Conference lends a sense of community
Author Robert Miles, right, is an expert on the Oracle of Omaha, Warren Buffett. Among his insights was that Buffett thinks of himself as a brand manager—an artist who lets his managers “paint” their own pictures. At age 11, he bought his first stock with proceeds from his paper route. He later said he regretted wasting his first 10 years.
If you missed this year’s FFDC, don’t worry, we’re giving you some of the highlights in our multi-page coverage. However, we won’t be able to provide you with all the networking and relationship building that went on. But there’s always next year...
There is some good news to be had for growing companies – the lenders are still out there, and a few more may be entering the fray. It's just not going to be as easy to find capital as it was in the glory days of high home equity and stronger consumer confidence.
But don't worry: "Lenders are entrepreneurial, just like operators," Dennis Monroe, chairman of Krass Monroe, told the packed room at the Franchise Finance & Development Conference in Las Vegas.
That doesn't mean it's going to be smooth sailing, however. Quoting from the recent Federal Reserve Bank Senior Loan Officer survey, he pointed out that 17 of 56 lending institutions reported they had tightened their lending standards on commercial loans since October 2007; and 11 of 54 reported they had tightened their maximum size of credit lines.
The reality: Rates are higher, covenants are tighter, advance rates are lower, but credit is still available – albeit at a higher cost.
Which is why it's so valuable to attend a conference like FFDC and meet those available lending sources face to face. Those in attendance were introduced to a variety of lenders both from the stage and at the development mall where lenders had booths stocked with pertinent information.
Brian Schnell with the law firm of Faegre & Benson kicked off the conference with a Primer for Franchisors on the new, revised FTC Rule which goes into effect July 1.
"As an industry we should say we're all about disclosure – which benefits franchising," he said in reference to some of the changes required by what is no longer the UFOC, but rather the Franchise Disclosure Document or FDD. For instance, financial representations are no longer optional.
Jimmy John Liautaud
Attendees also heard a candid talk from McDonald's by Dave Hamilton, chief restaurant officer, and Don Armstrong, chairman of the National Leadership Council and a multi-unit franchisee.
The two gave a dual presentation on how the company got back in the game after taking its eye off the ball in 2002, the first time the venerable chain had a profit-losing quarter.
The way the chain turned itself around was by having a two-way dialogue with owner-operators. "Collaboration got us on the right path," Armstrong said.
What it learned in the process was to listen to their franchisees, but also its customers. "We realized we can't be all things to all people," Armstrong said. Among the changes were a premium coffee program, placing an 800-number in the restaurants for customer feedback, upgrading both the image and the restaurants and opening earlier and closing later in some areas.
"None of this is new," Anderson said. "Ray (Kroc) talked about community involvement, quality back in the '50s."
It's just a wake-up call that was answered by franchising's poster company.
Joe Mathews, founding partner of Franchise Performance Group, facilitated what he called the "world's largest problem solving" session, by throwing out common excuses prospects use when they get cold feet about purchasing a franchise.
Here's a stumbling block, he said: "My mother-in-law's sick. What could you ask them?"
"Does she have a will?" someone from the audience suggested. Not the right answer, but it got a big laugh.
Overcoming objectives is a matter of asking questions until you discover the real reason they can't pull the trigger, Mathews said.
McDonald’s Don Armstrong
Jimmy John Liautaud shared the secrets of his success with Jimmy John's Gourmet Sandwiches, and the audience almost didn't let him leave the stage.
Among his noteworthy practices was a program where he sends consultants, or regional managers, into each restaurant one day out of every 28 days for the full day. They go in carrying wall tile, paint and other items to repair any damage to the store, along with coaching the franchisee and staff. "They leave the restaurant in better shape than when they came," he said, adding that the consultants are paid on how well the franchisee does.
Corporate helps control the costs of commodities for franchisees, a practice he learned from a member of his Young Presidents Organization. When someone in the audience asked how he was dealing with the high cost of gas since his stores did delivery, he replied, "We froze them at $30 a barrel." There was a moment of silence and then he laughed, "Just kidding."
His philosophy is to "do it better, faster and treat your people a little better."
Concerning his private equity partner who owns a third of the company, he said his job is to ensure there are no surprises.
Success at breakfast
Three successful franchisors gave advice during the second-day's success breakfast.
Lynette McKee, vice president of franchising for Dunkin' Brands, said Dunkin' builds relationships with preferred lenders for franchisees in order to help them out. They also look at the lenders' requirements and then match up the franchisees so they can meet those requirements, she said.
The best lending source for Diplomat Corporation has been community banks, because they understand the market, said Mike Patel, president of the company which is both a franchisor of Budgetel and a franchisee of several hotel brands.
Steve Michaels, vice president of franchise finance for Aarons Rents, said financing is an issue for their franchisees, because "we're going to ask for $500,000 for a franchisee to buy big screen TVs to rent to people you wouldn't give a credit card to."
McDonald’s Dave Hamilton
"We learned we have to stand behind the franchisees – we have a good balance sheet," he said of Aarons. "There's a 100 percent guarantee. There's some lawyer language in there that says it's not 100 percent, but essentially it is."
Aarons has also set aside a fund, which is now around $125 million, to help fund existing franchisees who want to open more locations. "We're victims of our own success, once they get up and going they want to open a second."
On the topic of refranchising, Michaels said Aarons has an open invitation to buy back franchises, which has translated into the company buying back 200 stores in the last five years. "Lenders see that as a red flag, but we've taken back some wildly successful stores, sometimes they invest in new areas," Michaels said.
In the hotel industry, Patel said the best growth has been to acquire regional chains in order to get to critical mass.
As for Dunkin' Donuts, McKee said 60 percent of its new development commitments is with existing franchisees.
Faegre & Benson's Brian Schnell moderated a luncheon panel on overcoming growing pains. Panel members were Mary Rogers, president and CEO of Abrakadoddle; Tony Gioia, chairman/CEO of Togo's Holdings; and Jim Tatem, president of Sign-a-Rama.
Gioia said a good system will sell. The three nuggets he had for attendees were to make sure your business model is simple and easy to operate; never forget your capital comes from the franchise community; and work on your unit economics. "Return on investment is important to franchisees, too," he said. "ROI sells franchises."
Tatem said his system is aggressive when it comes to franchise sales. At the recent IFE, for instance, "every single person we met at the show got a phone call by Sunday." The sales person will get in front of about 60 to 70 percent of the leads passed on to him or her. "If the number is lower, I don't want him," Tatem said.
Another panel presentation was an opportunity to hear from large multi-unit franchisees on how to approach them to sell them a second concept – or in the case of these panel members, a fourth or a fifth.
Guillermo Perales, a 150-unit franchisee of chains like Burger King, Golden Corral and other brands, told the audience he wants a close look at the financials – he's expecting 20 percent EBITDA (earnings before interest, taxes, depreciation and amortization). "It will help them (the franchisor) more if there is a full disclosure of the financials."
Lee Engler, co-owner of Border Foods, a 175-unit Yum! Brands franchisee, just signed on with Sonic to develop the chain in Minnesota. He agreed there should be nothing to hide in financials. In fact, one of the pluses with Sonic is that the corporate stores pay a royalty to the franchisor. Then, the P&Ls of the company and franchisee units are comparing apples to apples.
Really, it comes down to appreciating the franchisee. "At the end of the day, I'm going to deploy $40 million to $60 million over the years in their concept – I'm not always sure they appreciate the weight of this type of investment," said Engler.
How do you reach these franchisees? Perales is looking for future investments, and has been known to call franchises he's interested in.
For Engler, a Sonic representative called his office and he just happened to pick up the phone. We guess it pays to still use the personal touch.
Attendees also heard from some interesting, if not directly franchise related speakers, such as the luncheon keynoter Vincent Bugliosi, author of several books on famous trials, such as Charles Manson and O.J. Simpson. His talk at the conference centered around his latest book, "Reclaiming History: The Assassination of President John F. Kennedy." And while we hate to spoil the ending of the 1,600-plus page book, suffice it to say, Lee Harvey Oswald did it, and he acted alone.