Jeff: If you're a business owner looking to invest in other business opportunity and you may be on the fence about whether or not owning a franchise could be the right choice for you, then you've come to the right place.
From our studio in Southern California, with guest experts from across the country and around the world this is Deal Talk, brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.
Jeff: Hello and welcome back to the web's number one content source for small business owners committed to building a business for eventual sale. Here on Deal Talk it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.
Many people who already own their own privately-held business, and maybe you're one of them, are looking at franchise businesses often in different business sectors as future option should they decide to sell their own companies and move on to the next chapter in their business lives, or maybe even add to their own business portfolio. To talk about it and clue us in on how the whole franchise entrepreneur pairing and hiring thing works, we'll just kind of leave it at that, is Mr. Terry Coker. He's franchise consultant at FranChoice in franchoise.com. Terry Coker, welcome to Deal Talk sir. It's good to have you.
Terry: It's nice to be here Jeff. I want to say thank you for extending the opportunity for me to be on and share my knowledge with the audience. I really appreciate it.
You shouldn't buy a five-bedroom house in a three-bedroom neighborhood and expect to be able to sell it in 10, 15 or 20 years. And the same thing for entering into a franchise; you need to really think about the exit strategy, what type of management model you have, and how you're going to get out of that.
Jeff: We couldn't wait to have you on Terry, thanks again. You're a franchise consultant who has helped people find franchise opportunities kind of like a real estate agent might help people find a home, and the perfect home, the best home for them. How did you get into this? The whole idea is to kind of give people a little insight into how Terry Coker works and who you are. So if you don't mind kind of indulging us with that first question.
Terry: No, I don't mind that at all. I worked my way through college selling radio advertising to small business owners before I even got to college. I've worked with small business owners through my teens. And then through my radio career I was always working with small business owners. And I was having dinner one evening with a friend and he owned four franchise companies. And I was just absolutely fascinated about that.
We were talking about a startup business, a non-franchise startup business that I was, and honestly it wasn't doing all that well. He said to me, "Terry, the business isn't going to make it." And those words scared me to death because they rang true. And so he and I continued to talk and continued to talk. He said, "What are you going to do next?" And I said, "David, I don't know." And he said, "Come help me for a little while." And I said, "What would I do?" "I want you to talk to people about becoming small business owners." And I said, "That's interesting. How do we do that?" He said, "Well, talk to my people." And so I did.
I spent about a week talking to his people and I saw something there. And what I saw were systems. I fascinated me that everything that was done in his business and in the franchise companies that he owned was driven by systems. And so I spent a little time in reflection. I grabbed a legal pen. I wrote down all the successes that I had in my life and they were driven by some type of system. And then when I looked at the things that I hadn't been successful at they were Helter Skelter. And that was a real epiphany for me Jeff and it just opened my eyes up to the franchise industry and the fact that they were driven by systems.
Jeff: I think this is a really good place for me to kind of jump in Terry. This is something that has come up on the program before and we've never really taken the time to elaborate on that. I think we need to kind of look at it more deeply. There's more to a systems approach than just understanding the basic concept of a system, with franchising it's particularly important. Tell us a little bit about it.
Terry: Well, franchising allows someone to totally change careers, or to start another business if they're already current business owners without having to start at the bottom. And the reason that they can do that is this systems approach. And you hit on it, multi-unit ownerships is really the sweet spot of franchising. And if anyone out in our listening audience today has multiple locations, multiple units, remote operations, not in the same city businesses, they'll understand that core process, that core need for that. We start with the investigation systems that the federal government has put in place for franchising. The franchise industry is governed by the federal trade commission. And then at the state level, the State's attorney generals.
And there are documents that are required when someone looks at buying into a franchise to be given to them in advance of either meeting with the franchise company or signing in the agreements. And those are called franchise disclosure documents. They're common items and they're written in normal language that you can understand. It's the law so there's legalese there, but it's written for the common person understanding. It's also written do you can lay them down side by side by side and compare them. There are common elements i there. And so it's kind of the rule book, the rules of the game for everybody in that system but it's also one of the best things that our government has ever done, it has systematized that approach to disclosing what everybody should know about a business they're getting into. And that's kind of unique. It's like a prospectus if you were looking at a stock investment.
Jeff: And by the way too, I think that we need to look at these validation systems, the franchise disclosure documents. These are put together really to help business owners to help you understand not only the way that something works but to help you be as successful as you possibly can. And then of course each franchise, each organization Terry, correct me if I'm wrong, each company out there, and maybe their portfolio includes a number of different types of businesses, retail, and other types of industries that have systems underneath that to help you become successful maybe from a marketing standpoint and other types of operational systems that are in place to help everybody there under that corporate umbrella who owns their own location, their own franchise.
Let's talk about branding here, because everybody has these brands in their head. When they think franchise, whether it be 7-Eleven, or Circle K, or McDonald's is probably the most common one. And we hear about Super Cuts, or Fantastic Sams, it doesn't matter what industry. How important is branding though in considering a franchise?
Terry: That's a very important thing. It's one of the things that everybody looks to when they're considering in investment and an investment in a franchise. And the reason that it's an important step is that brand creates differentiation. You mentioned Super Cuts, a ninety plus percent national brand recognition, and the growth of that particular industry through the brands come from the independent operators. And so that's very, very important and it's more difficult than most people think. Trademarks, service marks, logos, artwork, copyrights, websites, social media, clothing, all of that needs to come together, needs to be integrated. And if there are people out there who have created a brand they understand that. And for people thinking about getting in the business who haven't created it, wow, there are a lot of moving parts just in creating a brand.
Jeff: Boy, and that is why it's really important to make sure that there is a legal entity, or there is a legal team that is in place to be able to assist with all of that because there are a lot of moving parts as you said, and all of these have to be compliant with what the corporate objectives are and tell us a little bit about just how critical the attorneys are in all of this, and how important they are in starting any business for that matter?
Terry: Every business needs some type of legal just so you don't end up on the rocks, almost inadvertently in some cases. And franchising obviously no different than that. And when someone decides to expand their business through the franchising model that's one of the first steps. They find a good franchise attorney who has written franchise agreements. That's the primary agreement between the franchise company and all of its franchisees, and they start there. And that process can take weeks if it's done very quickly. It usually takes months. And sometimes it'll even roll over into a year or longer as all that foundation work is laid. And so for someone on the receiving end who gets to document reads through it and says, "Okay, I can or can't agree to everything that I see here. These are my termination clauses. These are what we do in these separations. Here's where we go to mediation. I can and can't do this with the brand. I'm not allowed to bring in extra vendors. For somebody who reads that it's only the tip of the iceberg for people who had to conceive of and write it. So that becomes just a huge element and the foundation for starting a franchise.
And then in addition to that you got lease agreements. Many businesses are brick and mortar businesses. They require a storefront. And a storefront requires a lease. And storefront requires a build out. And storefronts require real estate contracts. And so there's an entire different layer required.
And one of the benefits in working with a national franchise company is these are standardized across the country and then individualized for the state and local level. And you've got people at the home office of the franchise company that deal in this day in and day out. And so they bring not only high-level knowledge but very granular knowledge. And then they connect with real estate people in that market. And then you go on to vendor contracts, buying at a discount on a national basis should give an individual franchise unit a real competitive advantage in terms of the pricing that it has. But those agreements require our contracts. And then you go on yet to another level of an employment agreement if those are necessary. A non-disclosure agreement towards the end of the process, exit strategy, very, very important when you enter into a franchise. You shouldn't buy a five-bedroom house in a three-bedroom neighborhood and expect to be able to sell it in 10, 15, or 20 years. And the same thing for entering into a franchise, you need to really think about the exit strategy, what type of management model you have, and how you're going to get out of that. And then those agreements, those non-disclosures, everything that comes into that process of selling a business comes extremely important to have in place at the franchisor level.
With the turn-key aspect of a franchise, not only can you plug and play, if you will, but you can also validate with other people.
Jeff: Well said Terry. And many of the things you talked about they also applied a privately held businesses as well but when you're talking about, working with a large corporation that has multiple locations possibly throughout the entire country, those interesting details that start to come to the forefront that differentiate franchise ownership from owning your own private company. They tend to be magnified and so it's really important that you do have kind of an understanding of how franchising works and how the legal component all comes to play. How about the money? Once in, let's say that somebody has got involved with a franchise that they're pretty happy with. They've spent the money to purchase their very own location and maybe they're doing obviously some homework before that. Let's talk about the money trail. Who keeps track of it? What about all the finances? Who overseas where the money comes and goes?
Terry: Well, both the franchisor and the franchisee. So the franchisor at the home office wants to keep track of that money because the common form of compensation in a franchise model is a royalty payment. And there are different structures but we'll stay at a high level for today's discussion. The average royalty for a franchise in the US market today is about 7%. And so what that means is the franchisee gets 93% of the gross revenue and the franchisor gets 7%. And so the franchisor wants to track that because that's their way of making money. There are not multiple profit centers within most franchise companies. They're driven by that royalty system. And so keeping track of that, extremely important. And so they have mechanisms for that. Obviously if you think of restaurant retail, your common franchise restaurant you got a point-of-sale system there that tracks everything. Not only does it track the money coming in but it attracts what you need to keep on the shelves in the back of the house. And then the local franchisee needs some form of accounting system or accounting package, and you can only imagine Jeff what it would be like if everybody used a different system.
Jeff: So what you're saying is that those systems or packages as you're talking about, those are not just recommended by the corporation, is that correct?
Terry: Yes, and usually provided in your startup package and they have people that can also train you on that. And then the real benefit is the expense categories are already plugged in so you don't have to do this all from scratch, it's there. Turn it on, let's go. Not to mention you've got payroll systems and payroll vendors if you have employees in your business. And then every business runs on software. So that runs the gamut.
Jeff: You bet. And it just really sounds very turnkey if you would, almost plug and play once you agree to take on a franchise location and run that store or that location that all of this being provided for you, it makes getting started much easier, it sounds like Terry to me anyway. You're listening to Terry Coker on that. And Terry, we're going to take a short break before we jump back into the conversation again if you don't mind. But when we come back Terry I want to continue our conversation a little bit. I want to talk a little about employees and how hiring determining recruiting help works with owning a franchise location. My name is Jeff Allen. That's Terry Coker on that end of the blower. He is a franchise consultant with FranChoice and we're going to continue our conversation when Deal Talk resumes after this.
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I'm Jeff Allen with my guest today Terry Coker. He's a franchise consultant with FranChoice. Terry we jumped off there. You had a point you wanted to make though about the turnkey systems that are often in place for a franchise ownership.
Terry: Well, it's a great way for an existing business owner to diversify maybe cyclically or maybe against the category that they're in right now. And because it's turnkey they don't have to go through that startup process that they did when they founded or bought their business. And any entrepreneur, any founder who's been through that startup process knows that the opportunity for it to be painful is always right around the corner. And so with the turnkey aspect of a franchise not only can you plug and play if you will but you can also validate with other people. And so for an existing business owner who has let's say a key employee, and that employee has been with him and they know the operation, they know the culture, and they know the communications among the individual personalities. And the owner thinks that key employee maybe up looking around, maybe they think they hit a ceiling in that existing business, it's an opportunity for that business owner to buy a franchise, plug that key employee in to run it. And if they're so inclined give them a little percentage of the profit, put some golden handcuffs there that will keep that employee within the organization as a whole but give them their own turnkey opportunity to run, run, run, and grow, grow, grow.
Jeff: Boy, it really is a great point you've made is almost like an ownership stake there in the organization. And oftentimes, and we've said it before, the best talent is homegrown, and so a really great point that you've made Terry. And by the way that does kind of lead us into very nicely the next point I wanted to make about employees is this similar kind of arrangement where you have someone that you need, that on the shingle there you go ahead and set it out, you hire your own employees. Or does the corporation work with you in order to recruit talent for your particular franchise location?
Terry: Well, any good franchisor will tell you these are the types of people that you need for the types of roles, for the types of jobs that happen within this business model. And once again back to legal there should be employment contracts and employee handbooks. And there should also be recruitment systems. Sometimes there are particular websites for particular categories that work really, really well. And maybe somebody has had some good experience in corporate or in their existing business managing employees. But HR has handled the employee recruitment and the actual interviewing, and then sometimes the exit interviewing and the firing. And so franchisors should come forward and have all these systems in place and help somebody who really wants to be a business owner or a second business owner but doesn't have that granular experience in those systems. And then we always need to keep an eye on the law, the EEOC and Workers' Comp Programs, those should all be in place. And if you've done those in your business you know how detailed that is. And if you've never done this oh my goodness, the fact that someone has done this for you really should make you sleep much sounder at night.
They'll (franchisor) give you the system and encourage you in every way, shape and form to duplicate it, but you have to do the duplication of that, which means going out and getting your own local customers.
Jeff: Boy, amen to that, a huge weight off your shoulders it would seem to me. Terry, so many people in this day and age who own their own businesses are freelancers and sole proprietors. They work at home or maybe they have a small office they go to or maybe they might receive customers, but there's really no need for a staff. And so at this time maybe they're looking to franchise ownership to kind of broaden their business acumen, their business perspective, and their experience a little bit and to add this to their portfolio as maybe their next step in their corporate lives or in their professional lives. And so they don't have the management experience necessary. Is there something out there that franchisors can provide their new owner operators to help them manage their stores or their locations and a team if employees for the first time if they don't have that prior experience?
Terry: Yeah, it's certainly in place. And it's one thing that we work with our candidates and talk about very early in the conversation is what type of model is appropriate for your situation. There's three basic types. You have an owner operator and you mentioned the people that are freelancers, solo entrepreneurs working in home. There's also an executive model where you manage the managers. And then of course in the retail model you have manager run businesses. And so it's an important part of the conversation because, Jeff, there are thousands of franchises available. The current working number everybody thinks it's somewhere between 3,000 and 3,500 franchises for purchase in the US market. And so you got to segregate those and work yourself down somehow. And so starting with the type of model that's right for how you want to live, the investment capital that you have and the return on that investment you want is a great place to start.
Jeff: Let's talk about something that we can't make any money if we don't have customers. And so we want to make sure that we can go out and bring these people into our locations and do business with them and them become the successful the franchisees that we agreed about becoming. So how do we get customers?
Terry: It was a theory that I learned in college 101, business exist to create customer. I think it was either Theodore Levitt or Peter Drucker. But without those we don't have a business. The franchisor will help you in terms of understanding who that perfect customer is. They'll do demographic analysis. They'll have targeting systems, and they will have various different forms of customer acquisition systems. Some of those are sales oriented. If it's a B2B, business-to-business franchise, meaning either yourself or a sales force has to go out and knock on the doors of other businesses, and make you presentation, and close that business and bring it back in. But then there are people who really don't want any part of that direct selling model, they want a marketing system to bring customers into a retail location. And so there are just about as many customer systems out there as you can imagine. But it's one of the things that should be, number one, investigated, and number two, validated with the existing franchisees of those systems actually do bring customers in. And the franchisor helps you do that, but, and this is a big but. The growth of the business is absolutely up to you. That's what the franchisor is looking for. They'll give you the system and encourage you in every way, shape, and form to duplicate it, but you have to do the duplication of that, which means going out and getting your own local customers.
Jeff: Now Terry I've been in the auto parts business or the automotive business my entire life but I don't know a doggone thing about massage therapy or massage treatments and yet I'm really interested in these new massage businesses that are opening up all across the country and they just seem like such a fantastic way to help people, it benefits their health, it makes them feel good, it relieves stress, it's a great business model, a great practice, and it's successful, I want in. I want part of that, but I don't know much about it. Is there any training that is provided by franchisors for their new owner operators?
Terry: Training's one of the critical components of evaluating and selecting a good franchise company, and all franchisors provide it but the question is how good is it. And you found out how good it is by talking to the people who have been through the training and use those systems. And then let me make another point Jeff. If you really were interested in investigating massage and didn't have any experience the franchise company would love you, love, love, love. And if you had owned a bunch of massage salons and studios they wouldn't have nearly as much interest because they want somebody to come in they can teach their systems to. And generally if you've done it on your own, you've got your own opinions already formed, and it causes a friction from day one. And so they want people that are open minded to their training systems.
Jeff: That makes perfect sense, and I'd really like to hear that too because it seems to open up some doors that maybe I previously thought might now be open to me as long as their open mindedness and the desire to teach me how things are done their way. I'm absolutely receptive to it, yes. The last thing I want to talk to you about right now Terry, really important. I kind of led to believe that because you are one of many franchisees across the country or in a region that there could be some competition maybe between you and the franchise owner down the street. But as far as support, after I get up and operating is that available?
Terry: It's certainly available. And generally you don't compete with the other people in your system. And the reason you don't is you're given a defined territory and you're given a map and boundaries and you know exactly what that is. And so the people that are down the street or in your market, or in your state or region they actually become friends. I talk to people that I placed in businesses years ago and they tell me about the life-long friendships they've made with their peer support group. Not just people at the home office, not their dedicated business manager, not the president of the franchise company and the founder, but the other franchisees in Seattle, or San Diego, or Tampa, or Virginia Beach that they met at the national conventional. Their wives had dinner with them and they picked up the phone and said, "Bob, I need to know how to do this. I got my operations manual open. I know what the home office said. How do you do it in Toledo?" And they tell them, "This has what's worked for me." And in a franchise with 50, 100, 200, 2,000 other franchisees there's an entire layer of support under that water line. What people look at is that tip of the iceberg when they look at a franchise company. But what's under that water line is so significant that most people don't even consider that.
Jeff: Terry, fantastic first conversation that we've had with you and I hope that we can have you back on again. For those folks interested in reaching out and contacting you, and learning more about how you can help them find the right opportunity in franchising how can they reach you?
Terry: Oh, they can email me or they can pick up the phone and call. My email address is email@example.com, that's all one word, firstname.lastname@example.org. And I'm in the Eastern time zone so my phone number is 734-459-4121.
Jeff: Terry Coker, tell a friend about this edition of Deal Talk won't you? We enjoyed having him on the program. We hope you enjoyed listening to the conversation. Don't forget, in addition to morganandwestfield.com you can find us on iTunes, Stitcher, and Libsyn. Just remember that morganandwestfield.com that is the place where you can actually find the full transcript to this conversation, so if there's anything that you forgot about what we've talked about you can always listen to the show again, or you can simply go to morganandwestfield.com and find that text right below. It has everything that we've said, word for word.
Deal Talk has been brought to you Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen. Thanks so much for listening. We'll talk to you again soon.
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