Expanding your operations and brand through franchising is one way to grow your business. It involves using the money and managerial talents of others to open and operate locations in desirable markets. However, just because you have a successful business doesn’t mean it will pass the test as a “franchiseable” or franchise-ready business. On this edition of “Deal Talk,” host Jeff Allen asks our guest expert how a business owner can determine if they and their business are ready for growth through franchising. Mark Siebert, CEO of iFranchise Group in Homewood, Illinois, discusses all the details and provides questions (and answers) you need to consider if you’re thinking about franchising your brand.
Franchising allows you to grow using other people's capital. It's really all about helping you to leverage I think is probably the best way of putting it. When you franchise a business you are working with the capital that's provided by your franchisee.
- Mark Siebert
Jeff: Mark, there are probably a number of people who are listening to this program who did not hear your first appearance on our show. For those who did not get a chance to hear that program, just to kind of get people familiar with who you are and what you do at iFranchise Group, why you folks stand out in the market place?
Mark: We are the largest firm in the world that specializes in helping companies to franchise. We work with 98 of the top 200 franchise brands in the United States. And on a regular basis we work with companies that are probably a lot like a lot of your listeners are growing businesses, looking for ways to grow the business, maybe position it for an exit. We help them to capitalize on their intellectual property and franchise their businesses.
Jeff: We do appreciate the fact that you wanted to join us again for this discussion because today we're hoping to kind of cover some new ground maybe for a lot of folks who may not be familiar. And we'll start by talking about why franchising really can be such an intriguing option for those owners of small privately held companies who want to grow their business. What would you tell them if you're meeting for the first time and why it is such a great option to think about?
Mark: Franchising allows you to grow using other people's capital. It's really all about helping you to leverage I think is probably the best way of putting it. When you franchise a business you are working with the capital that's provided by your franchisee. The franchisee makes the entire the investment in opening the business, in running the business, all the working capital that's devoted to it and they actually pay you for the right to do that in the form of franchise fee and an ongoing royalty.
In addition to being able to grow with other people's money and I guess going back to the other people's money part you're not borrowing money to do that. You're not going to the bank and borrowing money. You're not taking on an equity partner. You still own the whole business but you're just sort of selling the intellectual property. The second big advantage to franchising is that you get really highly motivated managers who stay with you long time. When you think about it, if you to hire a manager for a small business that might be one step on their career path and when they leave they're going to be gone and you're going to be looking for a new manager. With a franchisee, they've invested maybe their life savings in buying that franchise, they're going to be there a long time. And chances are they're a higher caliber person and they certainly can be very highly motivated by the fact that they did put their life savings into that business. And so you find that franchise businesses tend to outperform from a numbers standpoint, from a financial standpoint, they tend to outperform non-franchised businesses.
And the last piece of the puzzle for franchising is speed of growth because of the fact that you're leveraging off both the time of the franchisee and the capital of the franchisee you can grow much faster through franchising. One of our clients is a company called Massage Envy. It was one unit therapeutic massage company that had been open for only three months. They were able to sell 190 franchises in the first three years. There's no way that they would have the time to do that or the capital to do that if they were to try to grow organically. They were able to grow that fast because not only did they leverage off the money that was spent by their franchisees, but also they were leveraging off their time. So the franchisees would go off and find the sites. The franchisees would go out and hire the personnel. They would train the personnel. The franchisees would be responsible for building out the locations, for buying all the equipment. And so you’re able to grow much faster in a franchise environment.
With a franchisee, they've invested maybe their life savings in buying that franchise, they're going to be there a long time. And chances are they're a higher caliber person and they certainly can be very highly motivated by the fact that they did put their life savings into that business. And so you find that franchise businesses tend to outperform from a numbers standpoint, from a financial standpoint, they tend to outperform non-franchised businesses.
Jeff: I'll say and that's a great example with Massage Envy. Now you see them all over the place, and I'm sitting in Southern California and they are in practically every shopping center.
Mark: They've got about 1,200 locations now, something like that.
Jeff: Oh my gosh, it's just amazing. The growth has been tremendous. And it just seem like once you saw one it wasn't long before you saw one not two miles away. It's just unbelievable. They're all over the place now. Great example there of what franchising can do for a business. Why is franchising right to help businesses grow? Some businesses grow while at the other end of the spectrum it may not necessarily be right for this group of businesses down here. Does it seem to you that there are certain sectors, industries, or types of businesses that are really better equipped or better suited for franchising as a growth mechanism?
Mark: The first thing that you have to do as a company that is getting into franchising for the first time just to make a determination whether or not you got a business that is actually franchisable. Just because you want to franchise a business it doesn't mean that that business is ready to franchise. And so when we look for a franchisable business model we really look for three big things. On our website we've got a 12-point test of franchisability but it really boils down to three things. The first is can you sell franchises? Not every business is going to be saleable. And for that we look at things like is it unique, does it have a strong value proposition, does it have some brand sizzle associated with it, does it have some credibility? Those are the kinds of things we look at as a starting point. The second thing we look at is can we duplicate the business? Not every business is something that can be duplicated. If the business only works because somebody is spending 70 hours or 80 hours a week in that business, you're going to have a hard time finding other people with that level of commitment in the business that they’re going to spend that same kind of time. If the business only works because of a unique skill set that the owner has, that's not something that's going to work well as a franchise.
If the business only works in a certain type market. If you had a swimsuit shop in Florida, you're going to have a hard time franchising it in Chicago, that kind of thing. So we look for transferability, the teachability of the business, the degree to which it's systemized, and the degree that it will work without a particular person involved. You have to systemize it so that it works without your direct involvement. That's the second piece, the clone-ability of the business. And then the third piece is return on investment. You can have a great business, but after stripping out a royalty from it, it might not provide the kind of return on investment the franchisee would need to make after taking out your royalty as a franchisor. Franchise business has an additional burden of that royalty that it's got to make up for it, so what we look for is the return on investment of the franchisee. So if the franchisee invests $100,000, they're going to want a return on that investment in addition to being able to make a salary if they're actually operating in that business.
So those are the three things we look for. We look for: does it make financial sense on a return on investment standpoint, is it clone-able, and is it saleable. Not every business meets those criteria. At iFranchise Group we get 350 to 450 inquiries every month from companies that are looking to franchise. And by the time that we're done we probably work with maybe three, so it's a pretty narrow funnel.
The first thing that you have to do as a company that is getting into franchising for the first time just to make a determination whether or not you got a business that is actually franchisable. Just because you want to franchise a business it doesn't mean that that business is ready to franchise.
Jeff: Just because you guys are the biggest that doesn't mean that you're biggest because you deal in volume and dealing with as many clients as you can. You have earned the right to turn some businesses away because quite frankly they aren't able to measure up to the standards required in order to make their business franchisable if it's not already. And in order to have a relatively high prospect I guess you might say for succeeding down the line. And you folks have kind of earned that right to be able to be somewhat choosy as to which companies that you work with.
Mark: It's not so much that we earned the right; I think that by being choosy to begin with, that's what's led to our success, is by working with the best companies. I give a lot of the companies that we work with a lot of the credit for being great companies to begin with. I think it's important to work with people and work with companies that are going to be a good fit for you and likely to succeed. That's what's going to make your reputation.
Jeff: Really good points, Mark. Thank you so much. Mark Siebert, CEO of iFranchise Group in Homewood, Illinois. You're listening to Deal Talk. My name is Jeff Allen. Coming up in just a few minutes we're going to talk to Mark a little bit about how to get started. Because you may be kind of advanced with respect to your business acumen and you've been running your own privately held business for some time. You're successful, sales are good, and you're ready to move forward with plans to expand but you're not exactly sure how to go about doing it. Mark is going to have maybe some suggestions here for us. We'll talk a little bit about that in just a minute. But first of all, Mark, before we go out to our break just a question for you, do you think that there is still quite a bit of confusion out there among business owners about the difference between franchising and licensing? And I mean if you can take just a moment to kind of draw a line between those two and what the distinction is.
Mark: Sure, and you're absolutely right, there's a huge amount of confusion on this exact issue. When you look at franchising versus licensing understand that franchising is a legally defined term. FTC Rule 436 sets up the specifications of what qualifies as franchise and what does not. And the legal definition and I'm going to give you the shortcut version. It's about two pages long. The shortcut version is if somebody is using your name, if they are using your system of operation, and they are paying you a fee it’s a franchise. The technical definition is closer to trademark usage, significant operating control of the systems, and the payment of a fee, but I just say same name, system, and fee. If they’ve got those three elements, they are going to be a franchise. If you take away one of those three elements you turn it into something else. If you take away the system element you've got the trademark and you've got the fee, you've got a trademark license. If you take away the trademark license part of it you just take away the trademark and you just have the system of operations and a fee, you've got a business opportunities license. If you take away the fee part of that three-legged definition then either you have a dealership, or a distributorship, or an agency relationship, or perhaps a joint venture.
When I tell people that they should consider franchising or any kind of third party channel distribution, I usually don't say you should be a franchise, what I say is, "Do you want to use my name? Do you want to use a common system of operations and control quality. And is there going to be a payment of a fee?" If the answer to those three questions is yes then it's going to be a franchise. And if the answer to one of them is no then it's going to be something other than a franchise.
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Jeff: We're going to go ahead and end things here for the first segment. When we come back what we want to do is I want to talk to Mark just a little bit about how to get started in the process. Calling for example could be iFranchise or any other company in that space to help companies grow their businesses through franchise. How do we get started? We don't know the first thing about which step to take. We're going to ask Mark when we come back. Mark Siebert, CEO of iFranchise Group joins me, Jeff Allen, when Deal Talk continues after this.
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Jeff: I'm Jeff Allen with my guest Mark Siebert, CEO of iFranchise Group in Homewood, Illinois. Mark, let's talk about it a little bit. You're meeting someone for the first time and they're really interested in moving forward. Or they've given it a lot of thought and they're saying, "Mark, let's talk a little bit about it. How do we get started?" Maybe we've got a location, maybe we've got two, maybe even more than that but we want to grow our companies through franchising.” What's the first step?
Mark: The first step is to educate yourself on what's involved in franchising. If somebody's looking to start and get educated on franchising there's a number of things that they can use. They go to our website they can get a free 90-minute DVD or video seminar on how to franchise a business. We've got a new book out called How to Franchise Your Business that they can get online. The first step is really educate themselves. Make sure that you’ve got a business that is franchisable. Make sure that franchising is the right business strategy for you. Even if you've got a franchisable business, it doesn't mean that it's necessarily the right strategy for you. But once you've taken those steps what I would say is there are a number of steps that you're going to need to take if you want to be successful as a franchisor.
The first step is developing a good plan. Franchising is like growth on steroids. So it's really important to make sure that when you are setting things like your fees, your royalties, and your territory that you're taking these things into account. Just to give you an example, when you're going through the planning process determine what your royalty's going to be. If I have a small business that is doing $500,000 a year in revenue and I make a one percent mistake on that royalty. So instead of taking a six percent royalty I took a five percent royalty. I'm going to lose $5,000 off the bottom line of my business. I don't have any associated costs with that higher royalty. So I lose $5,000, but a franchise contract could be 20 years in length. It's not $5,000, its $5,000 times 20. It's $100,000. In franchising you're probably not getting into franchising to sell one franchise. You sell 100 franchises so $100,000 times 100, so that's $10 million. That's not even talking about the enterprise value that you've lost from your bottom line when you go to sell the business. It's really important because of the speed of growth and your ability to duplicate mistakes if you haven't thought these things through. It's really important to start with the planning process. We're going to do the financial modeling, you're going to do the competitive analysis, etc.
The next thing you have to do is you have to develop good, solid, legal documents, but that's usually the second step. Usually you'd look for a good franchise attorney after you've gone through that planning process because otherwise you're going to end up paying a lot more than you need to. The third thing, you're going to need to make sure that you get your quality control in place. That's going to be things like operations manuals, and training programs, and training videos, maybe even online learning systems. Most new start-up franchisors will start with an operations manual and then we'll build in these additional tools as they go along. But long-term you want to make sure that your franchisees are operating in accordance with your brand standards. The last thing you have to do is you have to market and sell your franchise. So you have to know where you're going to advertise and how you're going to find these prospective franchisees. You need to run those ads, you need to have a system in place for how to get the franchisee from being a prospect to being a sign on the dotted line franchisee who's given you money and that's opened up their business. Those are the basic things that you need to do.
Franchising is like growth on steroids. So it's really important to make sure that when you are setting things like your fees, your royalties, and your territory that you're taking these things into account.
Jeff: Mark, let me ask you a question. You mentioned Massage Envy earlier in the program is really kind of an ideal example of how rapidly a business can grow. And I think I heard you say something like they opened up or franchised off 190 locations in three years, is that correct?
Mark: Yeah, and that's an unusual circumstance that someone would grow that quickly. You have to …
Jeff: But let me ask you this, just kind of to continue using them as an example because I think it is kind of good, whether or not it's kind of an extreme case, they must have had a pretty large team of people the ownership group did there to help them kind of pull of this off. Who are the kinds of people that we would have to assemble as a team in order to help us really first of all determine whether or not this is the right move for us to make, and in second, if we do determine we'd like to do it and move forward assembling the group of people that we would need to help us market and sell those franchise locations that we want to expand with.
Mark: I think the team that you're going to build can be built in a number of different ways and it's built based on how aggressively you're looking to grow. If one of your listeners is thinking, "I'd like to sell franchise but I don't want to be Massage Envy, I want to sell three, four, five franchises a year. I want to get my feet under me as a franchisor. Maybe I'll sell for the second year, five the third year, but I'm not looking to set the world on fire." That franchisor does not need to have the same kind of team in place that somebody like John Leonesio of Massage Envy needed. Somebody like that might be able to do the franchise sales themselves, they could outsource the development of manuals, and development of strategies, and development of marketing materials and marketing strategies to companies like ours. And they could basically do this without adding staff in the early stages.
You want to sell franchises more aggressively, you want to sell 20, 30 franchises a year? The first person you need to hire is you need to hire somebody who's going to sell franchises for you. There are companies out there that will actually sell franchises on your behalf if you're looking for those. I'm affiliated with the company called Franchise Dynamics for example that does franchise sales on behalf of a number of clients. So you can hire that out or you can outsource it, so you can find somebody. But that's going to be the first thing. Before you do anything in terms of training or operations or support you have to sell that first franchise. Once you start selling franchises, you're going to need people to train and support franchisees. A lot of times that role is combined into one role of training and support initially. And then as the company grows it sort of gets carved up into two roles. One that's the field support team that will go out and visit folks in the field, and the other is the training and headquarters team that is going to help new companies or new people get acclimated to the world of franchising.
The first person you need to hire is you need to hire somebody who's going to sell franchises for you. There are companies out there that will actually sell franchises on your behalf if you're looking for those.
Jeff: Mark, from the corporation’s perspective, the business owner’s perspective, they're doing this, they're moving forward, and they're starting to market their franchise locations, starting to sell those. Where does most of the money go that the franchisor is now spending to grow their company through franchising? Is it mostly just going to pay for the leadership teams, the support teams, and managers who are going to take and train, and work with these people at these new locations? Is most of it going to human capital really?
Mark: It really is. The big expenditures you've got as a franchisor are people, that's number one, and then the marketing for the franchise, that's number two.
Jeff: Very, very good. Mark, we're getting ready to wind things down just a little bit but I was wondering if you could share for just a moment any parting thoughts that you might have for those people who are leaning toward that but wondering about things that they might want to avoid or should avoid. Sometimes you hear scary stories in the news about how things don't always go right despite our best intentions to grow a business. Is there a wrong way that people should avoid attempting to franchise their companies, anything that you've seen or scary stories, things that you've read about as really kind of a leader of the nation's largest franchise business that you can relay to our listeners to help them avoid making some really critical mistakes?
Mark: There certainly are. I think that the first key is to make sure that you're educated before you do anything. Go to sites like ifranchisegroup.com and get copies of free videos on the subject. Buy books on the subject. Again, we've got one but I'm sure there's others out there as well. Make sure that you're educated first. Make sure that it's the right step for you. Make sure that you have a business model that works for everybody. If there's one key lesson for franchising is that it has to work for the franchisee as well as the franchisor. It's got to be a win-win scenario. Make sure that you have adequate capital. Franchising is a low cost means of expanding your business but it's not a no-cost means of expanding your business. There's costs associated with the legal documents and developing operations manuals and training programs. You can't just throw something together based on copying what somebody else has done out there and hope to be successful, you have to do it right. Hire professionals. You can't use your real estate attorney to develop your franchise agreement. It's way too complicated for that. In my world I believe strongly in the value that's provided by a good consultant in this area. Someone who can walk you through the process of going through this who's been down these paths before. Make sure that you have as good a management team as you can afford. If you have a concept that's maybe a little bit broken or it needs a little bit of tweaking, good management will fix that. If you are undercapitalized, good management will find a capital. There's no cure for bad management. Ultimately it's about putting good people in place with the adequate capital and a good concept, focusing on the franchisee's success. And then making sure that that focus stays the top priority the organization goes for. Make your franchisee successful and the rest will come.
Franchising is a low cost means of expanding your business but it's not a no-cost means of expanding your business. There's costs associated with the legal documents and developing operations manuals and training programs. You can't just throw something together based on copying what somebody else has done out there and hope to be successful, you have to do it right.
Jeff: I'm certain that there are some people out there who are nodding their heads saying, "Yeah, I like what Mark has to say and I'd like to get in touch with him and his company to talk a little bit about my situation and whether or not I'm making the right decision as far as moving ahead with plans to franchise my business for growth." What should they do, Mark? How can they reach you and your team?
Mark: They can learn more about us at ifranchisegroup.com. It's just a small ifranchisegroup.com, all one word. Or they can call us at 708-957-2300. Either way we're happy to send them a free DVD on how to franchise. It's a 90-minute seminar on how to franchise a business that we use as sort of means of helping companies to educate themselves. We also have recently come out with a book called Franchise Your Business which is available on Amazon, if they'd like to get that or they can go to our website and get it, ifranchisegroup.com and there's a link there for the book.
Jeff: Mark Siebert again, I sure do appreciate all of your time today and this year's second appearance on our program. We appreciate the insight and your thoughts and we hope to have you again back on our team and on our program again before too long to share more of your helpful insights into this idea of growing a business through franchising, and maybe some other advanced discussions along the way. Thank you again so much.
Mark: Thank you Jeff, it's always a pleasure.
Jeff: That's Mark Siebert, CEO of iFranchise Group. He's been our guest today and we hope that you did enjoy this discussion.
Let us know what you thought of it. And while you're at it let us know what we're doing right here on Deal Talk and what you might want us to do a little bit differently to help make this show even better for you, because that is in fact what we do here at Deal Talk. We do this show for you to help you run a business that you can eventually one day sell. If that helps to improve your company's value then we've achieved our objective. The email address to write to by the way is firstname.lastname@example.org. Once again, send your comments to email@example.com, we'd love to hear from you. Deal Talk is presented by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. My name is Jeff Allen, thanks so much again for listening.
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