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The Pipeline

'Tons' of interest buoys dealmakers after three years' decline


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Will 2012 be the year franchisors begin to think more about growth than protecting their balance sheets?  After all, signs of an economic recovery were positive, if slight, in early March. Macro-economic indicators were suggesting U.S. businesses could have a good year—or, at least, a better one than 2011.

True, credit markets remained tight, making access to capital difficult for all but the most established franchisees, usually operating national brands.

Franchise sales executives were in an upbeat mode nevertheless. “I have three times the activity on my desk than last year at this time,” declared Valpak’s Director of Franchise Sales Todd Leiser, who expects to add 24 franchisees this year, twice last year’s number.

“I have tons of people interested. A lot of people are waiting to see the prototype,” said franchise consultant Richard Sharoff, of Amsterdam Falafelshop, who’s devising a franchise system for the single-unit concept.

Projections call for growth

Such optimism permeated the conversations I had with several development officials about how they intended to swell their pipelines.

Maybe they’ve bought into “The Franchise Business Economic Outlook: 2012,” a report from the International Franchise Association that projects the number of U.S. franchise establishments will grow by 1.9 percent in 2012.  This, after three years of unit declines.

Still, it is only a prediction, as Garth Snider of Franchiseopportunities.com reminded readers in a guest-post on the International Association of Franchisees and Dealers’ website: “In fact, the IFA has restated its numbers for the previous year’s franchise unit growth in each of the last three years.”

Yet, let’s not sweat the small stuff. On the day I talked to Leiser, for example, he was scheduled to meet with a 46-year-old former technology executive about buying a franchise. A franchisee’s age and background now make a difference to Valpak. The coupon service has added web-based deals and seeks franchisees who can readily explain the benefits of e-commerce to small businesses.

“There’s more to Valpak than the envelope,” Leiser said, before acknowledging that only a third of Valpak’s current 170 franchisees are capable of effectively touting website deals.

Ideally, Valpak desires digitally steeped 20- and 30-somethings as franchisees. Few, however, have the required franchise fee ($32,000) or net worth ($150,000)—or, one wonders, the interest in a system where the average franchisee is 49 years old.

Perhaps Leiser could better leverage Valpak’s Facebook page, with its 56,000 fans. A glance suggests the social media site is used chiefly to promote the brand and address customer issues, and not to recruit budding entrepreneurs.

“We are an ideal franchise for people who want to keep their job yet build something on the side,” said Rob Goggins, vice president of development for Great Clips, when asked who’s coming through the door.

Great Clips franchisees, who operate all the chain’s 3,200 salons, will add 200 units this year while signing 250 leases (50 or so of which will open in 2013). The company sets boundaries for franchise territories using Neilson numbers that measure TV and radio coverage; so, for example, a large city like greater Boston will have several franchisees.

“The good news is franchisees can go anywhere. The bad news is we do not carve out mini-territories,” Goggins said. Franchisees do, however, have a “protected radius” of three-quarters of a mile.
According to Goggins, the company’s earnings claim shows franchisees spend $150,000 on average to open a salon, ringing up $306,000 annually. That nets them a tidy $54,000. It has been such an attractive deal, he added, that many single-unit franchisees blossom into multi-unit operators within five years.

That equation makes sense to Sharoff, who thinks a “normal relationship” produces twice the revenue of the franchise investment. Yet, ironically, that’s precisely where Sharoff is pipeline-hampered, given his job is to franchise new concepts with little or no track record.
“I’m living in a world of early-stage franchises. Some people I’m talking to say, ‘$500,000 to open a restaurant. Are you crazy?’”

Consider Amsterdam Falafelshop, which costs about that much to get underway. Sharoff is franchising the fast-casual eatery for the husband-wife founders, who operate the only unit so far, in Washington, D.C.

To date, a franchisee has signed a lease in Boston; that restaurant will serve as the prototype. Another franchisee, without a lease, intends to open a unit in Austin. Sharoff claims 15 people are interested in metro D.C.

Starting from empty

Then there’s the company that’s starting its pipeline more or less from scratch. In June, publicly traded Pizza Inn Holdings (PZZI) debuted Pie Five in Fort Worth, Texas, a fast-casual model. Its lender added $4 million to PIH’s credit facility to open company units first.

“We have not created a banking relationship for the benefit of franchisees,” acknowledged Chief Operating Officer Madison Jobe. That’s because there isn’t a franchise pipeline, yet. Just five company-run Pie Fives exist, all near the Dallas headquarters.

“We’re building an infrastructure and the two concepts are already completely segregated,” he explained, referring to Pizza Inn, a buffet-style chain that will soon have outposts in China. Jobe, meanwhile, has been fielding calls from interested parties, many attracted by numerous press reports. Fast-casual pizza (or Italian) is a category currently with few competitors. (See related story on page 21.)

Unlike Pizza Inn franchisees, who typically operate one or two restaurants, Jobe is building a pipeline five units at a time. The general strategy is to dot larger cities in the Southeast with Pie Fives while continuing to plant Pizza Inns in smaller markets. Jobe said he’d consider franchisees who want to string Pie Fives across sparsely populated neighboring counties. “It will take the right individuals in the right markets to build scale quickly enough,” he added.

Pizza Inn’s website shows that despite glimmers of a recovery, PIH officials are hedging their bets. To attract new franchisees, the franchisor is waiving royalty fees for the first year and discounting them for all years thereafter.

David Farkas has covered the restaurant industry for 25 years as a reporter and food writer. Submit your company’s development agreements to him  at dfarkas99@gmail.com.

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