In this transcript, Clay Clark (US SBA Entrepreneur of the Year) talks with Terry Powell ("the father of franchising" and founder of Entrepreneur's Source) about the pros and the cons of the franchise business model on Thrive15.com, one of the best business schools in Michigan!
Clay: There's a gentleman that I kind of knew of, he's kind of an acquaintance, but he opened up this burger joint in Tulsa, Oklahoma, this new burger joint. 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. 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. For him, he really struggled to inform people what kind of food he served and why you should trust him and that kind of thing. I think that that absolutely is true.
Con number 4: If the public recognizes the brand in an unfavorable way, then it may reflect poorly on the actual individual who bought the franchise.
Clay: I guess the 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 how this can be a con?
Terry: It certainly can hurt the reputation of the business and those types of things are going to happen in any flourishing, growing brand. There's going to be hiccups and so forth but there's also going to be ways that they'll be able to manage that. The key is we're all operating under the same brand and that's why the franchise owner needs to take responsibility to keep people within the guardrails so things don't get out of control and that could cause a harm to the reputation or downsides of the brand.
It's a problem when there is 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 but it does take time.
Clay: 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 one thing that's important is, one of the Thrive mentors we have, Arthur Greeno. He owns a Chick-fil-A. He owns two Chick-fil-A. He's been with Chick-fil-A forever, I mean for years and years and years. They've had times when 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.
Moving on to Pro number 5. It's often easier to secure the financing needed to open a franchise business versus an independent business. This right here to me is a big one. This is huge.
Terry: It is huge.
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Clay: Why is it so much easier to get funding for a franchise than for a new independent business?
Terry: 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 is replicatable and duplicatable. That creates a sense of security for the banker or the lending institution. There's also ... you know, the track record of non-franchise businesses from a failure standpoint is quite high as compared to a franchise business. 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 the time.
Clay: The con here though is that when you're buying a franchise it often requires more money ...
Terry: Um-hmm. (affirmative)
Clay: ...than starting an independent. I guess an example is if I wanted to just open up my own hair cut salon, I could probably go out and borrow $100,000 or $75,000 and build out a white box, some type of office space, and then 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 up front but I guess the value of that is that you can get that money easier. Is that kind of ...?
Terry: 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. When banks and institutions that finance and lend look at that formula from not just a 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 5- and 10-year period. Franchises almost always come out on top.
Clay: Because you've worked 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 a 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?
Terry: 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 them.