BUSINESS PULSE : SMALL BUSINESS IN ORANGE COUNTY : Staying in Control : Franchisees Get Security --but With Independence

First, the counter worker called in sick. Then the other sales clerk said he would be late because he had to meet with his kid’s teacher. Meanwhile, a reporter was pestering Bill Koenig for information about his Postal Instant Press franchise.

“I’m all by myself,” the harried PIP owner said. “Can you call back late today?”

It was a typical scene. As the self-described owner, manager and janitor of the PIP store in Anaheim, Koenig has been coping with his store’s day-to-day disasters for 20 years. Yet he would do it all over again. “I enjoy what I’m doing here. And at least I don’t have anyone breathing down my neck,” he said.

That’s the attitude of many franchisees--hybrid entrepreneurs who want to own their own businesses but who crave the security of a bigger firm’s business formula--and it helps explain why franchising is becoming an ever bigger part of the American business scene.

A franchise usually refers to an arrangement, called business format franchising, in which an individual buys a system for operating a business. In exchange for fees and royalties, the franchisee gets the know-how that allows him or her to set up shop.

In an alternate arrangement, known as product and trade-name franchising, a manufacturer sells products to the franchisee, who basically provides an outlet for that item. That is the case with most soft-drink bottlers, gas stations and auto dealers.

Either way, franchising becomes a way of distributing products or services. And the variations are virtually limitless.

There are lots of franchisees that sell pizza, photocopies, computers and clothing. But somebody also has franchised pet care. Textured ceilings and banks have franchisees. A company in Michigan even franchises hemorrhoid clinics.

And the boom isn’t only in the types of businesses that are being franchised.

According to the U.S. Department of Commerce, 3,208 franchise companies were operating in the United States in 1988, a sizable jump over 1,394 counted a decade earlier. Total sales for all 509,278 franchised outlets last year reached $640 billion. Ten years earlier, 452,590 outlets recorded sales of $382 billion.

In fact, the International Franchise Assn. estimates that a new franchise outlet opens about every 17 minutes. And the trend shows no signs of slowing.

Projections are that franchises will account for about half of all retail sales by the year 2000, up from about one-third today, according to the IFA.

What makes these systems hotter than a Big Mac?

For the franchisers, they offer a way to expand quickly without making big capital expenditures.

Take McDonald’s, for example. The hamburger king started franchising in 1955 and now has about 8,000 American outlets, three-quarters of them franchised. White Castle, by contrast, has been selling burgers since 1921. Today, it has 238 U.S. restaurants, all of them company owned.

“White Castle says, ‘We want to control everything,’ ” said Patrick Boroian, president of Francorp, a Los Angeles franchise consulting firm. “The market exploded, and where have they gone? Meanwhile, McDonald’s is all over the world. It’s the classic example.”

Anaheim-based Carl Karcher Enterprises is using much the same strategy. The fast-food firm started franchising in May, 1984, because “it gave us the opportunity to expand,” said Frank Karcher, vice president of franchising.

Today, Karcher Enterprises has 385 company-owned restaurants and 77 franchise units. Usually, the franchise stores are in areas that are some distance from the company’s Anaheim headquarters, such as Reno, Las Vegas and northern Arizona.

That way, explained Karcher, the franchisee “becomes a part of the community he lives in . . . and we don’t have to worry about the management. It’s completely up to the franchisee.”

The chance to expand quickly isn’t the only reason that companies turn to franchising.

Remedy Temp, a temporary-employment service based in San Juan Capistrano, has found franchising to be an effective way to hang onto its people.

“With a franchise company, you’ve got an owner who has his money on the line,” explained Gerry Rhydderch, vice president of franchise development. “He’s not going to walk away to join a competitor.”

For franchisees, the systems are a way to own their own shops while reducing the risk of failure.

The Department of Commerce estimates that fewer than 5% of all franchises fail in any given year, Boroian said. “The bottom line is that there is a lower risk,” he said. “Franchises offer a proven system of operation.”

“It’s a lot easier than trying to start from scratch,” noted Carl Matlock, president of the Matlock Group, which owns two Carl’s Jr. outlets and is the company’s franchisee for Central Los Angeles.

“Otherwise, it’s like rolling the dice,” he said. “You can get lucky and hit it big or you can just bust. With a franchise, all the mistakes already have been made. You get a proven concept that’s already been working.”

Having the know-how can mean a very lucrative business, indeed. Boroian estimated that a good franchise system before taxes should earn net returns of at least 10% and as much as 25% of sales.

Of course, as with anything else, success doesn’t come cheap.

Franchise fees--often paid up front--can range from $15,000 to $95,000 for a highly successful concept. Then there are monthly royalties, which can range from 2.5% up to, say, 12%.

On top of those costs, the parent company can also collect for advertising, equipment leasing, equipment maintenance, and on and on. And then there are the costs faced by any small business: interest payments on loans, liability insurance, payroll, business licensing fees, supplies, taxes and the like.

Of course, even an apparent success can sour.

Many franchisees of Laguna Hills-based Heidi’s Frogen Yozurt Shoppes ended up disillusioned and disgruntled over what they viewed as the company’s inflated charges for equipment, allegedly false representations and its founder’s refusal to add some new products.

“We kept wanting to give the customers what they’d asked for,” and the founder refused, said Skip Villerot, former president of the Assn. of Heidi’s Franchisees. “When you’re a franchisee, you do what the book tells you, and that’s it.”

Management differences aside, does the system work?

“If you’re a lazy entrepreneur, it’s all written down for you,” Villerot said. “And if you’re making money, nothing else matters.”