So why do all the stores in New Jersey malls look the same as those in Georgia? Well, there are two reasons, each having to do with a different business model. First, there are the establishments like Starbucks and Outback Steakhouse, both owned by corporations that have stores throughout the nation. But there are other operations, like Applebee’s, Cheesecake Factory, and Kumon, which have spread widely using a different approach, franchising.
Franchising is big in New Jersey, with more than 20,000 franchise establishments in the state, according to Adam Siegelheim, a Stark & Stark attorney with practices in banking and financial services, business and corporate, and franchise law. “There are very few independent-run, non-franchised retail stores,” he says and quotes a recent Price-Waterhouse study estimating that franchises contribute $40 billion to the New Jersey economy.
For a local business owner who wants to expand, says Siegelheim, franchising is a relatively inexpensive way to go. “You don’t need as much capital,” he says, because the franchisee is making the investment. Furthermore, when the franchises are being managed by owner-operators, “they are more motivated for a store to do well than if a corporation opens 10 locations, and puts a manager in each one.” Whereas a manager sees it as a 9-to-5 job, the owner is going to stay there until 10 p.m. making it work. “If you have people vested in making it work,” he says, “it’s their livelihood, their baby.”
Siegelheim adds that if businesses choose the corporate ownership route rather than franchising, they not only need to hire and train employees, but are still responsible for day-to-day operations. “With franchising,” he says, “you also train, but at that point the franchisee takes over.”
Of course, the onus is still on the franchisor to choose a qualified franchisee to run a location. “You’re only as good as your franchisees,” says Siegelheim. “You really have to do due diligence to make sure you are picking the best franchisees.”
Siegelheim speaks on “Franchising Your Business” as part of Trenton Small Business Week on Tuesday, October 17, at 8:30 a.m. at Wachovia Bank, at 32 East Front Street in Trenton. Siegelheim will explain to business owners looking to expand their businesses and increase their profits what a franchise is, which businesses are franchisable, and what the legal requirements are. For more information, call 609-989-3531.
An annual fall event, Trenton Small Business Week runs from Monday, October 16 through Thursday, October 19. It includes the fifth annual Mercer Regional Chamber Expo on Wednesday, October 18, at 9 a.m. at the Trenton Marriott and the Trenton War Memorial. There are many seminars each day, and most of them are free. Topics include selling to the government, grass roots marketing, creative negotiating for real estate, trademarks and patents, and the art of using credit. The final event of the week is the “BlackNJ Professional Mixer,” on Thursday, October 19, at 7 p.m. at Maxine’s2 Restaurant on South Warren Street.
Siegelheim emphasizes that the advantages of franchising are not just for business owners looking to expand but also for relatively inexperienced individuals who want to start their own businesses:
Startup and ongoing support. “Lots of people who have been downsized out of corporate America are looking to do something completely different,” says Siegelheim, and franchising gives them the chance to open their own businesses with a safety net. Most franchisees, it turns out, have no background in the business they are going into, and need lots of help, and the franchisor provides them with a weeks of training, an operations manual, and ongoing training and support.
With franchising, he says, “they are not starting from scratch.” The franchisor gives them “a recipe to run the business,” which includes ideas about how to most effectively advertise, hire employees, and market products and services. A franchisor’s help reaches down to the nitty-gritty level; in the restaurant business, for example, it might include how to cook meals, do the payroll, and hire a manager.
Name recognition. Possibly the biggest advantage of a franchise is the franchisor’s name. “You are not only getting the formula of how to run the business, but also a brand name to associate with,” he explains. “You can make the greatest doughnut in the world, but if a Dunkin’ Donuts opens across the street, their parking lot will be full.”
Loss of control. But there’s also a big downside to becoming a franchisee, says Siegelheim. “It can stifle your creativity and any entrepreneurial aspirations you want to fulfill.” He cautions against franchising a McDonald’s restaurant and thinking you can improve on the Big Mac. With franchising, you can’t tweak the system. “If you feel you can make a better burger,” he says, “you should open your own restaurant.”
Although franchisees are not permitted to introduce their own products, there is a role for entrepreneurial skills when franchisees own multiple locations. Multiple sites open the possibility of volume purchasing, but the different sites also provide backup for one another. If a manager is sick in one location, you can bring an assistant manager from another, or if one location is low on staff, you can bring in employees from another. .
The decision to clone. To decide whether a business is franchisable, the owner needs to ask if it is easily replicated, and if it is easy to teach others how run it. “It’s one thing if a family in business for 80 years makes the best spaghetti in town,” says Siegelheim, “but it doesn’t mean someone downsized from AT&T who never ran a restaurant can do it.” The business also must be something that is not regional or specific to one area. “The largest segment of franchises popping up respond to universal needs,” he says. Right now a hot segment is businesses that cater to children and to pets.
Businesses that decide they are ready to franchise must contend with some legal issues. Franchisors must provide prospective franchisees with a Uniform Franchise Offering Circular (UFOC). In it they must disclose the total investment necessary for the franchise; the amount of fees to be paid to the franchisor; information about the franchisor, including business experience and whether any litigation has been filed against the franchisor in the past few years; whether the company or any key employees have filed for bankruptcy; how many locations the franchisor has; how many locations have terminated or otherwise left the system in the last three years; and a copy of the company’s audited finance statements. The UFOC must be given to a prospective franchisee after the initial face-to-face meeting with the franchisor.
Fifteen states have enacted registration laws that require a franchisor to register the UFOC and get permission from the state to sell within its borders. Although New Jersey does not have this requirement, New York does, so it would make sense for any New Jersey business planning to expand in the Tri-state area to register in New York.
“There are also statutes in states that offer franchisees protection that franchisors need to be aware of,” says Siegelheim. The New Jersey Franchise Practices Act, for example, affords franchisees broader protection than they would normally get under a franchising agreement — on issues like denying renewal without good cause or attempts to prevent the transfer of a franchise from one party to another. And, of course, a potential franchisee should bring the UFOC to both an attorney and an accountant for review before signing.
Siegelheim, who grew up in East Brunswick, comes from a family of businesspeople, not lawyers. His family’s firm, started by his grandfather, produces advertising specialties like the hats with a Yankees logo provided to the first 10,000 fans at a game. Because it sells in such large quantities, Siegelheim doesn’t think the business would work well as a franchise.
But he mentions a similar business that does work as a franchise, EmbroidMe, which he describes as a “watered down version” of his family’s business — providing one or a few items to each customer as opposed to his parents’ business, which sells thousands at a time.
So why did Siegelheim decide to become a lawyer instead of joining the family business? “When I was growing up,” he says, “I was always fascinated by TV shows like LA Law, Matlock, Law and Order.” After graduating from the University of Pittsburgh in 1996, with a bachelor’s degree in political science, and from the University of Pittsburgh School of Law in 1999, Siegelheim worked for several years as a litigator, first in Paramus and then with Carroll, McNulty and Kull in Gladstone.
He then switched to corporate with Stark & Stark, which he much prefers. He says that corporate law he feels that he can help foster positive relationships rather than always being adversarial. In franchises, for example, he brings together people who can form a mutually beneficial relationship. “It’s much better to be a deal maker than a deal breaker,” he says. “When I was doing litigation, the wheels had come off the bus, and everyone was at each other’s throats.”