Lawn & Landscape Takes A Look At Franchising

It’s a challenge that has become increasingly difficult over the last 10 years as franchising has enjoyed tremendous growth across a broad spectrum of business types. In particular, service industries have developed into very attractive franchise opportunities for national companies because of the market to market variations so common among service customers in different areas of the country and franchisees ability to stay on top of the customers in their local market.

“The franchise industry is going through a second boom phase,” recognized Mark Siebert, president, Francorp, Olympia Fields, Ill., an organization focused on franchisor consulting. “The recent growth has been unparalleled since the late 1960s.”

The numbers would seem to back up Siebert’s claim. According to the International Franchise Association, Washington, D.C., a new franchise opens its doors every eight minutes of every business day. Studies by Arthur Anderson & Company and the U.S. Small Business Administration have found success rates of 86 percent for franchise operations after five years compared to 38 percent independent businesses after six years. In addition, a recent Gallup survey found that approximately 64 percent of franchisees indicated they would be less successful if they went into the same business independently. Other studies, however, have found little conclusive evidence that franchisees enjoy any more success than independent businesses.

This growth has also yielded an expansion in the number of industries served by franchising. Siebert noted that a decade ago, approximately 40 percent of franchises were restaurants. “Today, that number is down to 20 percent, and the number of franchises in service industries has doubled from 12 to 24 percent,” he noted.

The number of franchisees in the green industry is also growing, based on information available on six of the companies. From 1994 to 1996, the number of franchises these six companies had operating grew 14.8 percent, from 453 to 520.

What does this mean for the green industry? Clearly, franchises play a major role in the industry, particularly on the lawn care side with players such as Lawn Doctor, Holmdel, N.J., Liqui-Green, Peoria, Ill., and The Weed Man, Mississagua, Ontario. In an increasingly competitive industry, does the franchise model work for everyone? If not, what type of person is most likely to enjoy success as a franchisee, and at what cost?

FIT THE MODEL. Franchise companies want to grow their organizations, but their ability to sell franchises is often dependent on the success their current franchisees are having. In addition, franchisors are required by law to disclose any problems, such as franchisee failure or lawsuits, to prospective franchisees in documents called Uniform Franchise Offering Circulars. This forces franchisors to be very selective in who they license to operate under their system. Most franchisors, in fact, claim to sell just one franchise for every 100 potential franchisees they talk to.

The key concern for most franchisors is a person’s willingness to operate under clearly defined guidelines with less room for innovation or system development than is offered the independent operator.

“For someone who is truly independent and who is not accustomed to working with some else’s systems, franchising probably isn’t right for them,” admitted Barry Matthews, vice president of franchise operations and franchise development, Spring-Green Lawn Care, Plainfield, Ill. “Franchising is right for the person who sees a model for success and wants to mirror that success by following that model.”

“People who are true entrepreneurs don’t tend to make good franchisees because they like tinkering with the rules and are always changing their systems looking for a better way to do business,” added Siebert.

Historically, new lawn care franchisees have tended to have little or no previous experience in the industry when awarded a franchise. That seems to be changing, however, as the industry consolidates and becomes more competitive and as increased regulatory pressure adds complicated licensing requirements for individuals to apply pesticide products.

“Five years ago, we were awarding franchises to people just getting started in lawn care,” observed Roger Albrecht, director of franchise development, Nitro-Green, At-lanta, Ga. “But now, 90 percent of our new franchisees were already in the industry.”

Albrecht attributed part of this switch to a change in Nitro-Green’s marketing of franchises. “The licensing requirements for pesticide use block us from putting so many people to work,” he said.

Matthews noted that increased compe-tition within the industry should continue to increase interest in converting to a franchise system for some owner operators. “Some independent operators may decide to try to strengthen their operations by purchasing a franchise and enjoying some of the benefits in areas like computer technology, marketing resources and purchasing power that these larger companies have,” he said.

This trend isn’t true for all companies, however. “Ninety-eight percent of our franchisees have no previous lawn care experience, and 90 percent have never been in an entrepreneurial role before,” noted Ed Reid, franchise sales director, Lawn Doctor.

“We tend to avoid conversions, if possible, because they come into our system with their own beliefs on how to run the business,” agreed Michael Kernaghan, vice president, The Weed Man. “If we can work with someone who is business savvy and has administrative skills, we can indoctrinate them into our philosophy and culture without too much second guessing.”

Ann Dugan, director of the small business development center at the University of Pittsburgh’s Joseph M. Katz Graduate School of Business, Pittsburgh, Pa., pointed out one additional challenge franchisors encounter with conversions. “Franchisees that convert from the independent operator model are more likely to be unhappy as franchisees because they’ve been in business for themselves for awhile and they have high expectations of major changes,” she said. “Otherwise, they would’ve remained independent.

“In terms of success, however, I would definitely say the conversion is much more likely to be successful because they already understand the industry,” Dugan added.

INSTANT EXPERIENCE. The primary benefit for a new franchisee is the access to the franchisor’s operating system, which has been developed through years of field testing in the company’s other franchises.

“A good franchise organization provides an operating system that an independent operator would have to develop alone otherwise,” recognized Matthews, who noted that such a system includes information on everything from diagnosing turfgrass problems to managing accounts payable.

“Because of our resources as a corporation, we’ve got access to people who are experts in a variety of areas, and that allows us to handle everything from A-to-Z,” agreed Jim Miller, director of franchising, Scotts Lawn Service, Marysville, Ohio. “The independent operator doesn’t have nearly as much expertise at his or her disposal.”

“We cover everything in our systems, not just what a potential franchisee might first consider, which is how to make a good lawn application,” added Matthews, noting that Spring-Green includes newsletters, regional meetings and employee training sessions to deliver this support.

“Being a part of a franchise system puts smaller businesses on a very professional level as far as their image, uniforms, vehicles and product consistency,” explained Albrecht. “They appear to be a much larger organization than they are.”

“When a franchise opens its doors on day one, it will already have professional marketing pieces and trained personnel in place,” agreed Blake Smith, president, Christmas Décor, a Lubbock, Texas-based holiday decorating franchising company marketed heavily to green industry firms. “Think of the difference that can make for a brand new business trying to establish itself in a market. The mistakes a lot of independent contractors make in those first few years can really set their businesses back.”

Different franchisors include different support mechanisms within their operating system, depending on the franchisees’ needs. For example, some companies have developed proprietary business management software that all of their franchisees use, and others have an Intranet that provides franchisees with access to training materials and other corporate resources via computer.

Franchisees also benefit from franchise-wide benchmarking derived from their performance reports. “Every month we perform an objective comparison of each franchisee’s direct costs, indirect costs, equipment overhead and administrative overhead against all of the other franchises to see if they’re operating the way they should be,” explained Tom Oyler, president of the industry’s only maintenance franchise organization, U.S. Lawns, Orlando, Fla.

In addition to a proven operating system, franchisees will have the power of a more recognizable brand name.

“Most of the people interested in franchising are people with strengths in areas other than sales, so they are looking for help acquiring customers,” noted Miller, who will be able to offer franchisees access to what is arguably the strongest brand name in the industry once Scotts completes the final assimilation and regulation steps from its acquisition of Emerald Green Lawn Care.

“The presence of a strong brand name is the first thing I would look for if I was interested in becoming a franchisee,” asserted Mark Bucher, director of operations, FranData Corp., Washington, D.C., an organization specializing in compiling research on the franchising industry. “If that brand is lacking with a company, there needs to be other reasons why I would buy from it, such as stronger support.”

Lawn Doctor certainly has one of the strongest brands among lawn care companies because of its presence in 35 states and its recognizable green thumb logo. “It would be a real challenge for an independent operator to get the marketing exposure our franchisees have because we’re on television and the radio and we’re buying direct mail materials at less than 5 cents apiece in color that other companies can’t get at that price in black-and-white,” acknowledged Reid.

PAYING THE PRICE. Sacrificing some independence isn’t the only price franchisees pay to be part of a larger organization. Initial fees to purchase a franchise range from $13,000 to $80,000, and franchisees are required to pay the franchisor royalty fees of approximately 6 to 10 percent of gross revenues. (see sidebar on page 36) The initial fee varies based on the market territory being awarded and the components of the package, which may include computers, vehicles, products and other materials. The royalty fees are generally set up on a sliding scale that is inversely related to the franchisee’s revenues so that as revenues increase the royalty percent decreases.

Although the initial fee may seem daunting to prospective franchisees, Reid claimed that it is not a significant revenue source for the franchisors. “Approximately 90 percent of our corporate revenue comes from the royalty fees, so we only make money when our franchisees make money,” he pointed out.

“Most franchisees can look to recover their initial investment in three to four years,” maintained Kernaghan, “but that’s without any plans for aggressive growth or expansion into new territories.”

It’s that royalty fee, however, that represents a major hurdle to be cleared in prospective franchisees’ minds. “We have to get the franchisee out of the mentality of, ‘I’m paying this royalty fee, so what have you done for me lately,’” asserted Albrecht. “I can’t break that fee down dollar for dollar to show them the actual value for that fee.

“People get involved in a franchise system for two reasons though – the operating system and the brand name,” Albrecht continued. “Down the road, those two things will allow them to be making more money. That’s what they’re paying for.”

While the majority of franchisees pay royalties as a percent of gross sales, The Weed Man assesses its royalties with a flat rate charged per production truck used by the franchisee. “It’s much easier for us to count trucks than to audit books, and it’s also a motivational tool encouraging our franchisees to get the most productivity out of each truck,” explained Kernaghan.

“In the best franchise systems, the increased purchasing power and advantages of being part of a larger organization more than offset any royalties paid,” agreed Siebert. “What a prospective franchisee has to ask him or herself is, ‘Am I getting value for what I’m paying?’ Paying 10 percent in one system can be a better value than paying 4 percent in another based on the support and resources made available by the franchisor.

“Another way to look at the royalty fee is for a franchisee to figure out how much time and money would be spent to have the same resources and services provided by the fran-chisor if that franchisee was actually an independent operator,” Siebert continued.

Dugan agreed that prospective franchisees should take a long, hard look at the value they would receive in return for royalty payments.

“An accounting system is helpful to have, but that can also be provided by hiring a bookkeeper,” she explained. “An 8 to 10 percent royalty is a lot of money, and there needs to be value returned for it that the business couldn’t get otherwise.”

“The assembling of net worth is the piece of the puzzle that a lot of potential franchisees don’t think about when they’re looking at purchasing a territory,” Oyler noted. “If I decide to sell my business, I want to find another vehicle where my money will compound as rapidly as it did in my company. Franchising lets the owner operator retain those returns and build net worth inside the company.”

Kernaghan cautioned that not all franchise systems offer the same investment potential. “Different franchisors position themselves differently – some are income replacement setups, and some help owners build equity as the frachisee puts effort into the company,” he explained.

AN INSIDE PERSPECTIVE. Jack MacArthur knows all about being a franchisee, having owned a Lawn Doctor operation in East Brunswick, N.J., for 16 years. Previously, he had spent 20 years in real estate.

He didn’t try to paint a picture of franchising as the perfect solution. “Putting together weekly, monthly and yearly reports are a challenge, and all of the Ts have to be crossed and the Is dotted,” he noted.

But MacArthur had little trouble identifying the benefits of being a franchisee. “The marketing support was so much more extensive than a local entrepreneur could afford,” he commented. “I also had all of the technical support I needed, and the benefit of using the experiences of another franchise in some other market when I was faced with a similar decision.”

While the benefits of the franchise business model are obvious for someone such as MacArthur, who knew little to nothing about lawn care when he started, Wayne Meade was already performing lawn care services for his clients when he purchased a Spring-Green franchise in Midlotian, Va.

“We started out in maintenance, and we still have a separate mowing company,” Meade explained. “When we had the opportunity to buy the franchise, we saw that we could get some support and marketing power that we couldn’t afford on our own. We also believe that being associated with a national franchisor brings a lot more stability and security than being independent.”

As for the royalties? Meade admits they are difficult to accept at times, and he is concerned about how valuable they’ll be to his company as he becomes even more experienced. “The challenge will be after I’ve had the franchise for 10 or 15 years and I’ve figured out how everything works,” he admitted. “I think it’s going to get harder and harder to pay that royalty then.”

MacArthur, however, said he never lost sight of the value he received for his royalty payments. “That royalty fee is where our equipment came from, where our marketing efforts came from and where our support came from,” he pointed out. “Yes, it’s money, but we wouldn’t have had that name recognition or all of the customers we had without it.”

FRANCHISING THE FUTURE. While all of the individuals interviewed for this article have an obvious stake in the success of franchising, they were generally in agreement that it will represent an increasingly attractive option for the independent contractor to consider, especially as consolidation continues.

“Franchising basically provides a tuck-in strategy to the marketplace,” noted Oyler. “Some owners choose not to be acquired and decide instead to compete. In doing so, they face a large challenge because these large organizations are going to grow their businesses through acquisition and direct marketing. Their strategy will be to take business away from smaller companies.

“Our franchise model is based on the philosophy that the owner operators, which are the backbone of this industry, can run their businesses more effectively than corporate giants can,” continued Oyler. “A lot of customers want high touch service from their service providers, and big companies can’t always provide that as well as smaller companies or franchisees.”

The author is Editor of Lawn & Landscape magazine.