Franchising can be a fast way to business growth
In 1994, Todd Beckman’s plan for building his tanning business was simple: Start small, cultivate and then expand.
“My original expectation was just to have three stores, and it just took off,” said Beckman, 42, chief executive of the Tan Co. Today, the Fenton, Mo.-based company has 72 locations in 12 states and annual revenue of $35 million.
Franchising played a big part in that growth, which was something he hadn’t expected. “Franchising was not a thought, not at the very beginning,” Beckman said.
Companies with a business model that can be replicated have two ways to grow.
They can add locations, financing each expansion themselves and taking full ownership of the new operations. Or they can find partners to open franchises under the company name. The franchise partners pay a fee to the company, and in return get access to its business model, products and marketing and advertising tools.
Franchising helps companies defray the cost of expansion, which can lead to faster growth.
“They (companies) grow faster by motivating management and using other people’s money to grow the business,” said Mark Siebert, chief executive of iFranchise Group Inc., a franchise consulting firm based in Homewood, Ill. “You have an ability to leverage the time and efforts of your franchisees as well as their capital.”
The franchisee does most of the work — leasing a building, hiring employees, buying equipment and managing inventory. Those are tasks that franchisers would have to undertake if they were to fully own those locations, Siebert said.
Perhaps most critically, franchisees are driven by their own investment in the store, Seibert said, improving the chance of success.
Nationwide, there are about 2,500 franchisers, according to the International Franchise Association, based in Washington.
The key for franchisers is to “start out with two to three stores in order to create that franchisable business model,” said Kevin Schulte, center director for the Smurfit-Stone Center for Entrepreneurship at the John Cook School of Business at St. Louis University. “Create that one success and then you can replicate it over and over again.”
Dan Abel, president of St. Louis-based Chocolate Chocolate Chocolate Co., which has 13 franchised and company-owned locations throughout the St. Louis area, hopes for quick expansion, as well.
He said in the next five years he will turn the ropes over to his adult children, who will open about 150 stores, expanding from the Midwest outward “like a spider web,” he said.
“I have taken it this far,” Abel said. “They have the energy to take it to the next level.”
The Tan Co. charges a one-time franchise free of $30,000. Franchisees also must pay royalties — 6 percent of monthly gross sales. They also are required to contribute to an advertising fund.
In order for a franchise to sell beyond the comfort zone of its hometown, the franchise concept has to be unique but simple, said Terry Hill, spokesman for the IFA.
“You don’t want to create something that is difficult to operate,” Hill said.
A franchiser must have a system that gives each location the right level of management and control for the business to run smoothly.
Beckman uses an intranet system that links all of his stores, providing daily information about sales, employees and inventory.
“I feel we are always on the leading edge because we have so many stores and we are actually doing the work,” said Beckman. “A lot of franchises out there are just a franchise company, and they don’t actually run their facilities.”
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