The Ultimate Guide to Responsible Franchising E-Book

Joe Mathews

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 438

Veröffentlichungsjahr: 2024

Beschreibung

A no-nonsense, start-to-finish roadmap for aspiring franchisees

In The Ultimate Guide to Franchising, straight-shooting author Joe Mathews delivers a practical and hands-on “how-to” guide for aspiring franchisees seeking to start their own businesses. In the book, you'll explore real-life stories from the franchising trenches that illustrate how to effectively look past the obvious and dig deep into the bones of a franchise to establish fit, predict success, and mitigate risk. You'll discover the personality types most likely to experience success and failure at franchising and identify the entrepreneurial traits that can expose you to additional risk.

You'll also find:

• All the info you need to know about franchising before you start looking for the right fit
• Strategies for properly and fully investigating a franchise opportunity in your area
• Techniques for conducting proper diligence to determine a franchisor's skills and viability.

Perfect for budding entrepreneurs, founders, and other business-minded professionals, as well as employees, leaders, and suppliers to franchise brands who want a better understanding and appreciation for how franchising works, The Ultimate Guide to Franchising will earn a place on the bookshelves of anyone serious about opening their own franchise as well as those who have already begun their franchising journeys.

Leseprobe

Table of Contents

Cover

Table of Contents

Title Page

Copyright

Dedication

Preface

Introduction

Three Truths About Franchising

Kissing a Lot of Frogs Before You Find Your Prince

How This Book Is Structured

Part 1: What You Need to Know Before You Look at Franchises

Chapter 1: Introduction to Franchising

Definition of Terms

Franchising Is a Business unto Itself

Why Do Companies Franchise?

How Franchisors Make Money

Finding a Responsible Franchisor Who Gets It

Chapter 2: Special Advice for the First-Time Entrepreneur

The Path of the 99%

The Way of the 1%

The Bottom Line

Chapter 3: Setting Your North Star

Goal-Setting and Benchmarks

Identifying Your Skills and Aptitudes

Summary

Chapter 4: Matching Your Skills and Aptitudes to Opportunities

Understanding the Franchisor’s Motives

The KASH Model of Success

Chapter 5: The Learning Curve and Lifecycle of a Franchisee

Moving Through the Stages

Three Modes of Franchisor KASH Distribution

Stages of the Franchisee Learning Curve and Lifecycle Explained

Summary

Chapter 6: What Insiders Want You to Know About Franchising Before You Invest

Franchising 1.0

Franchising 2.0 (Current Era)

Franchising 3.0: The Era of Responsible Franchising (Evolving Now)

Success Begins and Ends with Corporate Culture

Chapter 7: Assessing the Skills and Viability of a Franchisor

The Common Consumer Value Propositions of a Franchise Brand

Summary

Chapter 8: The Franchisor Landscape in the United States

Dynamics Affecting the US Franchise Market

Strong Franchise Brands Will Become Stronger

Why Candidates Should Consider Avoiding Smaller Brands

Opportunities and Risk Factors

Chapter 9: Understanding Where Franchisors Are in Their Lifecycle and Learning Curve

The FPG Franchise Brand Growth Curve

Key Inflection Points

Considering Risk and Reward by Lifecycle Stage

Summary

Part 2: How Do You Find the Right Franchise?

Chapter 10: Identifying Potential Franchise Options

The Brands You Know and Love

You Know Someone Who Succeeded in a Particular Brand or Business

Franchise Portals

Brands in the News

Franchise Brokers

Franchise Opportunity Shows and Events

The Last Word on Franchise Opportunity Sources

Self-Directed Research

Chapter 11: The Franchise Buyer Journey

Step 1: The Initial Interview

Step 2: Qualification

Step 3: Reviewing the FDD

Step 4: Due Diligence (Franchisee Validation, Financial Modeling, Applying for Financing)

Step 5: Discovery Day (Face-to-Face or Virtual)

Step 6: The Yes/No Decision

Chapter 12: Your Final Decision Checklist

Questions About the Brand

Questions About Fit

Questions About the Franchise Opportunity

Questions About the Franchisor

Questions About the Industry

What Can I Count on Myself For?

Conclusion

Acknowledgments

About the Author

Index

End User License Agreement

Guide

Cover

Table of Contents

Title Page

Copyright

Dedication

Preface

Introduction

Begin Reading

Conclusion

Acknowledgments

About the Author

Index

End User License Agreement

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JOE MATHEWS

The Ultimate Guide to Responsible Franchising

IDENTIFYING AND INVESTIGATING THE RIGHT FRANCHISE TO MAXIMIZE YOUR REWARDS AND MINIMIZE RISK

Copyright © 2025 by John Wiley & Sons. All rights reserved, including rights for text and data mining and training of artificial technologies or similar technologies.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permission.

Trademarks: Wiley and the Wiley logo are trademarks or registered trademarks of John Wiley & Sons, Inc. and/or its affiliates in the United States and other countries and may not be used without written permission. All other trademarks are the property of their respective owners. John Wiley & Sons, Inc. is not associated with any product or vendor mentioned in this book.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Further, readers should be aware that websites listed in this work may have changed or disappeared between when this work was written and when it is read. Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data

Names: Mathews, Joe, author.

Title: The ultimate guide to franchising : identifying and investigating the right franchise to maximize rewards and minimize risk / by Joe Mathews.

Description: Hoboken, New Jersey : Wiley, [2024] | Includes index.

Identifiers: LCCN 2024021305 (print) | LCCN 2024021306 (ebook) | ISBN 9781394243266 (hardback) | ISBN 9781394243280 (adobe pdf) | ISBN 9781394243273 (epub)

Subjects: LCSH: Franchises (Retail trade) | Sale of business enterprises.

Classification: LCC HF5429.23 .M39 2024 (print) | LCC HF5429.23 (ebook) | DDC 658.8/708—dc23/eng/20240613

LC record available at https://lccn.loc.gov/2024021305

LC ebook record available at https://lccn.loc.gov/2024021306

Cover Design: Wiley

Cover Image: © Designer’s Circle/Adobe Stock

Author Photo: Courtesy of the Author

I would like to dedicate this book to my family and friends:

My wife, Tara

(

Merchant) Mathews, whom I met through franchising.

My sons, Michael and Casey Mathews, and my daughter, Taylor (Mathews) Hernandez, and her husband, Obed Hernandez, who are both career franchising professionals. A franchise candidate whom my daughter was recruiting for a franchisor once asked her if she knew a certain franchising book. Grimacing, she said, “The author is my dad.” I got to be “the cool dad” for one day. By publishing this work, I hope to have a few more “cool dad” experiences.

My grandchild, Margaret, whom I hope will be the third generation of Mathewses who found franchising and entrepreneurship to be their calling.

My brothers, Paul, Ken, Jamie, and Danny, who all rose above their circumstances and made a difference with their lives and careers.

My best friends, Paul Rawlinitis, Paul Moore, Ki Chon, Mark McGuire, Charlie Rogoff, and Kwok Wong, who befriended me in college and stayed loyal friends my entire life.

And finally, my parents, Jim and Carol Mathews. My mom always thought I should have worked for the phone company because they have great benefits. But they let me be me and figure it out on my own. This book is the latest chapter in my never-ending process of figuring it out.

Most importantly, I dedicate this book to you all. I had you in mind every time I sat at my computer. Helping people like you find a satisfying and profitable business has brought me joy and a sense of purpose. Entrepreneurs are a different breed of animal. You are job creators. You are difference makers in your community. As a Christian, I believe that when Jesus decided to transform his world, he recruited, trained, and developed 12 entrepreneurs and then set them loose on the world.

Preface

I have spent an entire lifetime in franchising. My first job out of college was a rank-and-file, low-man-on-the-totem-pole franchisee recruitment manager in 1985 for a small Regional sandwich chain we now all know as Subway. Over the next few years, I witnessed Subway grow from a Regional brand to a National brand sporting a household name. For the next 17 years I moved up through the ranks, working for different brands and eventually making it into the franchisor C-suite. In 2002 I left the corporate world to start a consultancy I still manage called Franchise Performance Group (FPG), specializing in franchising best practices, particularly helping franchisors build their brand by recruiting top franchisee talent.

Prior to my starting a business, there was little entrepreneurship in my family. I grew up in the lower-middle-class town of West Haven, Connecticut, in a highly ethnic Irish and Italian, largely blue-collar neighborhood. My dad was one of the few college-educated men in our neighborhood, and the first college-educated man in the Mathews family. I am the second oldest of five boys, raised in a close-knit tribe consisting of my immediate family and my grandparents, who lived only two miles away. This certainly would go on to influence my future, because when properly executed, franchising is more than a business relationship – it’s also a close-knit tribe.

My mom and dad have been married almost 65 years. My mom was a stay-at-home mom, managing the seven of us in our small three-bedroom, one-bath home. I shared a tiny bedroom with two other brothers, where I learned how to share and get along, and to pick and choose my battles. In franchising you need these skills because you share a brand and limited resources with a larger community, requiring constant collaboration and compromise.

When I was eight, my mom took me aside and said, “Joey, I want you to know we have enough. You will always have food and clothes and a roof over your head. But if you want more than that, you have to go out and earn it.” Two weeks later, I secured an early-morning daily paper route. I made about $8 a week; I spent $3 and banked $5. I learned hard work and the value of a dollar, and lived with no entitlement. This taught me the way of the entrepreneur, meaning you have to learn how to make your way in this world with cunning, hustle, and skillful allocation of scarce resources.

My dad is a staunch Catholic who taught my brothers and me transcendent moral guiding principles, which I still believe to be true and have adopted as my own code of business conduct. For instance, I believe it is wrong to steal, not because society norms or laws of the land declare it so, but because those truths existed before society existed. This is important because I hold franchisors to a higher standard of conduct than what is stated in the franchise agreement. My experience tells me that franchising, when done right, takes the form of an immaterial social contract, not a material legal contract. When a franchisor takes the hard-earned money and custodianship of an entrepreneur’s goals and dreams, they assume the responsibility of the high calling to do what it takes and within reason to transform those goals and dreams into actuality. This responsibility cannot be housed or articulated in a franchise agreement any more than a soldier can articulate in a contract his responsibility to guard the life of the soldier next to him in the foxhole. I’ve come to the conclusion that for the brand and franchisees to thrive and fulfill the promise and potential of the brand, the franchisor and franchisees have to think and act outside a command-and-control or legal compliance mentality and adopt a “we are in this together” viewpoint. (I describe this in more detail throughout this book.) For a franchisor that means checking your ego at the door. The franchisor exists to serve the franchisee, not the other way around. And for the franchisee it means losing your entitlement. Like any entrepreneur, if you want success and freedom, you earn it on the street.

Fast-forwarding now to my dysfunctional and failed social experiment described as “my high school experience,” I developed a skill and passion for fine art. In the few pictures of me taken for my high school yearbook, I’m found with long, shaggy ’80s hair and a sketch pad. In 1981 I enrolled in the University of Connecticut fine arts program, hoping to pursue a career in graphic arts. Long story short, while I was a good high school artist, I wouldn’t have cut it on Madison Avenue. In my junior year, I changed my major to marketing and learned business.

But I stuck with art long enough to learn that artists know art is more than a pursuit. It’s a particular way of looking at the world, distinctly different from the paradigms of business. Regarding branding, I think the artists have it right. While my learned business paradigms helped me relate to entrepreneurs and executives, my artist mind helps me see things in business that other people miss. I will briefly describe it here. You will experience unique vantage points in my writing.

In my experience, businesspeople are almost always reductionists, meaning they try to reduce things down to individual and simpler components, such as processes, systems, and even business silos such as accounts receivable and social marketing.

Conversely, artists know that “the whole” is bigger and different than the total sum of the parts. In other words, you can’t accurately describe the ceiling of the Sistine Chapel as the sum total of Michaelangelo’s individual brushstrokes. The final artwork itself is bigger, grander, and more majestic than the added sum of the brushstrokes strokes and bigger than the artist himself. The Sistine Chapel lives on as its own entity, as its own brand. When franchising is done right, It is the same with a franchise brand. The brand is bigger than the founder, the franchisor, and the franchisees combined. The brand lives on as its own entity, like Harley-Davidson and Apple Computers, for customers to build unique experiences on their own terms. Franchisors who build meaningful, valuable brands possess a certain artistry and release the brand into the public domain to possess its own identity.

When artists begin the creative process, they start with a blank paper or canvas and an idea about what they want to see in the end. Artists are supposed to create something unique and different that they release into the world for others to experience and enjoy. Franchise brands operate seemingly differently, consciously or unconsciously. Franchisors are almost always replicators, not originators. For instance, franchisors didn’t invent hamburgers, ice cream, pool cleaning, maid service, or the way to unclog drains. Franchisors get products and services to market better, faster, cheaper, and more conveniently than the competition. Franchisor founders almost always start with what already exists and seek to improve it, but they don’t generally invent it. Why is that important? The net result is that the franchisor brand landscape has become littered with commoditized, copycat brands. They often lack personality, creativity, identity, and flair, and they struggle to add unique value and find their place in the market, which often ultimately translates into a bad investment for franchisees. We will show you how to spot them.

I lived 12 years in Nashville and befriended many career musicians and songwriters. When composing music, many said, “The music seemed to always exist. I heard it and recorded it, but I didn’t create it.” Musicians often have the experience of stewardship, not authorship. While they may own the legal rights to a particular song, the successful recording artist would often say the ownership model doesn’t accurately describe their relationship to the song. Successful franchise brands operate the same way. The brand lives as its own thing or being, as a separate and distinct entity from the franchisor, founders, franchisees, customers, and suppliers.

Let’s return to Harley-Davidson for a moment. What started as a motorcycle brand took on a life of its own with the help of its brand fan customers, creating a whole lifestyle category beyond what the founders originally intended. Along the same lines, I find it intriguing that corporate entities are legal persons. You’ll also find that franchisors’ brands are like people. But just what kind of people are they? Are they heroic? Dependable? Loyal? Or are they boring copycats, frauds, phonies, or thieves? Franchising has all of these, which we will help the reader distinguish throughout this work.

I’m proud that you’ve invested time, money, and energy in this body of work. I am committed to showing that the value you receive is worth the price of admission.

So let’s begin.

Introduction

If you are reading this, presumably you are looking to achieve your definition of getting ahead. You may be looking for additional income streams as you approach retirement. Maybe you’re looking for a highly profitable and scalable business in order to build your empire. Or your goals may be more modest and a simple family business might do. Regardless of your definition of success, I know what you need to know and do, and you will find it here.

If you are a first-time business owner, you will soon find that intense emotions often accompany thoughts about starting a business. Some people become pumped up, excited about the prospect of taking action and making positive changes. Others are simply paralyzed with fear, lost in ambiguity. This book was designed to meet you where you are and arm you with the tools to propel you forward, meaning helping you better identify opportunities and at the same time mitigating or eliminating risk.

According to volume 2 of the Economic Impact of Franchised Businesses, a recent study commissioned by the International Franchise Association and conducted by PricewaterhouseCoopers, there were over 900,000 franchisor and franchisee-owned outlets representing more than 80 different industries in the United States alone. According to the same study, US franchises generated nearly 11% of the entire US private sector economy.

Simply put, franchising works and people just like you are winning.

Note that this book is not an unbiased source of information. I am decidedly pro-franchising because most people who employ the knowledge in this book and follow the process I recommend for selecting and investigating a franchise succeed.

Although I am unashamedly pro-franchising, I am not an advocate for all franchisors equally. Like any universe of people or entities, there is a bell curve distribution of results. Franchise brands to the left of the bell curve are high risk and low return and need to be identified as such and avoided. Franchisors at the middle of the bell curve will survive and may do well as franchisors, but the franchisees of this brand will be bypassed by franchisors of brands to the right of the bell curve. This book will be a tool to help you identify and invest in franchisors that today are or tomorrow will be to the right of the bell curve.

Three Truths About Franchising

Self-employment simply is not for everyone.

Starting a business is a lonely and emotionally taxing undertaking, and it is not for the weak at heart. Unless you are already an entrepreneur, you will have two learning curves. The first will be learning to shift from being an employee to being an entrepreneur. Entrepreneurship is an identity shift, not a career shift. The second learning curve will be the business you invest in. If you have never owned a business before, you are about to enter a period of deep personal growth. The good news is that this growth moves in one direction. Once you are an entrepreneur, regardless of what happens next, you will never think and act like an employee again. Or as I like to say, “Once a pickle, never a cucumber again.”

Regardless of whether you are a serial entrepreneur or first-time businessperson, not every franchise presents a good opportunity.

Franchising is like any other industry. You will spot genius, mediocrity, and incompetence. If you are a great entrepreneur who makes an unfortunate investment decision in a bad or mediocre brand, eventually your business will go in the direction of the brand. A franchisee can only defy gravity for so long before the business suffers.

Not every franchise is right for every person, regardless of how successful a particular brand is.

Just like some people are not wired to be accountants or salespeople, not everyone is wired for every franchise concept. Real success comes when you select a business that leverages your background and skills, compensates for shortcomings, mitigates some risks, and delivers your objectives with the highest degree of probability. That’s a different set of variables for each reader. Secondarily, you pick a franchisor that is skilled at recruiting, training, developing, and leading a team of entrepreneurs such as yourself to dominate their local markets on the way to building a national brand. Franchising is hand-to-hand, market-to-market combat.

By reading this book and studying its contents, you will walk away with at least three positive outcomes (or more):

If you have never owned a business before, you will know whether self-employment is right for you.

You will learn the telltale signs of what genius, mediocrity, and incompetence looks like in franchising, giving yourself a better chance of achieving your definition of success.

You will identify with a high degree of certainty which companies and opportunities do or do not deliver the life and rewards you want for yourself and your family.

Kissing a Lot of Frogs Before You Find Your Prince

Currently, there are somewhere between 4,000–7,000 existing franchise brands and about 250–350 new brands entering franchising each year. Not every franchise that looks like a good opportunity is. The reverse is also true. Not every business that looks like a bad opportunity is.

For instance, how would you like to own a business that has extremely high employee turnover, high overhead, high lease costs, high equipment costs, low margins, and high advertising costs? The average customer only spends a few dollars, so you are forced to do hundreds of transactions a day, just to keep the lights on. You have to move customers through your business with such feverish fury, you can’t provide much in the way of customer service. As a matter of fact, extended customer interactions make the business model break down. You have got to keep your customers moving in and out, in and out. Speed is the key. Furthermore, your business is completely dependent on scores of minimum- or low-wage workers. Because employee turnover is so high, you are always on the lookout for minimum-wage workers and you are constantly understaffed. Other times, you will keep more people on the payroll than you really need because you know some people are going to quit. Would you ever want to own a business like that?

If you would be a “no” to owning this business, you just rejected McDonald’s, Chick-fil-A, Domino’s pizza, and just about every successful fast food and quick service restaurant chain in existence. While food service is not right for everyone, many food service brands have created multi-generational wealth and opportunities for its franchisees.

Every business has its share of challenges. When you invest in a competent brand, you invest in proven solutions to these everyday challenges.

How This Book Is Structured

This book is largely broken down into 12 chapters.

The first nine chapters represent what thought leaders in franchising would like you to know before you start looking at individual brands. These must-read chapters offer you the backstory about franchising. This includes an overview of franchising. This content shows you how to identify and align your experience, skills, aptitudes, and capital to the owner’s role in the business as a way to maximize rewards and minimize risk. In other words, it helps you shine a light on what you should be doing and should be avoiding because you are uniquely you. Read this part before you look at brands.

The final chapters show you how to find and investigate individual brands. Although you may find the right industry for you, if you pick a weak brand, you eventually will be hamstrung by the limitations of the franchisor and brand. For instance, Subway is still the dominant player in the sub category. The franchisor graveyard is littered with hopeful number two sub shop players who cratered, like Blimpie and Quiznos, sinking their franchisees with them rather than helping them build multi-generational wealth. Consider reading this part twice – once before you look at a brand, and again while you are looking at brands.

Part 1What You Need to Know Before You Look at Franchises

Part 1 contains advice that I would tell a friend if we were sitting on big leather chairs in front of a fireplace sipping coffee and they asked me, “Leaving nothing out, before I make any investment, what is it I need to know?”

I encourage you to read Part 1 and complete the recommended exercises before you begin contacting franchisors and potentially incurring risk.

Chapter 1Introduction to Franchising

Before I get into what it takes to invest into individual brands, I want to establish some terminology and define some terms.

Definition of Terms

According to Dictionary.com, a franchise is “the right or license granted by a company to an individual or group to market its products or services in a specific territory.”

I find this definition insufficient to the point of being laugh-out-loud funny.

True, a franchise is a legal contract, but when a franchisor is skilled, it takes more the shape of an intangible social contract than a tangible legal contract. The social contract is simple. Franchisees agree to execute the business model to the best of their ability, to build the brand locally consistent with the intention of brand leadership, and to add more value to products and services than it charges customers in price. The franchisor agrees to continually refine processes and systems and go to work each day to add more value to the franchisees’ business than it extracts in royalties.

Put it another way, the social contract says, “We each have roles and responsibilities that impact each other. We are in this together and the common bond is building value in the brand.” Within this social contract, there is no assumed hierarchy, no parent company that lords over the lesser-than, childlike, dependent franchisees.

Franchisees and the franchisor only pull out the legal contract when this social contract breaks down.

Because the textbook definition of “franchise” describes what the relationship looks like when the franchisor relationship is failing, I want to take the time to create more intelligent and workable definitions.

From this point forward, I use the terms

franchise

and

franchise system

to describe the legal and social contract binding all stakeholders of the brand, its franchisees, supply chain, and franchisor’s executives and employees.

I use the term

franchise agreement

when I refer to the actual license. I use the term

franchising industry

to describe the estimated almost $800 billion ecosystem of franchisors, franchisees, suppliers, and other stakeholders, such as the IFA.

The Franchise Performance Group (FPG) defines

franchising

as a brand expansion strategy entailing recruiting, training, developing, resourcing, and leading a team of successful entrepreneurs in order to build a brand.

FPG defines the

franchisee-franchisor relationship

as the totality of the contractual, commercial, and interpersonal relationships between the franchisor and franchisees.

FPG defines

franchisor

as the company that licenses a business system and trademarks to a franchisee and the

franchisee

as the licensee of the same.

FPG describes

the brand

as the meaning and value customers assign to a particular business. In other words, it’s everything that customers, franchisees, franchisors, and suppliers perceive about a business – what the business represents, the service it offers, and the value customers receive by patronizing the business.

Franchising Is a Business unto Itself

Throughout this book, I repeat this again and again. Franchisors are in two businesses, and they need to be brilliant at both to succeed.

The consumer-facing model:

The brand competes in the industry in which it distributes its products and services. This is how well the brand sells its products and services to the marketplace.

The business of franchising:

I define the business of franchising as “recruiting, training, developing, resourcing, and leading a team of entrepreneurs to successfully build a brand.” Notice the product or service is not mentioned in the business of franchising. The business of franchising is about delivering effective training, coaching, and expertise of the consumer-facing model to new franchisees who presumably are new to the industry and business model.

I briefly describe these two businesses and continue to develop these important themes throughout the book.

The Customer-Facing Model

For simplicity, I call the end user “the customer,” whether the business is business-to-business or business-to-consumer. Virtually every brand is faced with stiff competition within their respective industries. This appears self-evident. However, what does it mean to compete effectively?

A brilliant franchisor will have built a consumer-facing business model, which on balance should receive high marks on all the following criteria:

Their consumer offer is unique

(or copycats will crowd the market and drive down revenues and margins).

The business model is profitable

(delivering acceptable returns for franchisees).

Their offer is defensible

(so franchisees can carve out and defend a position in their marketplace and distance themselves from copycat concepts).

Their business is resilient

(so franchisees can weather any coming economic storms).

The business is replicable and scalable

(so an average franchisee will predictably earn an acceptable return on their time, money, and energy, regardless of whether they are opening in existing markets or pioneering a new market).

The business offers long-term sustainability

(so once the brand is built, the business creates a flywheel that generates predictable and recurring income for franchisees).

The following sections look at each of these points in more detail.

The Consumer Offer Is Unique

Businesses that offer commoditized products and services will ultimately engage in a war of convenience and price. If the customer can’t distinguish one brand’s offer from the next, then ultimately business will be won by which brand offers the lowest price, is nearest to the customer, or can get to the customer the fastest. The market becomes a war of price and convenience and franchisees struggle to remain profitable.

As a franchisee, you never want a business involved in a price war. Years ago, Subway offered $5 subs. The brand essentially trained the customer to spend no more than $5 on their product. As proteins, commodities, and labor costs increased, franchisees had a brutal time trying to pass these costs to their customers, who wanted $5 subs. Margins shrank. Franchisees became less profitable. The goals of the franchisor – who makes their money on the top line revenue and not on the bottom line cash flow – were not aligned with their franchisees, and thus were slow to respond. Franchisee dissatisfaction soared. Many franchisees started diversifying into other food concepts rather than reinvesting into opening more Subways, to the detriment of the brand.

The Consumer Model Is Profitable

A small business exists for the mutual benefit of the customer and the business owner. Whether the franchisee is an owner-operator or runs an empire, the business needs to consistently hit their financial objectives or it’s a bad investment. The franchisor does not get to say what is or isn’t a good investment any more than the business owner gets to tell a customer what they should value. The franchisee alone determines what is and isn’t an acceptable return on time, money, and energy.

The Offer Is Defensible

One of my favorite brands is Sandler, a business training franchise operating inside a nearly $80-billion industry where more than 60% of businesses outsource their training. While their franchise agreement is only five years, many franchisees have a 15–20 year tenure, meaning they keep renewing their agreements and doing business with the brand. Franchisees love what they do. Since the brand markets sales knowledge and experience as its core product, think about the brand’s competitive advantage of sustaining a team of highly skilled and experienced Sandler sales zealots around the country.

Sandler, at the time of this writing, is one of the nation’s leaders in sales training, with systemwide sales reported to be about $150 million. No brand operating in the training space appears to have more than 1% market share, so it’s a dominant brand in a fragmented industry, giving franchisees a real competitive advantage over independents in the same space.

Other than Dale Carnegie, Miller Heiman, and a few other brands, Sandler franchisees compete against a cottage industry of motivational speakers and success coaches who may have personality but often lack valuable intellectual property and sales systems to impart to their clients.

Why do I like dominant brands in a fragmented market? Simple. When a new Sandler franchisee opens in a new market, what competitor can keep the franchisee out? What competitor can make it rough for the franchisee to acquire new business?

The Business Is Resilient

The business is not subject to dramatic market fluctuations, or the model is adaptable. Take hair care, for instance. Stylist.com once published a study that showed the average woman spends $50,000 coloring her hair during her lifetime. Whether the stock market is up or down or interest rates are high or low, whether it’s raining or snowing, a universal truth remains. Many women don’t want gray hair.

The Business Offers Long-Term Sustainability

Years ago, the market exploded with self-serve yogurt chains. Many of the emerging brands bought their product from the exact same dairy, meaning they were selling the exact same product as the brand directly across the street from them.

Brands like Yogurtland tried to capitalize by tying their brand to the product. The net effect is that the brand remains relevant only if the product remains in demand. For instance, can Yogurtland credibly sell ice cream or Italian ice? Ultimately, the brand becomes directly tied to the product lifecycle. As demand for the category decreases, so does brand relevance and franchisees’ profitability. It’s often a bad idea to buy a brand completely tied to a product, because the product may turn out to be a short-term fad.

For many years, I was intimately involved with the market leader in frozen yogurt called Menchie’s. Menchie’s sold self-serve frozen yogurt, but the brand was built around a customer experience with the long game of building a National frozen dessert brand, not a frozen yogurt brand or any other particular product. While frozen products come and go, customers seemingly will always go out to eat frozen dessert in some fashion. Menchie’s CEO promised all new franchisees that Menchie’s would ride the wave of frozen yogurt demand to build a National frozen dessert brand and to build National distribution. As customer preferences shift, Menchie’s would pivot and add and delete products to and from their menu, keeping the brand forever relevant in the frozen dessert marketplace.

The strategy was the right one. Smart franchisees flocked into the brand by the hundreds, and Menchie’s became a rocket ship of over 500 stores.

As demand for frozen yogurt cooled (pardon the pun), the CEO froze (pardon more puns), never fulfilling his promise to diversify the menu. As a result, sales suffered. The CEO stayed on his collision course with failure, despite all evidence the ship was sinking. Many stores closed. Menchie’s killed the golden goose and franchisees suffered. As I was intimately involved with the brand, Menchie’s remains one of my biggest career disappointments. I could not impact the poor decision-making of the CEO.

Menchie’s original strategy appeared bulletproof. They executed well during their emerging growth stage. If I knew then what I know now, I would have spotted that the CEO was never going to navigate change, which ultimately would have cratered the brand. A franchisee can outperform a brand for only so long before the poor performance of the brand creates a ceiling. While much has been written about how to find the right business for you, in my opinion not enough has been written about how to spot a poor franchisor or a self-sabotaging leader, especially when they are flying high and there appears to be evidence to the contrary.

The industry of franchising has never done for the franchisor what successful franchisors do for the franchisee, which is to define, document, train, and support on a proven franchisor model. There is no documented franchisor model in existence. There is no manual, no book, no integrated business format in existence to show a franchisor how to go from one unit to a National brand of 1,000 units or more. Every franchisor has to create their own franchisor model through trial and error. That’s why I specifically call out franchising as a business unto itself and present it as a potential limiting factor to would-be franchisees.

The Business of Responsible Franchising

Earlier I defined franchising as “recruiting, training, developing, resourcing, and leading a team of entrepreneurs to successfully build a brand.” Let’s look at each of these tasks individually.

Franchisee Recruitment

Franchising has largely embraced recruiting of entrepreneurs into the brand as a sales function. Many if not most franchisors consider you a “lead,” and if you go further as a “prospect” they will discuss your “hot buttons” (reasons for buying). I see it as talent acquisition. My company (FPG) has mystery-shopped and trained hundreds of franchisee recruiters working for many brands you would recognize. Over the last 20 years of mystery, we have never been effectively interviewed by a brand. Most brands fail at knowing what the qualifications are on the franchisees they onboard, which adds substantial risk to your investment. An officer of the company would typically put a prospective administrative assistant hire through a more intensive interview process than they put franchisees through.

Training

Franchisors are in the business of imparting knowledge and skills of a new business to someone presumably from the outside of that business or industry as quickly as humanly possible. In other words, they must be adult education experts. As you research a brand, see if the people overseeing training have a corporate training and curriculum development background or whether they simply promote a manager or family member into a role they aren’t qualified for.

Developing

Training is not a one- or two-week event, although that’s how many franchisors treat the learning process. I have two brothers who were educators, so I know that educators have a saying: “I haven’t taught until they’ve learned.” In Malcolm Gladwell’s book Outliers, he describes the 10,000-hour rule, meaning it takes 10,000 hours (approximately five years) to master something. While I have no research other than my nearly 40 years of observation, my experience does mirror Gladwell’s research. With many business models, it takes two to three years to reach competency and five years to achieve mastery. Many franchisor training programs are one to two weeks, and ongoing support means “call me when something breaks or you have a question.”

Sandler is a franchisor of selling sales training and coaching services, and are adult education experts. They apply the same level of care to a franchisees’ training and development as franchisees do to their clients. That’s why they have been successful for 50 years and their average franchisee has renewed their franchise agreement twice.

Resourcing

A man once said, “A man is only as good as his tools.” Similarly, franchisees are only as good as their tools, processes, and systems. Too often, franchisors confuse processes and systems with “helpful suggestions” and “opinions.” Their systems are not fully planned out and integrated into a business unit. We frequently see this with local marketing programs. Often, their operations and marketing manuals look like menus at a New Jersey diner, meaning pages and pages of options, but fewer hard and fast systems.

Leading a Team of Entrepreneurs

Franchisors often confuse command and control techniques and compliance cultures with leadership. Too many franchisors rely on authority, meaning franchisees have to follow rather than lead, meaning they choose to follow. Too often franchisors believe it’s “my brand, my customers, my systems, and my territory,” thus putting franchisees in a subservient position, akin to a sharecropper. Later in this book, I show you how to spot a servant leadership culture designed to empower franchisees and lead other leaders, which works well in franchising.

The Brand as One Body

Oddly enough, perhaps the best definition of franchising was written 2,000 years ago by the Apostle Paul of Tarsus. As you read this, think of a franchise as one body consisting of several members: the franchisor (the parent company), the franchisees (business owners), and the suppliers and customers.

The body does not consist of one member but of many. If the foot would say, “Because I am not a hand, I do not belong to the body, that would not make it any less a part of the body.” And if the ear would say, “Because I am not an eye, I do not belong to the body,” that would not make it any less a part of the body. If the whole body were an eye, where would the hearing be? If the whole body were hearing, where would the sense of smell be? … If all were a single member, where would the body be? As it is, there are many members, yet one body. The eye cannot say to the hand, “I have no need of you,” nor again the head to the feet, “I have no need of you.” On the contrary, the members of the body that seem to be weaker are indispensable. … But God has so arranged the body, giving the greater honor to the inferior member, that there may be no dissension within the body, but the members may have the same care for one another. If one member suffers, all suffer together with it; if one member is honored, all rejoice together with it.

While many franchisors may embrace this definition, not all do. The founder and CEO of a successful national franchisor recently spoke at a national convention for franchise executives. During his presentation, a member of the audience asked, “How do you resolve conflicts with your franchisees?”

He proudly threw his shoulders back and chest out and proclaimed, “When push comes to shove, the franchisees know this is my company!”

This CEO was a type A, confrontational personality. He had little awareness that his approach to franchising actually causes the pushing and shoving he spoke of. In these tough economic times, franchisees and franchisors need to fight the competition for market share, not each other for power and control.

The Business of Franchising: The Bottom Line

A franchise agreement does not define franchising any more than a marriage certificate defines marriage. A franchisor or franchisee feels compelled to pull out their franchise agreement only when trust breaks down. Franchising only works when both franchisees and franchisors share a deep concern about the other’s interests. Franchising is as much about committed interpersonal relationships as it is business systems.

I believe the business of franchising is a two-metric business:

The strength of unit-level economics and consistency of franchisee profitability

The quality and trust level of the franchisee-franchisor relationship

These themes are fully described later in this book.

Why Do Companies Franchise?

There are several reasons why companies choose to franchise. This section discusses them at length.

Franchisors Taking the High Road

Responsible franchisors who take the high road possess multiple options to expand their business. They had a proven business model that produced great results, including replicating their success in other markets. Possible expansion strategies included bringing in investors, raising capital, and expanding through the chain method (where the parent company would own all the individual distribution points) or restructuring their companies and expanding it through franchising.

They chose franchising because franchising could provide them with advantages that the chain method could not.

The first competitive advantage that franchising can offer companies is stronger tactical execution of their business model by having highly skilled and motivated entrepreneurs run point on the implementation rather than perhaps less skilled, less invested company managers. An entrepreneur with their dreams and money at stake will usually try harder and therefore produce greater results than an employee with a bonus and job security at stake.

Second, franchising is a financing vehicle. Rather than having to raise millions of dollars to expand their business, franchisors leverage the franchisees’ ability to raise their own capital through the SBA (Small Business Administration), home equity, ROBS (401K rollover), family, and other sources.

Third, a franchise is typically better positioned to grow more quickly than a company that chooses the chain method of expansion. It’s been said, “Timing is everything.” Good businesspeople know that when a market opportunity presents itself, it must be seized. Franchising offers a brand greater speed to market, which is important if the brand stands the risk of losing a beachhead to local or regional competitors starting copycat concepts.

Fourth, franchising can be lower risk for the brand. Franchisors earn fees (royalties) that are paid by the franchisees typically from gross sales, not cash flow. Additionally, the startup capital of the new business is the franchisees’ risk, not the franchisor’s. Although the franchisees assume much of the financial risk, the franchisor is dependent on the continuing royalty stream paid in by franchisees. Additionally, franchisors will not grow if the franchisees are not making money and achieving great results. Therefore franchisors have a vested interest in helping the franchisees become profitable, but they don’t take the hit if they fail. The franchisor’s revenue stream is diversified by collecting royalties off the top line of many franchisees rather than the bottom line of fewer controlled investments.

Fifth, they want to share their successes and make a difference in the lives of others. Most franchisors are deeply committed people who love to see their teammates win.

Lastly, franchisees have a collective genius that is hard to replicate in a chain method. For instance, a McDonald’s franchisee thought of the Big Mac. Co-founder of Jiffy Lube and current president of Babson Business School Stephen Spinelli talked about how a franchisee solved a major problem for Jiffy Lube, which at the time was inventing the fast oil lube category. Labor cost fluctuated all over the place, depending largely on how easy it was for the technicians to remove the existing oil filter. Some filters were screwed on too tight from previous auto service providers, making it very difficult to remove, driving labor costs up and destroying margins. When examining labor cost, one franchisee seemed to show more predictable and acceptable labor costs than other franchisees experienced. Jiffy Lube support visited his location. They found he had invented a wrench with a canvas strap that the technicians would slide over the auto filter and pop it right out, regardless of how it was previously installed. The wrench was patented and distributed to all the other franchisees and added to the required equipment list for all new franchisees. Without the strap wrench, Jiffy Lube might never have gotten to the size and scale it is today.

The Low Road to Franchising

Many unethical and irresponsible franchisors get into franchising because some consultant or attorney in a blue pinstriped suit and a snappy red power tie told them that they could get rich using other people’s money. And for only $150,000 to $250,000 they will show them how!

You can spot a “low road” franchisor by the following indicators:

They are undercapitalized. Their financial survival of their company is completely dependent on the short-term revenue from selling franchises instead of long-term revenue from collecting royalties. There appears to be no other source of expansion capital available. They have to sell you a franchise to survive.

They have not been in business more than five years or do not have a proven business model. They expect you to invest your money for the privilege of proving their business model for them.

They have never expanded in multiple units and therefore have not proven they can replicate their success. They are expecting you to jump at the opportunity to let them experiment with your money while their cash sits in their bank – assuming they have cash at all.