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New Challenges and Solutions to Franchising Your Independent Concept

The siren call of expanding your concept via franchising is heady. You only have to look at successful national brands built on the foundation of franchise capital. It can be a pathway to rapid growth, but it is not child's play. There is tremendous planning and attention to details -- operational and, yes, legal.

Growing concerns. While franchising has alluring upsides, it isn't right for every independent concept. How do you know if it is? Well, here are some questions to ponder before you dive in.

Wayne P. Bunch, Jr., an experienced franchise attorney and partner with FisherBroyles, a law firm with offices in 22 U.S. cities, as well as London, refers to franchising as "a growth strategy" -- with qualifications. "Franchising is not for everybody." he says. "There are challenges."

That is a lawyerly perspective. Lawyers help us approach business decisions with sobriety. That said, while Bunch recommends serious soul-searching before diving headlong into franchising, he is not a buzz kill.

He is quick to note that although one might expect a prospective franchisor to prove their mettle with a significant number of successful units before franchising becomes an option, in fact, that is not a rule. Bunch cites one of his clients, Salata. The quick-service salad restaurant approached him when they had a single unit with the intent to franchise. As of this writing, Salata is nearing 100 locations.

In fact, our editorial team interviewed its founder on our podcast the Corner Booth. Listen in to learn more. (See "Keep Learning… The Corner Booth Podcast: Berge Simonian, Founder of Salata" below.)

Franchising allows the independent operator to grow their brand while adding value. As veteran hospitality consultant Chris Tripoli puts it, "as you succeed in multiple markets, you're increasing the value of the brand at a higher multiple."

YOU ARE NOT WITHOUT SUPPORT. The International Franchise Association (IFA) offers website resources and conferences where aspiring franchisors can get face time with those who have successfully franchised.

And if you are driven by a desire to contribute to the greater good, consider that franchising also performs a valuable economic and social function. A successful franchise provides opportunities for others to achieve independence and quality of life.

For Shila Morris, CEO of Squeeze In, the positive societal impact of franchising was a motivation to franchise the breakfast concept that her family launched on a shoestring. She remembers how the business became a pathway to financial freedom and purpose for her, her parents, and siblings in her formative years. And Shila desired to help other families enjoy the same.

We also spoke to Shila in the Corner Booth. Hear her extraordinary story in the first person. (See "Keep Learning… The Corner Booth Podcast: Shila Morris and Kay Salerno of Squeeze In" below.)

As you contemplate the numerous upsides to franchising, you should also consider that it is not the only vehicle for business growth. There are a number of multi-unit concepts fully owned and operated by the parent company. In addition, franchising is not an all-or-nothing model. Other concepts, including Squeeze In, have a mix of franchisee- and corporate-operated units.

The upshot: While franchising does have alluring benefits, it isn't right for every independent concept. How do you know if it is? Well, here are some questions to ponder before you dive in.

Is Your Concept Franchise-Ready?

Tripoli echoes the sentiment that independent operators need to tap brakes before they speed down the road to franchising. This is particularly true when franchise brokers and would-be franchisees approach you to consider letting them move you in that direction. As flattering as that might be, says Tripoli, "franchising is a strategy you carefully plan; it is not a request you react to."

Tripoli's restaurant consulting clients have called him to announce someone thinks their concept is ripe for expansion. While he acknowledges the inquiries are sincere, Tripoli cautions that "you have to be ready. You sign deals with franchisees when you know it's your chosen strategy [and] you select your franchise territories that way." And you don't dare make a move without an experienced franchise attorney in the wings.

With due caution, however, Tripoli believes franchising is in reach, even for newly emerging multi-unit operators. He agrees that conventional wisdom suggests that an independent needed five or six units, or two to three unique markets, before going the franchise route, but this is no longer the case. More important than the number of units is a strong replicable operational foundation, says Tripoli. Translated, he says, it means the concept has "systems in place. a well-established management team, and they're running profitable numbers."

Says Morris, "Everybody romances the idea of franchising because they just know they have a great concept." This can lead operators to gloss over the challenges associated with franchising. She encourages operators to ask themselves if they're doing everything they can with their current business before exploring franchising.

You might think you're ready now. Well, all operators believe they have their systems in place, says Morris, but franchising requires that every process needs to be documented in a franchise operation manual in tremendous detail. If you are intimidated by breaking down every aspect of your business into language that can't be memorialized in what is, essentially, your concept's bible, you might not be ready for franchising.

Morris adds there is nothing to psychologically prepare you for the process, other than going through it with the help of experienced advisors. The responsibilities can seem crushing at first, even for experienced operators.

"Managing franchisee owners is different than managing cooks or staff or managers. A franchise is often financed with people's life savings on the line, they're investing it in your concept, and they will hold you responsible for what is happening," she explains. You have others' livelihoods at stake. If you think you're ready for that level of engagement, leadership, and responsibility, continue to explore the idea. If you're not yet there, she advises you to build your brand in other ways.

Support Groups

You are not without support. The International Franchise Association (IFA) offers website resources and conferences where aspiring franchisors can get face time with those who have successfully franchised.

"IFA desires for franchising to be done right [so provides] this educational material to someone just starting out," says David Barr, chairman of PMTD Restaurants and the former chair of the IFA board of trustees. IFA networking opportunities allow potential franchisors to learn directly from peers. While IFA members receive a break on conference attendance, says Barr, the events are open for anyone to attend. Conferences cover topics like how to get into franchising, what to consider, and franchise development for all sorts of business models, including restaurants.

Barr says potential franchisors should be prepared to "forward invest" in franchising for five to eight years to set up for a profitable future. After this tipping point, "the system gets large enough that it's paying its own way," he says. In the early stages, franchising is hardly a cash cow. Patience is required.

He illustrates his point with this example: a franchisor has five franchisees with an average unit volume of $1 million. If each pays 5 percent royalty or $50,000, the franchisor gets $250,000. While that seems like a nice revenue stream, "you have to do the support, training and product development for five additional units with $250,000 in revenue," he explains.

Tripoli recommends hiring a hospitality industry consultant to fine-tune operations into a replicable concept. Someone who understands the restaurant business and the franchise process can help operators "assess operations and document what might need to be updated: trade dress, operating manuals, training materials, help define location requirements, and help [operators] write site strategies and a pre-opening checklist," he says.

As they work with a consultant, operators can also think about the markets they want to expand in, ranked by order. As Genghis Grill learned, opening a franchise too far from the base adds a level of complexity that may hinder growth. (See "Don't Make this Franchising Mistakes" below.)

If the concept has strong systems and clear organization, it might be time to talk to an attorney about next steps. In an hour or two, a franchise attorney can educate operators on their rights and responsibilities as a franchisor, says Tripoli. An attorney can advise on the best corporate entity for the franchise separate from the parent company, intellectual property protection, and the Franchise Disclosure Document (FDD), which provides required transparency to help potential franchisees assess the risks and upsides.

Squeeze In's Back Story

For Morris, franchising appealed to her as a natural way to expand what started as a family business, where each family member ran their own unit. "We grew our business to as much as it could grow with family members, then once we ran out of family members, we knew we wanted to see the business keep growing; but weren't sure how to do that.

We didn't have deep pockets of funding and weren't in the economic times when banks were lending to restaurants. We felt about franchising like a lot of people feel, which is [that it's a] sellout," she explains. The original unit, with its laid-back, ski-town hippy vibe, didn't seem to be a fit for franchising, which often invokes the image of button-down, cookie-cutter culture. While her brand was fresh and fun, initially she didn't see it as a fit for the franchise model.

When a franchise developer approached the Morris family, they agreed to consider it. Validating her worst imagination of what it might be like to travel down the road to franchising, Morris describes the developer as "Mr. Slick." Nevertheless, her initial discussion "got the wheels turning."

She continues, "We talked to another person who was in alignment with our values" and wanted to help small independents grow beyond family businesses. It was then Morris and her family shifted their notions about franchising. "We could see it was an advantageous growth model, not just for us, but for other families out there who wanted to do what we did. We were doing something together as a family, we achieved financial freedom, we had a positive [impact on the community]. That's what made us decide to move forward with franchising."

Squeeze In's journey to franchising started in 2013. In the early stages, "we were obsessed with the timeline, how quickly we could start making money, [and] how to sell them," she adds. They filed an FDD in 2014 and sold their first franchise for an 8-unit development deal near Las Vegas. The first two units opened in 2015 and 2016. "We added Modesto in 2017, Chino Hills in 2018, Fredericksburg, Texas in 2019, [and] Eagle, Idaho in 2020. They're doing great and we're so happy for them," says Morris.

Looking back on the journey thus far, one thing Morris wished she had at the onset is a mentor who was also a franchisor. She also wishes she had a long-term marketing strategy; something she could bring to employees in early days to help manage the internal messaging on franchising.

Promoting Your Franchise

There are two paths to promoting a new franchise as an independent: the DIY route or the partner route, where a consultant or franchise broker assists with every step of the process.

With the DIY route, "you're more involved in the selection process, your initial strategy of markets that you're opening [and the] franchisee you're selecting," Tripoli explains. Advertising the opportunity can be as simple as adding a website page to attract leads.

The DIY approach is ideal for independents who want to test the waters without spending money to bring someone in. An independent might be able to handle one or two markets on their own before it's time to bring in a broker.

If you start with a broker, there's someone holding your hand every step of the way and "you might get more action" in terms of finding franchisees quickly, Tripoli explains. Since brokers tend to have networks of existing relationships, they can play matchmaker between aspiring franchisee and franchisor.

They'll take the concept to industry shows to generate interest. However, the franchisees or markets recommended by the broker might not be the best matches. If this fit isn't right, the franchisees or the initial market chosen might not reflect the operator's wishes, Tripoli points out. This can lead to problems down the road.

Morris and the team at Squeeze In look to their mission statement of "Happy Guests, Happy Associates, Every Day" to guide the vetting process. This statement centers their core values of happy people and consistency. Morris believes that focusing on "excitement and energy" helps them "get the right franchisees on the bus to begin with," creating a strong foundation for growth.

Even if the franchisee is a good fit for the concept, brands sometimes regret growing too quickly. After all, the franchisor must support its franchisees, and expanding too fast escalates the responsibilities. Here too, early organization pays off by making this part of the journey easier. "It's not like opening units with employees, where they're working for you. It's more of a working together relationship, because they're their own separate company. You're more directing, supporting, informing, rather than really doing [and] some franchisors have an easier transition to that than others," says Tripoli. Barr agrees that the "biggest question people need to get their head around is how the franchise model is different from the employment model."

Legally, franchising a concept differs significantly from opening another unit. "The franchisor must comply with a regulatory landscape of laws that govern how you are able to offer and grant franchises" on both the state and federal level, Bunch says.

An experienced franchise attorney can add value throughout the process while making sure that all legal requirements are met. "The hallmark of all these laws is the provision of a franchise disclosure document to any prospective franchisee," Bunch says. The FDD must be given to a potential franchise before that prospect signs a legal agreement or pays any money. "It's a very extensive document that is meant to provide a prospective franchisee with enough info to make an educated investment decision [and] to even the playing field [between them] by requiring the franchisor to be an open book to its prospects," Bunch explains.

If there are disputes, "the FDD can act as a sort of insurance policy," Bunch says. The document is extremely comprehensive, so a franchisee can't claim they didn't know something, such as mandatory branding elements or requirements for the POS system. The FDD lays out everything from the franchisor's identity to the fee structure to trademarks and territorial rights to operations. Advertising, training, required systems and supplies...it's all in there.

The broad disclosure requirements of the FDD might seem worrisome to operators fearful of showing the world their secret sauce. Bunch says not to be concerned. There are "no recipes, no names of any vendors, you don't have to show your operations manual. There's not much they could take from the FDD to copycat your concept," he adds.

Within an FDD, you can specify as many or as few requirements as you like. Squeeze In has only two "non-negotiable" branding elements. The walls must be painted in a sunset gradient of orange and yellow; guests are encouraged to sign the walls with Sharpies. The furniture must be mismatched to reflect the brand's ambiance of "cool, unique and eclectic." Franchisees "go to the community and around to thrift stores or have town members donate items," which turns the interior design process into something of a family or community project, Morris says.

"I'm very careful to make sure my clients are disclosing everything. Once you do that, you really put yourself in a much better position," Bunch says. The FDD can be tedious to put together, but at the end of the day, it protects the concept and helps the franchisee understand their responsibilities to the parent brand.

After having the FDD for 14 days or more, the franchisee can move forward by signing a franchise agreement and paying the initial franchise fee. Most of the time, both parties have their own attorney to review documents.

Problems can occur after the franchise agreement is signed. At that point, options are limited. "Generally, franchise agreements can't be terminated except by mutual agreement," says Bunch. The exception is in cases of default, which could be anything from a missing payment to a change in recipe or menu from what was listed in the FDD. If the franchisee does not cure the default, the franchisor can usually terminate, Bunch explains.

While the franchise agreement lasts for a specified time period, say ten years, the FDD must be filed annually at the federal level (states have their own laws regarding this). The first year's FDD will necessarily require a large investment of time to put together. Barr encourages operators not to underestimate the amount of time they'll spend on this and other tasks in subsequent years. "Every year [the franchisor is] doing it over and over in different ways," he says, mentioning responsibilities like legal work, staff training, recipe development, and franchisee registration.

Reach and Revenue

Franchising can increase an independent's reach and revenue, but Morris cautions that it takes "dedicated effort and energy for you to see returns." Setting expectations up front is key. When you know what to expect and take time in advance to get organized, your path to franchise success will be smoother. Along the journey, be patient. Morris believes the right franchisees, the aspiring restaurateurs who truly love your concept and will work hard for mutual benefit, are out there. You need to create a replicable and sustainable concept, and then find them.

Are You Franchisee Material?

By Wayne Bunch, Esq.

In successful franchise companies, franchises are not sold, but awarded to fully qualified franchisees. It is important that any successful franchisor remain disciplined in its approach to finding franchisees that are a good fit with the system. This means effectively qualifying franchisee candidates on the basis of experience, net worth and available capital, and business values and ethics consistent with the franchisor.

An excellent franchisee will have the following characteristics: He or she (or it, in the case of a multi-owner, limited liability company or corporation) will be willing to follow the franchisor's system and maintain the franchisor's operating standards at a high level, he or she will be ready, willing and able to build value in the brand, and he or she will be well-capitalized, and able to carry out the franchisor's marketing and operational directives. A franchisor is defined by the quality of its franchisees. A franchisor cannot experience success without successful franchisees.

To develop a system of excellent franchisees, successful franchisors work very hard to build solid relationships with their franchisees. Both franchisor and franchisees should see themselves as working toward the common goal of developing loyal customers, increasing market share, increasing profits, and increasing brand awareness. Successful franchise companies attract and keep quality franchisees by delivering the core advantages of any franchise system, operational efficiencies and brand awareness.

Q&A: Beware the Hidden Franchise

A Short Interview with Franchise Attorney Wayne Bunch

Question: How would you define the process of franchising from a legal perspective?
WB: Basically, it's providing support for the setting up and the running of a business, in this case a restaurant business, and the business being operated under trademarks or service marks that are owned by the franchisor. In return for supplying the training and the support and the trademarks, the franchisor [the one who has created the concept] earns from the franchisee an initial fee and an ongoing royalty.

That's the basic franchise arrangement and it's an interesting concept because many of my clients will tell me they don't want to franchise because they don't want to comply with all the federal and state franchise laws, and that licensing the concept is easier. And, frankly, it doesn't work because you fall within the Federal Trade Commission's (FTC) definition of a franchise. You are in fact a franchise whether you call it a license or anything else, and then you must comply. So, some clients find themselves offering franchises and not really knowing it until they actually talk to a franchise attorney.

Question: So, is that where the term comes -- 'hidden franchise'?
WB: Yes, and the FTC defines a franchise as an arrangement in which a franchisor has given a franchisee the right to distribute goods under their trademark. That's the first element. The second element is that the franchisor exerts a significant amount of control or provides a significant number of systems to the franchisee. And finally, in return, the franchisor earns certain fees. And when those three elements are found, you are considered a franchise and you must comply with all the federal and, depending on what state you're in, state franchise laws. The laws are fairly complex and they do require representation by an attorney who really understands the field.

KEEP LEARNING…

The Corner Booth Podcast: Shila Morris and Kay Salerno of Squeeze In

Sisters Shila Morris and Kay Salerno were 17 and 10, respectively, when their parents bought a small breakfast cafe in Truckee, California. They had no way of knowing that the lessons learned growing up in the business would lead them to grow and refine "Squeeze In" into the successful 11-unit restaurant concept it is today.

"You get into the business because of your love of cooking and connecting with others," says Shila, adding, "but it wasn't until we implemented systems and procedures that we were able to maintain consistency and successfully replicate."

In this episode, we learn how a combination of award-winning omelets, eccentric decor from community thrift stores, customers referred to as "egghead nation" and served by an engaged staff known as the "tribe" created a breakfast/lunch concept that has successfully expanded throughout Nevada and into Idaho and Texas.

"The pandemic presented an overnight 85% drop in revenue and really tested our creativity," says Kay; however, quick adjustments to menu and marketing resulted in some amazing events. YouTube "cook-alongs" and their make-at-home Mimosa kits, along with an extremely successful meal sponsorship program for health care workers helped keep customers and staff engaged. The sisters are enjoying remarkable growth through franchising, and are pleased to allow families the opportunity to make a living with a high quality of life as Squeeze In franchisees. They plan to continue selecting their franchisees based on their fit with the culture and values of the concept.

"Happy Guest, Happy Associates, Everyday" aren't simply words to work by, but a way of life at Squeeze In. Shila and Kay are brilliant operators who have demonstrated how to properly shift from working in their business to working on their business.

This episode is a "must listen" for all those planning to open or expand their restaurant concept. This is how you do it!

KEEP LEARNING…

The Corner Booth Podcast: Berge Simonian, Founder of Salata

From behind the counter of his downtown deli, Berge Simonian saw the growing line of returning health-conscious guests and became convinced a fast-casual concept offering fresh consumer-customizable salads and healthy branded dressings could be expanded nationally. Berge opened the first Salata in 2005, and soon engaged the services of a restaurant franchise attorney and operations specialist to assist with its expansion. In this episode, Berge discusses franchising as a growth strategy for the independent restaurant operator. He explains why it is important occasionally to "apply the brakes" on rapid expansion to ensure smooth operations and consistent quality. Today, 15 years later and 90 units strong, Salata is focused on the current industry challenges of labor and market penetration while eyeing expansion opportunities in airports, campuses and other non-traditional locations.