Many business owners looking to grow their businesses may never consider franchising for a variety of reasons. However, the decision to ignore or avoid franchising as a legitimate means of business growth may come from a lack of understanding of the real short and long term benefits of a corporate growth model with a long track record of success. The truth is that franchising is not just for fast food and dry cleaning chains. Businesses in all industries are leveraging franchising for growth. Listen and learn from Mark Siebert, CEO of iFranchise Group, about what makes a business “franchiseable” and what franchisees should consider when looking for a business to buy.
Franchisees don’t just come to you by accident. You have to go out there and attract them.
- Mark Siebert
Jeff: Mark, what we're going to try to do I think is to give people a ground floor introduction to franchising today. In a matter of speaking, we may be going over some inter-media topics as well but for the purpose of today's show, what I wanted to start out talking about, Mark, you know you'd been CEO of iFranchise Group. You've got 30 years of experience with helping franchise owners and companies with their franchise organizational needs. Can you tell us what the term franchise consultant means? I mean exactly, what is it that you do?
Mark: Well, it's funny. There are people out there that will call themselves franchise consultants and what they really are is brokers who try to sell companies or sell franchises to people that will want to buy franchises and it's not what we do. We are more of the traditional management consulting firm where what we will do is we will help companies . . . really in two categories. One, companies that are thinking about franchising for the first time. So, you got a small shop. You're thinking about growth.
You think maybe franchising is a great way to grow but you don't know how to go about doing it. And then the other group that we cater to are existing franchisors who maybe hit a problem. Maybe they're not selling franchises as best as they thought they could. Maybe they are having difficulties with franchise regulations or of quality control. What we do with these companies is we'll step in and tell them how to do it better. So eventually, our practice is focused around how to be a good franchise or organization.
There are people out there that will call themselves franchise consultants and what they really are is brokers who try to sell companies or sell franchises to people that will want to buy franchises and it's not what we do.
Jeff: Mark, of those two lines of business - if you want, we'll just call them "lines of business" - but you talked about a couple of functions working with existing franchisors. The second thing you talked about were having some issues. You’re talking about, talking to them about, how to operate better and bring their franchise up the speed, not the standards. Of the two, do you work more with one of those clients than the other or is it evenly split as far as your business is concerned?
Mark: It's fairly evenly split. The services that we provide are actually, in truth, the kind of things we do for franchisors. They really fall under the same categories, whether it's a start-up or the established franchisor. By service line, we do a lot of work in terms of developing strategic plans. We do a lot of work in terms of developing quality control mechanisms like operations manuals and training programs and online learning systems. We do a lot of work when it comes to franchise marketing and lead generation. We will help franchisors, not on the consumer side, but on finding perspective franchisees. And then the last theory of our business is really organizational development and that can be anything from training people how to sell franchises and do it more effectively to actually selling franchises on their behalf to an affiliated company like ours called franchise dynamics, or to training people on just how to interact with franchisees so they can hit better franchise relations or a variety of different subjects, to field support etcetera.
Jeff: What we've done here is we've kind of established, Mark, that there really is no area of the industry that you folks don't cover with respect to the services that you provide and the lines of business that you provide to help people either operate a franchise or find a franchise or find people to buy franchises that your clients are looking to sell. What I'd like to do right now is I'd like to get down to the brass tacks, the needy-goody if you would. Let's pretend that I'm a business owner and I'm very interested in finding out if I can branch out. How do I know if my business is franchise-able?
Mark: We've got a test on our website - which is ifranchisegroup.com - that goes to twelve criteria that we look for. But the short version answer is that there are three things you have to do to be a franchise. One is you have to sell franchises. So, to be a sale-able business opportunity, you want to make sure that you have some credibility, that you've got . . . you positioned the opportunity uniquely, that you have a some kind of a value proposition that will compel people to buy you versus one of the other franchise opportunities that are out there.
Second, what you have to do is you have to be able to duplicate your business. That means you have the able substance to form the operations manuals, the training programs and it's got to be a business model that will work in a variety of different markets. So, if you have a bikini shop in South Beach, it may not work as well in Chicago where I'm located. Those are the kinds of things we that we look at from a --- hone-ability or duplicate-ability standpoint.
But the real acid test is really return on investment. When we talk about return on investment, it's really a function of how much money can you make and how much does it cost a franchisee to get into this business. If I'm a franchisee, I can go out and get a job and make a salary, and I can take the money that's in my savings account or retirement account and I can make a return on that investment. Alternatively, I can buy into a business, I can grow that business and ultimately sell that business. In the meantime, I can make the equivalent of a salary plus the return and the money I've invested in that business. As we really look to see, a great return is a little bit above market, we'd like to see a return on invested capital at above 15 percent if it’s an owner operator, and if you're going to be selling franchises to multi-unit operators who will have their own infrastructure that they need to support, we would typically look at and we try and close at about 20 percent.
Jeff: 20 percent. What are the advantages of franchising versus the disadvantages?
Mark: Well, the primary advantages that I could cite would be time, people, and money. From the standpoint of typically expansion options, franchisors could grow much faster because their leveraging off of the time of your franchisee. They're looking for sites, they're finding a negotiating leases, and they are hiring people and training people, so you don't have to build a big infrastructure around them. The second advantage is you get really highly motivated management. The people who are going to be your franchisees are typically going to be folks who are investing a good portion of their life's savings in making this work. And the third is capital. The franchisee is going to be the one who's going to invest their capital opposed to your capital, so you can grow using other people's money and at the same time without giving up your equity.
Now, for your readers in particular, I think there's a fourth advantage and that is that we have found that franchise businesses sell at a premium to the market. And in studies we've done, we've seen, like for example comparing the standard multiples achieved by publicly traded franchise companies to the multiples achieved by a publicly traded non-franchise companies, I need to just pick up the SMP as a benchmark, we've seen typically a 25 percent premium paid for franchise companies. So, there is certain advantages to franchises from a standpoint of valuation because investors see franchise companies as being faster growth vehicles.
... the primary advantages [of franchising] that I could cite would be time, people, and money.
Jeff: Why do you think that is? Is that mainly because the business model has already been through a test, it's already seen some success or establish a track record of success in a given market?
Mark: That's absolutely a part of it. But the other part is that every time . . . if I've . . . have my own corporate location and I need to expand by opening additional corporate locations, that will cost me a lot of money to do that.
Jeff: Interesting point.
Mark: In the franchise world, I can go out and open up ten more locations and I don't spend anything. The franchisees spend the money. I've got a little bit of money spent on marketing to find those franchisees but I can open a lot more locations a lot more quickly using other people's money and without deluding my equity.
Jeff: Now, Mark, we've talked about some of the advantages and obviously, it’s part of your business to working with your clients to make sure that they make the right decisions and right choices. But are there ever any situations where you're talking with a client and you say, "You know what, maybe this isn't a really good idea for you and your particular business." What are some of the disadvantages of franchising?
Mark: I would say the big disadvantage of franchising is that you're sharing the bottom line profitability with your franchisee. If a franchisee puts up all the money and the franchisee is putting up all the time and in investing this, they're going to expect the lion's share of returns when the business gets up and profitable. So, a franchisor equates the profit by making a royalty, they might make some rebate money, they might make some advertising money. But they are not going to get every dollar that goes to the bottom line.
And from a standpoint of is it right for everybody? Absolutely not! I would say that first of all, you have to make sure that you're business model can withstand that kind of a royalty of still providing a good return because when we talk about returns on investment, that would have to be our definition of the franchise and impose royalty and a return of investment. So you have to adjust those financials to reflect that.
The other thing is, frankly, it's not like for every person just based on what their individual goals are, what their aspirations are. If I have a business that's worth a million dollars and I want to sell it in five years for two million dollars, well, franchising's may not be the best strategy. Maybe I just want to open up one more corporate location. If I'm looking for more aggressive growth, it's very likely franchising is going to be the sum of all of the solution that will get me there faster.
If I have a business that's worth a million dollars and I want to sell it in five years for two million dollars, well, franchising's may not be the best strategy.
Jeff: Have you ever found, Mark, that some people may have made the mistake of setting up and franchising their business because they found out later on down the line that they just didn't have all the control that they wanted to with respect to managing that franchise location that they have bought somebody else on board to take control of. Has that ever been anything that you found in your experience?
Mark: Well, I think that that is something that can absolutely happen in a franchise organization. You don't have the same level of control and that you can't hire and fire employees at will or you could do it to your employees or the employees of your franchisees. That being said, a franchisee is to be highly motivated and just because of the fact that they've got their life's savings on the line, to do things as well as possible. Oftentimes, what we find is that franchisees will outperform the franchisor in terms of average revenue per unit. And that's . . . consumers voting with their dollars saying that they like this location better than the other because of the fact that it's better run. So, generally speaking, franchisees run the locations better. But the way to avoid those control issues which you've mentioned:
Number one, make sure you have very good franchise selection processes in place. You don't want to sell a franchise to anybody just because they can flog a mirror and they have a check. You need to make sure that you want to sell them to the right people who share your belief system and are going to follow the systems.
Number two, make sure you provide good tools, operations manuals, training programs, etc.
Number three, make sure that as a franchisor you're providing good ongoing support and you are visiting with your franchisees at a regular basis and letting them know what kind of things they could be doing to improve their revenue in keeping with your systems.
Number four, if they are not following your brand's standards, that may not be as simple as someone who maybe an actual termination of a franchisee, but if they're not following your brand's standards, you absolutely have the right to terminate that franchisee.
... a franchisee is to be highly motivated and just because of the fact that they've got their life's savings on the line, to do things as well as possible.
Jeff: We're talking franchising on this edition of the Morgan & Westfield podcast with Mark Siebert. He's a CEO and Senior Franchising Consultant at iFranchise.
Mark, what are some of the legal requirements for franchising?
Mark: In the United States, franchising is governed under FTC Rule 446, which basically says that if you're going to offer franchises for sale, you need to provide a disclosure document to a prospective franchisee 14 calendar days in advance of them signing or of them providing you with money. Eventually, under the federal rule, you have to provide some information about you, your background, the franchise, how it works, what the fee structures are with the prescribed cooling off period so that . . . and it has to be done in a very specific format. It’s got to follow the format dictated in the rule.
Aside from the federal rule, there are 14 different states that regulate franchising and not only do they require that you provide that disclosure document but they also require that you register at the state level. So, finding a good franchise attorney is something that's going to be a part of your process as a franchisor. The classification is relatively easy to develop and relatively inexpensive to develop but you need to find a specialist. We don't do the franchise legal documents, by the way. My team may provide referrals to people to lawyers in franchising. There are a relatively small number of lawyers out there who do this. You don't want to go to your real estate lawyer or your divorce attorney and ask them to put together these documents. You need to find a specialist. If you do that, it's very easy to comply with.
Jeff: Tell us about some of the costs that are involved here, Mark, in terms of franchising a business from the time that folks may come and see you, maybe to the time that the deal's consummated and closed.
Mark: I think it really is dependent on how aggressively you're looking to grow. So, as an example, if you are looking to grow relatively unaggressively, maybe you just want to sell a franchise to your brother-in-law or one or two of your employees, all you really need is you're going to need the legal documents and you're going to need an operations manual so you can control quality. Your cost will almost certainly be under $50,000. It could be, depending on what you've done internally and which lawyer you choose to work with, it could be $40,000 or $35,000. So, you can get into it relatively inexpensively.
If, on the other hand, you are looking to grow more aggressively, you start talking about the development of some of these other services that I mentioned earlier that we do - things like business plans, financial models, competitive analysis, training programs, training videos, online learning management systems, you start talking about more in the way of marketing so, brochures and marketing plans and websites and videos and other things from a promotional standpoint, then, you're going to have a much greater franchise marketing budget. Franchisees don't just come to you by accident. You have to go out there and attract them. Just go out there and attract them. So, finding those franchisees is going to cost you as well.
Depending on how aggressively you're looking to grow, I see a moderate franchise program, you might be spending $100,000 or on an aggressive franchise program, it's $200,000 and up. It really depends on how aggressively you're looking to sell in the marketplace.
Jeff: And that begs the question --- what types of businesses are best suited for franchising and many of us are familiar with some of the big names. Of course, McDonalds comes to mind and there are other fast food outlets, companies that also offer franchises as well and there are dry cleaners and so forth. What are some of the more common businesses that are best suited for franchising and maybe, you might even think of an industry that we're not familiar with or we don't realize, Mark; that right now we're seeing a lot of franchise activity with.
Mark: One of the things that people don't realize, frankly, is how ubiquitous franchising really is. Pretty much every industry you can think of has franchises. The biggest companies in lawn care are all franchised. The biggest companies in janitorial services are all franchised. The biggest companies in hotels, all the big hotel companies are franchised. The biggest companies in automotive aftermarket are all franchised. In many of the industries that are out there. The biggest companies are already a franchise. There are very few industries that don't have franchising, frankly.
One of the things that people don't realize, frankly, is how ubiquitous franchising really is.
Jeff: That's really interesting because we sometimes really don't give it very much thought. Whenever we walk in to a business, we just go in, we buy what were there to buy and we don't give any consideration to how the business is run, who's running it - corporation versus small business owner - and right there, that kind of clarifies for us that this is indeed a very, very popular form of business ownership. We understand that we're talking franchises off and we're talking about multiple locations out there with each location being owned by a different owner. Some owners own several different locations. Is it possible to actually have only one location of a business and that location is essentially a franchise?
Mark: If you only have one location, that would be something that you would own so, that would not be a franchise. But I think that it is possible to start a franchise program with just one location in existence. I'll give you an example on that. About 8-10 years ago, a gentleman called John Leonesio came up to me and said, "I've got a therapeutic massage business that I'd like to franchise.
I only have one location. It's only been open three months." I started talking to him about his business and as I started to hear more and more about the business, the more excited I got about it. Well it turned out the business model was a company called Massage Envy. Today, Massage Envy has well over a thousand locations - 1200 locations - around the US and it is, by far and away, I mean the biggest therapeutic massage company in the world, probably the biggest … certainly the biggest in the world I would think …
Jeff: And they're popping up all over the place.
Mark: And they're popping up all over the place. They basically created a new industry. They took something that was a very fragmented market beforehand where there was not a lot of franchising in that market and they converted that market in over the course of less than a decade. I think that if you had a good business model and, especially if you have good strong value proposition, just having one location could be enough to get you from where you're at to to quite a substantial gain.
Jeff: And Massage Envy does have a very unique business model and anyone who's interested in looking into that should go and check them out on their website. Very, very unique indeed.
The man you're listening to on the other end there is Mark Siebert. He is the CEO and Senior Franchise Consultant with iFranchise Group. My name is Jeff Allen. You're listening to the Morgan & Westfield podcast series. Today we're talking about franchising.
What is the time frame for putting something together, putting a deal together? I'm interested in owning a business and becoming a franchisee. Mark, how long do I have to wait from the time that I contact the company I'm interested in running one of their businesses to the time I actually get the keys and open up?
Mark: On the franchisee's side, you have to wait 14 days. I mean that's spelled in the law under the FTC Rule. From a franchisor's standpoint, it takes longer than that to put something together.
Mark: If you came to me and said, "I'd like to become a franchisor", you probably looking at about four months in a non-registration state and it could be a little bit longer in some registration states because there's a lot of prep work done in becoming a franchisor. And as far as how long it will take you as a franchisee to open the doors. It really varies by business. Some businesses are very quick to open. Some take months and months to open. So, if you want to open up a child care facility, it could take a year or more and if you want to open up a jazzercise business, you could open your doors in a week, now once the contracts are signed. So it can take considerable time on the franchisor's side ---from four to six months to get yourself ready for franchising.
I think that if you had a good business model and, especially if you have good strong value proposition, just having one location could be enough to get you from where you're at to quite a substantial gain.
Jeff: I know that there are probably one or two of our audience members out there that are looking to dip their toe in the water so to speak, Mark, and looking to buy an existing business perhaps franchise it in the future. Do you have any advice for people out there you'd be willing to share?
Mark: If they're looking to buy a business and then franchise it, I think that number one, they have to look at that asset test that we talked about earlier. They can get it on my website for more details but eventually, looking at the ability of the franchisee to make money after deducting any kind of royalties or any kinds of mark-ups because there are lots of business models out there that work great for an individual owner-operator but once you strip out the royalty, whether you give them income or mark-ups on the product that you're going to be selling, they no longer provide mandatory terms for the franchisee. So, number one is going to be return for the franchisee after deducting that royalty. Develop some financial models around that.
I think number two is going to be look for a business model that is revenue replicate-able. Again, going back to the subject criteria for franchise-ability, there are companies out there that are franchise medical practices so we worked with a company called Doctors Express that is franchising urgent care. The reason why their business model is replicate-able is because Doctors Express is not trying to teach its franchisees to practice medicine, they are teaching franchisees how to run a medical clinic and call on the doctors to practice medicine.
So, when we talk about replicate-ability, I think the key is --- is there a way to grow this business and it may be that you have to hire people that have certain skill sets or you have to target them. Is there a way to grow this business in multiple locations or is it something that works primarily because of a particular location it's in or the particular team that's been driving it.
Jeff: Mark, we are kind of running short of time here and I wish that we had more time to talk to you at greater length about some of these items that really pertain to franchise ownership. I'd like to end by getting your vision going forward over the next several years. What do you see in terms of trends in franchising based on what you're looking at right now in the industry, and the news that you're following?
Mark: The kinds of things that I'm seeing right now in the industry, I would say, senior care is very hot market right now because of the aging of the population. Health care and medical franchise are very hot right now. Fitness server is very hot right now. And the food front, I would say, Asian, Mediterranean and these new fast pizza places where you could go in and get a custom pizza made, those are all very hot right now. Home improvement is very hot right now. But frankly, from our perspective, the ones that are going to be the home runs in franchising might not be on that list at all. It might be something where . . . something that has just a great business model.
So, if you are doing better than your peers are doing in the same industry, that could be the key to being able to say, "this is going to be the next new thing". My crystal ball is maybe only slightly better than the next guys, I never would have predicted Massage Envy would happen to be as successful as it has. It's really all about having a better model and doing something that’s different, doing something that's unique.
Jeff: Well, there you have it. Mark, if someone is interested in talking to you or talking to one of your associates about franchising, where can they reach you? What numbers, websites . . . where can they find you?
Mark: Our website is www.ifranchisegroup.com. It's all one word, i-f-r-a-n-c-h-i-s-e-g-r-o-u-p.com. And our phone number is 708-957-2300. If any of your listeners would be interested, we do have a 90-minute DVD on how to franchise a business that we have in a variety of video formats. I'm happy to send out to your listeners with our compliments so they can make a better determination if franchising is right for them.
Jeff: One more time on that phone number, Mark, if you would.
Jeff: Mark Siebert, CEO and Senior Franchise Consultant at iFranchise Group. Thanks once again for joining us today. It's been a pleasure. We hope that we can have you back on again soon.
Mark: Thank you very much, Jeff. It's a pleasure talking to you.
Jeff: That's Mark Siebert, CEO of iFranchise Group talking about franchising today on the Morgan & Westfield podcast presented by Morgan & Westfield, a nationwide leader in business sales and appraisals.
If you'd like more information about buying or selling a business, call Morgan & Westfield at 888-693-7834 or visit morganandwestfield.com. And that, coincidentally, is also where you can find all of the podcast in the Morgan & Westfield podcast series. Until next time. My name is Jeff Allen. We'll see you again.