In 2000, Lou Brown, one of the more successful high-tech entrepreneurs of the 1990's, decided to exchange silicon for a grease gun, and took over struggling Precision Tune.
Actually, in a classic case of "who you know", Brown was recruited by his handball partner, an institutional fund manager who managed the money of Precision Tune's largest single shareholder. That partner kept him abreast of what was going on in the franchise: "All through the '90s I'd get a little vignette on the thrill of victory and the agony of defeat. By 2000 he was running around pulling his hair out. He says "You gotta do this." So we just dove in, and looking back now it's fun, but Robert and I had many days when we said "What were we thinking?"
You would have had to wonder. Brown discovered that Precision Tune and its parent, Precision Auto Care, Inc., were about to bleed to death. Encumbered by operations that were not part of the core business, burdened with a heavy debt with correspondingly high interest payments, the company was within a week of having to declare bankruptcy.
"The deal we struck to avoid that was I agreed to put in a little over a million capital and agreed to work for free until it turned around," Brown says. "I thought it would take a year; turns out it took three years."
The steps were drastic. Precision Tune had decided to franchise car washes, and then to manufacture the equipment for the car washes. It had taken on a load of debt to do the acquisitions, and had made a public offering of stock. Brown brought in Robert Franconi from another high-tech company to straighten out the financial mess, and recently promoted him to president. Over the three years, Brown and Franconi sold off the car washes and manufacturing operations, and then faced the problem of the debt.
"I told the major investors they had to take the banks out, which they did, and converted that to equity," says Brown. "That took $22 million in debt down to virtually nothing today. We obviously did a lot of downsizing. Some went with the divestitures, some we just downsized."
Besides those problems, the two took over a franchise in which the franchisees had lost confidence. Collections of royalties were way down, and morale was lower.
The solution, says Brown, was to go back to the roots, which was a three-tier system with franchisor, area developers, and franchisees.
"It's absolutely the way to go," says Franconi, "because it allows us to be coherent here in Leesburg. Whether we're dealing with an area developer in the United States, or a master franchisee/area developer internationally, or a co-branding situation, there's always somebody between us and the franchisee. So the support we provide throughout the system is pretty coherent."
The system now has about 330 stores. "Our strategic plan is to be at 600 stores by the end of '08," Franconi says "We have about 30 area developers, and if each area developer adds one store per year, that's 150 stores, and that takes us to 480; internationally we have some good growth going, particularly in Portugal, and now Spain. We have a cobranding deal with Getty Oil that is going well. We're opening up new areas; we've brought on three or four new area developers just within the last 6-8 months, so I think it's a very achievable goal."
That couldn't happen until the franchise relationship was fixed.
Says Brown, "One question I asked when I first got here was 'Who does what? What do we do, what do area developers do, what do franchisors do?' We spent about 18 months in meetings where we put together this matrix: here's what we do at Precision, here's what the area developers do, here's what the franchises do, and we broadcast that throughout the system so each person in our system knows who's responsible for what so we can hold each other mutually accountable. We're in a very competitive industry; we can't afford to make a lot of mistakes. We can't afford to duplicate anything because you only get to spend a dollar once. So if we're doing something and the area developer is duplicating that, then that's a dollar wasted."
It took a lot of rehabilitation, beginning with the home office, to get everyone realigned. "Part of the whole rehabilitation process was improving the value proposition to our franchisees," says Franconi. "When we got here the perception in the field of the Leesburg office was pretty low. They just didn't see a lot of value. When I'd call people up and see why they hadn't been paying the royalty, I'd hear the same story: 'The only time we hear from you guys is when you want money.'"
Brown went on the road to meet with franchisees to find out what they wanted and to explain what the franchisor was going to do for them. As technologists, they understood the value of the Internet, and improved that site, as well as adding an intranet for internal communication.
"We've been much more aggressive in getting our training group out in the field and training our franchisees, helping them to focus on profitability so they feel better about paying their royalties," says Franconi. "When I got here there were about 270 stores that were paying their royalties with anything remotely resembling regularity. That was only about 60% paying, now we're up to about 95-96%."
Many of the stores have new owners, and the remaining slow payers will probably also get new owners.
"What we've had happen a lot over the last few years is we've had a lot of transfers so we've had a lot of new blood get into the system. One of the interesting things about the new people who have come into the system is they're not automotive guys but people who view the system as a way to make a lot of money."
For Brown and Franconi, that's an advantage in a highly competitive and fast-changing industry. The training offered to franchisees has two sidesóone is the technology, which in the car business is getting more complicated by the year, and the other is how to run a business profitably.
Dealing with the Competition
The competition falls into several parts. Automobile dealers are putting more stress on service as their margins on sales get smaller. Other vertical-market specialistsólike Meineke or Jiffy Lube, for exampleóare trying to offer more comprehensive services. And then there are the independent shops. These last are suffering the most.
"The overall market just in the U.S. is about $120 billion a year, which breaks down to $55 billion in service and $65 billion in parts," says Brown. "With 330 stores in the U.S. averaging a half a million a year, you get somewhere south of $200 million on a real good day with a tail wind. That's a small part of an enormous market."
So Precision Tune is working on being a one-stop shop with a stronger appeal to the female customer. "We cleaned up the bays because the focus groups told us we needed to," says Brown. "If you look at customers, it's trending more toward female. If you look at our demographics as opposed to others, we're probably not getting our fair share of female customers. Our focus groups have told us if we want to get female customers, clean, spotless waiting rooms are not optional. So we have a three-year program, first the bays, and then the external look. By 05 we should have squeaky clean stores."
Independents are going to have a tougher and tougher time surviving. The branded shops, according to Brown, are picking up market share. The reasons make franchising looke very appealing.
Says Brown: "If you're an independent, you've got to run your shop 40-50 hours a week, and in your spare time you've got to do all your marketing and advertising, your branding, your vendor relationships, the training--and the training is getting very difficult and expensive."
All of that, he says "is killing the independents. They say they just can't keep up with the training and equipment demands. This business is evolving as a professional services business rather than a business dependent on parts markup. Twenty years ago local distribution meant more, but today you can go out on the Internet, find what GM wants for a part, have it here overnight. That's changing the dynamic quite a bit; it's commoditizing parts. It's the same phenomenon I saw in the computer industry 10-15 years ago. You can't make margin marking up parts any more, you've got to charge for service."
The principal, he says, is to build on the public's perception that service has value. Or, as Brown says, "You have to charge for your labor if you have real value, and fortunately for us, there's the old adage, 'Where there is mystery, there's margin.'" In other words, cars are so difficult to fix, and the process is so mysterious, we all have to pay to have it done.
Getting the Joke
Brown is looking for that professional franchisee who, as he says, "gets the joke."
Many of those are coming from the ranks of the independents. "It's sort of like the frog in the cooking pot," Brown says. "The water is getting warmeróthe independents know things are getting worse, they just can't put their finger on it. But the brighter ones get the joke and say this is a good value proposition."
"Why does someone send me 7% of sales every week for brand and whatever a franchisor does, and another 5% into a marketing fundó16 points sounds like an awful lot, right?" he says. "Now let me tell you why it's a small amount. That bothered me at the beginningóhow can you pull that much out and still make it work? But here's what happens: when you look at the way a franchise, or at least our franchise system works, what we're allowing a store to do is effectively outsource their G&A costs--recruitment, legal, training, accounting, tada, tada, tada. We effectively allow them to outsource a bunch of that because between us and the area developer we carry a lot of that work." He goes back to his high-tech experience, where the sales and G&A costs run as much as 33 percent. The savings are significant.
Carrying the message is one of the jobs of the area franchisee, many of whom have been with the company a long time.
"I was amazed, frankly, that you could do as well as some of them can with one store," says Franconi. "One of the things I like when you're trying to sell franchises is when you do have the successful multi-unit guy and you talk to somebody who has big dreams that you can validate the whole Precision experience by having him talk to someone who has several stores."
"We have a cadre of older guys who get the joke," says Brown, "and they're carrying the banner, so we just point them out and say 'Talk to him, he's been around forever, he knows.'"