Three new franchises set sights on steady growth, in Living Large
Reaching the 10-unit level may not seem like a major milestone, but in franchising it’s a threshold that’s difficult to attain, as many emerging brands know. And achieving the royalty streams that will ultimately sustain the brand come closer to the 50-unit mark, but the struggle is real as 52 percent of U.S. franchises that started 10 years ago have 50 units or fewer.
That’s not deterring concepts from going the franchise route to scale their business. FRANdata reports an average of 300 companies launch a franchise program each year, and all of them need to understand they’re not just in the restaurant or fitness or spa business but also the franchise business. Responsibilities change as franchisees come on board—something this year’s Living Large brands are learning—and it’s up to the franchisor to ensure their brand stands out so it can compete against what are often behemoth brands with strong awareness and affinity.
Is there a carefully crafted vision for the concept, and is it documented? How will that vision and point of differentiation be articulated? These are just a couple of the questions emerging franchises should have the answers to early on, because the answers are what the rest of the system is built upon.
The franchises covered here this year all come from different business segments—pet care, property restoration, fitness—but they’ll confront similar challenges and share what they learn along the way.
“You have to be the salesperson, you have to manage it, and very often, you’re the worker bee in the stores every day.” — Rob Flanagan, Wag N’ Wash
Love pets—and communicate
When founders Jef Strauss and Dan Remus brought Rob Flanagan on as president in early 2017, their Wag N’ Wash business had four franchise locations. That number has since grown to 14, to go along with five company stores, and Flanagan says the brand has a long-term growth strategy in place, “not the quick and fast approach.”
“At Wag N’ Wash, we look at this as a generational business—I want my grandkids to see Wag N’ Wash,” he says.
Signing four to six franchise agreements a year is the goal, and since joining the Centennial, Colorado-based pet store brand focused solely on cats and dogs, Flanagan has adjusted its process for approving agreements to include what he feels is a crucial step. At the end of the process, before the franchise agreement is signed, a “partnership dialogue” is used to make sure both sides are aligned on expectations. In what can sometimes be an hours-long call, “We go through the franchise agreement, that’s a gnarly document, but we go through 140 pages,” says Flanagan. He also talks with each prospect to discern “if they understand what it takes to run a business.
“You have to be the salesperson, you have to manage it, and very often, you’re the worker bee in the stores every day,” he said. And while the brand does offer multi-unit opportunities, Flanagan is cautious.
“I’m pretty specific when it comes to multi-unit deals,” he says. “In my experience, the franchisee is excited but often what can happen is they open one unit but never get to the second,” which can then prevent the area from being developed by another franchisee.
Multi-unit franchisees must have the capital to open two stores “right out of the gate,” continues Flanagan, an investment of $999,320 to $1.5 million. “I don’t want to hear that they plan to roll profits from the first store to open the second.”
Flanagan, who came up through Doc Popcorn and was its VP of franchising, also sought to enhance communication between ‘zor and ‘zee at Wag N’ Wash. “It’s a tightrope—if you over-communicate every little thing, you get zoned out, but if you don’t do enough then franchisees are wondering what’s going on,” says Flanagan, who started regular “Wag Chat” calls to update franchisees on strategic initiatives. There’s a communication calendar and the brand uses multiple platforms such as email, webinars and downloadable materials. 2019 will bring the launch of a scheduling tool to help franchisees manage labor, something Flanagan says “can really eat up their bottom line.”
“I firmly believe that will be really impactful in terms of profitability,” he says.
“One of the big differentiation points for Delta in the industry is the level of training and education, what’s required of franchisees.” — Dan Tarantin, Delta Disaster Services
Ready to scale with new parent
With a network of more than 1,100 franchisees across the two brands it already owned before acquiring Delta Disaster Services last spring, HRI Holdings has the ability and know-how to scale. And, says CEO Dan Tarantin, those same franchisees represent a ready pipeline for the commercial and residential restoration business that has 20 franchises open in six states.
“We knew we brought to the table a pool of Chem-Dry franchisees to serve as the initial growth opportunity for the brand,” says Tarantin of those already running locations of HRI’s carpet and upholstery cleaning brand. It also owns N-Hance Wood Refinishing. “We know these people, we know they’re strong operators.”
Some of those same operators were already starting to offer select restoration services on their own before HRI bought Denver-based Delta Disaster Services, prompting the company to search for a third brand.
“The restoration business relates well with the carpet cleaning business. The industry itself is a great industry to be in,” says Tarantin. “It’s pretty recession proof—these type of events,” such as floods, fires and major storms, “don’t know an economy, they happen no matter what.”
The acquisition brought eight franchise locations and one company unit into HRI, and by the end of 2018 Chem-Dry franchisees had already signed agreements for 30 territories. Tarantin anticipates signing another 50 deals this year as the brand expands with a nationwide franchise development plan now that it’s registered in all 50 states.
“A combination of focus, resources and the narrow channel that they used” resulted in a smaller pool of candidates and slower growth for a brand that’s been franchising since 2010, notes Tarantin. With HRI’s backing, it will increase marketing and enhance support to go along with an adjustment to the model Tarantin believes will broaden the restoration concept’s appeal.
A full-service restoration firm handling water, fire and natural disaster damage, Delta also provides reconstruction services, something Tarantin says not many firms do. But to help franchisees “get their hands around one part of the business first,” they now have three years to add the reconstruction side, after first launching the emergency services. HRI also restructured the royalty fees to 7 percent on emergency services jobs and 5 percent on reconstruction, with Tarantin explaining that emergency jobs have a substantially higher profit margin, thus the difference.
HRI is putting considerable resources behind the brand, including more than $500,000 to build a flood house training facility in Denver, where franchisees and technicians will learn and practice various remediation techniques.
“One of the big differentiation points for Delta in the industry is the level of training and education, what’s required of franchisees,” says Tarantin. “That’s one of the core strengths of the brand.”
New structure lets brand ‘be picky’
When Tough Mudder set out to create a fitness concept alongside its well-known endurance events, founder and CEO Will Dean saw an opportunity in a space where he believed “the big box brands were failing people” because there was no teamwork dynamic.
“We didn’t want an obstacle course gym, but an impactful, studio fitness model,” explains Dan Henry, director of franchise sales for Tough Mudder Bootcamp. Senior Vice President Cathrin Bowtell and others secret-shopped numerous different fitness concepts to evaluate not just the workouts but their layouts, the atmosphere and staff engagement, “and we codified all these things into Tough Mudder Bootcamp,” which launched in 2017. The concept provides 45-minute high-intensity interval training classes through both a membership model and single class offerings, and all have a social, teamwork aspect to them, says Henry.
The brand has two units open, and late last year Tough Mudder Inc. announced it was securing a capital investment that would include spinning off the bootcamp franchise into an enterprise separate from the live events. That process is nearly complete and Henry says the capital will aid Tough Mudder Bootcamp in its effort to connect with qualified franchisees who also have the passion to build the brand.
“It’ll allow us to be picky about who we bring into the system,” he says, adding more talent is also being added to the operations and franchise support teams. “We’re setting a really phenomenal base up front.”
Though a separate business, the franchise benefits from what Henry calls “a massive brand that’s really well known to over half of Americans.
“We have the playbook and intend to leverage the Tough Mudder brand,” he says.
The presale of memberships is important to the success of the studios, which have an initial investment of $297,000 to $521,350, and that’s an area the brand is working to improve upon, says Henry. “How do we engage the tribe? How do we continue to do a better presale? We’re always asking how we can get better,” he says. “We have no ego, we know we’re not perfect. We’re very thoughtful in taking feedback and we’re really quick to pivot.”
Though Tough Mudder Bootcamp created a beta space to test workouts, the brand doesn’t have a company location, something Henry says is “100 percent in our line of sight” for the coming year.
Laura Michaels, managing editor, follows three emerging franchisors through a year’s worth of challenges, and reports their progress in selling units. Email Laura at email@example.com.
What the experts say
Be able to let go. Young franchisors need to realize and accept that other people will be operating their baby, says Paul Segreto, CEO of Franchise Foundry, a franchise development company specializing in emerging brands. “Of course there must be compliance standards in place, but it’s the actual thought of others operating under the brand name that becomes hard to swallow. What this often entails is the founder treating the first wave of franchisees as employees, and as we know, that is a distinct no-no, especially in light of all the NLRB activity of late,” he said, referring to the National Labor Relations Board.
Understand the interdependency. Franchising is an interdependent relationship between franchisor and franchisee, notes Segreto, and is also built upon relationships with vendors, suppliers and even between franchisees. “This is the basis of establishing the right culture, a true foundational component of a successful franchise system and brand,” he says, adding brands should have a growth philosophy based on strong unit-level economics before selling franchises. “Even if the brand grows to 20 units and unit economics starts slipping, stop selling franchises until the problems are resolved.”
Start with the brand story. It’s important to tell your brand’s story online, which is where essentially all potential franchisees begin their search, says Joe Mathews, CEO of Franchise Performance Group. “The internet is the gatekeeper of your story—you’ve got to put your brand story out there. And be able to make your business case: what makes it unique, what makes it profitable. And you’ve gotta present it credibly.” Serious candidates want straightforward information and a clear explanation of the benefits of investing in the system, Mathews continued. “Cute doesn’t cut it” when it comes to the franchise website, he said, and franchisors should expect to invest heavily in their website and online digital marketing, to the tune of $150,000 to do it right. “Your website isn’t a cost, it’s a 100 percent revenue generator, that’s how you have to look at it,” Mathews said. “True buyers have a voracious appetite for information.” What about brands that don’t have a big budget? “Then you better have a sticky brand,” he said.
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Recap of 2018 Living Large brands
Like this year’s brands, the franchises followed throughout 2018 all had high hopes for opening new units and signing franchise agreements as they sought to expand Huey Magoo’s Chicken Tenders, DMK Burger Bar and Digital Doc. The growing pains were real, as neither restaurant concept added a new location, while for our digital device repair business 2018 brought its acquisition by a national player in the segment.
Though Andy Howard and his team at Huey Magoo’s didn’t open five (or even one) franchise restaurants as predicted, the Orlando, Florida-based brand finished 2018 on a high note with the signing of a multi-unit deal for the Atlanta market. That agreement, for an initial 10 stores and the option for 36 more, was in addition to four other multi-unit signings for another 18 locations in Florida, making Huey Magoo’s the most active of the three Living Large brands. Two franchise restaurants in Florida are under construction and expected to open early this year, for a total of nine units in operation.
The decision to bring on two franchise development consultants early in the year helped put a professional face on the sales side for this emerging brand, and Howard’s own background as a successful executive at Wingstop, along with the operations experience of his leadership team, undoubtedly elevated Huey Magoo’s in the minds of franchisees. Strong unit economics were another factor, as Huey Magoo’s strip center locations have annual sales of $1 million to $1.3 million, while its express unit (the brand has one college campus spot) has sales of $1 million. The brand invested heavily in digital marketing and in a new store design that features three service lines to make room for online and delivery orders, a forward-thinking move that positions Huey Magoo’s to capitalize on changing consumer preferences for off-premises dining.
Adding an Item 19
In Chicago, DMK Burger Bar ended the year without signing any new agreements and has just one franchise location open to go along with three company-owned units (it closed its restaurant in Lombard, Illinois). While the brand signed a three-unit deal with its first franchisee just a month after announcing its franchise expansion plan in late 2017, the absence of an Item 19 in the brand’s franchise disclosure document proved an inhibitor as DMK Burger Bar sought to expand outside its home base. Realizing potential ‘zees weren’t satisfied with the brand’s plan to develop financial projections as it assessed specific markets, co-founder David Morton said Item 19 financial performance representations would be published for 2019.
Under the umbrella of DMK Restaurants, the burger bar is Morton’s first attempt at franchising. The brand entered a hugely competitive—and overcrowded—better burger segment, and while it has a James Beard award-nominated chef in Michael Kornick and a franchise veteran in partner David Grossman, DMK Burger Bar needs to do more to differentiate itself if it wants to be a breakout brand.
Our third concept began the year as Digital Doc, but just two months in the franchise was acquired by CPR Cell Phone Repair, which rebranded the 30-plus stores and served to highlight the power of a national brand. Owned by Cleveland-based Merrymeeting Group, CPR folded Digital Doc into its system of 400-plus locations and gave franchisees access to resources such as an in-house digital marketing firm and legal team.
Franchising’s active M&A environment continues to prove attractive to young brands and is something franchisees must consider when evaluating the entirety of a system. Unless a franchisee has negotiated otherwise, they don’t have the right to exit because of a sale. That means they should make their decision based on the overall system and the unit economics, not just on a big personality founder or CEO because that can all change.