Ready, Fire, Aim: Learning Franchising On The Fly

When Kevin Osterfeld's "dream job" as a stockbroker didn't turn out so dreamy, he decided to switch things up.

"When I was a stockbroker, I would eat at Philadelphia Steak & Subs in downtown Cincinnati. I loved the food, so I decided to buy the restaurant, which would become a Penn Station East Coast Subs restaurant," he says. "I knew nothing about the restaurant business. I knew nothing about franchising. I didn't really even know how it worked, but I was young and reckless and thought I'd figure it out."

Twenty-five years later, it's clear that Osterfeld did "figure it out." Recipient of Multi-Unit Franchisee magazine's 2012 MVP Influencer Award, he now owns 18 Penn Stations in Ohio. He also is an active participant in charitable ventures and franchise organizations and a busy family man.

Despite the positive outcome to his own story, when potential franchisees ask Osterfeld for advice about getting into franchising, he sounds a bit like that old parental maxim: "Don't do as I do--do as I say."

His road to success has not lacked in tough lessons, he says. For example, "I'll never forget that first week in the restaurant when I thought I needed to cut down on labor costs. In the afternoon in downtown Cincinnati then, it was dead slow, so I sent home everybody except myself and one employee. When a customer came in, I sent the employee to ring him up. He said, 'I don't know how,' and I said, 'Neither do I. I've never worked a register before.' That was a clear indication that I'd bitten off a lot and that it would take me some time to chew it up and swallow."

Osterfeld, a Cincinnati native and graduate of Miami University in Ohio, also recalls the sinking feeling his first major debt gave him. "I lived every day horrified that I couldn't pay back all that debt. But I was 23 years old living in an apartment with no wife or kids, so I worked all the time. That was my greatest motivation: I lived for paying off debt," he says now with a laugh.

Osterfeld also learned the hazards of growing too quickly. "I was dying to expand, so I opened another store that was actually too far on the edge of downtown Cincinnati. It almost took me under."

But Osterfeld soldiered on. And he learned. For his third restaurant, he bought an existing unit that was solid enough to enable him to keep his head above water as he grew.

In 1991, he approached then-fledgling Penn Station East Coast Subs about buying development rights for three counties of Greater Dayton, since Cincinnati was filling up with the popular sub shops. "When I bought Dayton, I didn't have any internal competition so I went in and cherry-picked the best sites. It made things a lot easier," he says today. "When you develop a market, you learn not only to pick the right sites but to do it with an eye toward developing the whole market."

Osterfeld says his life during early years in franchising consisted almost exclusively of work. Now married and father to three daughters, he sees his younger self in many potential recruits. "Twenty-five years in, it still surprises me how many people get involved having no idea what they're getting into. They're no different than I was. More often than not, they don't understand the time commitment or the capital needs."

And he notes one major shift in franchising since he bought his first store. "Twenty-five years ago, it was onesies, twosies. Now, franchisees who have been around and had success don't want to open one unit. They've got their eyes on a bigger prize," he says. "My own franchisor would prefer to sell to multiple-unit franchisees. If you're going to have a franchisee as a customer, it's easier to have one customer with five units than five customers with one unit each."

Craig Dunaway, president of Penn Station, Inc. describes Osterfeld as a worthy recipient of the MVP Influencer Award for all he does to mentor new and potential franchisees. "Kevin and his team have a long history of excellent operations, local marketing, and business practices that have made them the 'go to' organization for other franchisees to follow. Through his leadership, his company has become the sales leader among Penn Station franchisees in larger, established markets."

Today, Osterfeld, who views franchising as a business model that greatly enhances one's chance of success, and he offers the following general advice to newbies: (1) Don't be shy about asking every question that comes to mind; (2) Learn about leasing before you sign an agreement, because leases make or break businesses all the time; and (3) Don't just look at a three-year horizon--look five to 20 years down the road and consider whether you'll have one unit and pay off your debt or try to do multiple units or an area developer agreement.

Over the years, Osterfeld has built a strong track record of leadership and collaboration. For example, he and a few fellow franchisees started the first advertising cooperative for Penn Station in Cincinnati, and he sat on the franchise's first franchisee advisory council. He also spends time weekly talking and meeting with potential franchisees who contact him. "I'm glad to help. It's rewarding to see people succeed," he says.

"I spend a lot of time sharing. That's what franchising is all about. Look at the buying power today: we buy things so much cheaper, even with inflation, than 25 years ago. The things the franchisor doesn't provide buying power for, we work on them ourselves. For example, our area's franchisees negotiated as 44 stores with a dumpster service to get better buying power."

As for the future, Osterfeld says he doesn't see his 18 stores becoming 80. "I'm slowly phasing out. I took a partner five years ago and it is our intention for him to buy us out over the next five to eight years. As he takes over more of the daily chores, I'm able to spend more time on real estate, charitable organizations , and my family."

The Osterfelds enjoy spending time at their lakeside cottage in Northern Michigan. In addition to golfing, serving as president of his local country club, and dabbling in classic cars and real estate, Osterfeld also coaches volleyball for his daughters' teams. "I've never played a game a day in my life, but I'm learning," he says, laughing at his same-old approach to a new challenge.

Name: Kevin Osterfeld
Title: President
Company: P.S. MGMT., Inc.
Brands/units: 18 Penn Station East Coast Subs

Personal

Age: 48
Family: Wife, 3 daughters
Years in franchising: 25 years
Years in current position: 25 years

Key accomplishments:
Going from one store I managed myself at 23 years old and having absolutely no idea what I was doing to buying the rights to and developing the entire Dayton, Ohio market for Penn Station East Coast Subs.

Biggest mistake:
Opening my second store before I was ready financially.

Smartest mistake:
Every one I've ever made because of the collective indelible impression they have left on me.

How do you spend a typical day?
Today is quite different from the past as I am far less hands-on in stores, but my day is filled working with my operations directors and general managers to ensure a quality visit for our guests. With such a fabulous and sought-after product, my focus only needs to be on the guest.

Work week:
I'm on call 24/7, and the phone often rings.

Favorite fun activities:
Spending time with my family at our cottage in Northern Michigan (Torch Lake), golfing, boating, and dabbling in real estate investment.

Exercise/workout:
I work out at the gym three days a week.

Favorite tech toys:
My iPhone

What are you reading?
Industry periodicals and intermittent novels to lighten the mood.

Do you have a favorite quote/advice?
I never learned anything by doing it right the first time. When you make a mistake and pay the price of that mistake, the lesson really sinks in.

Best advice you ever got:
I was raised to never forget that by watching the pennies, the dollars will take care of themselves.

Formative influences/events:
As mentioned above, I opened my second store in a hurry. It cost me dearly but taught me some crucial lessons about being over-leveraged and needing to find good people, paying them well, and letting them blossom.

How do you balance life and work?
By prioritizing. Early on I had to decide every day what was most important on that day and act accordingly.

Management

Business philosophy:
Pay people well, give them some rope and expect a lot from them. And, be vigilant with every detail every day.

Are you in the franchising, real estate, or customer service business? Why?
Strictly customer service--if you win there, the rest will take care of itself.

As an operator, what are the two most important things you rely on from your franchisor?
Buying power and quality products.

What gets you out of bed in the morning?
The enduring chase to be the best.

What's your passion in business?
My favorite day is the day we open a new store and see all the research, effort, and expense begin to pay off. It's exciting to see if I was right about my hopes for that location.

Management method or style:
Structure and follow-up. I have learned that if you develop the systems, require their use, and constantly follow up to ensure their proper use, everything else will fall into place.

Greatest challenge:
Not only finding and retaining great people, but dealing with the ever-growing government hurdles associated with being an employer.

How close are you to operations?
Extremely close. In addition to the daily interaction, I hold operations meetings every Tuesday morning for three hours, without exception.

Have you changed your marketing strategy in response to the economy? How?
We've changed it very little. We have avoided the temptation to try to "coupon" our way to sales. I strongly believe that if we serve a great product quickly in a friendly atmosphere, our guests will recognize the inherent value.

How is social media affecting your business operations?
The primary effect is on marketing. Between email, our interactive website, Twitter, and Facebook, there are infinite opportunities to reach out to people. Since social media is clearly here to stay, we work diligently to incorporate it into our outreach efforts.

Personality:
Hard-working, detail-oriented.

How do others describe you?
One word: controlling. I view it as an asset, but am aware I often need to let go more than my gut tells me to.

How do you hire and fire?
We rarely fire. In our system, we are always traveling at the speed of sound and those who can't keep up inevitably jump off. Hiring is where we spend all of our effort. Our interview process for GMs is extensive--a minimum of four interviews plus a full day's working interview. This is by design because when we encounter those who find this process too exhaustive, we know they wouldn't fit in.

How do you train and retain?
Training too is exhaustive. For GMs, it's three weeks of in-store hands-on and then a test. And the ongoing training never stops. Retention is achieved through paying my GMs almost solely on profit. They have great motivation and do extremely well financially.

How do you deal with problem employees?
Quickly, consistently, and definitively.

Bottom Line

Annual revenue:
NA

2012 goals:
This year our focus is on making our bottom performers achieve.

Growth meter: How do you measure your growth?
Only in terms of same-store sales growth.

Vision meter: Where do you want to be in 5 years? 10 years?
Frankly, I'm beginning to wind down in this industry. I will be training someone to take over most of my responsibility as I focus more on family and charitable ventures.

How has the most recent economic cycle affected you, your employees, your customers?
I believe it has made my company stronger as we have learned how to deal with adversity beyond our control. Additionally it has "culled the herd" as many of our weaker competitors have disappeared.

Are you experiencing economic growth/recovery in your market?
Yes, the last 18 months have actually been very strong.

What did you change or do differently in this economy that you plan to continue doing?
The downturn has served as a reminder to stick to the basics. Great food quickly in a clean, pleasant environment is still the winning formula. That has helped reinforce my long-held belief that extensive discounting only serves to erode customer loyalty down the road.

How do you forecast for your business in this economy?
Very conservatively. We have based all projections on numbers we have a high degree of certainty we can achieve. This leads to pleasant surprises for our GMs who are paid almost solely on profits. I don't worry about my income because I know if my GMs are doing well, I will be fine.

Where do you find capital for expansion?
Twenty-plus years ago I used a combination of conventional bank loans, SBA lending, and some private debt deals. For the last 10 or 12 years I haven't expanded until I could do so through cash flow.

Is capital getting easier to access? Why/why not?
Not in the market.

Have you used private equity, local/national banks, other institutions? Why/why not?
All of the above. In such a capital-intensive business, it is usually unavoidable. I only caution people not to become over-leveraged as I did.

What kind of exit strategy do you have in place?
I don't envision a full exit for some years, so I am taking it very slowly and cautiously in finding the right individual to fill my shoes. That began almost five years ago and the training and transition will continue for the foreseeable future.

What are you doing to take care of your employees?
We give them a compensation package that far exceeds industry averages. Equally important, we give them the freedom to allow them to use their unique skills to the greatest advantage.

How are you handling rising employee costs (payroll, healthcare, etc.)?
We never stop looking for ways to economize. All decisions regarding benefits are passed through our affected employees so we make collective decisions with their buy-in. As a result, sometimes we trim benefits and other times we incur additional costs.

How do you reward/recognize top-performing employees?
As mentioned, our GMs are paid primarily through profits, so the reward is built in. The GMs are also eligible for a $10,000 annual bonus based on the overall performance of their store through an extensive top to bottom year-long evaluation process. Additionally, we have a comprehensive bonus program for the balance of our management based on our own monthly evaluation coupled with a secret shopper score.