2013 Michigan Franchise Report

The economic recession slowed the franchise industry, both in Michigan and across the nation, but the sector still added more jobs than any other business category since 2008. Now the industry is poised to make more progress.
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Lori Lynn Calcaterra is the owner and operator of McDonald’s in Mount Clemens and Macomb Township. Photograph by Josh Scott

As young boys in Grand Blanc, the Chinonis brothers watched as their family business, YaYa’s Flame Broiled Chicken, turned from a startup restaurant in 1987 into a growing international franchise. Although Tom Chinonis went on to practice law, his brother, Dennis Chinonis, continued with the family business. In 2005, the siblings had the idea of opening a fast, casual-formatted restaurant — a recent trend in the restaurant industry — that served healthier Greek food.

They hit the road to see if their concept was original enough to start their own successful business. “We literally went around the country and every time we saw a Greek restaurant, not a sit-down restaurant, we went and (observed how the restaurant was run). We didn’t see anything like (our idea),” says Tom, who, in quick order, gave notice to his law firm, while Dennis left YaYa’s International Inc. in Flint, which has 16 outlets spread between Michigan, Florida, and Canada.

Securing their first location at Big Beaver and Crooks in Troy, the pair launched Kalamata Greek Grill in 2008 — not the best time to open a restaurant, given the global economic crisis. “We went in on this together with the whole plan of growing a large-scale chain restaurant,” Tom says. “After getting things worked out from there, that’s when we got a base for the foundation to begin the plans for expansion.”

Based on numbers from IHS Global Insight, along with the International Franchise Association in Washington, D.C., franchises create jobs faster than any other business sector. Even when the economic crisis hit in 2008, franchise hiring kept humming, albeit at a little slower pace, but still enough to outpace the national rate of employment. Ultimately, if indirect activity is included, franchising represents one out of eight jobs in the United States.

In fact, the number of franchise establishments, franchise output, and GDP contribution by franchises have all increased since 2010, and the numbers are expected to grow even higher in the coming years, according to the association. Currently, franchise establishments make up approximately 4 percent of businesses in the country.

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Mark Cory, a business consultant and franchisee of the Michigan branch of FranNet in Grosse Pointe — a company that specializes in helping to match people with franchises that best fit their entrepreneurial aspirations — says the industry has grown and changed since he joined the company in 2002.

“When I first started, it was primarily people who had lost a job and were kind of looking for more of a fallback position as opposed to going back to corporate America,” he says. “We still see a lot of that, but there are a lot more people now who are considering it for different reasons.” He says younger people have joined the industry, as well as people looking for additional retirement security and those affected by the lack of growth in the stock market.

“They’re looking at it more as an investment for the future as opposed to a day-to-day paycheck,” Cory adds.

Starting his business in 2008, Allie Mallad was determined to succeed despite the troubled economy. A wellness advocate, Mallad combined aspects of physical and mental health to open Massage Green International Franchise Corp. in Farmington Hills, which provides a luxurious spa concept at affordable prices. “To create a business that really is a luxury in a market that is economically challenged was an interesting part of our success,” Mallad says. “My focus was to make it a luxury that everyone could afford. We were able to do that, believe it or not, even though Michigan was one of the most hard-hit economical states. We’ve been successful.”

 

Massage Green, with more than 30 locations spread across five states, and Kalamata Greek Grill, with restaurants in Troy and Royal Oak, each entered the franchise industry with experience behind them. Prior to opening Massage Green, Mallad was a franchisee for 10 different national chains, including Little Caesars in Detroit, where he was the largest franchisee in the world for the pizza company. For the Chinonis brothers, watching their family business develop and grow led them to understand how to both own a restaurant and operate a successful business.

“It’s one thing to have knowledge to start a restaurant, which having the family business, there is that part, but then there is also the knowledge of having a business — how to set it up so it can be done in a way that you get more locations,” Tom Chinonis says.

Although both Kalamata locations are company-owned, franchising is right around the corner. “The most important part of the entire process for us, before we launched the idea of selling franchises, was ensuring that our training procedures were intact,” Tom says. “We know that the back-of-the-house system is built and it’s rock-solid, but that doesn’t mean anything if someone doesn’t know how to use it. The big hurdle to overcome, if you will, is preparing the franchise disclosure document.”

David Steinberg, an attorney at Jaffe Raitt Heuer and Weiss in Southfield who specializes in franchise law, says a disclosure document should spell out exactly what a potential franchisee is signing up for.

“If you want to become a Little Caesars franchisee, what is expected of you, what it is going to cost you, how much it will cost to open a store, what kind of royalty you have to pay — a variety of topics are described in plain English in the franchise disclosure document,” he says. “Then, based on the disclosure document, you sign what’s called the franchise agreement, which is the actual contract you have with Little Caesars, or whomever you’re going to be a franchisee for, which is the enforceable agreement.”

Still, there are no guarantees. Not every franchise will be successful simply because the business is attached to a well-known name.

“The relationship is one of contract — some franchises give a lot of help and a lot of assistance, and some of them don’t. You have to be very careful of what your documents say,” Steinberg says. “I mean, generally, there’s obviously a training component because the franchisor wants their franchisee to be successful, so just saying, ‘Here, give me money, good luck,’ doesn’t get them very far.”

It’s important to find a franchise not only with an effective training process, but also a business that’s timeless and recession-proof.

“Stable industries seem to have a better success rate, (and) they’re not necessarily the flashiest businesses,” Cory says. “Things like basic family hair care, in-home care for seniors — those are the types of businesses that can thrive in any type of economy.”

 

William H. Van Huis, CEO of SWAT Environmental based in Lansing, is in the process of converting what had been a franchisor-dominated operation into a traditional franchise business. In recent months, SWAT (Soil, Water, and Air Technologies) has converted 60 percent of its annual revenue to franchisees. Covering 25 states, the company offers radon mitigation services to residential and commercial building owners.

“This is an industry still in its infancy,” says Van Huis, who has held executive positions at other franchisors such as Two Men and a Truck, Ziebart, and American Laser Centers. “We’ve installed a lot of radon-detection equipment, and now we’re starting to offer more services. When we go into a basement, we might notice mold or water damage. By offering a menu of environmental services, we see a lot of growth.”

With more than 126 million residential units in the country, and millions of commercial buildings, the radon industry — along with the energy-efficient home improvement market — is expected to top $50 billion in sales this year, up from $38.3 billion in 2007. An investment in a SWAT franchise, including an initial fee of $50,000, can range from $77,800 to $127,500, based on training, rent, equipment, inventory, insurance, and other costs. The company plans to add 10 franchise owners by the end of the year.

According to Steinberg, on the surface it’s hard to tell what franchises are doing well. “We see a lot successful businesses, but that doesn’t mean they’re selling franchises like hotcakes. It may depend. There may be a reason why they’re only selling a few here and there; that doesn’t mean they’re not successful,” he says.

Franchising, however, is not for everyone. “Franchise systems are so much more successful than if you open up an independent business — you have name recognition, a trademark, a trade name. But you’re also paying for a system that’s supposed to be proven. The chances of success are so much greater than if you just tried to do something totally on your own,” Steinberg says.

Mallad looks for a certain mentality in franchisees for Massage Green. “I’ve always said that attitude is the mother of skill. I think we can teach people skill. But I think it’s difficult to teach people to have the right attitude,” he says. “So we are looking for energetic people who believe in health and wellness that want to pay it forward and show people how important it is to incorporate massage therapy into their lifestyle.”

Randy Thomas, president and CEO of InSite Commercial, a full-service commercial brokerage firm in Commerce Township, says the franchise industry ebbs and flows based on the availability of financing, corporate buyouts, and consumer buying trends.

 

“From 2000 to 2006, the franchise industry was doing well, and we helped a number of franchisees find high-volume traffic corridors, but things started to slow down in 2007,” he says. “Last year, the industry started picking up again, and we’ve seen a lot of food concepts like yogurt outlets and barbecue restaurants. We haven’t seen too much of the hard goods. There’s a lot of opportunity for growth, including in downtown Detroit.”

For example, Diversified Restaurant Holdings Inc., a Southfield-based franchisee operating 35 Buffalo Wild Wings outlets, recently branched out and opened the Bagger Dave’s Legendary Burger Tavern chain in Michigan and Missouri. Earlier this year, the company opened a Buffalo Wild Wings near Greektown, while a neighboring Bagger Dave’s is expected to open shortly.

Another locally based restaurant, Sweet Lorraine’s Café and Bar in Southfield, Livonia, and Lahaska, Pa., is beginning to franchise, as well, with Sweet Lorraine’s Mac n’ Cheez! Kitchen outlets open at the Somerset Collection in Troy and Great Lakes Crossing Outlets in Auburn Hills. Olga’s Kitchen, based in Troy, will soon offer franchise opportunities, as well.

Cory, of FranNet, having guided numerous franchisees, says beyond representing a large investment with major risk, the largest downside of franchising is the amount of creativity and control a franchisee loses to the franchisor.

“Franchising can be a desirable alternative (to opening your own business), but it’s not the perfect fit for everyone because they’re going to be required to follow someone else’s system,” Cory says. “So for those people who think they have a better way of operating a particular business, there’s no sense in them getting involved with a franchise and paying for a franchise system if they’re not going to follow it.”

According to Josh Merin, senior manager of research and strategic initiatives at the International Franchise Association, franchised businesses have a very high continuity rate.

“Over the last 20 years, the renewal rate has been 90 percent to 95 percent across franchising,” he says. “Alternately phrased, less than 10 percent of franchise businesses do not opt to continue when they come up for renewal.” db

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