Franchise Your Business Successfully: Key Strategies & Insights

[00:00:02]hello everyone my name is mark siebert um and today's session is going to be on how to franchise your business okay so um let me get started here and um let me start by just saying that the the today's agenda i'm going to talk a little bit about the decision of franchise talk a little bit about how it works what is um uh the definition of a franchise what kind of alternatives you've got the franchising uh talk a little bit about quality control and some legal aspects i'm gonna spend a good deal of time on franchise marketing and um selling the franchise and then i'm going to talk a little bit about how to create a successful strategy for franchising if we have enough time at the at the end of the day today so um that will be hopefully our agenda for today and the at the end maybe we'll have some time for some questions and discussion so just a little bit about us as an organization um the i franchise group is the uh nation's largest franchise consulting firm it is rated number one by a survey of franchise companies across north america a survey of 700 plus franchisors one year and 500 the other conducted by entrepreneur magazines with independent survey and we work with about 98 of the top 200 franchise brands and the profile of our people typically somebody who has some experience having worked directly with franchise companies and so um we've got presidents x you know senior vice presidents had a franchising from some of the best and biggest firms out there in the franchise world our average consultant has about 25 senior consultants about 25 years of experience in a franchise space the things we do really focus in a few different areas it's strategy it's quality control it's marketing it's organizational development and so we also have another related company called top fire media tom fire is a public relations firm and a seo firm that specializes in helping companies to find um companies to find um franchise prospects so um the um company itself has been around since 2013 won a lot of awards and um also has been ranked as one of the top suppliers out there so um the people who are here and i'm not going to do a formal poll but there's really three kind of people that are that are that we're typically going to address and that's the people who are thinking about franchising for the first time people who are franchising but have been doing it very for only a short period of time and people who've got a little bit more experience as a franchisor um by the way we're we're happy to send a copy of this presentation to anybody who'd be interested in this uh and uh also happy to send you a copy of a video i've done that goes into a lot of detail on some of the strategy pieces and also on some of the um the legal pieces as well so um if you don't want to take notes don't really worry about it so let me start off by talking a little bit about franchising in the u.s in the us the franchising is defined by law by ftc rule 436 and basically the rule says that you have to have three elements to be a franchise so the first is the use of a common trademark the second is the exercise of significant control or provision of significant operating assistance the third is the collection of fees royalties markups or other monies from franchisees so if you have those three things and i'm gonna shortcut that today by saying name system fee if you get the name the system and the fee you are a franchisor and if you have something that you're missing one of those pieces you're not a franchise or at least under the federal rule um the states there are some states out there that do have some uh different definitions of franchising and so if you're looking for sort of the those they're usually pretty similar um new york is a little bit of an oddball in that it has a uh requirement for only two of the three definitional elements uh one of the things to bear in mind is you don't necessarily have to call it a franchise or use the f word to to make it a franchise people call things licenses all the time that are in fact actually franchises and so from that perspective you want to make sure that what you're actually doing is doing something that is um is going to be uh legally uh compliant with franchise laws just calling it a license doesn't make it a license if you have those three things you are a franchise so um let's talk a little bit about how franchising works franchising in general uh is a is going to have something like this as a structure typically the franchisee is going to pay an initial franchise fee 25 to 35 000 is is sort of the mid point in that range but we see franchise fees as high as a hundred thousand hundred fifty thousand uh royalty ranges usually between four and ten percent i've seen them as high as 15 percent in the tax collection or tax preparation business um advertising typically ranges between one and two percent but again depends on the industry that you're in franchisor is oftentimes going to sell product to their franchisees and in return the franchise aura is going to get initial training they're going to get operations manuals and systems they're going to get some ongoing supervision support and then they may get some other kinds of support services so it might be that it's a purchasing uh department that's giving them better pricing it might be an advertising department and brand maintenance it might be uh that they are providing other backroom services like accounting or billing or what have you uh research and development those types of things so the services provided by the franchisor may vary based on the industry franchising today is in a lot of different industries and when we think about franchising i think most of us probably think mcdonald's and um the fact of the matter is restaurants are about 25 of franchising we see all sorts of people today we're seeing a lot more service-based businesses both b2b and b2c uh and even a lot more especially medical practices med spas things of that nature we're seeing a lot of senior care we're seeing a lot of things that are service-based businesses especially today's economy so if you guys are thinking about franchising today the first real question that you guys should probably try to address is whether or not franchising is right for your business now when we're talking about franchising and and being right for your business there are certain things that you typically are looking for um you know from the standpoint of the advantages of franchising um you're able to leverage capital you're able it will use other people's money because the franchisee makes the entire investment in unit and unit openings uh you're gonna be able to grow faster because the franchisee is going to be the one who is going to be doing a lot of the backroom services like finding sites and negotiating leases and working with architects and things of that nature uh you're gonna get highly motivated management um one of the things that we've seen over and over again is that when you put a manager in a location that was owned by a corporate location and it becomes a franchise own location we'll see sales boosts between 10 and 30 uh and we got some rural we got dozens of anecdotal evidence on that kind of information um obviously there's reduced risk since you're not the one putting the the name on the lease or signing the leases for any of the equipment or buying any of the things that go into this fewer operational concerns somebody calls in first thing in the morning calls in sick it's not you that has to go there and fill that role it's going to be the franchisee who's going to do that typically it's higher quality and that's one that sort of surprises a lot of companies that are new to franchising um they oftentimes will think well if i can't control them as easily as i can control an employee then i may not be able to have the same level of quality but the fact of the matter is when you're franchising you're normally going to get somebody who is a better candidate than the typical person who is uh looking to um who's looking to um be a manager of some location you're typically going to get somebody who's going to be there long term you know somebody who might be there for you know could be years decades or a third generation mcdonald's franchisees at this point and you're going to get somebody who's highly motivated to make sure that the operation runs really well um organizational leverage obviously there's certain things you your franchisees will do on your behalf things like the the build out of the unit level things like the hiring and the so you don't have to have a big hr department you want french franchisee is doing a lot of these things um on the downside you have to share profits with your franchisees so what you know this is of course assuming that the units are profitable in the first place so for example in the last year when we had some businesses that really weren't able to make a profit uh some of the companies that had a lot of corporate owned locations ended up going into bankruptcy whereas if they had a lot of franchise locations a lot of times the franchisees would you know be able to uh you know work a little bit leaner you know they'd have their families working in the businesses they'd be able to sort of dip into their savings or whatnot um but they're not losing you know the overall franchise corporation was not losing money um on hundreds of stores that are out there in operations but generally speaking in a in a non-covered kind of environment where your business hopefully is making money your franchisee is going to make more of the profit than you will of a profitable event there is less control although the kind of control that you do have is pretty significant from the standpoint both of the contract and from the standpoint of being able to make sure that somebody uses your brand just the right way because of the fact they're highly motivated and relationships with franchisees do take work it's not as easy as uh the typical relationship in which a franchise uh which you might have with somebody who's not a franchisee where you can just say it's my way or the highway uh in a franchise relationship uh you're going to treat these folks more like um they are your and the lawyers hate it when i say this but more like they're your partners certainly more like their fellow businessmen with the common interests um one of the things that people do talk about franchising is that it's litigious uh the fact of the matter is it's really not about um 25 27 percent of franchisors report any litigation um and that includes large companies that you know somebody like mcdonald's 30 000 plus franchises is going to have to report that they do have litigation but when i looked at the mcdonald's it was you know they had last time i looked at it they had six pending lawsuits with a litigation rate of 0.2 percent so two people out of every 10 000 franchises and they were suing them for things like making their children obese and beef tallow in the cooking well um and you know somebody says that they make the chicken in an unhealthy manner the fact of the matter is those are not franchise related issues but they were the disclosed litigation and it's just because again mcdonald's has that big target on their chest um so from a franchise standpoint one of the things that we typically see is that from a liability standpoint well executed franchising will have some increased contractual liability but that increased contractual liability is going to be a function largely of uh you know a contract that is very one-sided and is very much in favor of the franchisor on the other hand with the company on growth you have the employment liability you have the uh you have the property lease liability you have the equipment lease liability you've got workers comp slip and fall you're always going to have the what would normally be vicarious liability in a franchise because your people that are operating in your locations are in fact your employees um and you can you know have a third party insure you against liability in a franchise as well as insuring it internally so frankly the litigation exposure from franchising is a lot less than corporate locations now if you're thinking about franchising probably the first thing that you should be doing is you should be looking at the corporate growth option as an alternative what i encourage people to do when you're thinking about franchising or any kind of growth plan is to start with your goals so start by being very specific about what your goals are where you'd like to be and when you'd like to get there so do you want to sell the company if you do how much you want to sell it for and when um be careful that you don't just say some generalization like i'd like to sell it for as much as i can and as soon as possible because that is not really being very specific um then ask yourself what is your risk tolerance how much of the profits that you've got right now can you reinvest how much money are you willing to invest right now in your growth and are there other resources that you can bring to bear from the standpoint of moving this thing forward and then once you've done that what we recommend is that you do some kind of a cash flow analysis to see if you can reach those goals so as an example let's just say that you wanted to sell the company for 10 million dollars at the end of five years but just using rom numbers here right now you've got a couple units in operation uh your total equity investment in a new operation would be 150 000 your total available capital in the bank is 200 000 uh your free cash flow right now is 100 000 a year the units break even in the first year and they return 50 000 per unit after that this sort of assumes that there's no incremental overhead but just a very oversimplified approach to showing you what this might look like so you start and again for those of you who are accountants in the room um this is a very oversimplified model uh if i show you something that would be um the way that you really look at this it would be much more complex than this but sort of the short version is based on those assumptions you could open one unit in the first year uh you have a little bit of money left over from cash flow you'd have have the ability to open up a second location in the second year a third in the third year another one in the fourth year to the fifth year and by the end of year five you would have a cash flow of 350 000 and you'd have a value of the business about 2.5 million assuming seven times multiple of cash flow so that's that would sit there and tell you that in that scenario you could not get to that 10 million dollar wall so at that point you you need to have um really more like 450 000 of free cash flow in year six still only gives you 3.1 what you really need to do is you really have to get to about 27 corporate locations in this example i would take about 12 years of reinvesting everything and it would be about 4 million dollar investment over that time frame so what you sort of say to yourself is you know i really can't get there from here so what are your your options well your options are you can change your goal and say you know what three million dollars is pretty good or you can say i want to do this but i'm okay with going to 12 years or you can change the structure or you can raise equity but basically it's changing your strategy in those last two options so if you are going to raise equity your next option is to say how much am i going to give up my company and how does that impact my goals so the first thing is you have to factor in dilution and dilution is what happens when a company um gives up shares of the company so if i gave you 50 of my company when i sell the company i'm only going to get a selling price on 50 so because i am half as invested in the company i need to grow the company twice as big to get the same goal now if you do that you'd sit there and you'd say in the case of raising this equity you would say well if i bring in three million dollars and again this is oversimplification if i brought in three million dollars and i uh began to reinvest in the first year i couldn't open up 15 locations um that might require some additional staff but let's just say that it didn't um the existing cash flow is a hundred thousand dollars i've got 17 units at the end of the first year and then i start reinvesting year after year seven the next year five the next year eight the next year and by the end of year five i'm at 1.8 million by the end of uh year six i'm at about 2.7 million which is a 19.25 million valuations i'm about where i need to be uh given that i've got a 50 of the ownership i need to get to i'll get about a 9.6 million dollar gain on that business now the problem here is that while you can do this you can get in there with an equity infusion of about 3 million you still need to get to 50 to 54 units you have to be able to invest a lot of money to do that and the good news is you're using other people's money the bad news is that from the standpoint of valuation you have to look at it the way that investor looks at it so when you're looking at the way that an investor looks at it they're gonna say the value of the business back in year one was about seven hundred thousand the value of the new entity where i put in three million dollars of my cash money is 700 000 plus that 3 million 3.7 million so sophisticated investors going to want 3 million which is the amount of the investment divided by the 3.7 million or about 81 of the company so while you might be able to find an investor who's a angel type investor would do 3 million for 50 um you know the chances are that it's not going to be as easy to find that person as you might think at some point it just isn't realistic anymore and so the one of the real issues is really you know sort of the evaluation issue you guys have all seen shark tank probably where mark cuban is is saying what are these guys thinking and so what you really need to do is say if you can't get there from there what am i going to do and so you've got some alternatives so some of the alternatives to franchising uh obviously we said before sort of the shorthand name system and fee is a franchise but if we look at this from the standpoint of taking one of those away we can take away the system and we'll have a trademark license we could take away the name we'll have a business opportunity license or we could take away the fee and we either have a distributorship a dealership an agency a sales rep or a jv so those are sort of the options and you can combine these options if you want so you could be a franchise and a joint venture partner if you have somebody where they're paying fees but they're also getting but you're also sharing equity you can be a trademark license plus a dealer distributor so for example one of our clients and we don't do just franchising so i i really don't have a horse in this race in terms of guiding my clients one way or the other but so one of my clients is swarovski and they do this system which is not a franchise it's a trademark license plus a distributor agreement so that is one option now um different options have different sort of advantages and disadvantages when you're looking at which way to grow in terms of the advantages of a trademark license you know it's going to be less regulated uh although it still will probably trigger the fee um or the franchise definition in the state of new york and then you're going to have typically lower fees and the question is how strong is your brand name um you know you have very little control over the brand in this because you're not dictating the system you're not exercising significant control and then the question is how strong is the brand name so if you're you know if you are michael jordan and you're putting your image on nike shoes you know that might be something where you have the ability to do these deals very readily but for most of us it's pretty difficult to have a brand that is that um that important and that valuable and the other issue is that if you're doing this with a business it's going to be very easy to step over that line into providing that's that significant control or assistance there's 18 different elements that can trigger so the next thing is you could be a business opportunity so in a business opportunity what you're looking at is you're looking at a situation where you've got less regulation and while while there's less regulation at the federal level there is more regulation actually at the state level so there's 26 states that actually regulate business opportunities from a disadvantage standpoint you've got lower fees the second thing is you're not going to be able to build a brand right so right now you may not have the world's strongest name but once you open up 10 locations or 50 locations you will have that strong name but you won't be able to do that in a different situation where you might not be using your name so that lack of control uh is going to be because is basically because if you don't have a name you don't have a contractual nexus to say that you must do things my way so if i'm mcdonald's i gotta i can insist that you have a big mac but mark's burgers and your bills burgers there's no reason why i should control what goes on in bill's burgers because i don't know that brand uh so essentially what ends up happening in these kind of situations oftentimes you create your own competition uh and you have multiple people competing using the same systems in the same market usually leads to price competition and a poor image now it can be a good option for some um but again you know ask yourself some of the questions will you have national accounts do you want to have brand loyalty those kinds of things are going to be important to you the next is going to be whether you want to be a dealer a distributor and i don't know if anybody today is a manufacturer but the key here is you have to not take any fees so all your support is free the products um that you provide are going to have to be sold at a bona fide wholesale price it cannot be something where you're building in some kind of incremental fees on top of that um the thing that you need to be very careful about is you want to make sure that that your products are not treated as some kind of a step child here and again it's very easy to step over the line into accidentally collecting fees people don't realize how easy this is but just to give you one example there's a case where this happened with mitsubishi versus one of their dealers called toam in illinois and what happened in that particular case was that toeim collected or paid fees to mitsubishi over the course of an 11-year relationship and those fees totaled about 900 so it was not a big amount and all that was happening is there was some well-meaning clerk in the mitsubishi office that said if we're going to be providing all these books to you know on these manuals to the client we should at least make them pay for the cost of duplication well that the fee element is triggered at 500 and once they've gotten to 500 it went from being a distributorship to a franchise it cost mitsubishi 3.2 million dollars in that particular lawsuit so you have to be very careful about those types of things the the next thing that you've got as an option is sort of the the agency or sales rep and again this is um like an insurance agent or or something of that nature where they're selling this is essentially what we call a top-down model so in this essentially i am providing the service um to my ultimate buyer but i've got somebody in between who's going to sell on my behalf but the contract is ultimately executed with me i'm the one responsible for delivering so because all the money flows downward in this in this particular scenario i am not taking a fee again you have to be very careful about not taking any fees there are other options that you've probably seen out there these days you get the technology based app services um essentially this is a top-down fee structure places like lyft and uber and airbnb and then you've got certification programs now certification um uh mark is not a trademark it's um uh it basically says that um that anybody who has passed this training can use this as being certified or you know past whatever that standard is but you can't have exclusive territories and you can easily strain for franchise relationship with something like this so you have to you know one of the things is you have to offer it to anybody who qualifies under whatever your guidelines are so um it's a little bit different than what um typically a typical franchise so when we're talking about sort of the laws that govern third-party relationships um the laws are you know sort of a mixed bag but regardless of what you are going to do as a business owner you need to make sure that you hire a good attorney that can handle this and i always recommend that you would look at a franchise attorney even if you're not going to be a franchise just to make sure that you steer clear of franchising or business opportunity laws by the way i don't do the legal documents i don't do i'm not a lawyer and so if you want to talk to a franchise attorney i'm happy to make a referral to someone who can help you with that um and i don't take any fees from those attorneys i don't take any referral fees or anything so um i you know pretty much out just to make sure you get good representation so anybody like that just let me know but regardless which way you go make sure you get a good qualified attorney now when it comes to time to deciding on the right growth vehicle um again i go back to make sure that the distance is or the decision is based on your goal so how far distance is your goal how fast you need to get there what obstacles are in the way you want to make sure that you have a a good understanding of of that and make sure you have a good understanding of your own risk tolerance as part of that process also make sure that you're looking at this from the standpoint of you know are we trying to build a volvo or we're trying to build a rocket ship you know how fast are we trying to grow and there's different ways to go that way you don't have to choose just one vehicle you can be franchise and company owned growth uh you can do franchising in joint ventures um whatever you do though what i tell people is don't decide to franchise uh or whatever what you should do instead is figure out what your ideal scenario is in terms of growth so ask yourself do i want or need to build a third party jail of distribution if the answer to that is yes then do you want that channel to be branded if the answer to that is yes then do you want to control the quality that goes through that brand the answer that is yes ask yourself how you want to be paid if the answer is yes yes yes and i want fees then you're a franchise if the answer is something else then you're something else and you just need a good lawyer to put together the right paperwork what i tell people is don't let the lawyer or the law or the know-it-all uncle charlie dictate what are good business decisions based on what they're calling it um it you know franchising or licensing or whatever it should be that you make based on you've made good business decisions about the structural element of your growth model and then you look at what it is once you've made those decisions and if it turns out it's a franchise or a license or a jv then so be it so um let's assume that maybe you are still interested in franchising that's something that you're looking at moving forward with when we're looking at franchise ability we really look at a few different things the first thing we're looking at is whether or not we can sell franchises and that's going to be a function of things like do you have a successful prototype do you have the credibility in the marketplace uh or are you getting lots of hits on social media those types of things do you have some differentiation from your major competitors are there people out there that are um helping you to differentiate um is there some brand sizzle to this from the standpoint of buyer appeal is there a particular buyer that this is going to work for so are you selling a dental franchise to dennis the more narrow you can do that the better off you're going to be then from the standpoint of the value proposition what is it you're providing to your franchisees the next thing we typically look at is whether or not you can clone the business so that's a question of teachability you know whether or not it's going to work in a variety of different markets there's some concepts that just don't you know might work in one market but don't then another if anybody here is from cincinnati you've seen the cincinnati style chile but you don't see that down in texas where frankly if you try to sell in texas you have some real problems because it really doesn't taste all like a texas style chili um ask yourself if the business is systemized if it's not there are companies like ours that can do that for you but you have to make sure that you've documented how those things how those things would work the next question is really return on investment it has to work for the franchisee both from the standpoint of how much they're going to invest in it and from the standpoint of how much they can make from it and then there's the question of sort of the overall factors for success so when you look at things like you know the market trends and you know what's going on in the marketplace uh availability of capital and strength and management and what i would tell you is the the one that makes the most difference in terms of the success of most clients it's going to be strength and management good management can find capital good management can uh adapt to changes in market and market trends and changes of competitors but there's no cure for bad management ultimately what we want to do is we want to create a win-win-win scenario for our franchisees so that the consumer makes feels they've got a good buying decision and comes back for more the franchisee feels that they have investing in the business that is a win for them and it's a win for you now i'm going to give a little bit more detail on sort of return on investment hurdle rates um what we talk about when we're talking about how much the franchisee needs to make they need to make a return on their time first of all so that's no different than if they instead of working in the franchise went out and got a job so they should be able to get a salary if they're working in the business at a market rate if they're an investment banker they don't get an investment banker salary they get you know the salary of whatever it is whatever job it is they're taking in that particular unit because they could always hire somebody to do that and that's the underlying assumption the next is they have to make a return on investment so it's no different than if they invested in the stock market or if they invested in bonds over time you'd expect to get about three four percent return on bonds over time you'd expect to get about 10 return in the stock market um you know franchisee is going to be able to get a certain return on their investment and they should be able to cash it out at the end of the term by reselling the franchise to to the next franchisee in that system now franchisees expect that they're going to need to build their business so they don't necessarily think that they're going to get this return in the first year but we're looking for is about a 15 cash on cash return for somebody who's going to be an owner operator plus a salary or 20 for an area developer since they have additional overhead to support now if you want to look at how this works and again for the accountants in the room this is a very oversimplified analysis but let's go back to that same uh uh investment that we were talking about where we said you know we can open up a business for 150 000 franchise fee is 25 000. we need some working capital our total investment in opening up a franchise might be 200 000 then so if the estimated revenue at maturity for this business is 500 000 what we then do is we'd say you know let's look at the profitability at maturity and let's say it's 70 000. now let's make some adjustments to that so we might adjust our owner's comp because we're getting it we're uh overpaying ourselves or underpinning ourselves we might look at uh adding back in one time only investments that a franchisee would not have maybe you had to pay for a trademark uh maybe there's some tax minimization strategies which is sort of the things like the car and the country club to get written off um shared overhead between locations interest debt service depreciation amortization we'd add those all back into the profit and then we would subtract out incremental royalties or price adjustments on a product that we would sell to our franchisees and that would give us a adjusted profit in this particular case of about 80 000 so that 80 000 is relative not to the sales but it's relative instead to the investment so we divide by that initial investment of 200 000 and that gives you a cash on cash return of 40 knowing that at the end of the term you were able to be able to resell that business if you sold it for five times earnings you'd sell it for forty thousand for four hundred thousand dollars as opposed to two hundred thousand so that's a really strong return on that business and that's you know again sort of shorthand for how you would do this kind of an analysis now if you have a business that is franchiseable and you're looking at sort of moving forward that the next question is should you perfect that business before you have gotten to a point where you are ready to franchise and when we're talking about perfecting the business if you think you've perfected any business you should probably sell it because the fact of the matter is you have not perfected the business things are going to change over time that's just the nature of businesses uh if you're standing still somebody's out there gaining on you if you look in this bottom right hand corner here this is the mcdonald's menu when they were first starting in 1955.

[00:36:54]so you look at that menu and then say to yourself what does that look like to you know in terms of today's menu and you know frankly it doesn't look like um it doesn't look anything at all like it so when we're looking at something like that we want to make sure that we understand that's really exactly uh that you know the fact that we do need to adapt on call forward basis so now when we um think about this there's a article i wrote a while back called quick versus slick and essentially what that says is that if you're going head-to-head with highly established competitors if you're going head-to-head with mcdonald's make sure you refine that business first so when five guys came out into the marketplace and they were going head to head with mcdonald's and hurricane wendy's they had already built out a dozen different locations and gotten them to profitability before they started franchising on the other hand if you are unique in the marketplace and you are thinking about when you should franchise the risk that you've got is there somebody out there with a camera and a notepad who's going to be uh looking at knocking off your business so for example when we work with john lennisio over at massage envy uh they had one unit in in business for three months when they started franchising they knew that there were going to be people knocking them off and they wanted to get to the market first and fastest and today they've got over a thousand locations so when we talk about this think of it from the standpoint of the risk that you have in your business model is going to go down over time and that you know that risk is going to be reduced because you know more about how to operate the business the longer you operate on the other hand the risk of competitive threat goes up over time and so when we look at sort of those two risks everybody has to judge for themselves where this intersection of these two points is where this equilibrium point is but ultimately that will tell you when you should start franchising because the risk of competition is greater than the business model risk and so just for fun i got some slides in here um of some companies that just got started in the franchise when they first started uh and so obviously you recognize pizza hut the first mcdonald's dairy queen this one's a little harder this one is the first kfc sanders cafe colonel sanders first radio shack and here is the first subway um not exactly what it looks like today but that was first so we talked about first mover advantages um being the first in the marketplace if you do have something that's new and unique it's going to provide you with some significant advantages so if you look at companies like um you know in the burner industry the oldest company in the burger industry um is probably white castle um beyond that it's crystal crystal started in 1932.

[00:39:49]white castle never franchised so i didn't put them into some houses but um white castle crystal was found in 1932 burking 1953 mcdonald's in 1955. when they first franchised 1955 1961 1990 that tells you sort of you know when they started their expansion program and it gives you an idea of where each one of these are in terms of the speed of growth that they were able to achieve just by being first into that marketplace so there's a substantial advantage to be first in the market when you you're doing something like this now when we talk about how to succeed as a franchisor there are certain things that you need to do in order to be successful as a franchise first is you want to make sure that you have a good strategic direction and a good business plan now when i talk about a business plan i'm not saying i want a business plan just for the sake of having a business plan i'm saying i want a business plan because i think that it's important to make good business decisions and that's what i'm looking for there so it's not so much having the plan as it is making going through the analysis to get to good business decisions legal documents you'll need operations manuals training programs you need to market the franchise and have something to convey that message to people uh you need to advertise and then you're going to need to design and implement a sales strategy and you have to have the capital and the staff in place to implement that plan so let's talk a little bit about strategy one of my favorite quotes if you don't know where you're going anywhere will take you there um i think that that's uh again look at where you want to be as being the end product of this analysis so the next thing you know from a strategy standpoint the keys to success i would say is number one understand that you are entering a new business and by that i mean you're not getting out of the old business what you are doing is you are uh you are entering a business in which you are going to be selling and servicing franchisees so your job is going to be sell the training and the support that you provide to franchisees and then providing that training and support and that's the new business that you're getting into remember that your goals will drive your success so start with us you know start with your support and your cost structure and move on from there and what i say is you know again the most important thing in franchising and i'll probably say this more than once today is that in order to be successful as a franchisor you need to make your franchisees successful that's the most important thing that you can possibly do as a new franchisor so when you're looking at something like that um don't rely on guesswork it's really about doing your homework building that plan doing the financial modeling and reverse engineering your success so again when we talk about reverse engineering our success let's go back to that same goal we talked about earlier selling the business for 10 million dollars at the end of five years we're looking at selling a business for 10 million in five years and the average selling price for a franchise business is 6.7 times earnings before interest in taxes then what we can say is by dividing the 10 million by the average selling price we need to be earning about 1.3 million in order to be able to get that as a selling price now if our average royalties at six percent of five hundred thousand or thirty thousand dollars then we ask ourselves what are we gonna put to the bottom line now again this is a very oversimplified analysis but if we answer ourselves that a best practices franchise or top quartile franchisors between 35 and 45 to the bottom line based on some international franchise association studies so if you are able to put 35 33 of the bottom line you're going to net about 10 000 for franchisee well you would then divide that into your earnings and you would say that you would need to sell about 130 franchises to be able to get to the point where you can sell that business for 10 million dollars that's more than the 70 million i mean the 50 to 70 businesses that you'd have to open you know if you're doing a company owned but it's you know probably twice as many but obviously much less from an investment standpoint now at this point now what you do is you start to say what does this look like if i'm sort of driving this from a goal standpoint we like to see this sort of hockey stick effect in terms of the way in which you grow a business so we'd like to see this you know starting slower and then getting more aggressive uh people pay higher multiples for those kind of companies and they'll let you get your feed under you so we build in here's what we need to do to get to that 130 number once we've done that now we sit there and say when do we need to hire people we know for example that a franchise sales person should be able to sell 20 franchises per year so we know when we're going to hire the franchise sales person depending on the industry we're in we might be able you know so certain industries will they have different staffing ratios relative to field representatives so we might sit there and say here's where we need to buy to hire our field reps here's where we need to hire our support staff in fact we can figure out everything starting with personnel to marketing to office space to brochures based on knowing what this is so we know for example that uh that you know we are going to have you know 10 franchises in the first year we think that our close rates going to be 30 uh about 3 so we know that for every 10 franchises we're going to sell we need to have 300 brochures i mean you can get down to that level of granularity when we're developing this kind of analysis um the cost of a franchise program and getting into franchise program depending on how aggressively you're looking at it could be 50 to 200 000 or more but again it depends on how aggressive you're looking at i'm going to go through more detail on that a little bit later now when people are developing strategies for their franchise growth one of the big problems is that they take sort of a ready fire aim approach and they just sort of say well let's do it this way or they'll go to an attorney and they'll say well what do you think the royalty should be or do you think the fee should be and you know frankly those kind of decisions that are made sort of in a haphazard manner are what can be the downfall of a lot of new franchisors the you know me true you know where somebody says well i saw somebody else they did a five percent fee or five percent royalty you know it really sort of assumes a lot of things that just aren't going to be true me too assumes that the businesses are going to be the same that the the unit economic economics are going to be the same that the uh that there's no differentiation between the businesses that the um that the support structure that's going to be needed the marketing that's going to be needed is all going to be the same and it also assumes that the first person who's in there or somebody's in there as a predecessor to you has done everything right and they're not making mistakes along the way so these things can oftentimes lead to some some substantial failures um in fact i had a particular client at one point in time who came in to me and i won't mention their name but they came to me and they said uh they said we'd like to figure out what's wrong with our franchise program we're losing money and they have 50 units in operation and i said you know you guys i'm glad you came in because you guys are on death's door this is a horrible franchise structure and i started to tell them why and he said that's obviously not the problem mark they said this is we took this structure from tasty breeze and i said well that's that i don't really care and as it turned out the structure that they had developed um a year later tasty freeze went into bankruptcy and two years after that they did they followed it in so again you have to make sure that you're doing things in a way that um makes a lot of sense for you now i'll give you an example that's a little bit easier to quantify so let's assume that we make a one percent mistake on our royalty let's assume that we should have been at seven percent but we were at six uh that one percent on a 500 000 revenue business is going to be five thousand dollars right off the bottom line right so we didn't have any associated expenses it was just a mistake i can pretty much guarantee that none of the franchisees are gonna ever sit there and say hey you're not charging me enough so what's gonna end up happening is that that structure is going to get inculcated into your business oftentimes and that inertia will keep you at that level for who knows how many franchises well let's say that you open 100 franchises that's now a hundred times that five thousand mistake that's a five hundred thousand dollar mistake but it's not a five hundred thousand dollar mistake once if that contract term was twenty years that's a five 500 000 mistake times 20. and if you look at being able to sell your business as a franchise or maybe you can get 10 times earnings well if you've got 10 times earnings on 500 000 that's another 5 million dollars that you don't get when you sell a business so that one percent mistake when you sat there and said well i think it should be six percent and it should have been seven that's a 15 million dollar mistake and there's a lot of decisions that are like that things like the structure things like uh the targeted franchisee things like territory you know these can be easily multi-million dollar mistakes um margins on product sales so when we're looking at these kinds of things it's important that you really dig in deep and make sure that you understand what the implications these things are because essentially franchising is growth on steroids and if you make a mistake you're repeating that same mistake over and over again multiple times over the course of a very short period of time the faster you grow the more mistakes you've made and if it is mission critical in terms of the mistake it is the end of your franchise program one of the other things we talk about from a strategic standpoint is how aggressively should you grow a lot of people come in and they say they want to sell a bunch of franchises really quickly now when that happens if you want to sell aggressively and some of our clients have done this you have to hire staff in anticipation of the need and you have to advertise aggressively so you can't sit there and say i'm going to hire a field support person when the time is right you've got to hire that affiliate corporation right away you've got to hire you know the training person right away because you're going to have so many franchises coming in well what ends up happening is you have higher fixed costs plus higher advertising costs and so as your royalties start taking in remember royalties are where you make your money you've got to be able to cover this area of loss uh as a part of your proposition your growth proposition and you there's only three ways that you can do it you can either be initially capitalized enough to fund it you can uh get revenues from your existing operations or you can do it based on franchise sales but using franchise sales to fund your growth is a worse practice if you do that the problem is that you're going to end up lowering the standards for your franchisees and in the process of lowering the standards for your franchisees you're going to take on franchisees that are going to cause you headaches down the line now what we normally recommend for most of our clients is to start off more conservatively you know you can leverage off your existing staff you can do some more minimal advertising and you're going to have a very small area of loss that you have to cover when it's when it comes time to initially uh doing this and it's basically going to be your increased advertising costs um then what you do is you start hiring people underneath your royalty flow and if you do something like that while you grow more conservatively to begin with you are able to make a better um a better use of your um and a more conservative use of your growth again the thing that's important more than anything don't go any faster than your ability to support your franchisees so again franchising success is absolutely critical here now when we talk about quality control we talk about sort of a trade-off and the trade-off that we talk about is that um you know a lot of people think that franchisees have a lower level quality we talked about a little bit about this earlier but just the opposite is true in terms of the scores that we see and the trade-off is essentially that while you don't have the same level of control you do have higher caliber people you do have people that are there and are more highly motivated and they're going to be there longer term and so our studies have shown that franchisees will outperform in terms of both perceived stores so we did a project for example for texaco where we took corporate locations and sold them to franchises this was in the united kingdom and the perception scores of those were graded on a scale of 1-100 they went from 87 to 94.

[00:53:43]so the by putting franchisees in those locations they were able to improve the perception of the location in that process so lots of anecdotal evidence to you know sort of back this up now from the standpoint of what you need to do from quality control standpoint there's really four things number one is select good franchisees this is probably the absolute most important thing that you can do as a franchisor make sure that you're selecting good franchisees because the the quality of the franchisees are going to be absolutely paramount to your ability to um to make sure that these people are going to be successful bad franchisees are not going to be trainable they're going to do things their own way and they're going to end up just being a pain in the neck for you for a long period of time the second is make sure you have good documentation and training you know so good operations manuals good training programs those are the tools you're going to use to help you with franchise process the third is from standpoint of support make sure that you're supporting these people giving them the training visiting them communicating with them being with them as frequently as possible and then last is legal documents and compliance um i did a presentation with somebody else the other day they said compliance should not be a bad word making complaints a good work should be something that we should strive for as franchisors and i really like that um the fact of the matter is usually your franchisees are going to be the ones who are going to be most vociferous when it comes to saying that you need to do a great job of compliance because they want to make sure that everybody is living up the same grand standards but if they don't you have to be ready to enforce your legal documents you need to be ready to sit there and say either you comply with the program or you have to lose your franchise and you can do that in a franchise program now each one of these comes with a cost of course so you you know turning away franchisees providing and developing great documents having higher staffing ratios for support developing great legal documents or potentially losing franchisees you won't comply those all come at a cost but if you exercise that cost you will you'll be able to control quality oftentimes much better than you can in any other kind of situation now when it comes to to the that top criteria which is the qualification of your franchisees there's some things that are just sort of givens right so the top three intelligence capitalization and work ethic are really you know true of pretty much every franchise if anybody here knows of a franchise where you don't need to be intelligent well capitalized and good work ethic let me know because they've got a great brother-in-law that i'd be happy to introduce to the franchisor but that being said um stupid under and lazy just doesn't work but people don't say that to you when they're in the interview process when you're trying to find out if they are a good candidate they're not going to say i'm stupid under capitalized and lazy they're going to say something more along the lines of you know yeah i work really hard and everything else so you have to make sure you're asking the right questions um the the other things that you're going to look for personality are they a cultural fit for your team different people have different kinds of cultures and you need to make sure are they confrontational or are they adaptive are they um compatible with you because for the next 20 30 years they're gonna be your franchisee are they too entrepreneurial are they asking questions about when you start hearing people saying did you think about doing it this way and they haven't even gone through their initial training yet that's when you know you get something maybe it's going to be a little bit too entrepreneurial for us to have to look out for them and then there's sort of the job-specific qualification requirements uh and we're talking about those job-specific requirements what we're typically talking about is you know do you need somebody's a salesperson do you need somebody's a great manager do you need somebody who understands finance you know what is it specifically these people have to be able to do you don't want this guy as your franchisee i want somebody who's going to be a little bit more rational in the process now i talked a little bit about franchisees been a little bit too entrepreneurial i tell you that when you talk about a franchisee the best franchisees are sort of the straight a students they've got a long tenure with their job they've probably been in a corporate job for a long period of time they drive the family car they don't get lots of tickets uh they're typically married and they're typically looking for security um they are people that drive the station wagon through the right-hand lane of life and you know that's their their comfort zone um when we talk about entrepreneurs it's usually more along the lines of what most the people who attend my seminars sound like most people who come to my seminars who want to learn about franchising they were probably b or c students they've gone from job to job they own multiple businesses they drive faster sportier cars they've gotten tickets they're more often divorced and the general rule of thumb with these people is they've never seen a role they didn't want to break um and that's sort of the entrepreneurial mindset you're willing to take some risks uh you're that you are more of a risk taker you are somebody who's more driven and those kinds of characteristics are what make you successful as an entrepreneur but at the same time if your franchisees remind you too much of yourself it's probably not a good thing it probably means they're going to try and change the system on you so be very careful about somebody's really entrepreneurial now when you're developing your operational manual that's the thing that's going to govern the way in which these people are going to operate that manual is going to probably be 400 500 pages in length at least um it's going to be a sales tool for you when you go out there it's going to be a training tool when you're trying to train your franchisees it's going to be a reference guide for your franchisees it will help you to reduce liability and it is ultimately an extension of your legal documents so it is part of your quality control so when you're thinking about it think of it as a multi-faceted tool that does all these things and make sure that it's used now of course so when somebody calls you with a question the first response for many new franchisors is a lot of times franchisors will say to themselves you know somebody calls up a question they'll say how to install a widget the franchisor will say well the answer is x y and z but what you want to do is you want to train your franchisees to use this as a reference tool so instead of answering which would be the easy way of doing it as a franchise or what you should probably be doing is you should probably say well have you looked at the manual yet mr franchisee if you have not let's pull it out why don't we pull it down and see if we can find that answer if you do find the answer then you're going to reinforce to them that no matter what you're going to as a first step require them to look at the operations manual so they'll start doing that without calling you and if it's not in the operations manual then good you want to know that it's not in there so you can update your operations manual so think about the operations manual the table of contents of that operations manual is a required disclosure item and you know the operations manual itself is great at helping you to avoid litigation if it's well written but it can be a franchise world's worst nightmare if it is poorly written so i'm not going to give you stories about this about you know some of these operations manuals that uh created agency relationships or uh that had different um regulations that were or different prescriptions for how things should be done that were different than regulations because they didn't keep up with regulations etc so one of the things that you have to ask yourself in this in developing an operations manual is what you are providing a best practice or is what you are providing a mandatory uh requirement in your operations manual so there will be certain things that we mandated in your manual anything that's a brand standard should be mandated in your manual and if it's a best practice it should be something that is recommended but is not going to be legally enforceable it's not something that is too prescriptive you have to be careful of that so i'll give you a quick example here dominoes did a survey and figured out that one of the ways that they could reduce the amount of uh problems that they were having with uh with robberies at their location was they have drop safes in the locations so they put down that the franchisee should develop should have drop safes they specified here's the drop safe that you have to use and then one day one of their franchisees was robbed and when they were robbed they were not able to open the drop safe and it was the manager was not able to open the drop save the manager got pistol whipped and following that sued the franchisee and the franchisor saying that it was their drop saves that was the approximate cause of their injuries and they won and they won because these drop saves were mandated as part of the operations manual and so i asked people do you think that having a drop safe is a brand standard and when i talk about brand standard is the reason why people come into your location to have your pizza right so i think most of us would agree that the drop safe that domino's uses in their location has nothing to do with whether or not we're going to go into a into abdominals to get pizza so if that's the case it should be something towards a best practice and not a brand standard so it's a it's a fine line but it's an important one that people uh should do your operations manual should be constantly updated um one of the things that we've found is that if people don't get their operations manuals reviewed on a regular basis uh there could be some real problems you know one of my favorite lines is by charles monger over berkshire hathaway who basically said that if you jump out of the window at the 42nd floor and you still are doing fine when you're passing 27 it doesn't mean you don't have a real problem and there's a lot of franchise orders out there that if you think about uh what they are what they are doing they've got operations manuals that have time bombs in them that could very easily explode on them without them having the first knowledge of that so for example there was a major food service franchisor that some years ago had a substantial foodborne illness issue and this is a top name franchisor and they they ended up having a an issue with e coli and that issue that they had with the e coli uh ended up killing six people and injuring others and really the e coli issue was was not their fault it was their supplier that provided that actually was at approximate fault of the the e coli as contaminated meat was sold but in that particular case the operations manual was a little bit too specific about the temperature at which they should we should prepare the beef and while there was nobody there taking the temperature of every hamburger that got sold on that location because the operations manual said you must cook it to an internal temperature of 140 degrees as opposed to 160 degrees remember the law stated in the state of oregon the franchisor ended up with 160 million dollars of liability that could have that almost bankrupted the company and caused a substantial restructuring business so we talked about developing a best practices operations manual this is sort of the process and i um i would uh you know suggest that there's a you know a system that you can go through that essentially allows you to define what our best practices and what are not and then what are sort of uh other elements of this but uh so what i would say is i'm not gonna go into a lot of detail about this but this is essentially what the process looks like when we're talking about developing a system for the development of your franchise operations manual beyond the operations manual there's a lot of tools you can use um online training is one of the big ones these days it uh it allows you to review and see test scores and other issues like that so again quality control making sure franchisees are doing well are going to be it's going to be at the top of your list as a franchise or um one of the things we do is we encourage people to do um learning management systems um and this is just an example of what one might look like but you would look at various different topics that you would have uh and those things would be relatively easily searchable so we talked about legal we talked about that before fdc rule 436 requires that you have a disclosure document that has and that you provided disclosure document 14 days prior to the sale of a franchise the final franchise agreement with any changes in contract terms has to be provided seven days prior um the fdc rule talks about what you can and cannot say in terms of financial performance and everything that you say as a franchisor has to be consistent with what is in that disclosure document in addition to the federal law you're going to have to comply with the state law so the state law uh basically there are 14 registration states these are the states that regulate advertising there are also some business opportunity states you mentioned those earlier and then uh remember that there are some older definitions or some older laws and some other laws that are a little bit unusual so you have to be careful in terms of the way in which you are looking to [Music] comply with these laws and make sure again this is where having a great franchise attorney is important to you now the state laws they can be triggered for a variety of different reasons um where you're incorporated or your domicile where your franchisees lives the territory that's covered by the contract or where even the discussion takes place like in new york if the discussion takes place in laguardia airport you have to be registered in new york even if you are out of new jersey and your franchisee is going to operate in pennsylvania so you have to understand what those are again make sure you get your franchise attorney track these kind of variables closely and always check the attorney whenever you're in doubt on these things um from the standpoint of state specific legal issues um there are you know certain things that you have to do you have to be registered prior to soliciting sometimes you have to submit your advertising materials to some of these states so um depending on the state that you're looking to go into there are some states they have specific laws relative determination or non-competes or escrows uh so you have to make sure that if you're that you are doing this um that you have a good understanding of what different states are and what they will allow this is sort of a map that sort of in general shows you where the states are the green states are the franchise registration states the red states are both registration and bizap states in the blue states are biz op alone states a lot of times there's trademark exemptions in these states so florida georgia north and south carolina connecticut maine and utah all have trademark exemptions so if you have a federal registered trademark you don't need to get registered there that kind of thing but um this gives you sort of a visual about you know the states that you have to be cognizant of and i mentioned before a little bit about financial performance representations item 19 of the disclosure document is what used to be called an earnings claim uh it's now called a financial performance representation but you cannot say anything about your earnings or your sales or your your expenses unless you've covered it in item 19 uh of this there's gonna be certain things that will be covered in item seven like your startup costs uh but you have to make sure you understand what you can and cannot say now there are certain advantages to using an item 19 earnings claim might be able to help you sell faster or avoid litigation but it's got to be appropriate and one of the issues that is particularly vexing these days is what do we say if our business had a down year but the reason it had it down here is because of covet so there's different opinions on how you can do that i'm not going to go through the whole cove discussion here but you can still have those conversations as long as they are disclosed properly and you just need to make sure that you've done that in a way that is not misleading to a prospective franchisee about you know there's probably 40 to 50 percent of franchisors who don't use financial performance representations anymore uh so um there are certainly ways in which you can do that um so that's not necessarily something that you have to do uh bear in mind that there are significant finds and penalties for anyone who fails to live up to some franchise laws some of these things can be very substantial and so you have to be very careful uh of exactly what it is that you're doing and make sure that you understand again this is where the franchise lawyer comes in now when it comes to marketing your franchise again one of the things that we talk about is that you want to support your franchisees number one first and foremost so we usually tell people start locally and then go regional from there so you want to be able to cluster your support you want to be able to have franchise advertising companies purchasing economies brand building and a brand awareness but you also want to be able to provide that support in a ready ready manner so if you if you are operating out of new york and you have a franchise e in california that means you've got to take a full day flight to get out to california if they have a problem you have to spend the full day with them and then at the end you're going to take another full day flight coming back you've wasted three days just to have a one day meeting on site with your franchisee and it's very expensive as well because you paid for a long airplane ticket and you've also paid for two nights in a hotel and what we normally like to see is somebody within about a three hour drive time in the first year maybe the first two years and that's where you should be focusing your efforts until you get to a point where you're ready to expand beyond that um and again don't expand faster your ability to support your franchisees um nothing works as well as in selling franchises happy and successful franchisees and make sure quality control of their success is at the top of your list from a standpoint of marketing effectiveness um you want to narrow your prospects down as much as you possibly can so from the standpoint of doing that if you're already franchising survey the characteristics of your top performers if on the other hand europe have not yet started franchising survey the franchisees of your competitors you can learn a lot just by looking at their linkedin profile or you know ideally talking to them on the telephone make sure that from the lead generation strategy that you're you're selecting the right strategies this work again companies like ours that have accumulated hundreds of thousands of leads over the years have a pretty good feel for what some of those are um make sure your advertising is appropriate and make sure you're using the right media um you know based on the development strategy that you are trying to employ um so one of the nice things about franchising is a lot of people are out there looking for new brands they're looking to buy into the next new concept um you know forty percent saying joining a null brand is not vital 40 would prefer a known brand but are open in your concept and there's a group of people that only want um unknown brands and there's a group of people that only want new brands so um just you're in terms of your average candidate have them visit you um you know virtual discovery days are becoming more um more in fashion these days but you really do want to make sure that you're at least involving all your people in this conversation um in a normal world 10 of your franchisees are looking because of job loss in today's world that might be 30 to 40 percent of your candidates or more are looking because of that um one of the things that we talk about is that franchising really thrives in a recessionary environment and the things that drive franchising is people being out of work which we got very high levels of unemployed people about 7.5 percent now uh plus the that's about 11 million people he had to have another three four million people that are on our second thing that's going to drive it is availability of capital and unlike the last great recession we've got a great deal of capital availability today third thing is cost of capital which the cost of capital is substantially lower uh fourth thing is going to be the collateralization of the capital of the loans which you know unlike the last great recession we've seen records in the stock market and records in the housing market so this is really a great time for most franchisors that are out there now again make sure that the frame chat your franchisees talk your to your current franchisees so here's just some some quick exp um not some general high level information about uh what it is that people are doing to church to market their franchise you'll notice that uh about 50 of lead generation spend comes from um from the internet or the franchisee website when you add that together now if you add in social media on top of that as well uh you know it's going to be you know well above the 50 level um so those are um you know that's the main driver of these these days but when you find the you know and especially when you talk about leads you see that the leads are coming in um you know at less than maybe uh you wouldn't want but they're they're still coming in at above that fifty percent rate for leads by media but if you look at um uh where on the internet people are spending their money one of the things i would tell you franchise opportunity sites you have to be very selective in terms of the franchise opportunity sites that you look at a lot of those are are going to have very low conversion rates so that is something that we have found is not as effective on some sites as others the other is the social media advertising while people are doing more and more of it it is not uh getting the kinds of close rates for most businesses that we would hope for social networking again is another area that is not getting highest levels of close rates the email the seo the pay-per-click tend to do better and some other franchise opportunity sites are doing pretty well as well um when we look at franchising in general from a lead generation standpoint one of the things that we talk about is we talk about the um sort of the pipeline of where the leads come from so the what has happened in the last year is is not very reflective of what we're seeing in a typical franchise environment so what we're seeing in the last year are very high cost per leads so the year before um you know we see a cost per lead here about 312 dollars the year before this it was 134.

[01:19:03]but what's happening is people were spending more money on franchise marketing uh or continue to spend money on franchise marketing but fewer people were um were actually um interested in buying franchises at the beginning of this recession some of these other numbers are fairly consistent um but the um in terms of close rates and time to close it's taking a little bit longer to close in today's market from standpoint it's usually 12 14 weeks to close it's now 18 weeks for a close time and the average marketing cost has gone up to about 12 000 per franchise sale with a median about nine thousand six hundred percent so those numbers are higher average close rates about three point five percent which is also higher and then three point five percent you know in the average year those numbers usually are closer to two percent 2.5 but we're seeing a higher number today because the people who are buyers are actually there's more buyers as a percentage of total then there are um non-buyers as a percentage of the total so there's fewer tire kickers i guess is another way of saying it now one of the things we're expecting is in 2021 we're expecting that this cost per lead is going to go down substantially as more and more people start looking at franchises and so we're we are expecting that we're going to see these same kind of numbers here but we're going to see very low cost per leads over here which is going to result in a substantially reduced marketing cost per sale um and um lead times maybe us maybe continue to stay stay fairly long but we are looking at uh some substantial reductions this is sort of uh unusual year to be launching so in terms of closing costs you'll see that these numbers have gone up up up if you look at what happens during the great recession the numbers jumped up to 13 000 and then immediately thereafter they jumped they hit a substantial drop um in the net in the following few years after the last recession um just based on um sort of what we normally would anticipate and we're anticipating a similar kind of drop uh in 2021 um from the standpoint of marketing one thing i think is important to point out most franchise companies don't have an unlimited marketing budget so the circumstances are going to be very different in terms of what it is that you need to be looking at your budgetary restrictions your geographic focus those kinds of things so it's important to have a really fully integrated um lead generation strategy to be able to uh substantially you know hit the kind of goals that you're looking for so it's not really what we're looking for is not some kind of canned approach in this process uh obviously the web is the center piece of your strategy and there's everything so it will feed into the web um so it's important that your website has some kind of a plan to attract traffic specifically for franchising one of the things that we do recommend is that you have a dedicated franchise website it should not be a extension of your consumer website and the reason for that is that frankly google gets confused if it's hearing two messages from the same site so it's hearing uh from the site that it needs you know that you're looking to sell widgets and then it's also you're looking to sell franchises google says are they a are they a widget company are they a um franchise company so we recommend doing a separate site with a separate url it can look pretty much identical to what the um to what everybody else would normally see but it's it would be uh it would also be something that is from google's standpoint something where it's clearly differentiated um from a standpoint of seo um if you get caught on the last page you know on the second or third page of google chances are you're not going to get followed so it's really important to do seo um typically pay-per-click advertising is a great way to get in page one but that those costs go up over time with seo those costs go down over time so they typically start out more expensive but then as you continue to go back links and other kind of content uh then typically what you're going to find is those will go down so in terms of certain ranking factors and the kinds of things that are sort of positive seo correlations and again this is the kind of thing that our sister company top our media does you know it's the number of you know sort of keyword links it's it's a lot of it's social media these days uh are some of the biggest things that are that are out there uh but bear in mind again seo is a process so when we're talking about through the process of search engine optimization what we're really talking about is uh continuing to refine the way that your business is working adding more content and sort of continuing to to add more content as a part of the process that you're that you're doing one of the things that we are offering as a part of our seminar today is an assessment uh through you know from some of our um affiliates over top of our media so if you want to get a second set of eyes on your online marketing presence with the focus on the franchise side uh we will do an inbound marketing assessment that will take a look at social media pay-per-click that's we do this assessment at no cost to you so um if you want just uh send an email to us and shoot along uh some of your contact information and i'll have somebody reach out to you to get that assessment taken care of from a standpoint of messaging um bear in mind that franchise marketing is going to be very different than consumer marketing so i saw a brochure the other day that had a number of barbers sitting there waiting in a beautiful pristine um barber shop and it was a you know obviously a barber franchise i thought to myself boy this is great i need a haircut this is just exactly what i'm looking for but as a franchisee it's sort of a franchisee's worst nightmare because you've got all these barbers there and nobody in the chair there's no money changing hands or frank this is where franchisee wakes up screaming about the middle of the night so again make sure that you do do this but do this within the realm of what the franchise lawyers would like to do there's basically five sales you're making as part of your messaging the first is you got to convince people to go into business for themselves the second is that you want them to go into business by buying a franchise and understanding the benefits of franchising the third is they need to invest in your particular industry why is your industry so great and fourth sale is why they need to invest in your specific franchise so think about those four sales as part of the content development side and the last sale which is more relevant today than normal is what is the timing on this so from the standpoint of timing we look at you know is the timing right for us to be getting into uh the market in the middle of covet and that's something that people are going to be asking themselves depending on what it is you're doing now remember your attorney should review all this stuff because the registrations will review this stuff again make sure you got a great franchise attorney lastly i want to talk a little bit about selling franchises and when we talk about franchise sales this is sort of where you're starting you're telling somebody i want you to quit your job i want you to give up your vacations your 401k your benefits i want you to trust me even though we've never met before to invest your life savings and go into a business where you have no experience and where frankly you're going to make a the equivalent of a lifetime commitment if you think that sounds like a tough sale to make add to that the fact that you're gonna say oh and by the way i can't tell you how much money you're gonna make right so um it's a place where there's a lot of distrust and where franchise prospects are you know starting with a a very sort of worrisome attitude that being said franchise sales are very predictable so we talk about franchise sales um essentially when you talk about it it's you start with a good concept and the right message and the right marketing plan and an adequate marketing budget and you use good sales technique with that and you're going to get a predictable number of leads which will translate to a predictable number of meetings which translate to a predictable number of franchise sales now these averages are some very old averages but there aren't any newer statistics that have been out there but basically they say that the average new franchise will sell 9 11 13 in the first three years and the median number of sales are four five and six in the first three years so it's not if you're going into franchise i think you're gonna sell a hundred franchise the first three years that's really not typical of what franchise growth looks like now this is maybe a different representation of the same thing that we just talked about and that is sort of our sales and success cycle and franchising and essentially what we say is that if you start with a great value proposition you know that means a concept that works you structure it so the franchisee makes money and so that it's attractive you have a good marketing plan which is the kind of thing that we do at a franchise group and good messaging and good materials and a good sales process the only thing that's available here is the advertising expenditures and remember we talked about um you know the predictable number of leads and being able to predict that so in a large to a large extent the more money you pour into the franchise advertising budget the more franchisees come out the other side and so that's the only real variable if you do everything else right from the standpoint of the franchise sales cycle but post sale once you've sold that franchise you have to train them and hopefully the selectivity that you've exercised is going to make sure that they're easier to train you've got to help them with opening you've got to help them with support you've got to communicate with them and ultimately you've got to make sure they are successful so they validate for you and that sort of industry jargon for the franchisees are going to say good things about you if franchisees are all saying bad things about you then your concept regardless of how good it works for you is not going to play well in the franchise marketplace if everybody's saying i lost my life savings and the reason why was you know was the franchisor well if they've a lot you know those kind of conversations aren't going to make for a lot of franchise sales and it won't make any difference how good your marketing plan or your messaging and the sales process that we design for you are if you don't if you don't have good validation with your franchisees you will fail as franchisor so what we tell people is the number of franchises that you sell really has nothing to do with the averages what it has to do with this how much money you spend on advertising dollars down here at five o'clock uh at the same time the um the the one thing that we call that should be your capacitor on growth is going to be this back half of the cycle which says here is how fast we can afford to grow and still make our franchisees successful and so that's really what we're looking for there no again when we talk about selectivity make sure you understand that you're trying to award a franchise one of the first lessons of franchise sales is that you'll find out nobody's ever sold a franchise but really the psychology here is that it's a two-way street somebody's gotta qualify for your franchise they gotta follow your rules uh so you don't wanna be seen as a sales person you wanna be seen as somebody who's facilitated an award this is something they're investing in not something that they're buying uh so it even it goes into all sort of the nomenclature that you're going to use as far as this is concerned um so um understand what motivates the franchisee in this process you know and you know obviously the value proposition in terms of systems and you know operating economies and shared knowledge and those things are going to be important but bear in mind that a lot of this is assuming that a franchisee looks at this from a logical perspective and that's oftentimes not the way a franchise he does they're buying no sort of a logical franchise buyer would answer about a process that they would go through where they would say you know here are my investment requirements you can go through due diligence look at the whole universe narrow it down and then finally get to a decision on the purchase but the emotional reality is that people buy franchise a lot of ways that they often will buy and make other kind of major decisions like their spouse or their job or their home or their car and you don't necessarily follow a logical path uh some of these are not even going to read the disclosure document we don't encourage that but they won't um so you know they are motivated by a lot of different things and it might be they want to be independent or financial return or fun excitement or to get out from underneath their their boss but looking at sort of the things that they are motivated by oddly earning more money is not at the top of the list uh what we see is being their own boss and general independence are two of the things that at the top doing something they love is often one of them and then earning more money um comes in at sort of a third place on this spectrum so um understand what's motivating your franchisees that means asking them a lot of questions early in the process of finding out what it is that's motivating them now when we're talking about the franchise sales process understand that most franchise prospects are going to look at somewhere in the range of six to 12 franchises or maybe more so um understand that you are being shocked and make sure that you honor that you're prepared to answer how you are differentiated from the people that you're most likely being shot against this is sort of the flow of the franchise sales process and there are you know the the process itself is you know i mean obviously he has a number of different steps involved in it um basically it starts by with the lead coming in we provide them with a confidential information request form which we call a surf well for short once we've reviewed that and found out that they are qualified we will do personal interviews background checks we'll do disclosure uh and reference checks and then we'll have a discovery day typically there's more steps to it than this so again this is sort of a an overview but then you know they're typically this is a sort of overview of the process now from a philosophical standpoint one of the things i would like to drive home today is sort of the the understanding of the present value of the single franchise a lot of times there are a lot of decisions that you will make as a respect as a new franchisor where you're thinking about it from the standpoint of um maybe the short term so as an example uh franchise brokers as a means of lead generation provide very high quality leads oftentimes those leads they provide turn into franchises at a much higher rate than the typical non-broker lead but a franchise broker when they close a lead might be looking for a a commission on that lead or a referral fee on that lead that might be 20 000 or 25 000 and it could very easily eat up most of your franchise fee you know especially if you have to pay a sales commission to your franchise sales person who is still involved in the sale even though it came from franchise broker but you could lose money on every sale and it would sound like you're losing money right because you know your franchise fee is twenty five thousand dollars you paid a twenty four thousand dollar um broker fee you paid that five thousand dollar commission your franchise sales person and you had to pay for training and everything else but understand that what we're selling when we're in the franchise sales business is we're selling a long-term stream of income that is going to be you know again it's a mcdonald's franchise he's a third generation they've been paying franchise royalties for 60 years so every year there's you know 30 40 000 50 000 in royalties comes in from that franchisee year after year after year so essentially it's like when you sell a franchise it's like purchasing an annuity you're going to continue to get that money over time so understand what that present value that franchise is when you're making decisions that impacted so if if you were to look at it from just the standpoint of franchise fees you might say that broker is charging too much i'm not going to pay him that kind of money but when you look at it from the standpoint of a of a longer-term relationship you might say to yourself that you are you know happy to pay a 24 000 franchise brokerage fee when somebody is um in that situation [Music] um excuse me [Music] so um from the standpoint of the sales process the um when we talk about the sales process uh the sale uh essentially is the most important thing is be selective in terms of who you take out as your franchisees you know hire the best sales people that you can afford maintain a level of personal involvement in every sale um and again make sure that both the franchisees success and the quality that you're going to have from a franchisee are the guide posts for who to do do this with make sure your sales staff is trained you can have personal liability for franchise sales so um make sure that you do that and then set up systems to measure everything you want to know cost per lead by media um you want to know all these different elements because if you don't you're not going to be able to make the kind of adjustments that are going to allow you to be more effective in the sales process um so um ultimately done right it is a numbers game you know obviously if the concept does not work if it's not franchisable don't franchise it all you will do is create problems for yourself but franchisee success as your capacitor for growth will allow you to grow very quickly and with those caveats i would say that the the franchise sales are a natural result of well-executed marketing strategy and good sales strategy um so again um that's really the the process that we're talking about now um this is sort of a overview of sure what the the process up looks like for an established franchise or if they're not hitting their marks so if one of the things that we do with established franchisors is if we find a franchisor who's not doing a great job with the franchise sales we try and figure out what the problem is and so if you you were to look at referrals and publicity that could indicate concept problems if you were to look at high cost per lead in other media it could be media selection problems if you look at low conversion rates it could be your marketing materials or your sales process if you were to look at a few broker leads it could be you know lack of broker participation and going to the broker shows or it could be broker confidence in your sales process if you have a long close time it could be an inability to to create urgency or setting an agenda up front or poor closing skills um low conversion rates could be you know poor sales skills or poor validation so in short if you understand and you track everything you can figure out exactly where the problems lie in any of the um in any of the different areas that you're looking at but if you do not track these things you're just left with a a problem where you say you know it might be the leads it might be the sales person i don't know why we're not closing at the rate we should be closing so this is why it's really important to track every single statistic and when we do a marketing and sales audit what we will do is we'll look at four primary areas the franchise concept lead generation the messaging and the sales process and each one of these could have certain potential problems and there are certain symptoms that go along with each one of those uh issues and there's a way that we go about diagnosing that by doing different kinds of surveys or by evaluating portfolios or evaluating contracts for doing marketing comparisons or contract comparisons the same holds true for lead generation you know we know how to identify those symptoms and we can diagnose it by applying historical norms or messaging versus competitors or performance versus competitors same holds true for marketing materials same holds true for the sales process so each one of these things are you know there's you know obviously 20 plus problems that you could have in the sales process and there's really more than that and multiple kinds of symptoms but again it's very important to track where those symptoms come from once you've confirmed what the problem is though the good news is there are solutions for each one of these things so again i don't have time to go through this in detail with you but there are different things that can be done in each one of these areas to make sure that the franchisor is able to not only identify where those problems are but also to be able to figure out how to solve those problems and to start selling franchises so um that is essentially you know the process of franchising now when you're first getting started as a new franchisor one of the things that you're going to want to do is put together a a series of documents that are going to help you to become a better franchisor and so when we look at things like that essentially what we're looking at is a process that can be you know can vary fairly substantially based on how aggressively you're looking to grow so typically there's five major things that you need to do to be a good franchisor the first is you need to develop your strategy and that's things like what your fees and royalties and territory and structure are going to look like the second thing is you need to develop the legal documents that will be a piece of this and that's franchise agreement disclosure document and then state registrations the third piece is the development of quality control tools that usually starts with the operations manual training programs train the trainer programs training videos in an online learning system um then it's you know how do we market the franchises developing e-brochures and marketing plans and sales videos and making sure we've got a good strong website and then making sure that everybody's on the same page in terms of how we sell and what sales messaging is and how we implement and sort of ongoing consulting this is the kind of program that we do for clients who are getting into franchising for the first time now you notice here that says for aggressive growth this is for the kind of company that's looking to sell 20 plus franchises in the first year is not what we normally recommend we normally recommend a more conservative approach um but this gives you a feel this is the one piece of this we don't do which is the legal documents and again i would provide you with referrals to those folks whether you choose to use us or not i'm happy to do that the um so once those are are um completed this is essentially would turn and give you all the tools that a company like a mcdonald's would have so beyond that if you wanted to be more moderate in terms of your growth you would eliminate certain things you eliminate the videos you eliminate the online learning systems you eliminate some of the training tools that are meant for taking on lots of franchisees at one time and you could cut your costs down substantially in this process if you wanted to be even more conservative just want to start you know walking before your run maybe you're going to sell to some prospects that you've already identified or some former employees this might be more of a starter kind of program for companies that are just getting the franchising to begin with what i would tell you is that the process you know fees for a company like ours can range from twenty thousand dollars to 200 000 plus depending how many videos you're going and doing online learning systems and um you know doing the doing all these other things or if you're just doing like one little piece like an operations manual so it's it's really sort of a function of how aggressively you are looking to grow as to what kinds of capital that you're going to need now um what i would tell you is that when it comes to make a decision a franchise a little bit of fear is normal and i think that anybody who's taking a make a major business decision like this is going to have a little bit of fear i remember when i was a kid i i remember and i put this up here on purpose um you know i remember getting up to the top of the diving board and it looked so like so much fun when all my friends were doing it and then when i got up to the top and i started looking down it's like boy that looks like a long way to go uh but everybody's up there and started saying you know come on mark you gotta jump gotta jump and so ultimately i did and found out that it wasn't so bad it wasn't so hard and frankly it wasn't so you know it wasn't so much different than what i'd been doing off the low board the whole time anyhow uh it was just a little bit further distance and um so i think that's sort of normal enfranchising a lot of times people in franchising think that becoming a franchise or is um is really a sort of you know a major shift in the way they do business but going back to the sort of thought of how fast your cell franchise is um the transition is usually pretty gradual i i say it's sort of like walking out into the ocean you start by getting your ankles wet and then you're up to your knees and then you're up to your thighs and eventually you're swimming well when you're first starting a franchise think of it from this perspective if you're looking to sell 10 franchise let's say 12 franchises in your first year which is a pretty aggressive growth program and you've got let's say you've got a three percent close rate that means you need to have about 33 franchise prospects per month to be able to sell a franchise now so what you would end up doing is you'd end up spending you know the you know enough money to get 33 franchise prospects maybe ten thousand dollars in um uh in uh january 10 000 in february 10 000 in march and the way you're going to start franchising day one of your life as a franchisor you're going to pick up the phone once and you're going to be done or you're going to send out one email and you're going to be done and that's going to be it day 2 another email another another phone call uh you're going to continue that along that route most of the people that you talk to are not going to be qualified and so you're going to you know gradually let them down in a nice way but let them know that they're not ready for prime time and that you're going to you know they were going to have to uh think of something else to do with their uh with their lives they're not going to be your franchisee about 14 will be people that you know just based on the averages that you would want to get to that next stage in your process and so that means at the end of a month instead of having you know 30 people in your pipeline you probably have three to four people in your pipeline and that's you know maybe five in your pipeline and that's it um the second month is gonna be the same thing so you can still be doing your regular job for the first three four months until you sell that first franchise and even then it's going to be like opening a new location just one location so it's not it's not like jumping into the deep end of the pool it's it is much more gradual in terms of what happens uh in terms of the cost of becoming a franchisor um your costs are going to vary based on your particular situation you know so uh the speed of growth is going to influence what kinds of things that you would need from a company like ours your ability to do work internally um your is going to influence it obviously you don't want to be under capitalized in there your legal fees are probably going to run you 15 to 35 000 generally speaking the consulting fees are 40 000 they can be lower than that but um you know usually 40 to 200 is the range i quote people um organizational expenses um usually they tend to be closer to the 10 000 these days people don't do as much printing as they used to do more it's more e-brochure so that keeps the cost down um franchise marketing um you know eight to twelve thousand per sale and you should have about a six month budget for that so if you spend again going back to what we're talking about you spend ten thousand in january ten thousand february ten thousand in march ten thousand in april by the end of april you probably sell that first franchise or at least statistically speaking you should and so you've got ten thousand one out but you also have another 25 35 000 coming in so you're sort of cash flow breaking even at that point because the january leads ripened in april uh the february leads will ripen in may on average that doesn't work quite like that in the real world it's a lot more um it's a lot more um uneven than that but if you sort of give yourself six months worth of working capital that should be about what you would need from a budgetary standpoint then the last thing is going to be people and you can you know the needs that you're going to have are going to vary pretty widely based on how fast you're growing um how um how good the people are that are on your team right now and how many of you have and how you know but mostly it's based on the speed of growth so that's pretty much the presentation what i would say sort of in conclusion is that franchising is a means of duplicating success you can't franchise something that's not working to begin with it's got to be something that is working if you want to do that second create a win-win situation make sure your franchisee is successful i think now that's four times i've said it if it's if i've said it any less than four times i apologize it's the most important thing that you'll be able to do uh the the next thing is be selective in terms of who your franchise is are going to be make sure that you're selecting people that are going to be top quality franchisees understand that you're entering a new and different business it's not the right solution for every business but it is one of the most powerful and dynamic business models that you would that you'll ever be able to um that you'll ever be able to take advantage of um and then um in closing what i would say is if anybody has any questions i'm happy to try and entertain them i think you've got a few minutes left but um there is additional information available from i franchise group uh we have some consultants uh we call them franchise analysts that you can talk to anytime to ask them questions they're professionals with this they know you know how to answer most of those questions that you might have um happy to send you a copy of these slides uh i also have a video on how to franchise it goes into a little bit deeper dive on some scratchy pieces and a book on how to franchise it does a lot deeper dive if you send those out again with our compliments to the folks at uh mfb and lastly we mentioned before if you wanted to get a digital marketing assessment um we'd be happy to do a assessment of your marketing um to the extent that you're out there trying to search for franchisees already so with that said i'll i'll open it up to questions if there if there are any um and let's see if i can find though i am not hearing any questions and i'm not seeing anything come up on my so i'm not seeing anything i'm not getting my chat uh chip my room is not opened up with any questions so um i guess uh since i have not heard any questions it sounds as if uh we have um just about run out of time uh i want to thank everybody for the time and attention uh that you've given me today and if anybody is interested in learning more about franchising i'd love to hear from you and talk about whether or not franchising is right for your business or whether you have any um other alternatives that might make sense so again thank you for your time and attention today and everybody out there please stay safe and and hopefully business gets back to booming for you if it's not already