David Barr knows a thing or two about franchising. He’s a franchisee of multiple brands, including Capriotti’s Sandwich Shop, Pizza Hut, KFC and Taco Bell, among other investments. He sits on the board of directors for several franchise brands, such as BrightStar Care, TITLE Boxing Club and Capriotti’s. And most recently he was named 2019 IFA Chairman.
We were fortunate to sit down with David and get his insights into what prospective franchisees should consider before investing in a specific brand.
Q: How do you know if franchising is right for you?
A: Franchisees need to do an individual gut check to determine whether they want to be an individual business owner or whether they want to be a franchisee within a franchise system. I enjoy the benefits that come with working with a franchise brand, but with that comes some responsibilities as well:
- You have to work within the framework of the franchisor
- You’re responsible for adopting and adapting to the values of the specific system
- You also have an obligation to other franchisees within the system to operate just as they do
If you’re so entrepreneurial that you can’t work within the franchisor’s system and want to change it, franchising might not be the best fit for you.
Q: What do you need to consider when investing in a franchise brand?
A: As entrepreneurs consider investing in a franchise system, they should look at both unit-level economics as well as lifestyle. There are some brands that might be better suited for your lifestyle and/or your core values.
With that said, once you’ve made the decision about lifestyle, consider the capital that’s required to invest – what you can get from bank financing and how soon you can get a return on that invested capital.
Single-unit franchisees often look at a franchise investment through the lifestyle lens. But, if you own a single unit, can that business support your entire family?
Another consideration is whether you want to be an absentee owner whereby you’ll be able to continue working at a primary job and lean on the unit to generate secondary income or investment.
Oftentimes, as those franchisees grow into owning multiple units, they still face the lifestyle question, but they’ll more heavily scrutinize the return on invested capital. As you grow from three to six to however many units, it’s critically important to know where that next stage of investment capital will come from and whether you are be able to generate ROI for yourself, your lender or your shareholders.
As a franchisee, you should also consider the goods and services that you’ll be delivering. If you’re in the restaurant space, ask yourself:
- Do you love the food?
- When you’re thinking about where you want to have lunch, do you eat at that restaurant?
- Is it something you could take to your friends as a carryout on a daily basis?
- Are you proud of it?
After considering whether the product is differentiated and the financial statements provide an appropriate return on investment, you have to consider the structure in order to scale.
Most franchisors never get to 100 units. They either run out of intellectual capital, management talent or financial capital. The fact of the matter is, in order to provide the services that franchisees need to grow, franchisors need to invest $2 – $4 million per year. It’s important to know whether the franchisor for the brand you’re interested in is making that kind of annual investment
Q: What should franchisees look for in a franchisor?
A: As a franchisee, one of the areas beyond product and service you should research is how well you align with the franchisor’s values. This can be just as important as the unit-level economics. For instance, there might be misalignment around how the franchisee and franchisor interact.
Too often, franchisees just focus on the black and white data within the licensing agreement. It’s equally important for a franchisee to understand the franchisor’s core values and whether he or she aligns with them.
You need to be deliberate during the validation process and interviews with the management team. For example, you’ll want to consider some of the following questions:
- What are the business goals?
- Is there transparency with respect to communication?
- Are decisions made based on data?
- How experienced is the management team, and how does that fit with the experience of the franchisees?
These and other questions can help you ascertain whether you align with the franchisor that you’ll be depending on for support and guidance.
Q: What should franchisees consider when investing in multi-unit growth?
A: As franchisees consider expansion, they have to think about how easy the system is to operate. I often say there is a “hell zone” in franchising. For franchisees, that typically falls between owning three and six units. Why? When you’re operating one unit, there’s a direct line of communication between the franchisee and unit-level manager. When you operate two units, that model still holds.
However, when you start operating three, four, five or six units and you don’t have an area manager or regional coach, it can become very difficult for some franchisees who didn’t envision their lifestyle of running multiple units.
In my opinion, you need to have a vision for something greater when you start considering a third unit, so you can develop the management team necessary to operate the units. Therefore, the franchisee becomes the owner and visionary as opposed to the day-to-day manager.
Again, these are lifestyle decisions that every franchisee has to make and certainly be taken into consideration before expanding beyond a single unit – and into the “hell zone.”
Q: What should franchisees consider when expanding into new markets?
A: Franchisees are often faced with a dilemma – do they try to develop a brand within an existing market or do they go after new territories that haven’t been developed, where they’ll have a greater opportunity to impact the brand’s footprint?
There are benefits to either methodology. As you consider expanding into territories that haven’t been previously developed for a specific brand, you need to:
- Have insight into the commercial real estate market to capture sites that generate consumer traffic. Your units are often the best advertising.
- Make sure you have operations experience to execute the franchisor’s playbook flawlessly.
- Ensure you have the capital to dedicate to pre-opening expenses.
Taking these steps will allow you to communicate the franchise brand’s promise, which consumers in a new market might not recognize, and still be successful in developing the franchise’s footprint. Once you’re successful in expanding in a new market, you can then apply the same systems and processes to other new markets and continue expanding.
Q: What should franchisees consider when diversifying their investments?
A: Franchisees, by nature, are entrepreneurs. Sometimes entrepreneurs like to look at the new shiny object. I suggest that once you invest in a specific concept and get it to a point where it’s working, you’re probably better off staying within that concept – or at least, get to the point where you can hire management to oversee that concept before electing to invest in a franchise in a different segment.
So, I wouldn’t suggest becoming a franchisee of three brands, for example, and owning one unit of each. The fact is, operating systems can be difficult to learn and execute. Just as a franchisor scales through multiple franchisees within a single system, you scale through multi-unit growth and you’re better served doing so within a single brand.