One of the chief validations of the pandemic era is around diversification. Franchisees who have been riding the ongoing wave of diversification across concepts and business verticals fared better than average and continue to fare better as volatility continues.
Diversification has long been great advice. Don’t put all your stock in Enron. Don’t give your whole nest egg to some guy named Bernie Madoff. And if you’re collecting actual eggs, bring a couple baskets.
Striking out on a diversification play is smart, but savvy operators warn that it’s not as easy as adding a new LLC and putting up another sign. Franchise owners who want to buy into a new industry or build up a new segment can benefit from some guidelines.
Al Bhakta, principal at multi-concept operator and private equity investor CMG Companies, has added a few industries in his day. The latest was a massive acquisition of 99 Rent-A-Center locations with a 10-location development deal on top of that.
The deal made him the brand’s largest franchisee in one fell swoop—a big bet on a new industry and concept for CMG. He also oversees more than 300 restaurants, 90 separate retail outlets and eight hotels. He advised owners spend a lot time going deep on what makes the new industry tick.
“The learning curve of something that you haven’t done before can initially be daunting. The widget is different and understanding the need for the widget is key. Learning the key drivers of the industry, acronyms of the industry and the financial metrics of the industry is where we spent a good bulk of our time in the beginning,” said Bhakta.
Starting with the fundamentals of incorporation, financing and building a team, many operators see a little crossover, but focus is critical. While a bookkeeper, real estate leader or maybe basic human resources roles can work across industries, managers and leaders within a business segment benefit from true focus.
“We keep all of our business units completely separate. We tried the shared services model in the past and were not successful at it, to be frank,” said Bhakta, whose company is based in Plano, Texas.
“Each brand and each portfolio, regardless of industry, are separately and independently funded and operated,” he continued. “We feel this allows for the most focus and provides the required attention needed for that particular portfolio to thrive.”
Adding a ‘hedge’
That, of course, means getting the right people in the right seats, a monumental feat in today’s labor environment.
Vik Patel, who expanded into Rent-A-Center and also Take 5 Oil Change, has been working to diversify his company, Florida-based Purple Square Management, for a few years now. He’s on track to hit 230 locations by the end of 2021 across the service brands as well as Popeyes, Dunkin’, Baskin-Robbins, The Brass Tap and RimTyme.
“We decided that our portfolio consisted of 100 percent food and beverage. We like that business, but we didn’t want to stay at 100 percent,” said Patel. “Our idea was to not stop growing in food, but to make sure we had some kind of hedge in our portfolio.”
Both Patel and Bhakta said hiring brand and industry experts was exceptionally important to keep things going at the acquired block of locations and push further.
“It was an intense transition because it’s a complete different business, but we were able to hire one of their executives,” said Patel of adding someone with Rent-A-Center experience. “That really helped with the transition. Outside the customer service, there’s not many similarities. Having someone that is well versed in that side and mesh business philosophies, it ended up being a perfect fit. Not long after that, we were looking to add more stores.”
Scale helps there; giving a brand operator a slice of the upside and getting them excited about the entrepreneurial challenge can supercharge an acquisition or new growth outlet.
Bhakta said bringing in partners and operational leaders well ahead of the transaction can speed things up even further. Those experts are able to start building out their ideal infrastructure and ferret out key opportunities that industry outsiders might not see in due diligence materials or out in the market.
“We tend to bring on pertinent industry and, more specifically, brand-related experts on board early. Identifying operators that are willing to make a career move are available in all industries and many of them appreciate the entrepreneurial nature of being a franchisee and the ownership mindset that comes with that,” said Bhakta. “Having industry veterans that you can partner with early on in the diligence phase is key as well.”
Don’t forget training
Experts, deep diligence and a dedicated team, however, is no excuse to skip training. Bhakta, Patel and Teriyaki Madness multi-unit owner Tim McCurry said even with a deep business background, it pays to get humble and start from zero. McCurry, who operates restaurants in Colorado, had a few decades of finance experience, but he said getting behind the counter with a trainer and a coach was instrumental for all the non-spreadsheet work.
“As far as learning the business, the most important thing was most definitely my business coach from Teriyaki Madness,” said McCurry.
Successful franchise operators can easily get pulled into the daily firefighting, but when jumping into a new industry, it’s wise to silence the cell phone and take it all in.
As the trend toward diversified multi-unit and multi-brand operations continues to accelerate across the industry, operators would be wise to start their new-industry expansion with a lot of learning and leaning on experts, whether buying or building.
Franchise Times
Nicholas Upton
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