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-What is up, guys? My name is Daniel McKenna, and I am the world's largest jockey. When I'm not jockeying, I'm also the Executive Producer here at Thrive 15. And today, we have Clay Clark and Terry Powell sitting down to talk aboutd the franchise business model, the pros and the cons. Who is Terry, you might ask? Take a look at this.
If you are looking into what kind of business you want to run, Terry is going to give you some information about the franchise model, both the pros and cons of why you might want to consider it. Determining what business model you even start with is going to play a huge role in determining whether you can get to where you want to go. Is franchising right for you? Maybe. Check this out. We're going to give you some good information.
As you probably know by now, here at Thrive, we believe that knowledge without application is meaningless. Meaning if you don't actually watch this and learn something and then apply what you learned to your life or your business, watching this lesson is going to be more meaningless than the instructions to the shake weight. I'm not going to demonstrate.
-Terry, thank you for joining us today.
-My pleasure, Clay
-Well, today, we're going to be talking about the franchise business model and how to start a business, and we're going to be talking a lot about the pros and the cons of the franchise business model so people who are watching this who are maybe considering buying a franchise, they can learn a little bit more about this. But before we deep dive into it too far, I wanted to give the folks at home a little bit of background into your career. Can you explain to us maybe how long you have been in the franchise industry and in what capacity over the years?
-Great. Yeah, I'd love to. We just celebrated our 30th year in business this year. And started out in the franchise world in the idea of developing coaching processes with a brand called the Entrepreneur Source. And today, we work with about 5,000 to 6,000 individuals.
-30 years. Yeah. I was, I think, 12 when I started.
-Oh, awesome. Awesome Yeah.
So now, when you see people that come in to the world of franchising, a lot of times, they're new to some of these words. And one of them would be business model. A lot of them say, well, I'm looking for the right business model. Can you explain in layman's terms what the word business model means?
-Yeah. From a layman's term standpoint, I look at it as the picture on the Paint By Numbers kit. The model is really putting together all the elements of a turn key so that someone can just operate that. And so you're modeling what's the best outcome, what's the best customer experience, what's the best practices associated with that business.
-Well, the good folks at Investopedia, these guys wrote this definition. They said it's a plan implemented by a company to generate revenue and make a profit from operations, like you said. The model includes the components and functions of the business as well as the revenues it generates and expenses it incurs.
Now, Terry, I've met a ton of people over the years that have decided to hop into this world of self-employment-- or at least they think they want to. They want to become self-sufficient. They want to become self-employed. And it's a little bit scary for people.
But I wanted to get your take on this a little bit. Microsoft, which is one of the most successful companies we know of, this year, in July of 2014, they announced they're going to lay off 18,000 employees. And then Hewlett Packard, on May 23rd, they demonstrated they're going to lay off 11,000 to 16,000 employees. And I think a lot of people watching this are going, I think I want to start a business, but I don't want to leave the security of my corporate job. Do you buy that whole idea, that having a corporate job equals security? Do you buy that? Or what your thoughts on that?
-Well, it depends on your point of perspective on it. But I don't buy that. Haven't for many years. One of the reasons we launched the company was to help people become self-sufficient and go from employment to empowerment. But the statistics you just quoted, and many others from what we call the new normal today, how they've reallocated the way businesses and companies treat employees, really has brought us to what we call the battered career syndrome. So yes, employment is still an option for many people. It's always going to be an option for many people. But the culture within most employment relationships has shifted dramatically. So you can't just build a career and stay the track and retire like you once did. You might have six or seven different distinctly unrelated career paths that you need to focus on over your career.
-That's wild, six to eight different career paths. And I think if you're watching this-- you thought about starting a franchise. You thought about buying one. We know what a business model is, and we're saying maybe the franchise business model is for me. Maybe it's not. And so we're going to go ahead and hop into the pros and cons of owning a franchise. And so I'm going to read off pro number one. It's less risky than starting an independent business on your own. Terry, why is it less risky to buy a franchise than to start an independent business?
-Well, there are a number of factors that come into play. But just going back to the idea of the term "the model," the fact that the franchise has already perfected and created a model that you're just going to have a turn key to work from. An independent business, you're going to have to start from scratch and develop the learning curves to put that model in place over a number of years. So that in itself means it's a slower, longer track.
-I went in the other day to get my haircut at Sports Clips. I go in there. When I walk in, I was absolutely amazed to see all of the-- there's a print piece. Well, someone had to make that print piece announcing their special. Somebody asked me if I want the MVP. Somebody else asks me if I want this kind of haircut or this kind of service. And the decor, I'm sitting on bleacher seats. Someone had to think of all those things. So when you buy a franchise, it seems like there's just a ton of systems you're buying. Is that the big pro?
-The key to a franchise is it has to be replicatable and duplicatable.
-Replicatable and duplicatable.
-That's the key.
-OK. So the con, I guess the opposite of that, would be buying a business model that has been proved to typically work-- buy a franchise model that works typically costs more money upfront. Terry, you've worked with business owners. How often are people concerned when they decide to become a franchise business owner about that upfront cost? Or do they get that sticker shock of saying, "What am I buying here?" I mean how often do you see that as a big concern?
-It's fairly common. And people are evaluating what they're going to do as far as an investment. So the key is to help them understand it from an investment and return on investment standpoint. Once you think of it as a cost, it seems like it's a black hole that it goes into and there's not any upside from that. The reality is they cost more to launch, but they have a much faster return on investment and a more consistent and predictable return on investment. So in the long term, it actually costs you a lot less from time, energy, and effort of doing it on your own.
-I want to give a couple examples to Thrivers watching this that might be helpful. There's one gentlemen I know who was in the oil and gas business. He recently invested in a franchise. And within 24 months, he was up and totally profitable and doing great. And he said, "It was great because all I had to do was work the system and it worked." Whereas I know a lot of small business owners that have been in business for 20 years and still don't have all their systems built. So I think you're 100% right there.
Now, I guess the pro number two here is you could receive a complete system to operate the business successfully. So you don't have to waste your time and money guessing about what you need to do to become successful. Kind of like what you said, you don't have to waste your time.
-Not-- not only waste your time, but need to bring in all the ideas and creativity and systems and fine-tune and tweak those so that they are model ready. That happens over time in a non-franchise business and obviously, that's a slower track and can be more costly.
-And going back to that sports clips example. I was just thinking about all the graphic design costs, of designing the signage, and designing the print piece. And I was thinking, man if I bought a franchise like this, I wouldn't have to do all that. Because I know as a small business owner for years, every time I wanted to make a print piece, I've got to pay a designer 400 bucks or 500 bucks or think about, are we large enough to bring in a full time person yet? And there's a lot of that. Now the con is that you really have to stick with the system you bought. I don't have an issue with that, but I know a lot of franchise owners do. I mean--
-Well that would be the key is to stick with that. Because you know your example of the surroundings that you experienced in the sport clubs. Just think if you were an independent business owner and you had to go out and acquire all those tradespeople to create that for you as one individual, as compared to Great Clips doing it for hundreds and bringing that cost down. So there's a lot of cost savings associated with it. Then you have to meet the commitment of following the system. And the simplest way to think of it is that if you're a superhighway to success. With a franchise, it's a multi-lane highway, six, eight lanes wide but there's guardrails. OK and as long as you stay within those guardrails, success is very predictable. Once you get outside those guardrails, things happen very quickly. We call it the SYSTEM acronym is Save Yourself Significant Time Energy and Money. And one thing changes dramatically when you go outside the guardrails, and only one thing. And that save change to cost yourself significant, time, energy, and money.
-I want to ask you for your commentary on this story about not following the guardrails. Kind of a story time moment here. I recently met a franchise owner who was explaining to me, they wanted to hire me as a consultant. Because they wanted to build their own website, because the corporate wasn't building a good enough of a website in their mind. I told them I can't do that because of the legal ramifications. And two, you bought a system, you should follow it. But this person was hell bent on making their own website, because they thought that the corporate side wasn't good enough, quote unquote. What they were designing that they showed me was a disaster. And all their business cards were just nasty. Do you see that a lot where people actually buy a franchise and then make their own hideous business cards? Do you see these kind of things?
-Well actually we have a terminology for it. That we-- when we're training our new franchisees, one of the first things we talk about in day one is that for the next six months you need to spare us your brilliance. But franchisees come with brilliance that they believe right away is much better than what the franchise has done or will do. Not all but you run into that occasionally.
-So the first six months you need to spare us your brilliance.
-So if you ever-- if you're watching this and you've thought about buying a franchise, you might have a ton of good ideas. But you're saying, don't necessarily tell the world about your new ideas yet. Go ahead and implement the ideas you just bought for the first six months.
-Yeah because you want to-- you want to get the benefits of what you've invested in. And that franchise or in that first six months is putting the most emphasis on getting you ramped up, getting you into the systems, and getting a return from that. If you start deviating from that and bringing your brilliance from your past winning formula into the new winning formula, it tends to take you off track from the results.
-Now we're moving on to pro number three. And this is you receive all of the benefits and freedom of being self-employed but with a big brand behind you.
-Yeah, absolutely. It's being in business for yourself but not by yourself. So you have the brand. And you have the franchise company there to have an emphasis on your success. And there's not a franchisor in existence today, nor will there ever be, that can make money without having successful franchisees. So it's a win-win interdependent type relationship.
-One example I can think of is there's a guy who opened up a Subway restaurant. He was from somewhere in the Middle East. And he bought a Subway franchise right there in a building where I used to do a lot of consulting. And he only had the one location. He didn't have 15 locations, from what I can tell. It seemed like he had the one location. But as soon as he put up that Subway sign people just flocked to it. Because we knew that brand. We kind of were drawn to it. Is that kind of the power you're talking about?
-Well, most people when they think of the power of the brand a lay person would say well it's because they have this TV campaign. And the brand is known to everyone. Actually the majority of franchise companies don't have national TV campaigns. But there's a synergy that's created by having a brand consistency. And even if there's two or three of those brands in an area, or people are traveling between states and they see two or three of those, the synergy that's created in their minds and the dependability that's created in their minds.
I mean, I remember back to being a kid and driving, taking a road trip. And, you know, where we were going to stop was always a big debate. Because all of us were in the car. And it would be, let's stop at Howard Johnson's. Everybody knew a lot of things about Howard Johnson's. The service was slow. The food was mediocre. But we knew we could depend on that.
-If we stopped at some hot dog joint on the side of the road we never knew what to expect. We had to have that first experience.
-I think a lot of people we don't stop and think about how important that is. When we're out of town-- I mean today we're in North Carolina. We're in Charlotte here, beautiful area-- when you're looking for a quick meal for lunch or something, what do you do? You look around for a logo you recognize. And you go in. You know it's consistent.
Now on the downside, the con here, is that the big brand, the big corporate brand, often has to hold the franchisee accountable to following that consistency.
-And so I see outbreaks of this a lot. Where you'll see somebody who in particular has decided that the corporate menu, let's say in the food industry, isn't what they want. So they try to add their own special item to the menu. And corporate said, oh, no, no. You can't do that. Can you talk to me a little bit about why so many self-employed people who buy franchises have this desire to tweak the corporate model all the time? What's that all about?
-Well, it varies depending on the individual. Some never tweak it. Some will just operate it and really focus on maximizing having the system work for them, instead of working at it. When you get to the point of working at the system you're going to be looking for ways to improve it or to change it, which can be problematic. The system is designed to really be focused on, and create, the best practices that are available today. So you want to make sure you're taking advantage of that.
But people are always going to look for creativity, always going to look for ways to do that. But the thing that's important is every new menu item that came out for McDonald's, for example. When they started it was cheeseburgers, hamburgers, fries, Coke, and milkshakes. If you look at the menu today every single menu item that succeed came from franchisees having ideas.
-And working with corporate to get them in, like breakfast, for example. And every single menu idea that Ray Kroc had actually failed.
-They're no longer on the menu.
-Well, this just goes to show you that if your name's Ray Kroc you shouldn't be suggesting breakfast menu items.
-Now moving on to pro number four. It's easier to attract new customers to a new franchise as opposed to a new independent business.
-Why is that true?
-That's very true. And we talked a little bit about the synergy aspect. It's recognizable. It's understanding what you can expect. It's being able to attract customers with a marketing campaign right from the get go that most small, new business owners outside of a franchise would not invest to that level to drive business that quickly.
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