Franchising 101

Staff Writer
Columbus CEO
Charley Shin, founder and CEO of Charleys Philly Steaks

More than most 27-year-olds, Tony Capuano has a keen sense of what it takes to be successful in the franchising business.

As the grandson of Donatos Pizza founder Jim Grote and son of Donatos Chairwoman Jane Grote Abell, Capuano saw first-hand how franchising can help a small business grow into a large one by selling its proven product, operational approach and brand name to people looking to buy into a winning concept. Donatos has about 100 franchise restaurants and plans to add more.

Now Capuano is looking to make his mark in franchising but not in the pizza business nor as a franchisor. Instead, he is a franchisee with Snap Fitness, owning and operating five gyms in some of the most upscale neighborhoods in greater Columbus.

"Entrepreneurship runs in my blood," Capuano says. "I was determined even in college to own my own business."

He connected with Snap Fitness through his uncle, Tom Grote, who had invested in the Minnesota-based fitness chain's franchises in central Ohio. Capuano jumped at a chance to manage one of the centers when he graduated from Mount Vernon Nazarene University in 2011. He says he became a part owner shortly after that and now is the sole franchisee for the gyms in the Short North, German Village, Grandview, Bexley and Upper Arlington.

"(Snap Fitness) gives you a tool kit that sets you up for success from day one," Capuano says, "but it's still a crazy amount of work to get a franchise business up and running."

Capuano is not alone in taking the plunge into franchise ownership. The number of franchise establishments in the US is expected to grow to 795,932 this year, an increase of 13,359 compared to 2015, according to an estimate by the International Franchise Association, a trade group in Washington, D.C. This will be the sixth consecutive year that franchise businesses will grow at rates that exceed the economy-wide expansion of the industries in which franchises are concentrated, according to an association press release.

Franchising can be lucrative, but it may not be the best fit for some companies thinking about becoming franchisors or people wanting to go into business for themselves, says James Meaney, an attorney with Zaino Law Group in Dublin. He has focused his practice on franchise law since the 1980s and written a book,How to Buy a Franchise, about the topic.

Meaney's first piece of advice for would-be franchisees is to take a hard look at the franchising company's operating system, the strength of its corporate officers and experiences of other franchisees with that company. He recommends contacting franchisees directly to learn how well they are supported by the parent company.

"We see a lot of people who buy franchises on emotion or the belief that a franchise is the greatest thing since sliced bread and they've got to get one," Meaney says. "A lot of them jump ahead of due diligence on the (franchisor) and come to lawyers too late in process. They've already made up their minds and want me to validate that they should go forward … I've seen many situations where I tell them to put on the brakes."

On the flip side, he says the greatest challenge for first-time franchisors is selecting the right franchisees.

"Just because someone has the desire or money doesn't make them a good franchise partner," Meaney says. "I tell franchisors just starting up that probably their most important decisions are selecting those initial five to 10 franchisees. You want to do everything right for them because you don't want them saying (to others) 'Training was terrible, and no one is supporting me.'"

He says there are a lot of pieces and parts to establishing a franchise operation, including disclosure documents that spell out the terms of the relationship between the franchisor and franchisee. Franchisors also need to create operating and training manuals, submit to annual financial audits and register their trademarks.

"It's not an inexpensive proposition," Meaney says, estimating one of 20 companies that contact him about becoming franchisors actually move forward.

Franchising continues to be a key part of the growth strategy at Donatos, says Tom Krouse, CEO of the Columbus-based chain which sold its first franchise in 1992. Today, about two-thirds of the company's 152 restaurants are owned by franchise partners.

Krouse says franchising can be the answer for businesses looking to grow quickly because they can spread the demand for capital among franchisees. But business owners need to have more than just a great concept when going the franchising route.

"You're not going to be successful," Krouse says, "if you don't have processes, procedures and a system in place to help your franchise partners succeed."

That includes training and operations manuals as well as help with site selection and marketing. Krouse says franchisors must also be open to listening to the ideas and concerns of franchise partners.

Donatos has learned over the years the importance of selecting the right people to be its franchisees. The screening process includes personality tests, interviews with company officials including Krouse, and working a shift in a Donatos restaurant.

"We see how they interact with team members in the store and our customers," Krouse says. "If all they're looking for is an investment, they're probably not interested in going into a kitchen and working."

In addition, he says it is important to find partners who really like franchising rather than those who lean toward what he calls "the creative side" of operating an independent restaurant.

"If you're more interested in creating things," Krouse says, "you're really working against yourself to reinvent the wheel with a franchise. You can be creative (in franchising), but it's not about redesigning everything."

Buying a Donatos franchise is a major investment ranging from $449,000 to $697,000 depending on the location. While potential partners' net worth and business acumen are important, having strong ties to the communities in which they will operate the restaurant is essential as well.

"Our business very much depends on the relationship with customers," Krouse says. "When your franchisees have invested their life and personal finances in the business and are local residents, there is a much better chance they will have a stronger connection with customers in that area."

Charleys Philly Steaks' top priority when selecting franchisees is making sure they are aligned with the company's values, says Charley Shin, founder and CEO of the Columbus-based chain. Since Shin opened his first Charleys in 1986 near the Ohio State University campus, it has grown to 556 restaurants-all owned by franchisees–in 20 countries.

"We are all about taking care of our employees and making our customers happy," Shin says. "If someone comes to us with a get-rich-quick mindset, they're not going to cut it. We put them through a pretty rigorous background check and interview process with our executive team."

He says businesses thinking about going the franchise route need to understand their success hinges on how well they support their franchisees.

"All of our corporate people have that purpose in mind," Shin says. "We want to build camaraderie and trust with our franchisees … Our franchisees have the entrepreneurial spirit but they also want to be part of something bigger than themselves. That's where we come in, and it's our goal to help them be successful."

The buy-in cost for a Charleys franchise ranges from $250,000 to $400,000, but Shin sees the rewards of being a franchisor run deeper than just dollars and cents for him and his company.

"I love when I go into our stores," Shin says, "and the franchisee has a big smile and gives me a hug. They do it because of their success with the Charleys concept and support we give them. That makes me really happy."

Amanda Knapp, founder and owner of Sitting Made Simple in Columbus, is just getting started as a franchisor. Her first franchise location opened in Nashville in January, followed by ones in Cleveland and Indianapolis in March. She would like to have five by the end of this year and go from there.

Knapp is taking a cautious approach as a franchisor for her 7-year-old company, a babysitting and nanny service with more than 1,700 clients.

"I've had a ton of investors who want to come in and buy (multiple locations)," she says, "but that's not my brand and would not be a good choice for us. You have to be able to sell what you're doing and feel passionate about it. (Child care) has had to touch your life in some way."

For example, Knapp's first franchisee, Sarah Tortorella in Nashville, worked as a Sitting Made Simple babysitter for three years. Her Indianapolis franchisee, Cristie Wilt, used Knapp's service for her children when she and her family lived in Columbus.

Knapp's first piece of advice to business owners thinking about franchising is to hire an attorney experienced in setting the legal framework for a franchise operation. That includes drawing up a franchise disclosure agreement, which runs 146 pages at Sitting Made Simple.

Knapp says she also learned how difficult it can be to write an operations manual for use by franchisees.

"It's been about taking seven years of everything that's in my head and putting it all on paper," she says. "It's a lot of work, but it's exciting to see something you built from scratch be recreated by people as passionate about it as I am."

The Salo Organization, a Columbus-based franchisee of Interim HealthCare, is at the opposite end of the spectrum on franchising experience. Founded in 1971 by Eino and Nina Salo, TSO is Interim's largest franchisee with 60 locations across five states, including Ohio, and 5,000-plus employees.

In total, Florida-based Interim has more than 320 offices throughout the US, providing healthcare personnel such as registered nurses, licensed practical nurses, home health aides and personal care workers. The organization's success has stemmed in part from the growing need for the delivery of medical care in the home, says Tom DiMarco, who been with TSO for 31 years and serves as its CEO.

He says experience has taught him there is no magic formula on whether buying a franchise is the right fit for someone. But anyone considering such a move should know exactly what they are buying and the support they will receive from the franchisor. That includes an information technology system, operating policies and procedures and "real people to assist you," DiMarco says.

"You also need to see what opportunities there are to expand in your territory," he says. "If you're landlocked, you'll be limited in your opportunities to grow."

It's also critical that a first-time franchisee has enough liquidity to sustain the business until it starts to break even or turn a profit.

"A lot of people borrow on their credit cards and figure it out later," DiMarco says. "You need to have a business plan, business sense and a passion and belief in what you're doing."

His best advice for would-be franchisees is to understand they are buying into a business for the long haul.

"You need to be practical with your expectations," DiMarco says. "Unless you hit a gold mine up front, you'll have to roll up your sleeves and work at it. If you don't, you're going to have a tough time."

Capuano says he's committed to doing the work to make his Snap Fitness centers a success and add more of them if the locations and timing are right.

"We have more of a neighborhood atmosphere than what people expect from a fitness center," he says. "We want to make sure we're an asset to the community and not just a gym."

Capuano feels he found the right franchising company in Snap Fitness, which has 1,800 locations across the country and is looking to expand abroad.

"It's important to find a franchise that reflects your personal values and principles," he says. "The franchisor and franchisee are extensions of each other so there has to be mutual trust and respect."

Jeff Bell is a freelance writer.