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The rise of the underdog million-dollar franchises

The franchise model in the U.S. is thriving, and some of the biggest success stories are coming from smaller ideas.

While much of the growth still revolves around big brands that mark many of our street corners and strip malls—think Dunkin Donuts, McDonald's and Subway—sectors across a wide swath of industries are blooming as the economy continues its slow rebound, creating opportunity for a new generation of million-dollar-plus businesses generated from little-known franchise concepts.

"We're trying to establish escapism," said Tony Lamb, founder of Kona Ice, the shaved-ice dessert-truck company based in northern Kentucky he founded six years ago. Despite the seasonal nature of Lamb's core product, about 95 new Kona Ice franchises—modified Chevy trucks that use battery power packs instead of diesel generators when parked—have hit the road so far this year, up from 10 to 13 in the first year. Last year Kona Ice saw 130 new franchises launch.

Source: Kona Ice

"If you look at the 20- to 30-year trend, the number of businesses in America that are using the franchise model to grow and scale is higher than ever," said Matt Haller, vice president of public affairs at the International Franchise Association, citing statistics from FRANdata that show that the number of companies with franchise disclosure documents that have been around for at least three years is 2,520, up from 2,101 a decade ago.

The people behind the little-known franchise successes reflect some of the bigger trends and workforce issues in the U.S.

For Ted Arnoldus, 39, breaking free from corporate America—where, as an operating-room sales rep, he sold medical devices for a Fortune 500 company in Southern California—meant finding a place where he could work more family-friendly hours. When a former boss clued him in to what it was like working for Unishippers, a company that provides shipping solutions for small packages on up to heavy freight, Arnoldus was curious, but he didn't have enough capital to purchase his own branch.

Source: Gilbert Brothers Hardware

"The franchise [in Orange County, California,] was doing $13 million to $15 million in annual sales," said Arnoldus, who eventually took a job there as sales manager. Enticed by the brand's growth—even during the recession Unishippers maintained a healthy niche providing package, pallet and freight shipping service for small- and medium-sized businesses—Arnoldus appreciated the freedom afforded by a small company. "I was completely befuddled that I had so much power in the organization. That's something that doesn't exist in Fortune 500 America," Arnoldus said.

"I was bored after I retired—I'm not sick, not old, not decrepit. I knew that if I could tie my passion for hardware and tools with my brothers' business know-how, we'd have a win." -Dan Gilbert, retired firefighter, Sears Hometown and Outlet Stores franchiser

Familiarity with a franchise has been a big spur to taking the plunge.

While traveling the country as a consumer sales rep selling fresh sausage for a division of Sara Lee, chips for Frito-Lay or auto parts for Prestone, Sterling Coleman always tried to hit a Zaxby's location, the Southern chicken fingers and wings chain that he felt tipped the scales when it came to grabbing a meal on the road. When he started thinking about leaving corporate America to run his own company, he kept coming back to franchising, where "the systems are already in place," and to the Zaxby's brand.

"The food was fresh, a step above your typical fast-food burger," said Coleman, 45. "And back then there weren't as many Zaxby's stores as there are today. They had a great product and atmosphere, which was something I eventually looked for in terms of [scouting out] a franchise."

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After saving bonus checks and putting his home up as collateral for a loan, Coleman opened his first location in 2003 just outside of Atlanta. Coleman now has multiple Zaxby's locations and pulls in more than $1 million in sales each, along with a few multimillion-dollar locations.

A franchise crush

After graduating from West Point, Scott Douglas spent five years in the Army in the Gulf War, then earned an MBA from Duke and spent two decades toiling away in supply-chain management and purchasing for Fortune 500 companies, burning out before he hit 50.

By 2011, Douglas found that he couldn't stop thinking about Mellow Mushroom, a scarce pizza-and-beer chain started by hippies in the 1970s that he had visited in a few different states. The brand, known for selling craft beer and for each shop's own funky atmosphere, designed to reflect the culture of each neighborhood, is also expensive: It cost Douglas roughly $1 million to license and open his Mellow Mushroom.

"My first thought was, Don't do this—it's an emotional decision, and it doesn't make sense," said Douglas, 49, who had no prior restaurant experience. "But I was obsessed, and I got a sense that I would fit in very well with the culture." Douglas is now generating more than $3 million in annual sales.

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Downsizing in the corporate world has also contributed to the new face of franchise success. It led Jeff Tews to seize an opportunity tied to the aging of the baby boomer generation.

With more than 30 years of managerial experience at telecom companies and, most recently, at U.S. Bank, Tews wasn't necessarily burned out, but instead found himself at a crossroads in 2006 when his position at the bank was eliminated. After a few months of living off his severance and corroborating with a career counseling group, Tews made two big realizations: He wanted work helping other people, and he didn't want to jump into another corporation where he'd have to "learn a new culture and insert myself into a team that was already there," he said.

Tews turned down an executive-level job offer at a big company and instead started researching franchising opportunities with his wife, Susan Rather, a former government employee. They became the fourth franchisees of BrightStar Care, a provider of in-home care for adults, elders and children. The firm also offers medical-staffing services for health-care facilities.

Fighting fire with ... franchises

Firefighters—in a field associated with early retirement—are also finding new opportunities in the franchise world as a career second act, and with some models that, on the surface, wouldn't seem to be winners on the current U.S. economic landscape.

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Dan Gilbert, a retired career firefighter in suburban Chicago, wasn't looking for a business opportunity when he walked into Sears a couple years ago looking to buy a water heater with his son in a town not far from his own. "I'm talking to the sales associate about how nice-looking the store was, and he mentioned that Sears had recently started franchising," said Gilbert, who was financially secure, thanks to his pension and his wife's job. (Sears Hometown and Outlet Stores, which separated from Sears Holdings in 2012, has four store formats: Three are franchises, and one is dealer-owned.) "I thought to myself, How cool would it be to own a hardware store?"

After finding out that the Sears branch in his hometown was available for franchising, he convinced his brothers—older brother Mike, a career businessman who had recently sold his factory; and younger brother Rick, a former entrepreneur who was overseeing maintenance for a large apartment complex—that buying the store located three blocks from where they grew up would be a good investment.

"I was bored after I retired—I'm not sick, not old, not decrepit," said Gilbert, 57. "I knew that if I could tie my passion for hardware and tools with my brothers' business know-how, we'd have a win."

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