Chain Leader

David Farkas

Dave’s Dispatch: Laying the Groundwork
June 1, 2007

I like to talk to people who have been part of fast-growing restaurant companies. Success after all offers nearly as many lessons as failure. R. Wallace Hite was a Sonic executive during its go-go years. The experience, he insists, taught him a lot about franchising.

He’s convinced franchising is the best way for a young company to get bigger but only if—and here’s the catch—it doesn’t leap into franchising right away. Hite, who spent 30-plus years in the trenches before turning into an investment banker, was kind enough recently to tell me why:

“Franchising is still the very best method of growth because it is with owners and it comes from their capital. Franchising provides an unencumbered and noncapital-based income stream, which carries the highest valuation multiple. Because of that, many companies enter franchising prematurely.

“Let me explain. First a franchisor has a fiduciary responsibility to be financially strong because they’re making a commitment to the franchisee that they will provide and continue to provide the services that are spelled out in the franchise agreement.

“Second, in order to be responsible, a franchisor protects the brand by who it sells a franchise to. A bad franchisee can impair the value and future of the brand.

“Third, if an emerging brand builds a base of company-owned restaurants that prove the concept and provide the necessary monies for stability, then the brand can be selective about its franchise partners. Too many companies become financially addicted to area-development fees and are forced to make poor franchisee decisions.

“A historical view of franchising reveals that older franchisors build a base of company restaurants. These older companies have ups and downs but in large manner provide a stable base for their franchise partners.”

Posted by David Farkas on June 1, 2007 | Comments (0)