Determining Whether You Should Join a C-store Franchise

NATIONAL REPORT — In the retail world, it is often more profitable to lead than follow. However, there is an exception to that rule if you are a small operator belonging to a successful franchise network.

“In most cases, the franchisor has already made, and corrected, many of the business mistakes you would likely make, so you can now avoid those mistakes without learning the hard way,” said Dallas, Texas-based attorney Ryan C. Whitfill, a partner at Culhane Meadows, who focuses on all aspects of franchise law. “You also have support of the franchisor and other franchisees to assist you and give advice.”

Single-store and small operators in the convenience store industry who are considering joining a branded network must do their homework. Like any business decision, there are pros and cons to consider.

On the plus side, small operators can increase their brand recognition — and thus, their sales and customer base — by joining a franchise network. They can also purchase gas and other products cheaper due to the purchasing power and economies of scale that are not possible for a mom-and-pop shop.

A franchise network generally provides a tried-and-tested and proven business model with an existing successful track record of product innovation, successful pricing strategies, and a proven promotional paradigm.

“This greatly increases the chance of success for franchisees operating under this mantle of goodwill, as opposed to venturing off and starting a new concept without many answers to the foregoing disciplines,” noted Kevin Burke, managing director at Boston-based financial brokerage firm Citizens Capital Markets Inc.

The franchisor is responsible for products, pricing and promotions, while the franchisee is responsible for quality, service and cleanliness, which attract traffic.

“When both of these partners ‘swim in their own lane,’ it produces synergies and harmonies that can grow a company much more rapidly than if one were to embark on a business plan without the benefit of a franchise network,” Burke said.

On the minus side are giving up control over operational issues and paying a franchise fee.

“As a franchisee, the mom-and-pop, which has been 100 percent in control, will be required to change how they do things, and they will be subject to franchise fees and royalties that do not apply to independent businesses,” Whitfill explained.

Also, while a small operator will still own their business, it is important to understand that a franchised business must operate in accordance with the franchisor’s standards and specifications.

“Some franchisees make the mistake of buying a franchise and then trying to operate it outside of the standards and specifications established by the franchisor. That approach usually does not turn out well; it can lead to poor performance, as well as disputes,” Whitfill advised.

Ask Before Leaping

Before jumping on a franchise opportunity, potential c-store franchisees need to ask tough questions, both of themselves and of the franchise network they’re considering.

Burke of Citizens Capital Markets said operators should examine the brand strengths, market share, product innovation capabilities, and the recurrent sales, margin and cash flow from franchise networks before they make any decision.

Key questions retailers should ask themselves, according to Whitfill, are:

• What are my financial and personal goals for the business and how do I see the franchise opportunity fulfilling those goals?
• Do I have a good understanding of the financial resources needed to launch the franchised business and do I have sufficient resources to do so?
• Am I comfortable following a business operating system and processes established and required by the franchisor (as opposed to making my own systems and processes)?

He underscored that each business owner is different, so each person should carefully consider their individual goals and motivations before becoming a franchisee. 

Key questions Whitfill believe retailers should ask the potential franchisor are: 

• What systems of training, support and marketing has the franchisor developed to help franchisees be successful, and do those systems work well?
• Has the franchisor established a strong reputation/brand and goodwill in the community where the retailer currently operates?
• How quickly does the franchisor respond when franchisees have issues?
• How does the franchisor actively plan and take action to stay ahead of the competition in branding/advertising, new products, etc.?
• How are existing franchisees performing from a financial standpoint?
• How has the franchise system been affected by COVID-19? If negatively, how has the franchise system adjusted to meet the challenges? Have the franchised businesses’ financial results begun to return to pre-COVID levels?

Whitfill also recommends that small operators who are considering joining a franchise system should talk with existing franchisees of that system who were specifically independent operators before joining the franchise.

“Those franchisees will have great insight into the pros and cons and can provide real-world advice on how best to make that transition a successful one,” he said.