, sales in the $30 million to $50 million range, and/or an handle it contractually?” says Ormsby. When a private equity EBIDTA of at least $4 million to $5 million a year, says Yarkin. deal can help solve that problem and keep the units operat- “Generally, they’re looking for a decent-sized transaction. If ing, that’s a plus for the franchisor and the brand. “Franchi- they’re a billion-dollar fund, they won’t look at a million- or sors are having to learn how to accommodate private equity two million-dollar deal.” firms,” says Ormsby.

64 Multi-unit Franchisee Issue II, 2011

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66 Multi-unit Franchisee Issue II, 2011

ad_fumgmufranchisingconf2011_thankyou(66).indd 66 3/11/11 4:39 PM muf2_sponsordirectory(67-79).indd 67 3/11/11 4:44 PM muf2_sponsordirectory(67-79).indd 68 3/11/11 4:45 PM muf2_sponsordirectory(67-79).indd 69 3/11/11 4:45 PM muf2_sponsordirectory(67-79).indd 70 3/11/11 4:45 PM muf2_sponsordirectory(67-79).indd 71 3/11/11 4:45 PM muf2_sponsordirectory(67-79).indd 72 3/11/11 4:45 PM muf2_sponsordirectory(67-79).indd 73 3/11/11 4:45 PM muf2_sponsordirectory(67-79).indd 74 3/11/11 4:46 PM muf2_sponsordirectory(67-79).indd 75 3/11/11 4:46 PM muf2_sponsordirectory(67-79).indd 76 3/11/11 4:46 PM muf2_sponsordirectory(67-79).indd 77 3/11/11 4:46 PM muf2_sponsordirectory(67-79).indd 78 3/11/11 4:46 PM muf2_sponsordirectory(67-79).indd 79 3/11/11 4:47 PM security By DavID ellIs is Your Data secure? One misstep can hand a hacker a master key to your network n case you haven’t heard, franchises hold a place of lem typically is related to the remote management applications honor in the world of data thieves. In fact, chains are the used to disseminate business downloads, conduct sales polls, and/ favorite target of hackers trying to steal payment card in- or manage inventory within a particular franchise community. formation. The most recent figures from Visa indicate that Nonexistent or improperly configured firewalls (the equiva- iup to 97 percent of data compromises are suffered by smaller lent of leaving a store physically unlocked after business hours) merchants and “specifically franchisees”—particularly those in and unencrypted credit card data stored by the organization are the restaurant, clothing, sporting goods, and hotel industries. other danger zones. So are oversights such as a failure to segre- The reason so many attacks are mounted against franchise gate day-to-day business and Internet traffic from payment data operations is simple: a hacker who can penetrate one franchisee’s (leaving the entire network open to an attacker once they’re in computer systems can frequently infiltrate the entire network the door), and a failure to replace the vendor-supplied default with little extra effort. Having this kind of “master key” to a passwords that come with POS systems and other network de- larger enterprise is far more efficient—and lucrative—than try- vices with complex, individualized passwords. ing to attack scores of smaller companies that have fewer cards to pilfer, as well as disparate security systems to break and enter. the Pci cure The PCI DSS prescribes detailed safeguards in each of these ar- Franchise systems at risk eas and many more, providing a road map for keeping card data A 2008 security breach at a major hotel chain illustrates the off-limits to interlopers. The rules require merchants to follow payoff for a franchise system breach. In that case, after hackers procedures such as: penetrated one hotel’s computer system, they were able to ac- • Configuring firewalls to deny all traffic from untrusted net- cess information from more than three dozen other properties works and hosts, blocking a key entry point that cyber-criminals through the chain’s computer network. Not only were guest use to access payment systems. names, card numbers, and expiration dates theirs for the taking, • Using two means of identification to authenticate remote but so was the magnetic stripe data that made the information users to the network—including a device such as a token, smart even more valuable on the black market because it provided the card, or biometric—to prevent hackers from using a password ability to replicate the physical credit card for each stolen data set. alone to gain network access. This franchisee-first attack is a common scenario. Frequently, • Changing vendor-supplied default settings on firewalls and the first successful breach occurs at a franchise location and then other network devices to eliminate easily guessed passwords such spreads to the corporate network. Visa is so concerned about as “1234” and “admin.” the number of attacks directed at franchises that it has created • Encrypting transmission of cardholder data across public special rules to address the franchise environment. Recently, networks, so that any intercepted data cannot be interpreted. for example, Visa expanded its security requirements to include • Using and regularly updating antivirus software or programs the integrators and value-added resellers (VARs) who supply to minimize the risk that malicious software that can extract card payment-processing hardware and related services to franchi- data (like keyloggers that record each keystroke) will be installed sors and franchisees. on servers and other vulnerable systems. For these corporate franchise servicers, as well as franchisors and their franchisees, compliance with the Payment Card Visa guidance Industry Data Security Standard (PCI DSS) is not only the best While full compliance with the PCI DSS list of requirements defense against card fraud, it is also mandatory. Adhering to PCI should be a cornerstone of your compromise prevention strat- controls and processes will help plug the security holes that allow egy, Visa has also recommended a variety of other policies and criminals to pocket your customers’ card data—or even your own. procedures to thwart data theft—including strategies that are specific to franchises. cracking the code For one thing, Visa requires merchants to use third-party pay- For a determined hacker, there are multiple roads to success- ment application software that is compliant with the Payment fully bypassing a merchant’s perimeter security. Attacks can be Application Data Security Standard (PA-DSS) created by the PCI launched against the organization’s computer network, point-of- Security Standards Council as a complement to PCI DSS. To sale (POS) software, or the POS terminals themselves. Within meet PA-DSS requirements, payment applications must adhere each of these categories, data thieves can exploit a variety of to a list of protections, including a prohibition against storing security weaknesses. full magnetic stripe, PIN, or other sensitive authentication data. In the first six months of 2010, for example, four attacks (A list of approved POS payment applications is at www.pcise- out of 10 involved unauthorized users gaining remote access curitystandards.org/security_standards/vpa/.) to computer systems because of issues such as lack of adequate On the franchise front, in June 2010, Visa issued the cor- password protection. In a franchise business, that kind of prob- porate franchise servicer rules mentioned above to cover card

80 Multi-unit Franchisee Issue II, 2011

muf2_c_security(80,81).indd 80 3/11/11 4:49 PM payment processors and other network How do I retain service providers that previously had es- caped PCI DSS oversight. The new rules my top leaders? not only require PCI DSS compliance by the service providers themselves, but also Our way make acquirers responsible for ensuring compliance with these and other regula- tions. Fulfilling these new mandates pres- beats How do I grow ents a number of challenges, including determining the identity of the service their way. now that my franchisor providers used by franchisees. saturated the market? In addition, Visa has advised franchisors to adopt other protective measures, Franchise Be sure you’re opportunities not the next company grabbing available headlines for across the U.S. letting customer We’re smokin’ the cardholder data competition. Do you want to own a slip through your franchise that’s setting fingers. the restaurant industry on re? With nearly 400 such as amending franchisee contracts to include having a data security policy units and high average unit consistent with PCI DSS, and expanding volume, Firehouse Subs training programs to incorporate data se- is one of the hottest curity and PCI DSS rules. fast-casual restaurant Help is available opportunities With franchises in the crosshairs of data in the thieves and the risk that a data breach will lead to regulatory fines as well as reputa- country. tion damage, it is essential for franchise organizations to be aggressive in ensuring data security. Your PCI vendor can help you sort through the requirements as well as perform an external vulnerability Hook & Ladder Sub® assessment scan that can identify security weaknesses in your systems and procedures that may be exploited by hackers to pilfer customers’ cardholder data. Be sure you’re not the next company Join Great Clips! grabbing headlines for letting customer The world’s largest cardholder data slip through your fingers. hair salon franchise. New York Steamer Sub® David Ellis is a Certified Manager-run Information Systems Secu- and rity Professional and Direc- Take Action Today: ﬁ rehousesubs.com Recession-resistant. tor of Forensics Investigations or 877-887-8330 for SecurityMetrics, a lead- facebook.com/ﬁ rehousesubs ing provider of PCI DSS Follow us: @FirehouseSubs security solutions, based in Orem, Utah. 800-947-1143 Contact him at [email protected] or © 2010 Firehouse Subs. This material does not constitute an offer of a Firehouse Subs restaurant franchise. An offer can only be made by us after receipt of the Franchise Disclosure Document. GreatClipsFranchise.com 801-724-9600.

Multi-unit FrancHisee Issue II, 2011 81

muf2_c_security(80,81).indd 81 3/11/11 4:49 PM siteselection By Dale WIllerton

Whose Broker is it anyway? Beware of agents working for two masters

ne of my greatest concerns is agents who are at the Multi-Unit Franchising Conference in Las Vegas. He told supposedly working for the tenant while accepting me about his franchisor’s “broker referral program,” where the a commission from the landlord. I have hesitated franchisor matched up the franchisee with a broker located in writing this article for months lest it be considered his city. This gave the franchisee a false sense of security since Oan attack on real estate salespeople or agents. Nothing could be he believed the broker was being taken care of by the franchi- further from the truth. If it weren’t for real estate agents and sor. In fact, even brokers working in this manner, who are still brokers, landlords would have half-empty buildings. My purpose being paid by the landlord, may try to please the landlord more here is to enlighten franchise tenants, open some eyes, and let than the tenant. you decide for yourself about this important issue. Let me pause right here and say that, in many opinions, Before 1993, I was a shopping mall manager and before that people who work on commission are salespeople—they are not a typical leasing agent, so I know what I’m advisors. If you want to weigh your options talking about. Real estate agents are deal- “In leasing, and maximize your bargaining position, use driven, not detail-driven. Whether you pay a lease consultant who is receiving a fee only rent at $24 or $26 per square foot matters less franchise tenants from you, the tenant. This is the defining point. to many agents than whether the deal actu- Recently, a client in Toronto told me about ally gets done. After all, they are only paid if a don’t get what a supposed lease consultant who wanted to rep- lease agreement is signed and the deal closes. resent the tenant and still pick up a commis- Recently, a real estate agent insisted that they deserve, they sion from the landlord (this, of course, is even my client, the tenant, sign a dual agency worse). Beware of wolves in sheep’s clothing. agreement (which basically states that the get what they You may have heard the term “tenant rep.” agent is representing both the landlord and This is a common handle agents take on when the tenant simultaneously). Now I don’t know negotiate!” doing site selection for a franchise tenant. So about you, but to me serving two masters seems nearly impos- if the agent is being paid a commission by the landlord, are they sible considering that we’re all human. When two people go to really “repping” you, the tenant? You decide. court over a disagreement, the plaintiff and defendant would Real estate laws state that the tenant is entitled to know if the never agree to share a lawyer. What if the defendant agreed to broker is being paid a commission, and how much. All you have pay the entire attorney’s fee? No plaintiff would justify this as to do is ask. In most cases the agent’s commission will be 5 to 6 a reasonable cost-saving measure. So why would a tenant take percent of the base or minimum rent (not operating costs). So advice from the landlord’s listing agent (or any agent) just be- if you are leasing 3,000 square feet (times) $28 per square foot cause it’s free? But many of them do, and the results are often (times) 5 years (times) 6 percent (.06), the commission would be less than complimentary. $25,200. If you’re not inclined to take the advice of a car salesman When a multi-unit franchisee comes to me for consulting who makes a $200 commission selling you a car, how much more they will often say something like, “My agent says this is a really guarded should you be when the commission is many thousands good location” or “My agent thinks the rental rate is quite rea- of dollars? In some cases, the agent’s commission is a flat fee, but sonable.” My first response is to ask why they refer to the agent typically it is still being paid by the landlord. as “my agent.” Sometimes the response is, “Well the landlord Also, don’t be afraid to take charge of the leasing process. The has his real estate agent and I have mine.” So I ask, “Well, who tenant is the customer, and any landlord should be happy that you is paying them?” Ultimately, the landlord is still paying a com- are considering leasing space in their property. There is nothing mission; it is simply being split by both agents. wrong with negotiating aggressively. In leasing, franchise tenants Franchise tenants need to know and differentiate between the don’t get what they deserve, they get what they negotiate! two types of agents. First, there is the “inside agent,” who is the one with their name on the For Lease sign. Second, there is the Dale Willerton is The Lease Coach and a Senior “outside agent,” who may show you various properties. Should Commercial Lease Consultant who works exclusively the outside agent secure a signed lease deal, they will split the for tenants. He is a professional speaker and author of landlord’s commission with the inside agent. Landlords love this Negotiate Your Franchise Lease or Renewal. Need situation because they can try to control both agents’ paydays. help with your new lease or renewal? Contact him at I remember one franchisee who approached me after I spoke 800-738-9202 or [email protected].

82 Multi-unit Franchisee Issue II, 2011

muf2_c_siteselection(82).indd 82 3/11/11 4:49 PM You taught them how to open. Now teach your franchisees how to grow.

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ad_sullivision(83).indd 83 3/11/11 4:35 PM Finance By steve LeFever understanding Bankers Basic rules to boost your odds of getting a loan

ack in 1981, with the prime borrowing rate at an Woolly Mammoths Gone? puts it this way: “I’ve often thought if I all-time high of 21 percent, most bank customers felt that could collect all the nation’s bankers in a big gunny sack out in Bthose cameras they have in banks to photograph robbers the middle of the ocean, that I would jump overboard with the should, in all fairness, be pointed at the “real” crooks: the lend- sack and sacrifice myself just to rid the world of them.” ing officers. At such rates most companies found it difficult (if not impossible) to borrow money. Actually, it wasn’t so hard to Know thy banker borrow money—it’s just that no one could repay it. It doesn’t need to be that way. Let us share some thoughts from Those days of exorbitant interest rates are gone now, at least the perspective of someone who’s been both a banker and a busi- for the time being. In fact, interest rates are at all-time lows. ness owner. Since it usually aids in understanding to view any However, the problems of finding capital and repaying loans situation through the other person’s eyes, let’s examine where remain, and many business owners have feelings of animosity your banker is coming from. and bitterness toward banks and bankers as a result of their bad The best way for banks (and bankers) to be successful is to lend experiences. For just a moment, let’s redefine money to businesses that pay them back. But the Golden Rule: Those who have the gold, 80 percent of all businesses fail. So bankers make the rules. the best way tend to be very cautious because they have a 4 out of 5 chance of guessing wrong—and How we got here for banks to be that 80 percent statistic was in good times. Let’s also take a look at the recent past. The To make matters worse, most business economic firestorm of the past three years has successful is to lend owners don’t understand leverage or why changed the credit landscape going forward. more debt equals more risk… and they tend First, let’s look at the primary components to overstate their optimism and understate of the recent financial meltdown: 1) a lax money to businesses their need for capital… and they’re usually regulatory environment creating conditions undercapitalized and overextended… and for abuse, 2) substandard credit policies and that pay them back. they rarely have accurate, timely informa- documentation, 3) economic over-optimism, tion. But they do have an almost religious and 4) borrowers’ lack of financial acumen. But 80 percent of belief that things will be all right if they can In the bank regulatory arena, lax enforce- just get the funds they need to “get over the ment has been replaced by an overly restrictive all businesses fail. hump.” (Sound familiar?) review process applied in an arbitrary manner Of course, borrowing is a two-way street. that is actually hindering the recovery. Banks so bankers tend to It’s not just a case of business owners needing are scrambling to refocus on credit training bankers; bankers need their business custom- and loan documentation. ers just as much. For banks, their deposits are Finally, there’s the issue of the lack of fi- be very cautious liabilities (as in “demand deposit” accounts). nancial acumen on the part of business own- Banks don’t make any money until they make ers and managers. For decades, everyone has because they have a a loan. Find a banker who’s never made a known, and accepted, the classic profile: Most bad loan and we’ll show you a bad banker. business owners know how to make it and 4 out of 5 chance of On the other hand, show us a banker who’s sell it, while the financial side of the business made too many bad loans and we’ll show remains somewhat of a mystery. This folk- guessing wrong. you someone who now has a different career. lore profile will no longer cut it in today’s (The classic advice story for young bankers overzealous documentation environment. Business owners will who want to be successful is: “Make good loans.” How do you be expected to “up their game” with regard to financial acumen know if a loan is good or not? “Experience.” How do you get and business performance. experience? “Bad loans.”) Keep in mind that borrowing and lending represent two sides One of the things many bankers also discover is that the way of the same coin. No business relationship works out unless you to get ahead is not by doing good things, but rather by not doing have a win-win situation. This includes banking. In fact, most bad things. Thus, the easiest thing to say is “No.” Bankers can bad experiences and loan rejections are the result of poor com- become skeptics, so it becomes the business owner’s job to give munication and lack of education: the banker’s lack of education them a reason to say “Yes.” about your business, and your lack of education about the bank’s procedures, policies, and constraints. What you can do This mutual lack of education breeds misunderstanding, mis- With these realities in mind, let’s examine some of the things you trust, and frustration. Ted Frost, in his book Where Have All the can do to strengthen your banking relationship and increase your

84 Multi-unit FrancHisee Issue II, 2011

muf2_c_finance(84,85).indd 84 3/11/11 4:44 PM “bankability.” Banks generally evaluate your loan request using the “five C’s” of credit: • Character: You must be trustworthy and have a good name; otherwise how good the deal is won’t matter. • Capital: Don’t look for 100 percent financing; expect to invest some funds yourself (skin in the game). • Collateral: What assets are available as a secondary source of repayment (just in case)? • Capacity: You must understand your company’s ability to absorb and repay debt (financial skills). • Conditions: What are the general economic conditions, and in what ways will they affect your industry and your company (shaky recovery)? Since the bank really depends almost entirely on you, the more you look like you know what you’re doing, the better off you are. Coupling this knowledge with an understanding of the way banks operate can create a winning combination in getting what you need at the bank. To test whether or not you’re adequately prepared, always ask yourself the following five questions, the ones most bankers want answered before they’ll lend anybody anything:

1. How much do you need? 2. What will you do with it? 3. When will you pay it back? 4. How will you pay it back (i.e., what will make cash flow)? 5. What if something goes wrong?

If you can answer all of these questions, you’re ready. Then keep in mind the old Boy Scout motto: Be prepared. And be mindful of the advice from a senior credit manager at one of the larger Midwest banks: 1) keep in mind that borrowing is a privilege, not a right, and 2) know your numbers or stay home!

Steve LeFever is chair of Business Resource Services (BRS), where he guides business networks from “Profit Mystery” to “Profit Mastery.” For more than 10 years, franchisors and franchisees have improved their financial performance by following the BRS Profit Mas- tery process: financial training, performance benchmarking, and accountability/bankability modeling. Contact BRS at 800-488-3520 x14 or [email protected].

Multi-unit Franchisee Issue II, 2011 85

muf2_c_finance(84,85).indd 85 3/11/11 4:44 PM investmentinsights by Carol Clark

repeatedly stresses the importance of giving children the ability to develop wide-ranging competencies. For children entitlement growing up in affluent households, this can be especially difficult. As Hausner puts it, “Many wealthy parents lead lives that place them in strong supervisorial roles… Eliminating, or De-Programs significantly diminishing, this ‘take charge’ orientation when parenting is not easy. But parents who assume the responsibil- Teach your children wisely ity for making all the important decisions without input from financial legacy can provide an incomparable their children are actively encouraging dependency rather “leg up” to offspring—if they are adequately pre- than helping them develop competency.” pared. However, inelegant handling of the training • The tough love school of intergenerational wealth a stage can create generations of enmity, or breed transfer. Parents need to be aware of the emotional mes- unmotivated individuals with an entitlement attitude. A fam- sages sent by funding their children. If a parent steps in with ily business (especially if some offspring participate in day- financial aid every time the child’s credit card is overextended to-day operations while others do not) presents even more or cell phone bill is too large, the messages the child receives complexity, particularly in the area of “fairness.” Following are that “Struggle is bad,” or worse, “You are not responsible are a few things to think about as you grapple with starting enough to get yourself out of jams.” Come to a child’s aid the preparation process. too often, and an entitlement mentality may become firmly • Unveil your own financial management beliefs—the established. However, not all parental expenditures are bad. sooner the better. In the frenzied intersection of building a For example, paying for post-secondary education is a le- business and raising a family, it can be overwhelming to take gitimate way to help children prepare for independent and time out to discuss the emotionally laden subject of “money” productive careers of their own. But each time you pull out with your heirs. Entrepreneurs are by their very nature used to the checkbook, think carefully about the message you are being in complete control and often reluctant to discuss details, sending your child. Your children can inherit your assets, but yet it doesn’t take a four-hour discussion of the family balance not your wisdom. Personal wisdom is attained by overcoming sheet for you to open the dialogue. Start small, by teaching obstacles and struggling to reach goals. key values such as “Spend less than you earn” and the impor- • What does “fair” look like? Some affluent couples are tance of giving back to the community. Explain how you first intent that equal dollar amounts flow to each child and their pay yourself by funding your retirement account off the top. family. Indeed, many professionals argue that this approach Explain how you use automatic payments to fund charitable ensures future family harmony. Alternately, some grandparents donations. Let them know that what comes in as “gross in- want each child to be treated equally and each grandchild to be come” for the business isn’t play money, but is invested in plant, treated equally—which means that the family of a child with equipment, advertising, etc., and pays taxes (which helps put a larger brood receives more of the parent’s wealth then the people to work, builds infrastructure, and fuels the economy). family of a sibling with fewer or no children. Either approach • Delay talking about your financial balances. While it is valid; how well either works depends on the family’s unique is best to start demonstrating your money philosophy early, dynamics. The more parents and grandparents communicate to most advisors agree that you should be very careful regard- the children and grandchildren about what their perspectives ing how soon you reveal “real dollars.” Children understand are and why, the fewer intra-family resentments there will be. very early where they are in the social strata relative to their Though the issues surrounding wealth transfer planning peers. To the extent that privilege discourages children from are emotionally charged, they are not insurmountable ob- finding their own purpose and reason for being, it can be an stacles. With thought and careful planning, affluent parents overwhelming burden and a disservice that lasts a lifetime. have an incredible opportunity to pass a lasting legacy—both According to many advisors, any significant amounts gifted financial and emotional—to the generations in their wake. to a child before age 25 can seriously impede that child’s personal search for a meaningful livelihood. Some advisors rec- Carol M. Clark, CFA, is a partner and invest- ommend waiting until children are in their 40s or 50s before ment principal of Lowry Hill, a private asset man- giving them direct access to significant unearned wealth. Part agement firm that provides proprietary investment of the answer lies in what children are taught about the role management and financial services to families, in- that money plays in their lives during their formative years. dividuals, and foundations with wealth greater than Children must learn the responsibilities attendant to afflu- $10 million. The firm manages approximately $6 billion in assets ence, not just be left to revel in the privileges. for nearly 300 families and more than 60 foundations from offices • Encourage your children to find their own passion in Chicago, Minneapolis, Naples, and Scottsdale. She welcomes ques- and purpose. In her book Children of Paradise, Lee Hausner tions and comments at [email protected].

86 Multi-unit Franchisee Issue II, 2011

muf2_c_insights(86).indd 86 3/11/11 4:48 PM FRANCHISE BUSINESS INTELLIGENCE

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ad_frandata(87).indd 87 3/11/11 4:34 PM customerscount BY JACK MACKeY

42 hotels that a 5 percent improvement in customer retention (customers who say creating loyalists they are “likely to return to Hilton”) would result in a 1.1 percent increase in annual revenues the following year at a typical Nurturing existing customers must be a key property. Marriott found similar results. Davenport shows a number of statis- strategic goal for franchise organizations tical models that link nonfinancial variables (like customer loyalty) to business ntil your organization fig- customers to increase their frequency; 2) results. For example, the cause-and-effect ures out how to drive higher get them to leave more gross profit dollars between customer loyalty (retention) and sales and profits at existing behind on each visit; or 3) get more new sales is well-established. The obvious stores, adding new units is very customers. The surest way to grow is to question for executives is: What causes urisky. The only time McDonald’s got in do all three at the same time. customer loyalty? real trouble came when they focused on Based on 100 million customer experi- In the basic business model (see graphic), growing sales by adding new units while ence metrics in the SMG Benchmark Data- the only way to make this model action- neglecting to grow same store sales. base, there is no doubt that loyal customers able is to discover which elements of the The source of sales—customers—can 1) visit more often, 2) spend more at full customer experience are the key drivers be a tricky, fickle bunch. They say they like price, and 3) spread the positive word of of customer loyalty. This can present a the way you treated them and the service mouth that causes new customers to try barrier to management because many they received, but then they go across the you. The insight here is that same store franchise companies do not have the ana- street and spend their money with your sales and profits are built on the shoulders lytical skills to confidently create a predic- competitors. If only tive model. Davenport franchisees could fig- surveyed more than ure out how to trans- 4,000 companies of all form customers who types and found that visit once or twice most companies (64 into customers who percent) do not ana- are loyal! Customers lyze the quantitative who return again and relationships between again are by far the indicators of business most profitable. performance, such as Without an ever- customer satisfaction increasing stream of and loyalty compared loyal regulars, fran- to sales and profits. chisees find them- To be fair, it isn’t selves anxiously looking at the franchisor’s of loyal customers. easy to consider, or control for, all pos- marketing calendar as the answer to gen- This is why customer loyalty is such a sible variables that might affect financial erating the traffic needed to survive. But big deal and must be a key strategic goal. performance: customer satisfaction, em- rarely will the “Five Dollar Footlong” come Multi-unit franchisees must be relentless ployee attitudes and behaviors, marketing along and deliver a double-digit bump in and consistent in nurturing existing cus- capability, level of innovation, etc. But there sales for franchisees. tomers. Successful franchise organiza- are franchise firms that have developed Marketing and innovation are crucial tions survey their customers and provide service models that allow statements such elements in driving traffic. But gaining franchisees with customer satisfaction as, “With all other performance drivers customer awareness and customer trial and loyalty metrics for each of their lo- held constant, an x-point rise in customer is just the beginning of growth. Without cations. Multi-unit operators should use satisfaction yields a y-point increase in sustained same store sales growth, multi- these metrics to keep their organizations same store sales growth.” If your franchi- unit operators are on very shaky ground. focused on expanding sales and profits by sor hasn’t provided you with this type of Ron Shaich, founder of Panera, sets increasing customer loyalty at existing lo- analytical support, ask for it. an even higher bar for multi-unit leaders cations. Proving you can do that is key to than same store sales growth. He recently expanding the number of units you can SMG Vice President Jack wrote, “Earnings growth and real value successfully manage. Mackey helps multi-unit creation occur only when a company is In The Rise of Analytic Performance Man- operators improve customer able to generate same store profit expan- agement, Thomas Davenport cites a com- loyalty and drive growth. To sion over multiple years and add high re- pelling example of the correlation between request “Connecting with turn on investment, or ROI, to new units.” customer loyalty and same store sales Customers Beyond the There are only three ways to grow prof- growth for multi-unit operators: Hilton Survey,” contact him at 816-448-4556 or itable sales in existing units: 1) get current Hotels concluded from 5 years of data at [email protected].

88 Multi-unit Franchisee Issue II, 2011

muf2_c_customers(88).indd 88 3/11/11 4:43 PM It’s Not a Test Kitchen…

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Multi-unit Franchisee Issue II, 2011 89

ads_fractional(41,45,47,51,53,55,61,63,89,94).indd 89 3/11/11 4:34 PM exitstrategies By Dean Zuccarello M&a activity: 2011 Outlook avoid obstacles as the climate slowly improves

any restaurant operators the process is slow, tedious, and littered transactions taking longer to close, op- and dealmakers are hoping with landmines. Equity requirements are erators must keep their eye on managing for a return to the pre-2008 higher and have not reverted to pre-2008 costs, growing sales, and ensuring that environment, when mul- levels, and borrowers must be prepared to the company’s performance is sustainable. Mtiples were robust, liquidity was flowing, address any deviation in company financial While the natural instinct for an entrepre- equity was prolific, and debt capital was performance. Borrowers cannot expect neurial seller or middle market CEO is to plentiful. lenders to ignore uneven financial results micromanage the deal process, sellers are We have seen a respectable improve- and should have a backup plan when ap- advised to focus on company operating ment in restaurant company performance, plying for credit. In most cases, borrow- performance and allow transaction pro- capital availability, and M&A activity in the fessionals to navigate the often-changing past six months, and we expect a recovery dynamics of the deal process. The most in deal transactions. We have seen some difficult assignment for any M&A pro- market players revert to what we’ll refer to We sense fessional is to maintain deal pricing in a as the “new normal,” in which buyers and declining operating environment. sellers recalibrate valuation expectations and that the M&a • Plan and over-communicate. Sellers deal structures to reach the closing table. and borrowers sometimes delay negative This caution has arisen from the difficult market is news until later in the process. This strategy economy, and may be a factor for some might work in a robust deal environment, time. However, we sense that the M&A recovering in where buyers look for reasons to make a market is recovering in lockstep with the transaction happen. In challenging times general economy and expect 2011 and be- lockstep with the reverse occurs, and negative develop- yond to be increasingly healthy and active ments often result in deals falling apart in terms of the deal environment. the general over a perceived lack of trust between While the selling process has never been buyer and seller, without even a chance to easy with middle market transactions, own- economy and attempt to renegotiate. If bad news sur- ers and entrepreneurs must be especially faces, disclose and manage the situation strategic, educated, and prepared when expect 2011 proactively. Burying or hiding question- going to market in today’s still somewhat able information will not suffice today. uncertain environment. Obstacles to suc- and beyond to Plan the transaction process, anticipate cessful deal completion in 2011 include: negative developments, and manage the • Political risk and costs. While we be increasingly communication and disclosure. Remem- may have seen the worst from Washington ber, in almost every case, the information and state governments in terms of more will come out eventually. regulation, uncertain tax legislation, and healthy and • Understand the realities of buyer mandates on new government initiatives psychology. Buyers in today’s market- (e.g., healthcare), reversing government active in terms place are more opportunistic than at any programs in a divided political environ- time in recent memory. Well-capitalized ment is at best difficult and uncertain. In of the deal buyers often are convinced that sellers short, sellers must be prepared to address have to sell and will attempt to re-trade, the costs associated with these programs environment. restructure, and renegotiate based on any and defend their impact on future expenses unforeseen or expected development. If and cash flow. Buyers generally assume the ers and buyers should engage multiple margins contract, sales drop temporarily, worst and project higher costs in evaluat- lenders to underwrite transactions, even or the underlying brand or concept has ing acquisition opportunities. at the risk of paying higher up-front fees a tough comparison or weak promotion, • Credit and lending markets. The to avoid a change in advance rate, pricing, be prepared for the demand of a price ad- credit markets tightened dramatically in or credit structure. justment. Buyers will use any tool to take 2008–2010, while underperforming loans • Operating results. Valuation integ- advantage of a short-term correction. Be spiked and chief credit officers at financial rity is based on the seller’s ability to drive prepared, know your limits, and have a institutions experienced days that will long positive company results during what is backup plan in place. Many deals need to remain in their memories. While financing typically a protracted deal process, and die before they eventually close. activity is returning and lenders recognize sellers must focus on maintaining posi- • Most sellers don’t have to sell. Most they’re in the business of providing credit, tive operating trends throughout. With value buyers remain unconvinced of this

90 Multi-unit Franchisee Issue II, 2011

muf2_c_exitstrategies(90,91).indd 90 3/11/11 4:42 PM FOR THREE YEARS RUNNING, BOJANGLES’® HAS BEEN fact, and many opportunistic buyers think they can steal good deals in the current en- ONE OF THE FASTEST GROWING RESTAURANT CHAINS vironment. The realities of the marketplace IN THE COUNTRY. WE’RE NOT SLOWING DOWN. are that few “distressed” deals get done. In actuality, many bankrupt companies sell COME SEE WHY-- for higher prices than anticipated, unless the performance has deteriorated to the  Bojangles’® was named by The Wall Street Journal among only eight restaurants point where the company has questionable in its “25 Franchise High Performers” across all industries life as a going concern. Buyers should be diligent but realistic, and focus more on  ranked #1 in the chicken category by Entrepreneur how they can logically improve the cash  listed among the top seven growth foodservice groups by Nation’s flow of the business than on buying for Restaurant News in 2010 the lowest possible valuation. If buyers are too aggressive on deal pricing, sellers  listed in Inc. magazine's fastest growing private companies in 2008, 2009 and 2010 simply will go away and resurface when  listed among QSR’s top eight growth concepts in 2010 conditions improve.  listed among the ten fastest growing restaurant chains by M&a slowly recovering GE Capital Franchise Finance in 2010 The second half of 2010 witnessed a significant improvement in terms of deal activity, and we expect 2011 and beyond to improve on that momentum. While the environment has yet to reach pre-2008 levels of deal activity and buyer interest, Learn more by calling 1-800-366-9921 Cypress is observing the rumblings and or visit bojangles-franchise.com positioning among the industry players, evidence of their renewed and heightened This is not an offering to purchase a franchise. interest in M&A transactions. The level Offerings are made by Franchise Disclosure Document only. of scrutiny in deal due diligence remains high, as private equity firms and some underleveraged strategic buyers become more active, but we have no doubt that the players are getting ready for the game. Sure, there is some caution in the air, but that is to be expected based on the stress the finance world has endured, and that caution is likely to continue for some 60% of Franchisees are Multi-Unit Owners time. As a result, it is more important than Nation’s Largest Franchised Pet Supply System ever to properly position yourself to realize success. Whether you’re a buyer, a seller, or a borrower, keep these factors in mind to increase the odds of a successful conclusion to your transaction. We may not experience pre-2008 deal activity in the very near term, but Cypress believes that the M&A industry will become more robust as the general economy continues its recovery.

Dean Zuccarello, CEO and founder of The Cypress Group, has more than 25 years of financial and trans- actional experience in mergers, acquisitions, divestitures, strategic planning, and financing in the restaurant industry. The Cypress Group is a privately owned investment bank and advisory services firm focused exclu- FOR A FRANCHISE OPPORTUNITY THAT’S RIGHT FOR YOU sively on the multi-unit and franchise industry VISIT www.pspfranchise.com for more than 17 years. Contact him at 303- or call MARC KIEKENAPP at 866-477-7747 ext. 199 680-4141 or [email protected].

Multi-unit Franchisee Issue II, 2011 91

muf2_c_exitstrategies(90,91).indd 91 3/11/11 4:42 PM People By Mel KleiMan

Checking Your References How to get useful responses from former employers

n the course of my speaking and steps you can take they think you want to hear. However, consulting engagements, I’ve found First, if it’s not already a part of your if you tell them at the beginning of the that many franchisees have given up employment application form, get writ- interview that you expect the truth, you even trying to get meaningful refer- ten authorization from all applicants to change their mindset. Iences on promising job applicants. From check their references and run a back- Position applicants to tell you the the frustrating experiences recounted to ground check (whether you actually do truth by saying something like: “I’m go- me by others and my own company’s so or not). This release helps hold you ing to be very open and honest with you policy, I know that most employers will and everyone who provides information about the job and our company, and I report only dates of employment and the harmless and free of any liability that hope you’re going to be open and honest starting and ending wage or salary figures. could result from the process. (For a with me about yourself. It doesn’t mat- The information clampdown is the sample form, register at www.kleimanhr. ter if you’ve ever resigned, been fired, or understandable, but misguided, response com and visit the “Members” page.) had difficulty with a former employer. to the number of lawsuits filed—and Then, when you conduct the inter- As long as you tell me about it, we can won—by former employees who went view, position the applicant to tell you take it under consideration. But if you to court to dispute what they believed the truth. Job seekers are inclined to put don’t tell me, and we find out about it were unfair, unfavorable references. things in their very best light on their when we do your background check and To complicate matters, the turbulent look into your history, I can’t hire you. economy has made it possible for dis- We owe it to Do you understand what it is I want?” honest people to list defunct companies Then wait for the applicant to say as former employers, as well as to create our employees something like, “Of course, you want a job title and range of responsibilities the truth.” Once you get this acknowl- that lead you to believe you’ve found and the publics edgement, you’ll find applicants much just the person you’ve been looking for. more forthcoming. Approximately 90 A pre-employment screening com- we serve to hire percent will be more honest than they pany in Colorado reports that one in 10 planned to be. Ten percent may still job applicants they screened had a crimi- decent, ethical, omit information or lie, but this ap- nal record. The fact that this company proach gets most applicants to tell you ran approximately 800,000 background safety-conscious what they really weren’t planning to: the checks last year makes that number even employees. unvarnished truth. scarier. They also found one in three ap- There’s also a simple tool you can plicants misrepresented themselves on resumes, on your application form, and add to your hiring process that will get an employment application, and one in in person. However, there is a specific you the references you need, as well as four provided false educational or cre- positioning technique that gets people help managers to do a better job of in- dential records. to tell you what you need to know. It was terviewing. A reference verification If you’re not getting references, those discovered during the early use of lie de- form includes the release from liability numbers give you an idea of the kind of tector technology for pre-employment discussed earlier and requests basic in- risk you’re taking. When you rely only on testing when administrators found they formation about each relevant former information provided by the applicant, would get more admissions pre-polygraph job and employer. A separate form is you’re at risk for everything from hiring when they carefully positioned people completed for each of the applicant’s last a dishonest person to a costly negligent to tell them the truth by saying, “We three jobs or the last five years of work. hiring lawsuit. The only good news here expect you to be honest. If you aren’t For each job, applicants are asked to rate is that if you at least try to get references completely honest and it shows up on themselves as they think their previous and someone withholds unfavorable in- the lie detector exam you’ll be taking supervisors would on job performance formation, it will probably reduce your later, we cannot hire you.” measures such as initiative, dependabil- liability should anything untoward hap- Because people have a propensity to ity, productivity, effort, cooperation, and pen. (Just be certain to document your meet our expectations, we can use this overall performance. (A copy of this form conversations and keep these records.) technique to our advantage when con- can also be found on the Members page While this is a good defensive strategy, ducting interviews—without hooking at www.kleimanhr.com.) it’s better yet to get the information you anyone up to a lie detector. When you’re ready to do the refer- need to make a sound hiring decision. Job applicants show up for interviews ence check, you simply fax or email the And it can be done. well prepared to tell you exactly what completed form to the reference with a

92 MultI-unIt FRanChIsee issue ii, 2011

muf2_c_people(92,93).indd 92 3/11/11 4:43 PM notation that you’ll be calling to discuss department again later. You may get hire the person, document your inability the information. When the reference more information if a different person to get meaningful references and keep sees you have provided the applicant’s answers the phone. the records in the employee’s file. release in writing, as well as the appli- • Have someone else try. Some- Also, take a moment to consider your cant’s self-rating, you’ll find you get a times it’s difficult to establish rapport own policy on references. As employ- great deal more cooperation. with a reference. Someone else may be ers, we owe it to our employees and the Experience shows that employers get able to get more information. publics we serve to hire decent, ethical, useful responses and reliable answers more • Speak with a former co-worker. safety-conscious employees. One of the than 90 percent of the time when they You may get a more willing response from only ways to do this is by sharing infor- use this tool. The technique is effective the applicant’s previous co-workers than mation with one another about former because you’re asking references only to from their former supervisor. (It’s also employees. confirm the applicant’s self-ratings—not possible you may obtain valuable leads When you hire new people, ask them to divulge information. on other potential job candidates. After to sign a release that, should they leave, all, if the applicant you’re checking on allows you to give references when asked. additional strategies was unhappy enough to leave, chances If every employer would adopt this proce- If you still meet with resistance when are someone else may be too.) dure, negligent hiring lawsuits would soon using the form to check references, try • Appeal to the person; don’t think be only a footnote in law school texts. these strategies: of them as just a “reference.” If you • Have the applicant do the leg- have established a good rapport with the Mel Kleiman is a consul- work. Ask the applicant to call and tell person on the phone, but they will not tant, author, and Certified the reference you’ll be calling, and that give you any information, you could try Speaking Professional on they’d appreciate it if the reference would this approach: “I understand you may strategies for hiring and cooperate. The applicant’s follow-through not want to discuss this, but if you could, retaining the best employees. (or lack of it) will tell you a lot about what would you tell me?” It may sound He is president of Humetrics, their viability as an employee. too simple, but it does work occasionally. a developer of systems, training processes, and • Try, try again. If you call the ap- Whatever you do, don’t give up or tools for recruiting, selecting, and retaining plicant’s former department and are pass on getting reference information. If the best. You can reach him at 713-771-4401 referred to human resources, try the you don’t get any cooperation and then or [email protected].

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Multi-unit Franchisee Issue II, 2011 93

muf2_c_people(92,93).indd 93 3/11/11 4:43 PM 94 Multi-unit Franchisee Issue II, 2011

ads_fractional(41,45,47,51,53,55,61,63,89,94).indd 94 3/11/11 4:34 PM adindex Advertiser PAge Advertiser PAge Aaron’s 51 Jack in the Box 5 BGR: The Burger Joint 59 Jersey Mike’s Subs Cover, 7 Bob’s Big Boy 85 Jiffy Lube 61 Bojangles Famous Chicken ‘n Biscuits 91 Jimmy John’s Gourmet Sandwiches 37 Camp Bow Wow 89 Laptop Xchange 89 Checkers 63 Mr. Goodcents Subs & Pastas 33 CKE Restaurants Back Cover Papa Murphy’s Take ‘N Bake Pizza 89 Dairy Queen 9 Pet Supplies “Plus” 91 Denny’s 2 Pizza Inn 93 Domino’s Pizza 97 Pollo Campero 85 Driven Brands 19 Red Mango 27 Dunkin’ Donuts 25 RetroFitness 1 EarthFruits Yogurt 53 Robeks Premium Fruit Smoothies 93 Easy Leasebacks by Sperry Van Ness 47 Schlotzky’s 42 Edible Arrangements 29 Seattle’s Best Coffee 21 Famous Dave’s 95 Shakey’s Pizza Parlor 55 Fast Fix Jewelry Repair 41 SportClips Haircuts 95 Fiesta Insurance 94 Sullivision 83 Firehouse Subs 81 Swiss Farms 17 Franchise Source Brands International 35 TCBY – The Country’s Best Yogurt 45 FRANdata 87 Togo’s 13 Gold’s Gym 45 Twin Peaks 63 Golden Corral Buffet & Grill 89 The Wall Street Journal 41 Great Clips 81 WingHouse Bar & Grille 94 The Greene Turtle Bar and Grille 43 Wingstop 61 Huddle House 47 Yogurtland 51 Hungry Howie’s Pizza 53 ZIPS Dry Cleaners Inside Front Cover J.D. Byrider 55

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For information on our easy-to-execute multi-unit model, call Gayle at 1-800-872-4247 ext: 240, or email us at [email protected] Visit our booth #514 at the Multi Unit Franchising Conference.

Multi-unit Franchisee Issue II, 2011 95

muf2_adindex(95).indd 95 3/11/11 4:48 PM FranchiseMarketupdate

By Darrell Johnson

same-store sales, unit expansion and unit closures, capital expenditures, unit and chain cash flow, and earnings per share. Beyond the FDD They can track specific metrics about a public company, and can do so on a quarterly basis. Multi-unit operators need more to The multi-unit investor has access to regulatory documents as well, but how useful is the regulatory information make investment decisions for making investment decisions? Are the other sources and types of information comparable to what the sophisticated ith the stock market on a run at the stock investor has available? start of 2011, I began thinking about the A 10(k) and an FDD have some content similarities (e.g., similarities of how stock investors and fran- both have audited statements and descriptions of manage- W chisees choose an investment. ment). However, a 10(k) relates directly to the company the Prospective franchisees with no previous franchise ex- sophisticated investor is considering investing in—whereas perience seem to act a lot like retail stock investors, relying an FDD intertwines information about the franchise system on news articles and other information gleaned from maga- with information about the company that controls the system zines, newspapers, and the Internet. Stock investors see ads that the multi-unit operator is considering investing in. Thus, (and variously disguised versions of ads, like infomercials and an FDD’s value as a guide to evaluating a franchise unit in- many press releases). They get calls from brokers who have vestment is far less than its value as a guide to evaluating the plenty of suggestions. Some even get regulatory documents company that controls the system. on targeted companies. They often buy on rumor or sugges- Over the years, the FDD has been seriously misused and tions from a trusted advisor. That sounds a lot like the process misinterpreted regarding system performance. In my opin- prospective franchisees go through. ion, prospective franchisees, the media, lenders, and all sorts Sophisticated stock investors may do some of the same of experts have tried to infer some system performance at- things retail stock investors do, but they perform much more tributes and investment potential from many sections, most extensive research on a prospective investment. They review notably Item 19 and Item 20. From a potential investment analyst reports on a company, as well as regulatory documents, standpoint, the information contained in an FDD simply tells and they may speak with customers and competitors. They a small portion of the story, particularly as it relates to system do this in large part because they know the questions to ask. performance. Combined with the absence of the quarterly And not only do they understand the information they are reports publicly traded companies are required to issue, an reviewing, they also know the limitations of that information FDD’s usefulness to the multi-unit operator’s investment de- as the basis of an investment decision. cision process is rather limited. What about multi-unit franchisees? When it comes to Unfortunately, other sources of information for the multi- deciding whether to add another unit of a brand, they clearly unit investor aren’t there either. There are no independent emulate the sophisticated stock investor (the parallel being a analysts reporting on a franchise brand’s performance (unless, further investment in the same company they’ve previously of course, the brand is a public company). Even more chal- invested in). On the surface, the comparison also applies equally lenging is that there are no common metrics for comparing well when a multi-unit operator is considering investing in franchise brands (although the hospitality industry does come another brand. When some performance attribute catches a closest). Therein lies the point of my comments: Multi-unit multi-unit operator’s eye, they usually do a bit of preliminary operators have the power to define the performance metrics homework. But it’s at this point the comparison begins to di- systems should strive to achieve. And if you ask for it with a verge—and for the wrong reasons. loud enough voice, franchisors will produce it because they want you in their systems. Better information needed What is it that would allow you to evaluate the appeal of The sophisticated stock picker has access to more informa- a franchise brand in the same way the sophisticated stock in- tion, such as analyst reports on companies and their competi- vestor evaluates companies? Perhaps that is a good topic for tors, than their multi-unit counterpart. To get a handle on the upcoming Multi-Unit Franchising Conference, if not as future performance, the sophisticated stock picker looks at a a session topic then certainly as a hall topic. company’s historical performance (the assumption being that history is a good predictor of future performance), at industry Darrell Johnson is CEO of FRANdata, an in- statistics, and at a company’s current strategy and how that dependent research company supplying information relates to its competitiveness. The management team’s track and analysis for the franchising sector since 1989. record also is a common area of focus. Terms that often are He can be reached at 703-740-4700 or djohnson@ used include return on investment/capital equity/earnings, frandata.com.

96 Multi-unit Franchisee Issue II, 2011

muf2_c_marketupdate(96).indd 96 3/11/11 4:48 PM ad_dominos(C3).indd 3 3/11/11 4:32 PM ad_cke(C4).indd 4 3/11/11 4:34 PM