Drive through any U.S. city or town of size and you'll see them: McDonald's, Burger King, and Subway, Pro-Cuts and Supercuts, Jiffy Lube, Re/Max, The UPS Store. Franchises one and all. Franchising sales in the U.S. alone exceeded $1 trillion in 2000, with more than half a million business units generating some 8 million jobs, the International Franchise Association reports. Franchising will soon account for more than half of all U.S. retail sales, the organization claims.
Dealership vs. Franchise Home improvement contractors and the general public tend to lump franchises and dealerships together, but they're not the same. A franchise involves a particular legal form that spells out the responsibilities and obligations between parties and is regulated by the U.S. Federal Trade Commission (FTC). Dealerships are more informal arrangements, ranging from verbal agreements to more structured written forms, and are not regulated by the FTC.
“A franchise tends to be a strategic partnership,” explains Doug Dwyer, president of the DreamMaker Bath & Kitchen by Worldwide remodeling franchise, in Waco, Texas. A dealership, he says, is a company selling a product to build a brand name for that product. “With a franchise, you're looking at a more fully integrated business system. It's not just an agreement to represent a product. [The franchisee] will have an asset at the end of the day.”
Franchises involve a “deeper relationship” between the parties, says Charlie Chase, president and co-founder of the CertaPro Painters franchise. Where dealerships are a product distribution strategy, “franchisees are more deeply related to the franchisor because of the complexity of the delivery system,” he says.
Unlike franchises, dealerships are usually “unilateral,” Chuck Anton, CEO of Lifetyme Exteriors, an Allston, Mass., company offering dealerships for its spray-on coatings, points out. “You can't be charged a fee for a territory [as with a franchise] and all you have to do is stop buying products and you're no longer a dealer.”
Dealerships Prevail Franchises are plentiful in some industries, but in home improvement, dealerships prevail. In part that's due to the nature of the business. Dealerships are typically short-term arrangements — 1 to 2 years versus 5 to 10 years for a franchise —which suits the home improvement contractor who is forever in search of a hot new product, such as gutter protection.
In addition, Anton points out, “a replacement contractor normally carries more than one item — windows and siding, for instance. There isn't one company that would sell you a business for both those items.”
Established home improvement contractors sometimes shy away from franchises for other reasons. Bob Dillon, president of Unique Window & Door, Indianapolis, rejected several in his effort to complement his successful window and siding company. What bothered him, Dillon says, was “the control.” One franchisor, for instance, wanted to change the way Unique tracks jobs. Another wanted ownership of the franchise customer list.
In the end, Dillon went with a dealership that gave him much of what a franchise promises — training, quality control, and enhanced productivity.
On a Growth Track Some argue that shrinking sales margins, increased contractor specialization, and the growing power of brand create a natural market for franchising among home improvement companies.
One factor that would appeal to owners is product exclusivity, according to Jerry Beyers, founder and president of ABC Seamless, headquartered in Fargo, N.D., with 130 steel siding franchises in 43 states. “Many contractors are sales driven, but their products haven't kept up with where they need to be in sales,” Beyers says. “Margins get tighter on the product everyone else has.” An exclusive product sets the contractor apart and allows for margin improvement.
Savvy marketing and the power of brand draw others. “Most prospective franchisees realize that they have to have marketing to be successful,” says Pete Wiggins, vice president of franchise development for Archadeck, which has 92 deck-building franchises.
Many contractors that DreamMaker president Dwyer talks to are looking for “strong margins and quality of life.” Often they work long hours, frequently without sufficient reward.
“Many think they have a system, but it isn't in writing and there are a lot of pieces missing,” Dwyer says, pointing out that the “written procedures and integrated systems” of a franchise are what's needed to get a business on a growth track.
Why Re-Invent the Wheel? Franchises can get you in business quickly. Franchisors offer business, marketing, and sometimes production systems, with proven effectiveness. Why re-invent the wheel?
“Franchisors tend to talk in terms of three key things: brand and brand awareness, their operating system, and the ongoing training and support they provide,” Wiggins says.
But franchises can differ significantly in the skills that potential franchisees need to run them successfully.
“If you have an up-and-running business, then that kind of franchise is going to be different than if you're just starting out,” Dillon says. “You don't need the same systems.”
Chase points out that there are generally two types of people who get into franchising. One group has an existing, perhaps related, business in the industry and “wants a brand and a system to accelerate growth and profitability.” The other likes the idea of the business and wants to get in —often for a career change — but has no experience.
A Four Seasons Sunrooms franchise, for example, is geared to someone who already has construction knowledge, says Tony Russo, director of franchise compliance and vice president of business development for the company. “We take people in the remodeling industry who know construction and know how to pull a building permit, who are licensed and insured, and who know how to generate and run leads,” he says. “It's owner-operated. We don't expect a dentist to own 20 of our franchises.”
An ABC Seamless franchise, on the other hand, is suitable for “mom and pop,” Beyers says. “People who want to have the purchasing power and the other benefits of someone big without being that big person themselves.”
Franchises aren't for free, however, and they can be risky. They require an up-front fee and a sometimes considerable investment to get started, ongoing royalties on sales, and a long-term commitment — often 10 years. Because of the complex relationship between franchisor and franchisee, they're governed by the U.S. Federal Trade Commission franchising regulation rule (The Rule), as well as by laws in numerous states. Under The Rule, franchisors are obligated to provide potential franchisees with broad disclosure about the business (see “Franchise Regulation”) well in advance of a contract being signed.