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Franchising a Slow Go for Mover

NorthStar Moving Co. has chosen the slow route of franchising to expand its brand, but it has proven a longer haul than expected. At 22 years old, the Chatsworth company has a reputation as a do-what-it-takes mover with earth-friendly and pet-friendly policies catering to the rich and famous as well as regular folks. NorthStar wants to protect its reputation and the company’s roughly 8,000 customers at all costs, but losing control over the brand can be the big risk in franchising. To prevent that, NorthStar has spent two years and hundreds of thousands of dollars to award its first two franchisees – out of more than 25 people who started the application process. The company’s first franchise is scheduled to open at a yet undetermined location in Orange County next month. The process has been way more complex, costly and time-consuming than anticipated, said co-founder and Chief Executive Ram Katalan. “I thought it was so easy,” Katalan said. He assumed employees from his or other moving companies would quickly sign on, be easily and quickly trained and open new locations. But it turned out to be more complex. “The thing about franchising is it’s so complicated, and so expensive to put together. But we believe it will be absolutely worth it.” Craig Everett, assistant professor at Pepperdine University’s Graziadio School of Business and Management, said while franchising is less risky and less costly for companies than organic growth or growth by acquisition, it’s a lot slower. And the complexity of putting together the franchise package – including audits of financial records and documenting every policy and procedure so the new business is a turnkey operation – presents a big challenge. “From a legal standpoint, (putting together the) franchise disclosure documents – the agreement – that’s huge,” Everett said. “If you’re opening up your own business, you can wing it. If it’s a franchise, you can’t do that. The first (franchise business) is probably a disaster, and will not turn out the way you want. It’s complicated.” Moving up NorthStar has carved out a profitable niche in the moving industry by focusing on celebrities. Its client roster includes names such as Angelina Jolie, basketball star Derek Fisher, the Jonas Brothers and even the J. Paul Getty Museum. The company also markets its eco-luxury moving practices – biodiesel trucks and reusable and recyclable boxes and packing supplies – and promotes a willingness to go beyond the ordinary with special services such as pet kenneling during a move, moving on short notice and doing state-to-state moves. For celebrities, NorthStar has implemented creative ways to avoid the paparazzi – such as driving decoy trucks. Katalan says these all are part of its mantra and philosophy to provide a stress-free experience. “If everything is easy and not difficult, there’s only that much you can shine on,” he said. “But if things are complicated and tough and complex, and we come in and do our jobs right – the moving part, and the behaving professionally part, and we also do a good job on the stress-free part of it – clients really appreciate it, and because of that, we have clients for life.” That’s branding, and for franchisors, the brand is the most valuable asset, according to the International Franchise Association in Washington, D. C. When a company decides to franchise, it is essentially putting its brand into another operator’s hands. Consumers decide whether or not they will pay for a brand’s products or services based not on who runs the business, but on what they know, or what they think they know, about the brand, the association said. Protecting the NorthStar brand has consumed Katalan while selecting franchisee candidates. Katalan and his internal team spend several days interviewing, reviewing and considering each potential candidate. They put the candidates through a two-week training process with the goal of developing franchisees who will apply NorthStar’s principles, philosophies and procedures not just for a few days but at least 10 years – the length of the franchise contract, Katalan said. And that relationship could go longer with extension options. “We’re being very, very selective, because when considering going into franchising, there’s always the opportunity for a compromise on quality,” Katalan said. “Our main goal is not to have a lot of franchisees, but for everyone that we deal with to be like-minded – to care about their (employee) team, and customers and provide the same customer experience. You can’t really fire someone once they’re a franchisee, so we have to find someone who is really aligned with our philosophy.” Everett at Pepperdine noted that the potential risk of losing control when a company franchises its brand is one of the business model’s disadvantages. “If they are breaking policy, and you ask them to change, and they don’t, you can really only take legal action,” Everett said. Franchising is also slower than the other growth vehicles, Everett said, because the franchisor can’t include the franchisees’ revenues with their own revenue, and can only include the royalty fees, which are usually around 5 percent of a franchisee’s revenue, he added. For NorthStar, it will be 8 percent paid monthly. The typical calculation is that a franchisor usually has to open 20 franchised outlets to equal the revenue from one company-owned location, Everett said. However, while the royalty fee may not count for a significant portion of a franchisor’s revenue, it’s still revenue with no expense, and lacking the hassle of running the business, Everett said. “There’s no capital investment, just strictly profit, so profitability is good under that model,” he said. But preparing financial information and operating procedures for the first franchise has proven costly for NorthStar. The company has hired external accountants to do several financial audits, which will have to be done each year going forward. It had to hire lawyers who specialized in franchising to prepare financial disclosure documents, and to subsequently customize them for each of the 14 states, including California, that mandate franchisors submit disclosure documents to regulators. It also hired a franchise consultant to walk through the process, Katalan said, although finding a mentor in a business owner whose company franchised its brand proved much more effective. Finally, NorthStar had to develop formal procedures and policies and write operation manuals for every aspect of its business, as well as set up a call station and develop a marketing strategy for the new franchisee. “It took us years to set up those platforms.,” Katalan said. “We had some procedures and manuals (already), but it’s completely different to have it done for your own company rather than having to set it up for someone outside the industry and company. It just brings it to a whole other level.” First franchise Fred Farooqi was selected as NorthStar’s first franchisee and will open the franchise in June, if all goes as planned. He has worked at NorthStar for nearly a year, and in that time, his leadership and communication skills led to his promotion into a supervisory role, and caught Katalan’s eye. Farooqi said the franchise idea appealed to him because the company has become successful for 22 years operating with a proven system of how it assigns teams and gets the job done. “Everything falls into place, and nothing is ever forced,” Farooqi said. “I’m the one who sees how much money this business brings in.” Katalan approached Farooqi because of his entrepreneurial spirit and love of customers and co-workers, he said. “He has people work with him instead of against him; and he sees the value (of a franchise) and sees the end game,” Katalan said. “Some people have been here for years, and I offered it to him. It’s absolutely going to change his life in a big way, and I believe he’s ready for it.” The new franchise won’t be cheap. The initial investment of $150,000 to about $180,500 includes the one-time $50,000 franchise fee, insurance deposits, initial lease payments and security deposits for two 26-foot long trucks and an office, plus other startup costs and training. The company will provide the marketing support and assign the jobs. NorthStar has registered as a franchisor with lenders that provide Small Business Administration loans to help franchisees with that hefty initial investment. That is another advantage a franchise model provides, Everett said. Most lenders require two years of profitability to approve commercial loans. Most new business owners can’t get them, but an established franchisor with a minimum two years of profitability that also knows the demographics of the anticipated franchisee location usually enables the franchisee to get a loan, Everett said. NorthStar says it prefers a slow move with the right franchisees rather than one that is quick and on a large scale that puts its valuable brand at risk. “Obviously, we’d like to go quickly, but it’s a lot more important to do it well,” Katalan said. “We want to make sure that every single franchisee is profitable and enjoys what we do.”

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