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-There's a gentleman that I kind of knew of. He was kind of an acquaintance, but he opened up this burger joint in Tulsa, Oklahoma-- this new burger joint. And he had some really great food items, I'm sure. Many people I know said the food was pretty good, but he had a hard time getting people to get in there.
Now, right across the street there was a Panera Bread. Well, everyone knows Panera Bread. That new business comes in. Everyone just heads over there. We know that brand, and for him, he really a struggled to inform people what kind of food he served and why you should trust him and that kind of thing. And so I think that absolutely is this true.
Con number four-- if the public recognizes the brand in an unfavorable way, then it may reflect poorly on the actual individual who bought the franchise.
-So I guess example is if the corporate office does something crazy, every one of the local franchisees feels that pain. Can you talk to me a little bit about this can be a con?
-Well, this is certainly can hurt the reputation of the business, and those types of things are going to happened in any flourishing, growing brand. There are going to be hiccups and so forth. But there's also going to be ways that they'll be able to manage that. So the key is we're all operating under the same brand, and that's why the franchisor need to take responsibility to keep people within the guard rails so things don't get out of control and that could cause a harm to the reputation or a downside to the brand. It's a problem when there's an issue in a situation, and we all remember the Jack in the Box issue from many years ago, and how that rippled. They've recovered from that, to but it does take time.
-I think it's super important if you're watching this, maybe you do own a franchise, and you're watching this, and you're thinking about buying another franchise or something, I think what is important is one of the Thrive mentors we have Arthur Greeno. He owns a Chick-fil-A. He owns two Chick-fil-As, and he's been with Chick-fil-A forever-- I mean, for years and years and years. And so they've had times where they've been in this media for all the bad reasons, and they've been in the media for all the great reasons. But it's the brand overall, it gets him more awareness. It helps him a lot. But there is sometimes the ups and downs of that.
Now moving onto pro number five-- it's often easier to secure the financing needed to open a franchise business versus an independent business. Now this right here to me is a big one. This is huge.
-It is huge.
-Why is it so much easier to get funding for franchise than for a new independent business?
-There's a lot of variables there, and a lot of reasons why it's easier. But typically it's the idea that that franchise concept has built a model that's replicatable and duplicatable. That creates a sense of security for the banker or the lending institution. There's also the track record of non-franchise businesses from a failure standpoint is quite high as compared to a franchise business. So if you're lending money to a new business owner and you're looking to comparing those two, the franchise is going to come out on top 95% of time.
-Now, the con here though is that when you're buying a franchise, it often requires more money than starting an independent. So I guess an example is if I wanted to just open up my own haircut salon, I could probably go out and borrow $100,000 $75,000 and build out a white box, some type of office space, and the be up in business. Where maybe buying a franchise might cost me $300,000 or something.
Again, I mean, I guess it's a con. It costs more money upfront, but, I guess, the value of that is that you can get that money easier. Is that kind of--
-Well, there's a number of values. You can get access to the capital to be able to invest properly and shift it from a cost perspective in your mind to an investment and then a return on that investment. So when banks and institutions that finance and lend look at that formula from not just the short term what's it going to cost to launch this business for the first year, but what's it going to cost to keep it growing and successful to get the return on investment over a five- and 10-year period? Franchises almost always come out on top.
-Because you've work with so many franchisees over the years-- I mean, you've worked with thousands of people that have bought a franchise or wanted to buy franchise-- do you ever see an aha moment where they go, oh, my gosh, I can actually get funding for a business? I mean, do you ever see that moment happen?
-Quite often, actually, that's one of the biggest fears that individuals are looking at business and franchise ownership is they don't understand how easy it is to get funding, and they don't understand how to leverage their reactive investments to turn those into proactive investments with themselves behind
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-Can you give me a little bit of a story or an example of what you mean by taking a reactive investment and turning into a proactive? Just so that the folks at home understand what you're saying there.
-Well, we mentioned earlier about the battered career syndrome and the job market. But also of late, the last 10 years, we're all suffering from what's called the battered investors syndrome. So those reactant investments that we're doing quite well before we shifted to the new normal, and we re-calibrated those returns, have gotten very minimal returns right now. So the reactive investments aren't really growing like they need to.
You can leverage by transferring some of your react investments to a new line on your net worth statement called value of business owned. You still have the asset. But now they're going to work with you behind those to get a higher return.
-Would that be like a 401K where someone is saving money for retirement and they can kind of roll that over into a loan, there?
-Yeah, or taking some of my stock portfolio and liquidating that and shifting it to that new line of my net worth. So that's value of business now. I'm behind that. Those other investments, somebody else is really orchestrating whether it's a good or bad return. I really can't impact that.
-I want to just share this for anybody watching this who's maybe struggling to grasp this. Or maybe you're going, gosh what exactly are you talking about. As an example, if we put money into a mutual fund, you and I might make 10% a year return, if it's a good year, 10% return every year. But as a business owner if you put in $100,000 into a business a lot of times you can make a 20% return or a 30%. I've seen people double their money, triple their money.
It's very hard to do that in the stock market. You can do it. And there is people that do. But when you're betting on yourself you get that sort of return you could make a huge return if you're an aggressive marketer. So I don't believe it's as risky to invest in yourself as it is to invest in a bunch of companies that you can't control the results there.
Now moving onto pro number six, franchisees often receive great training and support. Meaning that if I buy a franchise I'm getting some great training. What kind of training and support can I get if I'm buying a franchise?
-Well, it's very extensive. And the reason that's in places because the franchisor is focused on getting that franchisee and their team ramped up as fast as possible. Because it's about a return on that franchisor's investment also. At the earliest stages of getting you started your royalty payments are at their smallest. But the franchisor is giving the most amount of training, support, guidance, and help to get beyond that start up phase so that there's a win-win where the royalty payments grow and then the franchisor can start to recapture some of their returns.
-And just like to give an example for the folks at home, let's say that I own a franchise. I just bought one. And it does $100,000 a year of gross revenue. Typically what kind of royalties go back to the corporate office, to the franchisor?
-It varies depending on the industry. Some franchisors provide a lot of back office type of support that franchisee would have to invest in themselves. So they charge a higher royalty. Some of the franchisors actually do collection and manage those things for the franchisee. So that would be slightly higher, but anywhere between 5% to 10% is pretty typical in a franchise system.
-Just to give an example, if I was bringing $100,000 a year of gross revenue and let's say my royalties to corporate were 5%, corporate makes $5,000. So they have a desire to get me to be as successful as possible quickly, right? So they could more and more royalties. I mean, it's a win-win.
-It's referred to as an interdependent relationship. The franchisee doesn't work for the franchisor. And the franchisor doesn't work for the franchisee. They come together in this license called an interdependent win-win relationship.
-I just love the way that relationship works. That's, to me, one of the biggest most exciting things about the franchise world is that corporate, who sometimes people might say, oh the guy's at corporate don't care. Well in franchising the guys at corporate get paid a percentage of what you get paid. So they're trying to push you to be as successful as you can quickly. They're trying to equip you and empower you. I just love that relationship. To me that's a really neat part of franchising.
-Now, on the con side of that I guess is that you would say that you really have to have a lot of training from corporate. I mean they're pushing you all the time.
-Well, it's depending on your desire to excel in that model. The better franchise, what we'd call world class franchisors, have not only initial training but they have ongoing education and training to continually fine tune the skills of their franchisees but also bring them back to basics. What happens is franchisees get into a rhythm of find the system. And it works so well they stop doing it.
-They get out sync.
-So it's a deal where you might feel like, man corporate is really on me about compliance. Well, they want you to be successful. And so I think it's always about a great basketball coach, or a sports coach, or some sort of great teacher. And sometimes they have to push us out of our comfort zone to make sure we're successful.
-Absolutely, some of your best mentors do that all the time.
-Now, on the pro number seven here, benchmarking opportunities exist within the franchising world. So you can compare yourself with other franchisees. Can you explain how that works in the franchise world?
-It's one of the greatest examples of how franchise organizations work collaboratively with each franchisee-- rather than competing with each other, they're complementing each other. And to have your peers sharing successes and being competitive and allowing those benchmarks to be shared, it actually-- what we call, the rising tide raises all ships. So it creates a synergy for the rest of the franchisees to really aspire to follow those examples.
-I know in my career-- I started my first business. It was called DJ Connection. And we did wedding entertainment. And I remember when I was doing one wedding a weekend, I would go meet with some of my competitors and they didn't want to talk to me. And I get it. I don't know why they would want to help me.
But then, as we grew, we started doing 30 or 40 wedding a weekend. I didn't really have any other competitors that could relate to me, because we were doing so many more weddings than anybody else. And I think in the world of franchising, it's so special that you can actually get on the phone with the franchisee in a different part of the country who doesn't feel threatened by you wanting to pick their brain. And they can help you say, well, this is the kind of results I'm getting. Here's how you can tweak it or here's the systems we use. I think it's a neat thing.
Now, on the con side, benchmarking can often make the business owner feel like corporate expects some sort of unreasonable result. So, some guy in Phoenix is just really doing a great job and you're in Florida saying, man, it's hard. And sometimes corporate wants you to rise to that level there. And so I think maybe the con that franchisees see sometimes is they feel like they're being held accountable to the maniac franchise who's doing the best.
-I don't hear that terminology often, but there are some examples of that. And some franchisees are going to feel that way, because in any franchise system there's what we call the 20/60/20, the divide of what results franchisees get. So the franchisor doesn't dictate how successful you can drive the model. In fact, that's one of the downsides of being a franchisor is we can't require each franchisee to maximize the results. They really build it based on their own goals, needs, and expectations and their income, lifestyle, wealth, and equity plan.
So the 20/60/20, there will be a top 20% that are doing three to five times the amount of business. And there will be a bottom 20% that are just getting started or aren't following the system or are getting ready to get ready that are on the bottom end of that spectrum. Then you have this wide range in the middle called the 60%. Those 60 in that 20% are all very happy with the results, but they're quite different. So you get to really model the lifestyle you want from your income, lifestyle, wealth, and equity by how you build your franchise.
-And I love that you have that. I've never heard of the 20/60/20 outside of some of the things I've seen you talk about. It's so true. Because you've spoken to countless franchise groups and I've spoken to several of them as well and it's interesting.
But you'll always get those alphas-- they're out there. These men and women, they are just performing in that top 20%, the middle is just as content as can be. Then you always, it doesn't matter what franchise it is, there's always that 20% who's just upset, they're not performing.
So if you're watching this and you think about buying a franchise, I really have yet to see an example where every single person's at the top. There's always the bottom discontent, there's always that top 20%, there's always that 60% in the middle. It's amazing how that happens.
-It's amazing that you can go through your initial franchise training with a group of 10 or 12 individuals and find out what each individual's income, lifestyle, wealth, and equity goals are and how diverse they'll be. And that's just the beauty of being able to grow and drive your business to the level that you desire.
-Now, we're moving on to pro number eight. Pro number eight-- so here we go. It's often easier to attract new employees to a small business that is a franchise. Or, I guess, it's easier to convince people that you're not crazy as a start-up when you're coming to an established brand-- is that why it's easier, potentially?
-It's very much easier to do that. And employees are looking for that employer who has their act together and can offer them the assurances of training and being able to have a career path and being able to grow more predictably. And also, typically have a slightly better wage earned from a franchise concept than you may from a non-franchise business.
-I want to give an example for the people watching this, because this is a true story. When I started my first business, I remember trying to convince people to come work for me. And they're like, well, how many locations do you have? Uh, one.
Where do you office? My apartment. Where do you meet clients? Here at Panera Bread. I mean, I didn't have that brand. And if I would have had that brand, the years of history, I could have said, well, our company's been around for 22 years and we have 400 locations throughout the US or that kind of thing. I can just tell you, if you've never started a business, that's a huge, huge value right there.
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