Back to Basics - Why a Franchise?

We are continuing going back to basics with this episode of the podcast. Pete and Nat discuss why you should invest in a franchise through the top characteristics of franchises.

They review the advantages of a franchise over creating your own business from scratch or just investing in the stock market.

Transcript

Pete: [00:00:00] 

Good morning, Nat 

Nat: good morning, Pete! 

Pete: Woo! I'm pumped up today. 

Nat: I'm glad to see the energy is up today. 

Pete: Up today, for sure. You know, it the weather's starting to break, a little warmer so it's all good. So I'm, I'm, I'm pumped up. Nice. The dog actually wants to go outside now. You open up the door when it's, you know, windchill at 25 below, the dog goes, I'm not going out there.

Nat: Sometimes they're smarter than we are. 

Pete: I never accused our dog of being smart, but at that given point, I think he, he demonstrated some, some intelligence for sure. So Nat we, we're talking a little bit about this idea of getting back to basics kind of going through some webinars or going through some podcasts and talking about some stuff that are just general questions that people ask.

And one of the top questions people ask is, how does a franchise business model work? I mean, franchises touch their lives. every day. They're walking into businesses. Businesses are [00:01:00] coming to them franchises. But I thought what we do is kind of go through, get this the top, you know, kind of 10 characteristics of a franchise kind of give people a good education again.

It's a lot of people know this stuff, but I thought we cover it real quick. That 

Nat: is perfect. Sometimes we forget what we know because we've been doing this for so long. 

Pete: Yes, absolutely. All right. So what would be kind of the first, you know thing about a franchise? What would be the, the kind of the building block or the, the starting point of a franchise?

Well, 

Nat: I think for franchising, you know, you're, you're a lot of times people are attracted to it for the brand or the rec brand recognition. So in cup cups cup in a encapsulated in that would be, you know, the trademark, the so the, the signs, the logos, the, all that kind of stuff. You know what, so for example, Jimmy John's, I know we were talking about that, I think on one of our other podcasts, but Jimmy John's would be an example.

You can't just go out and decide willy [00:02:00] nilly to open up your own Jimmy John's. You have to license that so that you have the permission 

Pete: to do that. Yeah, I mean, they have the brand, right? That's what you're kind of buying into. So they, they figured out the, the business model, then built, started building a brand and, and people invest in that, that brand to use that for a period of time.

So that, that's the, that's the foundation. And with that, the second, the second thing that kind of. Sets franchising is what 

Nat: It's that business model or business format for lack of a better term. The so proven replicatable business format. So, you know, that's kind of like the rinse and repeat type concept, right?

Most franchises that we're working with will have, you know, 10 plus locations open. So they have it pretty much hammered out at this point. 

Pete: Yeah, they have all the systems, the process of procedures. So you, as the franchisee, as you invest in the franchise, plug into that, right? You bring your business acumen, your leadership skills, and you follow the systems of [00:03:00] process procedures.

So, so they got a brand, they have all the systems, the process of procedures, but it costs money to get into a franchise, right? 

Nat: Yep, it takes money to make money, right? So the initial franchise fee is the upfront investment. A lot of that, I feel like, is kind of returned to the franchisee in training and support over that first, you know, six to twelve months after kind of figuring everything out.

I remember when I bought my franchise, I think I was on the phone with, you know, this was not before internet, but I feel like I was on the phone with corporate or headquarters almost every day trying to figure out the, everything. 

Pete: Yeah, yeah, absolutely. And a franchise fee, you know, you're basically paying for the rights to use that business model for a period of time, right?

And generally, that could be 50 for the rights to use it. We'll call it 10 years. So that's kind of that initial fee. And then you also have beyond that when they give you that ongoing support. [00:04:00] How do franchisees pay for that? 

Nat: That's the royalty. So that's just a percent of top line gross revenue which kind of creates a win win situation because they want you to do better and make more money so that they make more money.

So I just feel like that's kind of a win win because your interests are aligned at that point. And then they're. They want to bring more technology and infrastructure in place to support you so you can be more successful locally. 

Pete: Right. And that's important, right? That support. That's one of the key advantages to franchising is that support.

And so, you have to pay for that support and generally that's, call it, 6, 7, 8 percent of your top line revenues go to the franchisor for that support. But there's real value associated with that. Okay, good. What else? What else you know, kind of as we talk about a franchise, how it works? Okay. 

Nat: Well, we were talking a little bit about support, but, you know, there is training also sometimes some franchises.

If you're hiring a new manager, you can send them to corporate for training. [00:05:00] There's also a lot of standardization. So they'll have, like, you know, marketing materials, brochures. They'll have the same like he asked or the same like point of sale systems, like all that stuff's completely hammered out.

You don't really have to think you just have to kind of execute against the plan. Yeah, 

Pete: and a lot of times that standardization, right? Every every Jimmy Johns has the same. process. Every Jimmy John's has the same kind of marketing from standpoint. You know, it's that in that there, that's the real benefit of a franchise is standardization to make it very simple, especially as you have team members, you know, going through it.

 Yeah, I 

Nat: went to Jimmy John's the other day and I I forget, I don't know how I did this, but I asked him what kind of cheese they had. They're like provolone. Yeah, I'm like there's no like American or one kind of cheese, what 

Pete: kind of cheese, right? Very simple, right? And no, no no confusion there.[00:06:00] 

All right now with the franchise, you pay for the rights to have the franchise, right? They train you all that kind of stuff. It's all standardized, but you know, you have a specific geographic area that your business has. Is that right? 

Nat: You have a protected territory. So if it's retail, usually whatever your address is, you guys will negotiate like a, a radius and then draw a circle around it.

Or if it's like a service-based business, you typically have conti contiguous zip codes. So, or a county, something like that. But then that's your protected territory. Put your, you put your flag right there. Yeah, 

Pete: and absolutely. And I think from the standpoint is that there's it's not pretty sophisticated.

These franchisers have technology or software. They can look at the demographics. They can look at the number of businesses, you know, like the Buxton report and things like that. So pretty advanced in terms of how the territories are set, but it's their [00:07:00] franchisees protected area. All right. You know, when we talk about the franchise, we we spoke about you, you buy the rights to use that for a period of time.

So, can, can I continue on with that? So, after my term is up, what, what happens? 

Nat: Usually the, it will either auto renew, or you'll have the right to renew. And a lot of times, what I've seen are 10 year agreements. So that's kind of nice too, because you want to, you want to be able to protect your future and have the right to renew, if that's what you want to do.

 And then, I mean, you know, as for me, when I bought my first franchise, I ended up selling it. So that's also always an option, too, you know, you're, it's not like you have to do it forever, you can always sell it. The franchisor typically has to approve the buyer, but, you know, the buyers love to buy existing franchises, so that's kind of a win win right there, too.

And why do buyers 

Pete: like to buy a franchise, opposed to just buying a small business that's not a franchise? 

Nat: A lot of it is because of the [00:08:00] standardization, so like the the numbers, the P& L is going to be standardized. And, you know, people are not going to over report their revenue because they're not going to want to pay.

Excess royalties on that revenue and then there's validation so you can call, you know, existing franchisees and other cities or states or territories and just kind of see how the business is doing. What kind of supports in place when you're buying a mom and pop, you know, let's be honest. Sometimes you've heard that term of putting a lipstick on a pig.

Yeah, I feel like that happens a lot, you know, probably more times than not, you know, kind of like, oh, let's kind of pump up the numbers. And, you know, there's all these ad backs, which are may or may not be ad backs and and things like that. So you just have to you have to be careful either 

Pete: way. Yeah. And I think the benefit of a franchise when you, when you are looking to buy it or sell it as the power of the franchisor, because if I'm just buying a mom and pop, I, the transition is you, you spent two weeks with me, [00:09:00] you hand over the keys with a franchise.

Yes, the owner does hand it over, but you also get to all the support from the franchisor. And all the other franchisees. So I think that makes it very attractive. So that is an exit strategy. You can sell a franchise and generally speaking, if, if I'm going to sell my French, I didn't go to a business broker.

I can go back to the franchisor, but the franchisor. They have a say a little bit in regards to the person I'm selling to. Is that right? 

Nat: Yeah, definitely. They typically have right of first refusal, or they have to approve the new buyer. Which makes sense because they want to protect who's coming into their system.

 But also the other kind of sweet thing about franchises is, you know, they're getting they probably have a long list. Like, going back to Jimmy John's as an example, they probably have a long list of people that have inquired about Jimmy John's in the last, you know, 9 to 12 months. And if you were like, hey, you know, raise your hand, I want to sell my Jimmy John's.

They, you know, they, they very likely have people in the pipeline that would buy it right away. 

Pete: And we talked earlier about, you know, you sign a franchise agreement for a period [00:10:00] of time, and generally speaking, a franchisor, they're gonna have some type of transfer fee. So if somebody buys the franchise from me, I'm gonna, I'm gonna, there's a, an a nominal amount that you, you pay to transfer the rights from you as a franchisee to the new franchisee.

Yeah, 

Nat: that's a good point. And you know, typically the new buyer will go to corporate for training and everything too. So yeah, it kind of makes sense. There's some a little bit of upfront for that. 

Pete: Yeah, so kind of put it all together when you look to Franchises basically you're buying the rights to use a business model for a period of time and you're paying a franchise fee to use that business model You're going to get ongoing support from a standpoint, which we're going to pay royalty for.

And this is a business that they've got all the systems, all the process procedures. It's very standardized. And the idea behind it is, is that allows franchisees to be more successful. 

Nat: Yeah, and let's not forget about kind of some of the softer aspects of franchising. You are plugging into a huge network of people that [00:11:00] are somewhat like minded because you're all doing the same business.

Franchises have annual conferences, you know, so you'll meet a lot of people you know, you can, it's almost like a built in support group. I remember a lot of times I'd reach out to other franchise owners, you know, trying to figure things out. And, you know, some of my best friends were from that from when I bought my first franchise.

Yeah. 

Pete: Yeah, it's it's really an added layer of support and to your point, you make some great friends, right? I, my first franchise I invested in still good friends with the, with some of the other franchisees. 

Nat: So, hey, if nothing else, at least you meet some characters, right? Yeah, absolutely. 

Pete: So, all right. So, small businesses are important in the United States.

Franchising is a big piece of that, you know, with over 4, 000 franchise concepts out there over 800, 000 establishments contributing over, what half a, a little under half a trillion dollars to the U. S. economy. So small businesses and franchising play a big part in our economy. 

Nat: Yeah, and I [00:12:00] really would encourage anybody that's kind of, you know, thinking about it, just, you know, take some time and explore to better understand how franchising works and how it might be a good fit for you.

Pete: Absolutely. All right, Dad. Well, I'm, you, you got me hungry again talking about Jimmy John's, so I'm off to Jimmy John's. All right. 

Nat: He'll support that economy. 

Pete: All right. Thanks.