The risks and rewards of franchising a pizza restaurant concept
Franchising could make you a fortune or leave you in the poorhouse. You'll never know for sure until you try it.
The co-owners of Piesanos Stone Fired Pizza, including (from left) Joel Mills, Laure Young, Melissa Akey and Mike Akey, spent years perfecting their business model before venturing into the franchise game.
So you’ve got a successful pizzeria—maybe even several locations—with a winning menu and a concept that can grow. Are you ready to hit the big time and franchise your store? It’s a tough decision, one that few operators take lightly. Franchising could make you a fortune, or it could bring all of your hard work to utter ruin. The problem is, you never know for sure until you try it.
Before we explore the pros and cons of franchising, though, let’s first clarify our terms. Many people confuse chains and franchises, which are not, in fact, the same thing. In the case of a pizzeria chain, one company owns all of the locations. With a franchise, the franchisor provides a common trademarked brand and a system of operations and collects a fee and royalties from the franchisees, who own their locations. And, to ensure success, the franchisor must be prepared to exercise sufficient control to maintain consistently high brand standards across the board, at every store, in every state, no matter who owns or manages the shop.
|Friends of the Franchisor|
A Different Kind of Business
The good news is, the pizza industry is tailor-made for franchising. “Food concepts will always be the largest market in franchising, and, within the food industry, the pizza segment is obviously quite large,” explains Adrianne Bibby from the Bibby Group in Shreveport, Louisiana. To distinguish themselves, Bibby says, pizza entrepreneurs first need to develop a concept that does not exist in their target market and then perform an honest self-evaluation of their business. “Have they secured a provable, repeatable system for their concept and for profitability? And do they have the demeanor to train others in making a living?”
Jania Bailey, president of FranNet, agrees. An operator may run a few successful pizzerias, she notes, but franchising is an entirely different kind of business. She recommends a little bit of soul-searching, asking yourself some key questions. “Am I available to leave the daily operations of my business and focus 100% on franchising, or can I hire someone who is?” she asks. “Is the concept making at least an 8% to 10% profit? Is the concept a fluke, or does it have a solid track record of at least 18 to 24 months?”
After some critical analysis of your business concept, if you think you’re ready, experts say you should watch out for two major hazards. “The biggest pitfalls in franchising are an undercapitalized concept and a concept that’s not ready for the growth that franchising may bring,” Bailey says. “Many concepts have failed because they grew too quickly or weren’t properly capitalized to fund the growth.”
Paul Russo, president of the Orlando, Florida-based NYPD Pizzeria concept (nypdpizzeria.com), initially opened one pizzeria with the specific goal of franchising it once he had tested his recipes and model. Having worked in entertainment management and owned a yogurt shop franchise, he had a solid business background, but he was new to the pizza industry. “We had to learn the basics of not only franchising, but running a pizza store,” Russo recalls. “I spent several years developing the concept, and then I knew that I had to get started with another unit. At that time, people said you had to have five to 15 units to get started, but I started with two.
“A serious pitfall is spreading yourself too thin,” he adds. “For one thing, distribution costs are a major factor.” Russo also warns that, in the current economic environment, it’s very difficult to obtain loans for potential franchisees. “You have a very small pool of people who can actually get loans to build. There is a lack of confidence from lenders, from those wanting to get into the business and from consumers.”
Piesanos Stone Fired Pizza (piesanostogo.com) in Gainesville, Florida, initially found success as a small chain. After co-owner Joel Mills and his associates spent many years of hard work and research in the pizza industry, the company recently expanded into franchising. “The franchise structure will allow us to partner with other like-minded, hard-working entrepreneurs and utilize our proven model to offer them a pathway to success,” Mills says. “The realization that your business is ready for the big time comes from consistent, proven results that can be replicated.
“I would advise any potential franchisors to thoroughly test their systems and be sure they can function efficiently among multiple units,” Mills adds. “Franchising is much different than just opening additional units. The franchisee is depending on you for systems that have been proven and for supply chains that are consistent. In the end, our success depends upon our franchisees’ success.”
NYPD Pizza presently has six locations in Florida, including the Metro West store (above) in Orlando, and one location in Arkansas. The company offers two types of stores to franchisees: the Metro Unit for takeout and delivery only and the full-service Precinct Unit.
The franchisor should carefully screen potential franchisees to protect his brand’s reputation, shield himself from liability and increase his chances of success, Russo says. But choosing the best candidates can be a shot in the dark, so he meets every potential partner personally, performs a background check and makes sure the partner is financially viable. Other than that, he admits, there are few hard and fast rules. “Some of my best franchisees had no retail experience whatsoever. The person with no experience will listen the most to you. Somebody who has a lot of experience may think he can do it better,” Russo says. “At the same time, you do need to listen to your franchisees. We’ve had very knowledgeable people who gave us a lot of input and strengthened the brand—we don’t know everything. The Big Mac and Filet-O-Fish were created by McDonald’s franchisees.”
NYPD holds a four-week training session for new partners in a corporate store and has someone on hand for follow-up training in new stores during the pre- and post-opening stages. After that, the company continues to keep close tabs on its franchisees. “We send in secret shoppers, especially if we have had complaints, and conduct announced checkups periodically,” Russo says.
Consistency from one store to another is particularly important to a franchised concept. For example, most franchisors require all of their stores to use certain proprietary ingredients—such as sauce, cheese, flour mix and meats—to ensure dependable quality and taste from location to location. But they also may encourage the use of local, seasonal produce and the addition of ethnic dishes. Many franchises require a basic floor layout and select furnishings, but they may allow some flexibility in finishing touches to give each shop a mom-and-pop feel and to reflect the local culture (think Elvis-themed decor in Memphis or Buckeye souvenirs in Ohio).
|Running With the Big Dogs|
Not everyone has a marketable pizzeria concept—or even his own pizza shop. What if you’re a pizzeria employee looking to start your own franchise pizza business? Fortunately, options abound—if you’ve got plenty of money in the bank or the ability to raise the capital.
Entrepreneur.com last year offered its list of the top 10 pizza franchises as measured by factors such as financial strength, stability, growth rate, breadth, experience and start-up costs:
Small Numbers, Big Choices
To get started as a franchisor, you will first need to create a legal Franchise Disclosure Document (FDD), which states all of the information about your business and is presented to prospective franchise buyers. However, that sort of paperwork doesn’t come cheaply. “Just obtaining general counsel for the FDD and trademarking your logo can run six figures,” Russo explains. If, like Russo, you plan to handle the process by yourself, expect costs for franchising to run in the six -to seven-figure range. “I did everything hard-core,” he recalls. “I hired a franchise attorney, a contract attorney, an intellectual property attorney and a general business attorney. I hired people in-house for marketing, artwork and public relations.”
In addition to an FDD and a trademarked logo, you’ll need a business plan, a marketing plan, an operations manual and a system for screening; and, if possible, you’ll need to help find financing for potential franchisees. All of these aspects of the business call for different types of attorneys and different specialists. “If you were to engage separate entities on your own, you would need to recruit an accounting firm, franchise attorneys, a marketing firm, and someone to create your training manuals, all of whom must be thoroughly skilled in the development of franchise concepts,” Bailey observes. “This phase is one of the most critical in the life span of a franchise. One wrong step during this due diligence phase could spell legal and financial disaster in the future.”
Some choices, in fact, might at first seem like minor ones, but, over time, they can turn out to be multimillion dollar decisions—for example, determining how much to charge in royalties. “Look at the difference between 5% and 6%,” says Mark Siebert, CEO of the iFranchise Group in Homewood, Illinois. “If you do the math, with 100 franchises over 10 years, you could be looking at a $5 million mistake. And if you try to sell your franchise later for 10 times earnings, it could be a $10 million mistake.”
Many aspiring franchisors consider all of these bewildering options—and opportunities to screw up—and don’t want to risk going it alone. For them, hiring a franchise consultant makes more sense. “The first time you make a pizza, chances are it’s not your best—you are going to make mistakes,” Siebert observes. “Likewise, advice from a knowledgeable consultant can prevent fatal errors, improve your quality and structure and help you to sell more franchises to the right people.”
Limiting your liability is a good example of one of the trickier aspects of franchising. “The way in which you structure your contract and write your operations manual will have everything to do with whether you will be able to protect yourself from potential lawsuits,” Siebert points out. “Up to 27% of franchisors report litigation. A lawsuit can destroy you, so you need to make sure your operations manual, legal documents and marketing materials are bulletproof.”
In one example shared by Siebert, a franchisor dictated in its operations manual a specific type of safe that its franchisees had to use. When one franchise owner was beaten by a robber because he couldn’t open the time-lock safe, he sued the franchise and won. It’s these seemingly minor details that can spell disaster for an inexperienced franchisor.
Many would-be franchisors simply don’t have the time to attend to these small but crucial details. “A typical operations manual might take 2,000 hours to write and run four or five hundred pages,” Siebert says. “When you throw in all of the time and effort it takes to write, and you’re already running your own business at least 60 hours a week, trying to come up with even 500 hours to write a manual—you have to ask, what is your time worth?”
If you’re still determined to franchise your own concept, just be prepared to take time away—maybe permanently—from your core pizzeria business and instead concentrate on the franchise business. When Mills and his partners took the leap, they hired a group of attorneys who specialized in franchise development, but it was still a lengthy and arduous process. “We are now to the point where the paperwork has been finalized and filed and we are beginning to market Piesanos franchise opportunities,” Mills says. “Getting to this point has definitely been challenging, but we believe it was time and effort well-spent in developing efficient operational models to ensure the success of our future franchise partners.”