Many people are changing their lives as a result of buying and growing a successful business. Learn how you can benefit by entering into the wonderful world of franchising from Terry Powell who is known as the "Godfather of francising"Sign Up to Watch
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-What's up, guys? My name is Daniel McKenna. I'm the Executive Producer here at Thrive15. And I don't prefer to run with the bulls. I prefer to run with the kittens. It's a lot more fun than you might think and hilariously adorable. But today, we're sitting down with Clay Clark and with Terry Powell talking about franchising 101 and how to start a business. Terry is known as the "godfather of franchising." You want to check this guy out.
Specifically, we're talking about the basic knowledge that you need to know going into franchising. If franchising is something you are considering or just want to know more about, this lesson is for you. At Thrive15, we believe that unless you actually do something with the knowledge you're about to obtain, watching this video is going to be more meaningless. More meaningless than what? I'll tell you, more meaningless than fiberglass underwear. Crazy itchy, not comfortable.
-Terry Powell, how are you, my friend?
-Clay, great to be here. I'm doing great.
-Hey, we are talking about franchising 101 and who better to talk to about this than Terry Boom-Boom Powell? He's never been called that until today. But no, in all seriousness, though, you are kind of like the godfather of franchising in a lot of world-- people call you that and I know you're sort of a big deal in the state of Connecticut. But people who might not know you are, can you explain to people just briefly what your relationship has been with the world of franchising, how long you've been in this industry?
-I've been in the industry over 30 years and primarily, the fame, so to speak, and what I'm known for is a company called the Entrepreneur Source that was launched in 1984. That really revolutionized the way people discover franchise opportunities and how they use them to grow income, lifestyle, wealth, and equity.
-Well, today, we are going to be talking about franchising 101 and how to start a business. And specifically, we're going to be talking about these four different areas, OK? One, what is franchising?
TERRY POWELL: Mm-hmm.
-Two, what is the difference between a franchise and other types of self-employment?
-Three, where did franchising actually come from? And four, what do you actually buy when you buy a franchise system? So we're going to start off with, what is franchising? Terry, the definition of franchising, according to our good friends at Investopedia.com, is it says, "a type of license that a party (franchisee) acquires to allow them to have access to a business's-- in this case, the franchisor, proprietary knowledge, the processes, and trademarks in order to allow the party to sell a product or to provide a service under the business's name. In exchange for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual licensing fees."
Terry, from your perspective, if you had to explain what franchising was to a third grader like me, an adult third grader, what does that truly mean?
-Well, the-- the definition there is very accurate. But from a third grader's standpoint, it's-- it's important to talk about what it isn't. A lot of people talk about franchising as an industry and it really isn't. Franchising is a methodology, a way of doing business. In fact, it's-- you know, there's corporations, there's private entities, there's self-employment, there's entrepreneurship, but franchising is nothing more than a methodology for growing and expanding a business. Franchisors make the decision to franchise in order to bring in some of the entrepreneurial aspects of having individual franchisees bring their passion to apply to their business model.
-So you're saying it's a business model, not an industry. And why does it--
-franchising is not an industry.
-Why does that distinction matter?
-Well, because it's-- franchising is not an industry because in-- inside of franchising, there are 70 to 80 different industries that apply franchising as a business model to grow.
-So they have a choice. They could either open company units, which many large corporations do, or they could take their model and grow it by franchising it.
-So a lot of people, they say franchising-- or when you say the word "franchising," they think immediately of the golden arches and McDonald's or restaurants of some kind. But you're saying, hey, restaurants are just one of those 70 industries--
-or one of those 80 industries. There's a lot more to franchising than just restaurants.
-Yeah. So it's the way the business decided to grow and franchising is just one of many ways you can do that.
-So what is the main difference, you know, as, I guess, we talk about principle number two, is the main difference between a franchise and other types of self-employment? Terry, in your mind, what is the main benefit and difference that separates owning a franchise system from owning other types of businesses?
-Well, the biggest one comes to mind is the idea of being in business for yourself but not by yourself, where you have a different type of relationship there where there's an interdependent relationship between the franchisor who's licensing you their intellectual property and their systems and proprietary processes to use within guidelines for you to be able to use that model to grow your income, lifestyle, wealth, and equity. So it's an interdependent. They don't work for you. You don't work for them. But they form an interdependent, win-win type of relationship.
-So you're in business for yourself, not--
CLAY AND TERRY: by yourself.
-I love that. I love that. So you have a support staff. And if people who are watching this don't know, when you buy a franchise, a lot of times, you can pick up the phone and call corporate and they can help you with things. If you're having a struggle, they have training for you. They have materials, supportive documentation-- it's really a neat, neat relationship
More trainings on how to start a business on Thrive15.com
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-How much, though, do these proven systems really help the franchisees who buy them?
-Well, it depends only to the extent that they leverage them and we know from experience that different types of franchise owners will use the franchise model in different ways. Those who get the highest return in the shortest period of time are those who leverage that model to the greatest extent, getting it to work for them.
They're really using it as a leverage point and a synergy of creating multipliers that allows that business to be more successful. And then there's others that will work at the system and they won't necessarily follow it exactly, but they'll use pieces of it. They'll treat it as a smorgasbord. They'll use pieces of it and allow other pieces to go to the other side.
-How important is the ongoing expertise and support, the coaching that these franchisors, the people who started the franchise-- how important is that kind of training and support to the average business owner who buys one?
-It's the difference between what the Small Business Administration says is about a 52% failure rate outside of businesses to a 5% turnover rate in franchise businesses.
-Let me just make sure I'm hearing you right. If I start a business, and I'm very familiar with the Small Business Administration statistics, you're saying about half of the business owners are going to fail?
-After five years.
-After five years. Whereas, in franchising, the people who buy a franchise, about 5% of them fail?
-The way they refer to it is there's an annualized turnover rate in the average franchise system of about 5%.
-Now, that doesn't mean that the business failed. It means that that particular owner found that it wasn't the right vehicle for them and they sold it to someone else who would carry on. So the failure rate's not really large in franchising as much as-- people realize it's not the right vehicle and they move on to something else.
-Now, I've heard this said over and over that one of the big benefits of buying a franchise is that you have this massive purchasing power. You have the massive marketing power. Can you give me an example of how this massive purchasing power can actually help the average small business owner who decides to purchase a franchise?
-Well, it's critical in businesses that really have lots of products that you need to purchase or food elements and things that require massive investments to produce the end result, such as a restaurant, such as a bakery, those types of things. It's more important in those areas.
But let's assume it's a brand new emerging franchise brand, that they haven't built it to the point where they have that buying power. Even the fact that it doesn't exist, there are leveraging points that allow that model to make them more successful than they would if they didn't have that.
-Let's say that I'm watching this and I may be not quite getting this. I'm going to give you an example. You tell me if I'm wrong here. But if I owned one restaurant, I might only be able to get a certain price on my chicken because I'm only ordering enough to serve 200 customers a week, whereas a big, big restaurant chain might be buying enough food to service thousands of people a day. And so they get a better deal. So it's the kind of the economies of scale, is that what you're saying?
-There's a lot of that that takes place. And even in an emerging brand, they might only have 10 units. The purveyor or the supplier's going to look at that and know that that's going to continue to grow. They look at an independent business in a restaurant, some of those do multiply, where they have multiple restaurants, but rarely is that the case.
-I love it. Now, as far as the marketing power, this combined marketing power-- how does this marketing power, so to speak, how does that help the franchise owners who buy franchises, this market power?
-It primarily works to the greatest extent when that brand is large enough where it's doing national or regional TV, radio, print advertising. But many franchise concepts don't do. They actually focus their energies on marketing tools, and resources, and campaigns that are customized to the regionalized areas.
So either way, you're going to have resources brought to the table that are going to be far greater than you would individually. But you also will invest a part of your revenues into those marketing tools. So it's just like any business that's going to have advertising and marketing expense, you also have that in a franchise.
-I think one thing that's awesome in franchising that's great is like there are some unbelievable commercials I've seen-- internet commercials, web commercials that franchises will run. And if you're a small business owner-- I mean, if you're a one-sandwich shop and you went out and tried to make a commercial that looks like that, you're going to spend $50,000 or $100,000 real fast on making a commercial campaign.
That's not even buying air time. But when there's thousands of franchise owners and they're all paying a little bit into the hole, you can do some spectacular stuff. So I love that aspect of it. I love the whole idea, you said, you're in business for yourself but not by yourself. I love how that works in marketing. That's exciting.
-And the whole idea of franchising, the reason it's successful, is because it's synergistic in nature. And those marketing opportunities and advancements that the franchiser receives creates a synergistic result for them that draws more business with less dollars.
-Now, those are a lot of the great benefits of being a franchise as opposed to other types of self-employment.
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-What are some areas where you see franchise owners and the franchisees that bought the franchises having the most conflict? Where do you see there being the most conflict when it doesn't work out? What are the areas where you see there being the most conflict?
-Typically, the first point of conflict comes determining whether they're actually following the system. I've coached a lot of franchise owners that would say that they are 100% following the business model until we do a real quick audit and ask them simple questions. And I can usually get to it in about 10 to 15 minutes just knowing that franchise model and find out that they're 10%, 15%, 20% off the system.
In a franchise system, if you're applying 80% of it, you're not going to get 80% of the results. You're going to get 20% of the results. It's that 20% that you're not doing that really gets you into the areas that are holding you back, that when you focus on those, you'll get the 80% of the results. So franchisees spend their time in the 80% that they're comfortable with, and avoid the 20% that they're not.
-So I might want to ask myself, if I'm watching this, am I good at following systems? And if I'm somebody who's averse, doesn't want to follow systems, franchising might not be the thing for me.
-Yeah. If you're that entrepreneurial that you just like to learn by mistakes, and you want to make your own, rather than follow a proven trail. An example-- if you come to my house and you have a great cake and I say to you would you like the recipe? And we give you the recipe in excruciating detail, and you want to replicate that, but when you go back to it, you start to change the recipe. You don't buy the ingredients at the right place.
You don't buy the right quantity, the right quality. You put them together in the wrong order. Or as you're going through it, the flour's too messy so you leave it out. The chocolate's better than the vanilla extract. So you add more chocolate and skip the vanilla extract. Would you expect the cake to turn out the same?
-That's pretty much the way it works in a franchise.
-So you're saying in the world of fran-- I just want to make sure I'm getting this here-- is that if I'm following 90% of the systems in the world of franchising and I don't do the final 10%, that could blow up the business. I mean, I might do all the marketing but if I'm not answering the phone the right way or following the right conversion system, it might not work? So, I mean, all that goes into it. I have to be very diligent about following systems.
-Well, it is. And it's not as arduous as it seems to follow the systems. It's built into the model in a way that it attracts you to do those types of things, for most people. It's those who get caught up on the things that they leave out, being the uncomfortable piece, usually, like sometimes, marketing or business development. Or making sure that your team got a right culture and everybody's applying the things that they can apply to the model for the client experience. Those little things can have a pretty large detriment to the results.
-Now, as far as point number three here, where did franchising come from? Terry, many people get all historical, they kind of break it down, they're looking it up, they're trying to figure out where it came from. And there are some people who believe this goes back to medieval times, where you had the king and the queen and you had the-- basically, what they would do is they would actually grant somebody a franchise in order to do something like hunting or collecting taxes or do some type of activity within their kingdom.
And basically, franchising just allowed people to have the right or the privilege to do some kind of activity. Do you believe that that's the origin of franchising? Or do you believe there's a different origin? Who invented franchising? Where did it come from in your mind?
-Most of the of the research leads to Singer sewing machines.
-Yeah, as being the actual first business application of the franchise model in our economy.
-Singer sewing machines.
-Singer sewing machines, right.
-That was some time ago. I don't recall the exact date. But there are a lot of examples, going back to the examples you used where they used something similar to a franchise model. But they weren't necessarily licensing them and creating the systems and processes and replication and application such as tax collecting, for example.
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