Call it doubling down, when your CEO also buys units to operate
Toppers Pizza CEO Scott Gittrich says he’s happiest when elbow deep in dough.
Some franchisor execs like their concepts so much, they buy units of their own. They tout the superior returns, and some fellow franchisees appreciate the vote of confidence. But watch for pitfalls.
Legendary investor Warren Buffett is known for saying he likes to buy things he can understand.
That stock market philosophy has made Buffett one of the world’s richest men. It also may explain why some of the franchise industry’s top executives are putting their own twist on Buffett’s approach by gobbling up locations of brands they founded or oversee.
A growing number of franchise executives are doubling as franchise owners to expand the number of locations they own, partly a move to build a nest egg as retirement approaches, says Steve Beagelman, CEO and president of SMB Franchise Advisors, a Philadelphia consulting firm.
He said the strategy is not welcomed by some franchisees who want all of an executive’s attention focused on corporate duties. Others see the dual role approach as an enticement for potential franchisees to buy into a concept.
“It speaks volumes about a franchise and shows prospective franchisees that CEOs and other executives are committed to growing their brand,” says Darian Richardson, owner of RMC Franchise Connect, a Cincinnati-based consulting firm that helps individuals identify franchise opportunities.
That’s not to say some possible pitfalls won’t pop up. A clash can occur if potential franchisees feel direct competition from the home office. Richardson says a fight over territory can be a very sensitive issue. Some franchisees believe when franchisor executives are interested in opening their own locations they will buy up the best real estate.
He added it is important for franchisor executives to promote, support and communicate idea generation across all units so franchisees continue to stay motivated and feel welcome to present new ideas to the home office.
Steve Strickland, CEO and co-founder of Atlanta-based Workout Anytime, says that while he does own his own units, he does not “cherry pick” locations.
Strickland says he and his partner make “seed investments” in the franchise locations they buy, aiming to get the best sites that will be more attractive and easier to sell down the line to existing or new franchisees. They build up the sales, which helps the system as a whole.
Kinjal Shah sells Forever Yogurt franchises as VP of development, and he owns three stores himself. “Being a multi-unit franchisee hedges your investment risk,” he says.
From an investment perspective, Strickland understands the value of a diversified portfolio. He’s opening locations because he knows that the Workout Anytime concept works. He’s reaping stronger returns than from other asset classes like stocks or gold. “We have the right recipe and we’re experts at what we do,” he says. “We know it’s profitable, so we do it ourselves.”
Strickland plans to open his first Workout Anytime location in Sumter, South Carolina, in September 2013. Teaming with John Quattrocchi, the firm’s president and co-founder, Strickland says the pair could open three more locations in Greenville, South Carolina; Naples, Florida; and in the Philadelphia area by late this year.
It costs about $375,000 to open a Workout Anytime—including equipment, fixtures and signage—typically in a strip center a landlord agrees to build out. Workout Anytime had about 40 locations mainly in the Southeast region as of late June.
Along with helping grow the franchise faster, Strickland estimates each location can net a monthly profit of $20,000 to $30,000.“We’ll build these clubs up and eventually someone will come along and buy them,” Strickland says. “Then we’ll go elsewhere and build another one.”
Three more believers
As president and CEO of Whitewater, Wisconsin-based Toppers Pizza, Scott Gittrich strongly believes in his company’s franchise concept. He owns 13 Toppers in Illinois and Wisconsin, primarily in Madison and Milwaukee. He plans to add another seven locations in Madison, Chicago and other cities by fall 2014. As the company’s founder, Gittrich opened the first Toppers in 1991 in Champaign, Illinois.
The strategy provides a nifty investment gain. Excluding 80 percent of the bank financing he used to help build out the stores, Gittrich invested 20 percent, or around $57,000, of his own money to open four Toppers locations last year, each costing about $286,445.
Toppers Pizza CFO Kendall Richmond says the investment gave Gittrich an annual cash-on-cash return of about $42,000 for each location. He added last year the stores owned by Gittrich that had been opened for more than a year made an average profit of $143,000. “For me, it’s stable income and brings extremely high returns on my capital,” Gittrich says.
His stores are treated equally to other franchisee stores, he says, adding that they pay royalties and marketing fund fees and receive the support services that Toppers normally provides franchise companies.
“I feel that it is good to show franchisees personally how I believe in our model and that it works straight up,” Gittrich says.
Operating as a franchisor and franchisee can be tricky. But Gittrich says he shuffles the duties by spending most of his time running Toppers as the franchisor. He also hires managers that oversee the stores.
“If it was a business that I was starting from scratch, I would not have the time or inclination to make an investment like that,” he says.
Kinjal Shah is attracted to the lucrative Forever Yogurt business model that allows him to remain vice president of franchise development and be a multi-unit franchisee in Illinois.
He invested about $400,000 to open his first Forever Yogurt in Naperville last October. He opened a second location in Evanston next to Northwestern University in July 2013. He hopes to open a third store at a yet-to-be-determined site in Chicago’s northwest or western suburbs by next spring. He’s considering two more locations in Wisconsin, Indiana or Michigan by late 2014 or early 2015.
Shah also is opening new sites because he contends Forever Yogurt is among the best self-serve yogurt brands out there. “Being a multi-unit franchisee hedges your investment risk because you’re getting income from many different revenue streams.”
Long bitten by the entrepreneurial bug, Victor Salamone became a franchise partner for Famous Dave’s. Also vice president of development and franchise sales for the Minneapolis-based barbecue chain, Salamone and two partners opened their first location in Louisville, Kentucky, in 2003.
They opened a second Famous Dave’s in 2005 in nearby Clarksville, Indiana. They’re considering a third site but have not determined when and where. Their investment can run from $1.5 million to $3.5 million per location.
Confidence in Famous Dave’s also led Salamone to become a multi-unit franchisee. “That’s how we’ve been able to survive and now want to grow,” he says.