In this transcript, Clay Clark (US SBA Entrepreneur of the Year) discusses with Terry Powell ("the father of franchising" and founder of Entrepreneur's Source) franchising 101 on Thrive15.com, one of the most affordable business schools in Michigan!
Clay: Terry, on this fourth principle is, what do you buy when you buy a franchise? What am I actually buying here? I think there's a lot of miscommunication here, a lot of misunderstanding of this here. Many people believe that when they buy a franchise, they're actually buying a big brand name. However, they're really just purchasing the right to use the system, right?
Clay: What's the difference? What does that mean exactly?
Terry: Well, our mission is to have everyone realize that you don't want to buy a franchise.
Terry: There's nothing there that you want to necessarily buy. You want to own the results that will come from it. Looking at a business, you're investing in a franchise. The key elements of that investment are the franchise fee. That's a one-time only fee that gives you the right to be part of that license system. It typically runs twenty-five to fifty thousand dollar one-time fee.
Terry: The cost it may take to open that business could be three hundred thousand.
Clay: Oh, wow.
Terry: So, it may have a thirty thousand dollar franchise fee, but they're going to be a three hundred thousand dollar total investment you need to make. Now, you're not going to pay that to the franchisor. You're going to invest that in areas that they're going to manage for you, such as equipment, furniture and fixtures, inventory. That's going to be the amount of capital you need to have to get that business off the ground. So, you're really investing in a franchise so that you can get the rights to use their proprietary licensing system, the track record, the paint by numbers approach that allows you to jump start your success and fast track your growth.
Clay: You're really buying the results is what you're trying to do. You're not so much owning anything tangible as much as you're buying the results.
Terry: Well, you have an asset, if you invest in a franchise, and even the franchise fee is thirty-five thousand. That'll be an asset on your net worth.
Terry: You'll move it from one area on your net worth statement, from your savings over to value of business owned. Then you're going to invest in this equipment and furniture and fixtures. That's going to be an asset on your net worth. You're going to reallocate some things or you're going to borrow money to leverage that asset. You're really investing in the tools and resources that you need to have a success track with that proven business model.
Clay: What are some of the tangible items that I'm actually purchasing when I buy a franchise. I'm getting tables and fixtures and logos. I mean, what am I actually, for somebody who's watching this going, "Well, what am I getting?" What is the thing they're actually getting there, in terms of tangible stuff.
Terry: Well, most of the things we talked about will be very tangible.
Terry: The larger asset investments, furniture, fixture, equipment, inventory, marketing packages, advertising, types of promotional items, you'll actually see what you're getting for that value. Where they have the difficulty is the smaller amount, the franchise fee.
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Terry: You know, lots of people take exception. Well, why do I need to pay the franchisor fee to have the right to use that brand? That's because the franchisor makes a considerable investment in meeting the requirements of the Federal Trade Commission to offer franchises. There's a lot of legal costs associated with that.
Clay: I don't think anybody realizes how much work, and we have some episodes where we've recorded about this. I don't think people realize how much work goes into being able to franchise a business. It's not just like having a successful business and saying, "Well, I'm going to start selling these." I mean, there's a lot of regulation, and we have some great, great training for that. Terry, when you buy a franchise, you're going to pay lots of fees. I know you've been in the industry for thirty years, over thirty years. Is it really worth it in your mind? I mean, despite all the fees, is it really worth it when you go out there and buy a franchise? In your mind, is it really a good investment?
Terry: In the majority of cases it absolutely is and you really just have to ask yourself. The way to measure that is to look at the results. Franchising is the most successful business investment model in our society. It actually is more successful than securities and exchange and the regulation of stocks and bonds, from a standpoint of investment and return on those investments. The fees that you pay are really designed to allow you to be able to access the purchasing power, the intellectual property, the assets of the team the franchisor has to support you, what we call the performance enhancement pieces.
Clay: From your experience, I mean, you do believe that it's the safest kind of investment, investing in a franchise versus stocks and bonds or anything else. It's the safest.
Terry: Especially today.
Clay: That's amazing. Now, Terry, in your mind, does buying a franchise guarantee you a smooth ride as a business owner? Is that what you're saying?
Terry: Absolutely not.
Clay: Okay, so there's still some challenges?
Terry: Sure. Absolutely. Most of those challenges come from the individuals that come in. Franchises are successful because franchisors totally simplify the business model. It's super simple. The challenge is we bring human beings in to operate those simplicity models. Human beings do not accept simple things easily.
Clay: Yeah. Yeah.
Terry: Once it's very simple, they start to question it, and it challenges them about applying it.
Clay: If we could get some robots that might be a good solution. Buy a franchise, get some robots, and bam! Terry, I appreciate you being here and talking a lot about this subject, because you know all this stuff. It's just off the top of your head. I mean, you've done this for so long, but at the same time, I think a lot of people who are looking at buying a franchise, these are new concepts to them.
Clay: You have a website that you, it's the entrepreneur's source. Can you direct us to the website there if you want to learn a bit more about some of the details as it relates to franchising?
Terry: Sure. Yeah, the website entrepreneurs source dot com. Entrepreneur with an "S," entrepreneurs source dot com will give an element of a virtual coaching experience, so you can really kind of get a sense of how we can help you discover in a safe space whether franchising is right for you. If you want to jump right in to look at some things and picking some business models, you can do it virtually with our franchise match dot com website.
Clay: Awesome. Franchise match dot com is the second one there. Terry, I appreciate you being the godfather of franchising and really spending time with us here today and I can't tell you how much you're helping and blessing people who've thought about buying a franchise and maybe are a little bit nervous to even look into it. Thank you so much for your time.