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Chapter 3. The Wealth-Creating Power of ... > Understanding the Motivations of an ...

Understanding the Motivations of an Entrepreneur to Become a Franchisor

There may be no better franchise illustration of the glory and costs of rapid growth than Boston Chicken. Boston Chicken opened its first restaurant in 1985. Eight years later, in November 1993, it was a franchisor and floated an initial public offering. Serving healthy food that actually tasted good in a fast, casual setting was a simple but compelling story. Besides, restaurant sales had shown consistent and impressive growth. But Boston Chicken (which later changed its name to Boston Markets) transformed itself into more of a real estate mortgage company than a restaurant franchise. Until the IPO, Boston Chicken had grown by way of individual franchisees who put up substantial amounts of their own money to open new stores. To accelerate expansion to a dizzying pace, the company signed up financed area developers (FADs). These folks put up 20 percent of the required development costs for a market, and the rest provided by loans from Boston Markets.

The capital market appetite for Boston Chicken seemed insatiable. In 1997 the company raised over $400 million in bond offerings and convertible debt. At the same time, those choice FADs were losing increasing amounts of money—$156.5 million in 1997 alone.

Did Boston Chicken grow too fast, or did it lose sight of the business format that made it a success in the first place? It was probably guilty on both counts. The growth strategy is always dependent on the religious devotion to the business model and store-level economics. Success can be turned into dramatic failure when you forget that.

Historically, an entrepreneur launches a successful single outlet. That success often motivates a desire to add new outlets. If the entrepreneur perceives the opportunity as considerable, the human and financial capital requirement is likely to be bigger than the currently available resources. There are many ways to secure capital for new outlet growth, and as we have discussed, franchising has proven to be a significant method. When a franchisor sells a franchise unit, she is securing both the capital and the talent of the franchise partner—the franchisee. The one-time, upfront franchise fee, ongoing royalties, and franchise management system creates a sharing arrangement between the franchisor and franchisee. Once success has been achieved with the initial rollout of a franchised unit, most franchisors begin to think along the lines of, “If we can have 10 units, why not 25; if 25, why not 50; if 50, why not 150?” and so on. This successive growth logic becomes self-fulfilling as more success leads to more success—but only if you run the stores right and make a profit.

Eventually, Boston Chicken filed for Chapter 11 bankruptcy, reemerging only after being purchased by the MacDonald’s Corporation.

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