From The Bottom Up -- How Some Franchisees Have Leveraged Their Companies By Becoming The Owners
Franchise companies do change hands; sometimes often. New ownership is not always sympathetic to the goals of franchisees, and that can cost a system badly. Some franchisees are taking a more aggressive approach to that situation-or the threat of it. They've become owners themselves. And there are good reasons why that strategy might work.
Ed Pendarvis had been approached numerous times over the past two decades with propositions to buy his privately-owned Charleston, SC company, Sunbelt Business Brokers. Indeed, investors were eager to take over his business-selling franchise, which had more than 340 offices throughout the United States and 11 foreign countries. After all, the average price of businesses brokered by Sunbelt was $280,000. But Pendarvis had always rejected the offers in the same manner by simply replying, "It's not for sale. It's my life's work."
But in May of 2002, Carl Grimes, who operates three Sunbelt franchises in Arkansas and Missouri, and several other Sunbelt franchise owners got wind that Pendarvis' long-time partner was interested in selling his share of the company. The franchisees were well aware that outside investors had made moves to buy the company in the past, and they were not at all excited about that prospect.
"One thing that really bothered us," explained Grimes, president of Fayetteville, AR's Sunbelt Business Advisors (Sunbelt's new name), "was that the most recent takeover proposition had come from some young dot-com investors who knew nothing about our business. It would have been a real culture clash. We questioned their motives." Grimes and about 20 other franchise operators convened and formed a franchisee advisory council. The group met to discuss their options and possibilities. One thing was certain, according to Grimes: the existing franchisees wanted to control their own future and not have somebody else doing it. Within just a few weeks, the council had agreed to dig into their own pockets and proposition Pendarvis to let them buy the company. Pendarvis had become acutely aware of his partner's desire to sell and the fact that to really grow the business was getting to be too much for one person to handle anymore. But there was a catch.
"I wanted this buyout to be available to all of the franchisees who wanted in. I wanted to be able to buy stock, and I wanted to stay on in a leadership position for the next five years," explained Pendarvis. He got his wish.
In the end about 80 of the 175 Sunbelt office owners participated in the buyout, which was finalized in December of 2002. Pendarvis remains as president and chairman of the board.
It was an ideal situation, says Grimes: "All of the franchise office owners who wanted to participate could recapitalize an organization that needed more operating capital. We all had a tremendous amount of knowledge as Sunbelt franchise owners, and this new 'shareholder' approach gave us more say in the decision-making process." The cornerstones for the deal were money, ideas, and structure.
That's not to say there weren't some bumps in the road though, according to Grimes. "There is a lot to know about managing a large group of franchises such as all kinds of negotiations and the buying and selling processes of franchises. And financially, we only had a pro forma worksheet to base our decisions on. Legally, there are all kinds of issues of registration from state to state across the country."
Earlier in 2002, a board had been formed to originally consider the purchase and make the acquisition. After the deal was closed, a new seven-member board was formed to set policies and goals.
"We had three main goals in the beginning," explained Grimes. "We wanted to improve our web site, improve and coordinate better training for our brokers, and improve the communication within the organization." Grimes feels the group has made significant headway over the past six months in carrying out those goals.
Another interesting by-product of the Sunbelt franchisee buyout according to Grimes is that now the organization is perceived within the industry as being more powerful and organized. It's no longer "Ed's company." The group has been able to parlay this new perception into improving and leveraging strategic relationships and group purchasing power.
Jack Hollis opened his first Computer Renaissance franchise in August of 1998. Less than two years later he had five stores, and a growing concern as to the direction the fledgling franchise was going. Grow Biz International (now Winmark Corp.) had acquired the Computer Renaissance franchise in 1993 with high hopes, but in Hollis' opinion it had become much more interested in growing several of its other concepts and growth divisions. Add to that equation a struggling computer market and sinking computer values and you have an under-performing financial headache.
"The computer industry had really taken a nose dive by the spring of 2000, and I thought Grow Biz seemed more interested in the development of their other divisions and companies," said Hollis, who today is chairman and CEO of Lakeland, FL-based Hollis Technologies, the parent company of Computer Renaissance.
One evening while Hollis was sitting on his front porch lamenting the situation, his wife suggested that he buy out the franchise. After a significant amount of research and due diligence, and raising his own capital, he offered Grow Biz $3 million for the 178-store chain of computer trade-in and repair businesses. Grow Biz agreed to terms and Hollis took control in September of 2000. That's when the real work began.
"There was a tremendous learning curve involved in going from franchisee to franchisor," explained Hollis. "There were numerous growing pains including staffing and employee issues." Hollis says it was critical to get the right people in the right management spots to make the company run as efficiently as possible. Another obstacle he faced was the expectations and demands of all 178 franchisees. "Since we were now the franchisor, these folks were expecting us to know all the answers and offer them all kinds of support," remembers Hollis. It was a tall order.
One of Hollis' first goals was to diversify the company's product and service offerings. "Prior to the buyout, Computer Renaissance mainly just dealt in the selling and repairing of used computers. But in a down computer market where computers are quickly outdated, that was not a strong angle," Hollis explains. Today, Computer Renaissance not only buys and sells new and used computers, but also refurbishes computers, custom builds computer systems, and handles servicing and repairs. The diversification has worked.
Hollis also implemented new policies to make the franchise opportunity more affordable for various income levels by slashing total startup costs to as little as $63,000 while beefing up options to help franchisees secure financing. Now in-store training is followed up by regular field visits and more marketing and advertising support.
The new management group also developed a preferred supplier program so the franchisees had more access to the products and services they needed at competitive prices. And the channels of communication were opened up through the development of a company Intranet system that allows the franchisees to communicate with Hollis and his corporate team, but also to communicate with each other, discussing all kinds of solutions and best practices ideas.
"I think we have assembled a strong team of executives who possess expertise and vision. We've blended that with a solid concept in Computer Renaissance, and created a thriving organization," says Hollis.
When Suburban Lodges of America was acquired in the spring of 2002 by industry rival InTown Suites, the 19 franchisees operating 61 Suburban Lodge facilities knew they weren't wanted. "They wanted the 60 corporate hotels," explained Kevin Lewis, president and CEO of the newly formed Suburban Franchise Systems, Inc., "but they had no interest in the other 61 franchises."
Franchisees like Atlanta's Chris Battel knew they would be liquidated. So Chris and the other 18 franchisee owners gathered and decided they could buy the franchise rights and manage the facilities themselves. "When we all met, we came to the conclusion that we had a great product, we had strong leadership among us, and we wanted to control our own destiny and chart our own path," noted Battel. It was a chance to realign the franchisees' interests and maximize the brand and everybody's real-estate investments.
As with any new venture, there were unknowns. "Did we have the people to manage all of this? Would we be able to watch out for the brand and the franchisee needs?" Battel asked. So far the new owners have charted an aggressive course to do both.
One of their first moves was to hire Kevin Lewis from former Suburban Lodges subsidiary GuestHouse International. Lewis' hotel franchising background made him an excellent fit. He now serves as president and CEO of Suburban Franchise Systems, Inc., based in Atlanta.
"Kevin sort of came from within the original company, and then we hired a CFO and marketing manager from the outside," explained Battel. "We think we have assembled a great team of executives."
The new owners also invested in research to better define its target market. With this information, a new branding campaign and name were developed. This included updating the old Suburban Lodge look and renaming them Suburban Extended Stay Hotels-also incorporating a new logo and color scheme.
Other changes brought about by the new franchisee-driven ownership included the development of a web-based Intranet site for the franchisees. The private site includes a business plan and marketing templates. "The site also contains a comprehensive online store where franchisees can purchase anything from uniforms to soap," adds Lewis. "Franchisees can also go online for help with guest services, sales and marketing and quality services giving them savings and independence they have never had." The group also changed reservation service providers in an effort to create more awareness and bookings.
The results so far? Battel says business is up and the new arrangement has really brought the franchise community together at Suburban. All the members of the group are more in touch with each other than ever before. "Even those who were under-performers are now involved and the sharing of ideas concerning what kinds of solutions have worked for others is helping everybody," adds Battel.
"The 19 franchisees who own this company have the power to make changes, and that is a departure from traditional franchise hotel chains," sums Lewis. "The changes we're making will strengthen the brand and the product as we move forward."
Kerry Pipes is a Texas-based business writer.
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