| For the last twenty-eight years, as a franchise | | | | the evolution of the business in such a prime territory |
| attorney, author, instructor and recognized franchise | | | | were strong selling points. The new owner of our |
| expert, I've helped firms enter and prosper in the | | | | franchise ultimately took the next steps and with three |
| franchise industry – each hoping to become the | | | | crews enjoys weekly sales of $30K to $35K - which |
| next "McDonalds" of their respective industries. Along | | | | is over $1.5 million per year. |
| the way, I've met and worked with an interesting group | | | | IMAGE AND LIFESTYLE |
| of entrepreneurial founders. From apparel to water | | | | I didn't need to flip burgers, scoop ice cream or clean |
| treatment, the franchised concepts were also | | | | restrooms. As a franchise co-owner, my principal job |
| incredibly diverse. Some of them interested me to the | | | | was creating and maintaining client relations. I placed |
| point where I considered buying a franchise myself. In | | | | ads designed by the franchise company, responded to |
| two or three cases, talks were initiated to discuss the | | | | customer phone calls, set up appointments, did |
| possibility, but never moved forward. I just couldn't find | | | | estimates and sent out contracts. A lot of my working |
| the precise set of criteria to satisfy my exacting | | | | time was spent driving to customer's homes, meeting |
| requirements. After all, I had advised hundreds of | | | | with them over coffee, taking measurements of all |
| prospective franchise buyers, and developed | | | | their interior doors, going over the options and |
| sophisticated radar for detecting the good, the bad and | | | | explaining our one week production cycle – picking |
| the ugly in franchise investments. | | | | up their old doors on a Monday and installing the new |
| In May of 2002, my life changed dramatically as I took | | | | doors by Thursday. |
| the plunge and became a first-time franchise owner. I'd | | | | Back at the office, I'd enter the estimate information in |
| just completed a franchise development project for a | | | | our computer and generate a contract proposal. Then |
| San Francisco Peninsula company poised to enter | | | | I'd email or fax the contract to the customer and wait |
| franchising. They operated a very successful home | | | | for their deposit. About 70% of the proposals turned |
| improvement business that specialized in a unique | | | | into jobs. Customers called back, gave me their credit |
| niche. Targeting homes constructed in the 1960's to the | | | | card billing information, faxed in the signed contract and |
| 1980's having old, flat, ugly interior doors, this company | | | | I scheduled their production week. By the time I sold |
| replaced all interior doors in a home with new, | | | | the business in September of 2003, residential |
| freshly-painted raised panel designer doors, locksets | | | | homeowners negotiated for position on our six to eight |
| and hinges. Their advertising mantra was "Replacing | | | | week waiting list to get their interior doors replaced. |
| America's 1.16 Billion Interior Doors." | | | | I also ordered the new doors, lock sets, hinges, paint |
| After interviewing a couple interested franchise | | | | and accessories. Finally, I paid the bills. It was a very |
| candidates who didn't sign up, the company became | | | | efficient business, great cash flow, no billing and no |
| concerned about selling its first franchise. Selling the | | | | waiting for payment. As I look back, I saw some very |
| first one is usually the most challenging task facing any | | | | nice homes and met some very interesting people. |
| new franchise company. There are no other franchise | | | | The pickup, production, painting and installation process |
| owners a prospective buyer can talk to about financial | | | | was handled directly by our employees under the |
| performance, training, ongoing support and other | | | | supervision of our contractor, so I wasn't involved in |
| franchise relationship issues. Because of this void, | | | | this aspect – although I did go out with our crew for |
| selling the first one is difficult. After I was repeatedly | | | | about three months picking up and installing doors. That |
| asked when they could expect to sell their first | | | | way, I understood the process firsthand, and this |
| franchise, my hand finally jumped up and I volunteered | | | | helped considerably in knowing how to bid jobs and |
| for the assignment. My franchise agreement was | | | | cover contingencies in the contract. |
| signed May 22, 2002. | | | | TRUE FRANCHISE VALUE |
| Let's consider the major assumptions and factors I | | | | I knew going in this franchise investment was not with |
| evaluated in making my buying a franchise investment | | | | an established ‘blue chip' franchise company. After |
| decision, and see how things worked out. | | | | all, I'd purchased their very first franchise, becoming the |
| INDUSTRY TREND | | | | ground breakers, the pioneers – willing to accept a |
| As stated in the previous franchise article, a major | | | | much greater degree of risk than other franchise |
| issue is finding a franchise in a cutting-edge industry | | | | buyers. In return, I expected an adequate level of |
| that is doing well currently and is projected to do well in | | | | support from the franchise company. Virtually every |
| the future despite any economic slowdown. From my | | | | new franchise company gives not only adequate, but |
| experience in evaluating hundreds of franchises, I | | | | extra support to its first franchise to compensate for |
| observed the home-improvement industry was a | | | | that franchisee's help in pioneering the new franchise |
| stable segment. People are always looking for ways | | | | system and the additional risk they've assumed. |
| to improve the appearance and value of their homes. | | | | There's also a self-interest in providing extra support |
| Unlike other home improvement companies that | | | | – the future growth of the franchise network hinges |
| concentrate on a single, high ticket improvement (a | | | | on the success of the first franchise. |
| kitchen remodel, for example, that can cost $50,000 | | | | The ultimate test of franchise value came in |
| and more), for a couple thousand dollars ($2,000 to | | | | November of 2002. I was en-route, driving our box |
| $5,000), a homeowner can give every room in their | | | | van, jamb-packed with doors, power tools, lock sets, |
| entire home a major face lift by replacing their old, flat | | | | hinges, etc., headed to our biggest installation job yet, |
| doors with new raised panel, designer doors. In the | | | | with our contractor, Scotty, who supervised our team |
| aftermath of the 9-11 attacks, and the country's high | | | | and was our franchisor-approved manager. Everyone |
| security anxiety, I felt more people than ever would be | | | | else was back at the shop, frantically cutting, sanding |
| nesting at home. A home typically represents the most | | | | and painting the rest of the 100-plus doors scheduled |
| valuable asset in a family's portfolio. If the homeowner | | | | for other jobs that week. |
| can be educated and motivated to improve the | | | | Knowing we had taken on the busiest week of our |
| appearance and value of this asset, by making a | | | | fledgling business, contractor Scotty complained all |
| reasonable investment, sales are easy. | | | | week about his wages, saying he wasn't being paid |
| Major home improvement chains, like Home Depot, | | | | enough. I'd explained, numerous times, our cash flow |
| realized this and were aggressively promoting interior | | | | wouldn't support any pay increases at the moment, |
| door replacement. However, they were not organized | | | | that he'd only been working for me a little over two |
| to meet the needs of the target market in a | | | | months, and his pay was exactly what he requested |
| cost-effective manner. The franchise company had | | | | when I hired him. Scotty wasn't listening and his |
| discovered and perfected the "do-it-right" approach for | | | | complaints continued during our drive along El Camino |
| this market, and actually welcomed competitive bids | | | | Real to the client's house. We were stopped at a red |
| from the Home Depot and other large home | | | | light, waiting to make a turn when Scotty abruptly |
| improvement chains. In my estimation, all of this bode | | | | announced "I'm out of here, I quit." Opening the |
| well for home improvements in general, and this | | | | passenger door, he jumped out, and walked quickly |
| franchise company in particular. | | | | down the sidewalk of El Camino Real, leaving me |
| TOTAL INITIAL FRANCHISE INVESTMENT | | | | stranded in a van that's a bit larger than a UPS |
| The franchise company estimated initial franchise | | | | delivery truck. Scotty believed he was indispensable |
| investment between $127,00 and $180,000 in its | | | | and his theatrics were nothing but a hardball, power |
| Franchise Offering Circular. Turned out, I came in | | | | play for money. |
| below the low end of the range. Including the $20,000 | | | | Looking back at all those freshly painted doors in the |
| in franchise fees and the $78,000 I used against a | | | | van, I knew there was no way one person could install |
| home equity line of credit, our total investment was just | | | | them. I completed my turn, pulled over, and called our |
| under $100,000. Incredibly, this was enough to get the | | | | shop with my cell phone. Our main door cutter and |
| business operational AND reach the critical break-even | | | | best employee, Brian, confirmed what I already knew. |
| point where cash flow paid all the bills. As discussed in | | | | He could leave and meet me for the install, but that |
| the other franchise article, reaching the break-even | | | | would throw off our entire schedule for the week. |
| point in many businesses can take a year, two years | | | | Then, I remembered something important. "That's why I |
| or more. | | | | bought a franchise," I thought to myself, "we're in |
| Getting operational happened fairly quickly. From the | | | | business for ourselves, but not by ourselves." Surely |
| time I signed the franchise agreement at the end of | | | | the franchise company would know exactly what to |
| May, 2002, secured the real estate in mid-July, 2002, | | | | do, and help us, their very first franchise, deal with a |
| completed improvements then training in August, 2002, | | | | problem that could cripple or kill the new business. |
| and began operations like a rocket in the first week of | | | | They were just a short twenty-minute drive away, had |
| September, 2002, about four months elapsed. We hit | | | | multiple crews, etc. I called the founder, Mr. Interior Door. |
| the break-even point in mid-October, 2002, just six | | | | The first thing Mike said, after I'd related my |
| weeks after operations started, and began to | | | | predicament was: "Do you think Scott will start a |
| accumulate an ever-increasing balance in the business | | | | competing business?" I assured him that wasn't even |
| savings account. | | | | remotely possible. Starting a door business usually cost |
| When I sold the franchise in September of 2003, our | | | | upwards of $350,000, requires a sizeable |
| interior door replacement business was rocking and | | | | warehouse-showroom, power tools, delivery van and |
| rolling. Residential home owners negotiated for position | | | | other things. Scotty, besides his personal tools, had no |
| on our six to eight week waiting list to get their old, | | | | assets. He'd even moved into our warehouse from |
| ugly, flat interior doors replaced with new raised-panel, | | | | day one so he didn't have to pay rent and lived |
| designer interior doors and shinny lock sets. The new | | | | paycheck to paycheck. |
| owner paid $236,000 for our franchise, and I received | | | | I quickly redirected Mike to the purpose of my call and |
| $235,000 after escrow fees. Subtracting our $100,000 | | | | asked for his advice and H-E-L-P. Perhaps a couple of |
| investment left a tidy $135,000 profit. Not bad for | | | | his door installers for the rest of the week, at my |
| operating the business exactly one year, and this didn't | | | | expense? Answer - no. What about one person for |
| include operating monthly income before the business | | | | the rest of the day? Answer - no. What about one |
| was sold. | | | | person for just a couple hours? Same answer - no. |
| REAL BUSINESS | | | | Incredibly, Mr. Interior Door said he couldn't spare even |
| I operated a retail business with a storefront, as | | | | a single person (including himself) for a couple hours to |
| opposed to a "work out of your home" operation. | | | | help us out. |
| FRANCHISE MANAGEMENT EXPERTISE | | | | So, no help - but what about advice? Mike's only |
| The management team of the franchisor had no past | | | | advice: call all our customers, including the one I was |
| achievement and experience in operating a franchise | | | | en-route to, tell them we couldn't make it this week |
| company. They had just started the franchise | | | | and re-schedule all jobs forward a week. Since we'd |
| company and were learning on the fly. That was | | | | already booked other jobs over the next two weeks, |
| definitely a major risk. However, I'd given them detailed | | | | this would have been a disaster, not only to our cash |
| seminars on how to operate a franchise company and | | | | flow (payroll, rent and supplier bills were due that |
| manage franchise relationships based on my | | | | week) but also for our customers who'd already |
| twenty-plus years of franchise industry expertise, and | | | | scheduled time off work to be at their homes on the |
| had every reason to believe they'd follow my advice. | | | | scheduled dates. |
| And, because I was their very first franchise, I also | | | | That's when I realized we were in business for |
| believed they would do everything it took to make me | | | | ourselves . . . and by ourselves. After thinking things |
| a success. My goal was to develop the first franchise | | | | over in the silent van, I called the shop and told Brian to |
| from scratch, build it up, then either develop other | | | | meet me at the customer's home for the installation. I |
| franchises for them, or sell out – depending on what | | | | figured at least we'd collect $4,000 doing this job and |
| happened in the franchise relationship. I opted to sell | | | | just have to see about the rest of the week. By the |
| out. | | | | time Brian and I finished, the day was over. We arrived |
| NORMAL WORKING HOURS AND DAYS; | | | | back at the shop at 4 p.m. – quitting time for our |
| SUFFICIENT INCOME LEVEL - FRANCHISE PROFITS | | | | construction workers. Our door jobs for the next day |
| AND FRANCHISE PROFITABILITY | | | | were not even close to being finished. The crisis was |
| The nature of this business was a normal five-day, | | | | finally upon us - should I follow Mike's advice, call all our |
| forty-hour workweek. Our business hours were 9A to | | | | customers and try to reschedule for the following |
| 5P, Monday through Friday initially. After talking with the | | | | week? |
| owner of the second franchise in early 2003, I | | | | I decided on a different approach. I held a little meeting, |
| discovered and copied his idea of a forty-hour work | | | | explained the situation, and asked our employees if |
| week spread over four, instead of five days. | | | | they'd be willing to work overtime, so our new business |
| Although this meant our employees needed to work | | | | wouldn't go out of business. I also fully realized our |
| four ten-hour days, they were very receptive to the | | | | employee's concerns. They'd been working very hard |
| idea. By starting on Monday and getting all door orders | | | | that week to help us achieve our ambitious goal. Our |
| for the week installed by Thursday, everyone had a | | | | team leader, Scotty, was history, and they all had |
| three day weekend every week, not just on an | | | | families and responsibilities at home. Under normal |
| occasional holiday. Of course, I didn't have to work ten | | | | circumstances I'd be up the proverbial creek without a |
| hours a day. I arrived by 10 a.m. and usually finished by | | | | paddle. |
| 4 p.m. - Monday through Thursday. Supervising four | | | | MANAGEMENT STYLE TO THE RESCUE |
| employees, working 24 hours a week and having | | | | From the very beginning I treated our employees like |
| 3-day weekends off every week – try finding that | | | | members of a family. It was a very extended version |
| in another franchise! | | | | of theory "Y" management style I'd studied in my |
| What about the financial picture? Let's take June of | | | | graduate business classes. Everyday, I bought lunch |
| 2003, the tenth month of operations when I started | | | | for all employees and we ate together, discussing |
| interviewing a number of interested buyers. Sales | | | | what was new in their lives as well as exchanging |
| were $47,000 less expenses of $35,500, left an | | | | door stories. I also provided soft drinks, coffee and |
| income that month of $11,500. Of course other months | | | | snacks throughout the day at the shop. On birthdays, |
| varied, and the business was still in the start-up | | | | I'd take the person out to a movie of their choice and |
| development stage operating with only a single crew | | | | dinner afterwards. |
| of four employees - but you get the idea. Using the | | | | Luckily, I didn't have that many employees, but every |
| results for June and multiplying by twelve for an annual | | | | month saw an ever-increasing total for these benefits |
| result, I'd entered financial performance territory only | | | | on our profit and loss statement. I questioned myself |
| enjoyed by a select group in the entire franchise | | | | about it, thinking Mr. Interior Door only provided |
| industry. | | | | employee meals once every couple months for a |
| MINIMUM NUMBER OF EMPLOYEES | | | | special occasion. But I realized if some day I really |
| Remember my key question here: can you operate | | | | needed them, they'll be there for me." |
| the business with six or fewer employees? When we | | | | This management style kept the business in business |
| started business operations in September, 2002, we | | | | and on track that November. All employees |
| had two employees. A month later, we added another. | | | | immediately agreed to work overtime. I ordered pizzas |
| When the business sold a year later, our crew | | | | for everyone for dinner and they worked from 5 p.m. |
| consisted of one part-time and three full-time | | | | until 1 a.m. the next morning. This dedication repeated |
| employees. | | | | itself over the next two days, which is nothing short of |
| LEASING AND LOCATION | | | | incredible, given they all had to report back to work at |
| Our interior door replacement business operated from | | | | 7 a.m. each morning. We completed all jobs scheduled |
| a low rent commercial business zone, so high square | | | | for that week, collected our money and all customers |
| foot rent and triple net leases were never a concern. | | | | were very satisfied. By the next week, the business |
| The 7,200 square foot warehouse and retail | | | | was on track, humming along, and strengthened by |
| showroom we settled on in San Carlos, CA, with rent | | | | overcoming the adversity. |
| starting at $0.65 per foot the first year, seemed almost | | | | SUMMARY |
| too big (and expensive) initially. Cutting a rental check | | | | Looking back, I happened to be in the right place at the |
| to the landlord for about $5,000 every month, by far | | | | right time, and was willing to take a calculated risk. I |
| the biggest initial operating expense, made my heart | | | | didn't rush in, took a lot of time evaluating many |
| race while I thought "is this whole thing going to work | | | | factors, and kept emotions out of the franchise |
| and how long will it take to reach the break-even | | | | investment decision - avoiding the three mistakes |
| point?" But, as things turned out, our location was | | | | made by most franchise buyers. |
| perfect, sales were never an issue, and we hit | | | | It was definitely an effort getting the business |
| break-even just six weeks after operations started. | | | | established, finding the right location, the right workers, |
| Due to the size of the facility and nature of the interior | | | | and navigating a new business on my own. But the |
| door replacement business, three crews were possible | | | | challenges were a learning experience, and |
| and bringing them online, one crew at a time, would | | | | overcoming them was very rewarding. Although I've |
| double then ultimately triple sales. Also, because we | | | | advised hundreds of individuals and firms about the in's |
| were the first to enter the franchise system, we | | | | and out's of franchising, the insights gained and lessons |
| selected the very lucrative, exclusive territory that | | | | learned in operating my own franchise and interacting |
| stretched from Palo Alto, CA all the way up to San | | | | with the franchise company retooled my knowledge of |
| Francisco, CA. Although we never expanded the | | | | franchise relationships. |
| business beyond a single crew, these "next steps" in | | | | © 2003-2008, Kevin B. Murphy, B.S., M.B.A., J.D. |