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hi my name is chris connor i'm the president and founder of franchise marketing systems i've been working in franchise development since 2001 i've worked with over 600 different brands to help them become a franchise model and get into the franchise business by creating scalable simple and efficiently duplicatable systems uh what i want to talk about in this discussion here was a little bit about why companies franchise how the franchise model works what's involved in becoming a franchise and some of the reasons why companies choose to go down the franchise route and scale their business through franchising the first thing that every business has to consider when they're looking at how do they grow how do they expand how do they take what they do and turn it into something bigger is capital how do i get more money into this business more fuel in the tank to help me scale the business bring in the resources that i need to grow it and to capitalize on my intellectual property and my brand and ultimately fund the expansion of the company there's a number of ways that we can do that and the the first and probably most conservative would be to take our profits from the business year one and two and roll it into growth every every every time we're able to save up enough money to expand and open up another location you could call it bootstrapping the problem with this sort of of growth is that it's typically not very fast takes a long time to achieve any significant real growth and the second issue that i found in doing this over 20 years now is a lot of times as the business owner when you use your own capital you end up digging yourself deeper and deeper into the operational requirements and the and the minutiae that come up in running the business every day if you haven't read the book the e-myth by michael gerber i always recommend it it's a simple great read but the concept is you cannot really build a business if you're stuck in it we become our our best and most prolific employee and we're unable to do things that are strategic and really help move the business forward the second way we can raise capital is going to the bank going and taking out a loan getting debt bringing on debt funded capital so that we can then infuse that that funding into the business some of the same things happen with organic growth where we potentially get ourselves embedded deeper in day-to-day operations but also when you borrow money a lot of times the cash flow from a new location when you open it does not match the payback structure of the loan when you borrow it from the bank they want a payment month one month two month three month four and so on and a new business might take a year or two years to begin breaking even and being able to even feed itself so a lot of times companies get in over their head over leveraging themselves and end up unable to pay the bills and and to fund the debt financed debt financing the third option to raise capital is to go out and bring on an investor it could be private equity if it's large-scale investment could be an angel investor could just be a traditional partnership with someone that we know partnerships can have a very very low probability of success in general and the biggest issue with them is when you give someone equity in your business you give up some percentage ownership they now have the right to tell you how to run the business it almost doesn't matter what percentage you give them i we all hear about the 49 51 percentage difference in ownership to give you that ability to control it still ends up in a legal fight if there's a disagreement in how to run the business a lot of times partnerships will start out on the same path everyone has the same vision they're excited about where the business is going and over time those paths diverge and now the partnership ends up in some conflict and the business suffers because of it it's not that partnerships can't work there's great examples of partnerships that have worked and businesses have been successful because of them i guess my advice would be that before getting into a marriage make sure that you are as tightly aligned and as clearly on the same path with the vision that you'd like to take the business in because once you give that control and once you give up any percentage of ownership to someone they now have a legal right to tell you how to run the business the fourth option to raise capital would be franchising and not that many people think of franchising as a way to infuse funding into their business but i'd argue that's exactly what you're doing when you franchise your business you're now offering your opportunity to invest in your business to to invest in your intellectual property your knowledge and the franchisee is paying you for that right the beauty of it is that you're not giving them any ownership control in the business they own 100 of their business you own 100 of your business two completely separate entities that are tied together through the franchise agreement it's a powerful combination of leveraging a brand buying power and this overall system that you're running and managing as the franchisor and a locally owned independent owner operator who's got their own money in that business and they're focused on it they're driving it they're passionate about it and the and the success rate's going to be significantly higher because of it so let's talk about how franchising works first of all it's defined as name system and fee meaning that we're selling the rights to use our name i have chris connor's hamburger shop and i'm going to sell you the rights to become chris connor's hamburger shop in your market that's my brand you have to follow my logo my look my presentation everything that i've created that my brand stands for you will follow as the franchisee part because i want you to keep my brand consistent but also because as we grow more locations and add more locations to the franchise the brand equity increases and there's a reason why the average mcdonald's restaurant does 2.7 million dollars in sales and the average burger restaurant that's not a brand might do 800 000 sales because we've become to know the brand we've seen it there's awareness around it and more people go into that restaurant to buy the product the same is true whether we're doing carpet cleaning services or roofing or painting or landscaping brand equity ends up becoming part of our value the last component the second component of a franchise is the operating system part of what i am selling to you as a franchisee is i'm giving you my intellectual property i'm giving my coaching i'm giving my mentorship i'm teaching you how to run this business and all my years doing this and working in this industry i've learned what to do and i've learned what not to do that's what you get as a franchisee it's that operating platform and that operating system the last component of a franchise is the payment of a fee that fee is paid up front and you and a franchisee pays that fee for the rights to get access to my name my system my model my intellect my entire brand following that franchise fee the franchisee will then pay a royalty percentage the royalty percentage will will be collected either weekly or monthly depending on the industry segment it might be anywhere from five up to ten or eleven or twelve percent that's of gross sales and i am collecting that fee as a franchisor for the ongoing coaching and support and guidance that i'll be giving them as a franchisor some franchise systems will also sell products and services and supplies to franchisees as well and they might sell these as a part of doing business or part of maybe their operating technology maybe they have to buy their branded apparel through the franchisor all of those can also be profit centers for the franchise system and the beauty of the franchise model is that as the franchisor i now am developing my own consistent controlled and branded distribution system it's a great way to develop distribution whether it be a product or service because these are franchisees that have to follow my model they have to follow my system they're presenting themselves as part of my company and part of the brand it is the look feel and consistency that the high tide raises all ships everyone in this franchise network wins because we're all doing it the same way so in franchising there's a number of benefits number one is the consistency of brand there's a number of levels of marketing that we require a franchise to follow that when we sell a franchise we want the franchisee to execute number one is local marketing every franchise location that i sell of my brand has to spend a certain amount of money in my prescribed format in their market so if i open up a location in omaha nebraska and in chicago and in la and in miami every one of those markets is now spending locally driving traffic in locally doing things to create awareness and generate dollars at the store level or the unit level i'm also instituting a nationwide marketing fund that's more of a global big picture advertising initiative i will require that every franchisee pays back a percentage of the revenues on top of their royalty fee maybe one or two percent that goes into a fund that i now can invest in promoting the brand overall think super bowl commercials big picture think celebrity endorsement think pr think driving more web and digital traffic it's things that everyone benefits from and the entire network globally begins to see value in being part of this franchise regionally i'll also require that franchisees contribute to a marketing cooperative this is more of along the lines of all the franchisees in the orlando market i want you to contribute to a fund and do tv do radio do cable do things that you all can contribute to you can get a discount because you're doing it in in some bulk or volume discount and now every franchisee in that region gets the benefit of having big picture large-scale promotions that you probably wouldn't do if you weren't part of a franchise you wouldn't you wouldn't be able to justify the investment but because you're part of this franchise network now you can do it now you can leverage the buying power and you get more for your dollars it's this regional local and national advertising effect that everyone begins to win from and ultimately the entire network benefits from the next part part of franchising that's a significant advantage is the local market representation that you get when you sell to the right owner in a market who's from that market they know it they've lived there they've raised their kids there they've raised they went to school there they know the market that they're investing in the customers the people in that market know them it's a huge advantage for us as the franchisor who is opening up a new location in a new market it gives us that leg up the advantage of having someone there who already is embedded in that that region already is trusted already is credible we now have shortened the learning curve for our new location that's going to have that local market representation and ownership one of the things that a lot of people don't realize about franchising is the opportunity for an exit and it might seem ironic but a lot of companies and a lot of entrepreneurs get into franchising in order to at some point get out of the business and build something that has value and exit opportunity franchise systems will sell for anywhere from 15 to 25 times earnings in an incredible ratio something usually that is traditionally aligned with tech or pharmaceutical or very specific industries they get much higher multiples now if i'm in a service business and i'm doing a transactional service offering say cleaning say restoration say painting i might be able to sell my business for one and a half two and a half times my net profit so if i net a hundred thousand dollars a year my business is worth a hundred and fifty to two hundred fifty thousand dollars if i'm in a restaurant business i might be able to sell for three maybe three and a half times my net franchise systems routinely get 15 to 25 times earnings because of the repeatability of the revenue that's what it all comes down to once i've proven that this business works because of the system and the brand and the model and not just because of me i'm the entrepreneur and i'm amazing and i'm talented i've shown that this business can be replicated and taught to other people as franchisees that's when it starts to take on significant value that's when a private equity firm or an individual investor can justify spending a significant sum on this business because they can buy into that residual revenue they can take the package you've created and they can sell more locations it gives them an opportunity to see return on investment and justify a much higher investment into that business so let's talk a little bit about the legal requirements that are involved in franchising franchising is a regulated industry it's one that's governed federally by the federal trade commission they look at franchising as a method of distribution there's also some state level compliance that we have to adhere to in order to offer and sell a franchise to someone the beauty of franchising is that it's very consistent and very uniform that allows you as the franchisor to have one core set of documents one core offering that you can use essentially in all 50 states when you go into countries like canada you need to have a different set of disclosure documents but it's very similar it's uniform it's consistent it allows you to focus on the relationship and the business aspects not so much having to have representation in every state to do it so at the federal level they require what's called a franchise disclosure document this is a significant offering document it's maybe 150 to 250 pages the key to this presentation is disclosure so let's talk a little bit about what's in this disclosure document the document details all the background on you as the owner of the company any of the officers in the company any businesses that you've owned in the past and any businesses that are in in operation now that have anything to do with the franchise system in this disclosure document you have to list an overview of what the investment range might be not just the fees that they will pay you but what range of investment might it take for them to get into this business open up the location and actually fund the business startup construction signage inventory working capital marketing dollars all these things are part of the investment they have to be ready for and we need to tell them up front about it all the fees that go into this franchise relationship both up front and ongoing as the franchisor you have every right to require them to buy products through you to buy equipment for you to buy inventory and supplies through you it just has to be disclosed up front in this disclosure document you have to have your financial statements not for your main business but for your new company that you will set up to offer the franchise with chris's hamburger company we have chris's franchising llc that company i have to present the financial statements for if i'm in a registration state or after my first year offering i have to audit those financial statements because it's not the main business usually that audit isn't overly cumbersome and is reasonably efficient to get completed in this disclosure we also have the opportunity to include an item 19. which is basically showing the financial statements for chris's hamburger company it's showing that buyer what i have done from a profit and loss standpoint to give them an indication of what this business potential is i can't guarantee anything i can't guarantee performance for the franchisee but i can show them numbers as long as they're factual and as long as i can back them up with historical data once i have my disclosure document in place i then need to file that in certain states there are 27 states that don't have any filing or registration at all so as soon as i have my disclosure document i'm okay to present in those states the other remaining states are either filing or registration states filing states generally just want to be put on notice states like florida texas utah kentucky it's a simple application you have to file with the state before they'll let you sell franchises there they won't even review the franchise disclosure document states such as california new york illinois maryland virginia minnesota washington they will review the franchise disclosure document they'll come back with feedback changes amendments things that they'll ask of you before you sell there generally it takes anywhere from 60 to 90 days to get approved in most of those states and they all come with a fee anywhere from 500 to 750 dollars to apply for registration once we've gone through the the legal process and we have our documents in place we then are now permitted to go out and promote in selling a franchise there's so many different ways that we can sell and to me franchise marketing and lead generation is is one of the real fun parts of this whole business it's a marketing and promotions game and what's more fun than selling the vision selling the brand selling the history selling the culture that you've created that we've created as entrepreneurs that we've built and developed and defined you're now giving someone the opportunity to leverage all of your work your knowledge your time your energy your blood sweat and tears that have gone into this and they now have the opportunity to become an entrepreneur and start a business with your help you in return get payments and fees and ongoing residual income for it and you've grown your company every franchise with a new market a new location and someone who's vested in your business it's one of the most powerful ways to grow one of the most powerful and efficient ways to scale the last thing i wanted to cover here was helping talk through the whole concept of is my business franchisable and when is the right time to consider franchising a lot of the discussions that i've had over the last 20 years doing this are with companies that are trying to answer these two questions and when it comes to looking at whether a business is franchisable it's a number of things that i would i would recommend looking to and evaluating and and gauging what you're what you're doing now and whether it's a potential fit for the franchise model number one is what you do broadly applicable do you sell a service or a product that's needed in a broad market segment do you have something that's that there's consumer demand that's growing and interest in the offering over a large number of markets if there is franchising obviously plays better you look at the markets that have franchise well usually there's consumer demand that outpaces the company's ability to satisfy it with company growth that's why they franchise they needed to bring in third party investors to help them capitalize on this market segment and grow to to satisfy that demand the second thing i would look at is how structured are your systems and your operating procedures many of the companies that i've worked with that we've worked with in setting up franchises come to us generally a little bit raw they haven't built incredibly in-depth systems and models yet that's part of what we can help them do but we need to have the content we need to have the ability to put down on paper how we get a new customer what advertising works what kind of spend do we have to do to pull in a new customer how many potential new customers do we have to interact with to convert into a paying client what sort of operating procedures and technology have we developed and put in place so that we can teach and train and help someone else become proficient there is absolutely a difference from a business that is successful because the entrepreneur is very talented works hard as a driver and puts every hour of every day into it and a business that has operating systems that can be taught trained and shown to a franchisee we want to be more on this side when we go to market and begin to scale the other thing i would look for is what is our competitive unique selling proposition do we have a brand that says something and means something and speaks to the consumer so much of what draws in franchisees and captures franchise interest is the look and feel we put forward great website great design great logo great messaging great tagline all of these things make a difference mean something and we might be able to get away with it when we're selling to a consumer but now when we're selling a franchise we're selling an investment usually a significant investment to someone who's trying to figure out do they put their future in your hands and trust that you will help give them the path to better financial freedom to a better lifestyle and all the things they're hoping to get out of this franchise relationship if we don't have everything tight presenting neatly professionally clean it it's going to scare away buyers and we're certainly not going to be able to justify people putting an investment of 30 or 40 or 50 000 into our business if it's not showing correctly we need to have an operating prototype it's okay if we have a business that doesn't necessarily produce a million dollars a year net it's not just about the bottom line but we need to show people a good return on investment for our industry segment normally if we're talking a fixed location business i'd like to be able to show someone how to get their money back in three to five years 100 return on investment if it's a service business probably a year year and a half need to see that return on investment if we're not able to show people these sort of returns and the potential for these returns it's tough to sell it we need to show people how this how our franchise offering gives them that opportunity and presents an opportunity to them again we don't guarantee any performance in franchising the franchisee has to go out and work the business they have to show up they have to put in the effort they have to make it happen but we need to at least give them an understanding of what the potential is and what the possibilities are the last thing that i've seen make a significant difference in whether companies can succeed in scaling their platform for french through franchising or or they have a tough time with it is the vision and the mentality of the owner themselves you as the entrepreneur are in control of what happens with your brand you have every bit of decision-making power to take that brand either in a very positive direction and scale it and turn it into a an entity with sustainability and value or to pull all the profits out work it as a job and not really give the business the life and the potential and the freedom to flourish like it might be able to and i've worked with some great concepts some great models that the entrepreneurs didn't focus on the business did not reinvest in it did not do the things that would have taken it to the next level and i've had others that have flourished because they did those things they reinvested they hired people they put systems in place they gave it the opportunity to thrive you have to be willing to make those decisions you have to be willing to give up a little bit of control as you let franchisees in you have to trust that they can run the business and give it the attention and love and focus that you have and and you would and you have to have some faith in the fact that as a entrepreneur if you can pull yourself out of it and work on it and be that strategic thought leader there's so much more opportunity than if you're the one who's doing all the work every day and not entrusting and delegating and teaching and scaling i i welcome the opportunity to speak with you and talk through how franchising works introduce the platform answer questions about franchising we do this with no obligation please don't hesitate to contact us and set up a phone interview a phone discussion we'd love to hear more about your business we'd love to talk with you and we'd love to get to know you and all about what you've created you