The Hidden Challenges of U.S. Franchising

Nurse Next Door was born in the relatively straightforward Canadian market. Selling into the U.S. proved far more complex

Written by John Lorinc

In the early 2000s, John DeHart and Ken Sim were spending very little mental energy on the question of aging. DeHart, a Cornell University grad, was starting tech companies in the U.S. and Europe, while Sim had a gig as an investment banker. But after both found themselves figuring out how to take care of aging family members, they realized that the home care business €“ which has long been dominated by large not-for-profits €“ could use a serious shake-up.

“The demographics were right,” says DeHart. “It is a very old and antiquated industry and ripe for bold change.”

Working out of a Starbucks, DeHart and Sim cobbled together their own firm, Nurse Next Door, with three caregivers. They launched a week after the 9/11 attacks. “We didn’t know a thing,” says DeHart.

After two years of intense selling and growth in a 24/7 industry, DeHart and Sim decided to try to franchise the firm, which sought to improve the task-driven homecare “experience” for clients and their families. The idea was to provide caregivers who engaged socially with often isolated or depressed clients instead of just providing them with baths, meals and other specific tasks.

But the two entrepreneurs couldn’t get their franchise offering off the ground because they weren’t on top of the company’s complex logistics, which involved constantly dispatching caregivers and matching their shifts to client needs.

Retrenching, Nurse Next Door began building a centralized scheduling system that DeHart and Sim reckoned could become the backbone of a franchise network. In 2006, they plunged back into the franchise market, and have built a chain of 54 locations across Canada.

The company’s real test, however, came about four years ago, when the founders convinced their board and investors on a plan to sell franchises in the U.S. From the beginning, says DeHart, he and Sim were aiming to establish the firm south of the border. But when they set to work developing a strategy, they encountered many veterans of the U.S. franchise industry who told them not to take the risk. Some said, “You’re going to get your ass handed to you.” DeHart concedes that franchising in the U.S. “hasn’t been an easy road.” Indeed, he’s had moments when he wishes he had heeded the naysayers and stayed at home.

The first challenge involved health care red-tape: every jurisdiction seemed to have its own rules, and almost all were far more regulated than anything Nurse Next Door had encountered in Canada. In Florida, the company had to wait for eight months to get a licence to operate, a time delay that made it much more difficult to cement a deal with prospective franchisees.

The second obstacle had to do with the viability of their brand. As DeHart discovered, the fact that Nurse Next Door was successful and differentiated in the Canadian home care market meant nothing in the U.S. Those victories simply didn’t translate. Consequently he had to invest significant sums to hone the concept, and ensure the distinctiveness of Nurse’s value proposition. “We had to change gears and we weren’t going to bootstrap it,” he says. The process took two years of trial and error.

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Perhaps the highest hurdle, however, had to do with finding franchisees with the courage to invest in an upstart Canadian firm in the health care space and the patience required to endure about five years of losses, the typical amount of time it takes a franchisee to reach the break-even point on their royalty payments. “We had people say, €˜Are you serious? Are you kidding me? Who are you to come from Canada and tell us how to do health care?’ ”

As DeHart subsequently discovered, many prospective franchisees didn’t want to take a chance on Nurses Next Door until it had broken through the 25-location threshold, generally seen as the point where a chain has enough visibility to attract investor attention. (At one industry event, Subway founder Fred DeLuca told DeHart: “Until you get to 25 locations, no one will take you seriously.”)

He also learned that franchises are bought and sold differently in the U.S. than in Canada, where franchise shows remain the main marketing vehicle. South of the border, chains hire franchise consulting firms that match prospective franchisees and franchisors in exchange for a hefty fee.

“We didn’t know that going in to the U.S. Those guys represent hundreds of chains.” In fact, DeHart adds, it took Nurse Next Door “a long time” even to convince the consultants to agree to take on his firm.

After almost four years of pushing “a massive boulder up the mountain,” DeHart says Nurse Next Door’s U.S. division has finally surpassed the 25-location point, with 40 outlets sold and 27 operational, most of them in fast-growing sunbelt states. The company, he admits, still loses money in its U.S. operation, but DeHart is projecting that it will pass the break-even point next year. “It’s taken us a while,” he says. “We’ve had trials and tribulations.” But the pay-off is a battle-toughened outfit. “We’ve had to get so much better and smarter and we used those lessons in Canada.”

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