A number of franchises now reaching a middle stage of life are facing issues they never anticipated when they first started selling franchises.
Back in the '80s and '90s, growth was the order of the day. There was money for franchisees to establish themselves, new franchises were popping up everywhere, and the country was embarking on its post-Cold War, technology-driven economic expansion.
Sylvan Learning Systems, founded in 1979, grew up during that lively period. Areas were sold, centers grew, and the company developed a strong culture that survived (along with its management) through a number of different ownership arrangements.
The country also grew and changed. Population centers shifted as the South and Southwest began to grow, while those in the Midwest and Northeast remained level, or even shrank. The result was that, over time, the original franchise territories no longer matched their initial populations.
Franchises have always bought back territories or individual franchises for various reasons (retirement, end of contract period, poor performance, etc.). Lately, when this reaches a fairly extensive level, it's come to be called "refranchising."
Companies like AFC Enterprises (Popeyes Chicken & Biscuits) and CKE Restaurants Inc. (Carl's Jr. and Hardee's) are planning to sell dozens of company-owned stores to franchisees. IHOP is doing the same. Some of these efforts, like the one started by PepsiCo and continued by Tricon (KFC, Taco Bell, Pizza Hut), hit snags when franchisees overextended themselves and needed a corporate financial bailout.
Sylvan, says CEO Peter Cohen, took a different course. Refranchising usually has been a matter of reducing the number of company stores or groups of stores in defined territories. Sylvan had a different purpose, he says.
"When we bought them back, we specifically targeted centers so we could cut them up and refranchise." The idea was to redivide the territories so they could be offered as units that covered a significant population area. It became a way of fitting the company better to the country's changing demographics. In effect, this allows the company to structure itself almost as if it were franchising anew - giving "refranchising" a somewhat different meaning.
"Franchise sales people will sell what they can sometimes," says Cohen with a laugh. That meant that contracts didn't always specify how many centers should be opened in a given territory, and that territories wouldn't match the way they should. That made for a contractual problem, Cohen says, and "We bought them back ultimately to redistrict and refranchise."
In one of the largest efforts at refranchising yet to be announced, the company is refranchising 250 centers, plus an additional 150 centers that have always been company-owned and operated. The value of the process, says Cohen, is being able to redistrict, since large urban areas are now entirely available - Atlanta, Orlando, Boston, San Francisco, Chicago, Salt Lake City, and a number of others.
"The object," he says, "is to become a pure franchisor again but with better density. Consumers typically don't want to drive more than 15 to 20 minutes to a location, so we need to offer that coverage in all our markets."
"For the first time we had territories available in markets where we hadn't had opportunities in a long time," says Cohen. "So as we looked at ways to put those back in the hands of franchisees, we started looking for the right kind of franchisee. We first made them available to corporate employees, though most of them didn't have the financial resources. Then we made them available to existing franchisees. Now we're going out to look for new people."
This obviously offers opportunities to area developers interested in multiple concepts. In fact, Cohen says he's looking for franchisees who are problem-solving types. He thinks that people who bring experience from other systems will offer best practices the whole network can use. For example, he says, "In Miami, all the centers in the DMA are currently company-operated. An area developer coming in would have the opportunity to buy seven existing centers plus opportunities for eight more."
Most of the franchise's multiunit operators have between three and eight centers, he says, because of the brand's strong tie-in to the local school community. "The schools are looking for someone they can relate to. Franchisees need to be actively involved in the schools - whether going on TV or radio, or talking to parents about grade levels and challenges the child faces. They require a hands-on operator. So a multiunit franchisee needs to be passionate about working in the community."
Cohen says the company receives upward of 5,500 inquiries a year about franchises, so he doesn't think there will be a problem finding franchisees. He says Sylvan is looking for people with the financial ability and expertise to come in and begin operating an existing business. "If they have the experience and background to run a multiple-unit operation in a service environment, we have a great opportunity," he says.
"The education space continues to be attractive for a number of demographic reasons. The student group coming up will be the largest in American history. The pressure on college admission will be huge," he says. "This competitiveness makes it acceptable for parents to hire a coach for education, just as they would for sports or dance. Used to be tutors were a bit of an embarrassment, but now it is practical and parents are comfortable talking about it. There is a consumer trend toward taking control of education."
Sylvan is also offering new programs that will make the company more attractive to area developers, including at-home tutoring over the Internet, and a program for schools to help with the requirements of the No Child Left Behind law.
"Folks in the Boomer generation are now looking at their next career. They're taking on the responsibility of looking for something for themselves, rather than expecting corporations to take care of them. We're getting a lot of interest from those folks, and that trend will continue for the foreseeable future."
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