In this transcript, Terry Powell (Founder of Entrepreneur’s Source) and Clay Clark (speaker of choice for Hewlett Packard, Maytag University, and more) discuss the importance of Franchise Disclosure Documents on Thrive15.com, the best sales training program.
Clay: Moving on to lightening round, Item #6. Here we go. Other fees. This is a disclosure of other recurring or isolated fees or payments that the franchisee must pay to the franchisor or its affiliates. They must be disclosed here.
Clay: Walk me through how this is different from Item #5, this other fee section.
Terry: Great question. This is the ongoing things that will reoccur such as your royalty payment. All franchises have a royalty payment that's based typically on your revenues. It will describe that, whether it's a percentage or whether it's a fixed monthly fee. If there's an advertising or brand building initiative associated with it, which is pretty common, it'll describe what you can expect from that on a regular ongoing basis.
Clay: On behalf of the potential franchisees or current franchisees who not here right now, I'm going to ask the tough question right here, okay? Because I have spoken to franchise events before where I've heard some of the conversations of the people who bought said franchises and they're kind of the rumors, the discussions, the things that they're asking. Sometimes they'll say "Why do we have to pay ongoing fees when we already paid fifty thousand or a hundred thousand to buy the franchise?" Can you just go ahead and clarify real here why there is a need for ongoing royalties after someone's already paid these initial fees?
Terry: Great question and it comes up frequently. What you want to understand about the relationships, this interdependent relationship is that franchisors charge an upfront fee just to recover what they've already invested in the expenses that they have to incur, such as this FDD document, registrations, attorneys, all that the programs are going to be brought to your attention and value right out of the gate before you're actually generating any revenues. There's no royalty payments, there's no royalty dollars coming in. That really, that franchise fee is just assigned to bridge that gap to get the focus on getting you ramped up and successful so that royalties will come in the future.
Franchise companies only succeed from ongoing royalties, they don't succeed from awarding franchises and collecting fees up front.
Clay: I just feel like if you're watching this and you may be having that thinking where you're saying "Oh my gosh, this is just an unreasonable franchise fee." I think when you realize that legal costs that go into making this federally regulated document you'll get a little nauseated and then you'll start to empathize more so with those fees. If you want to learn sales training, Thrive15.com can help. It's important for you to have a ...
Clay: And it's expensive stuff so ... We're moving on to lightening round, Item #7, here we go. This one's dedicate, we're going to dedicate this one to John Elway. So here we go. This is the estimated initial investment. This item includes a comprehensive list of all the expenses that you can reasonably expect to incur as you open the business. Talk to me about this.
Terry: Well I want to get you a range and it's addressed from low to high range and there will be some variables but it will give you a description of what that low to high range will be. The good news there is when you estimate what you're going to need to get the business launched and the total investment, you're going to know the high side of that and the low side of that. And typically it's going to fall somewhere in the middle.
Clay: Again, if someone's reading this before you get sticker shock and you kind of pass out here, one thing I'll tell you is that [inaudible 00:03:13] it's a federally regulated document so the fees have to be, I mean they have to get the high range in there and the low range. You got to calm down a little bit and just go when you read this you got to realize that this is all factual stuff that we have to share otherwise if it's not shared, that's against the law so it has to be in there. Yeah, you just got to get the high range and the low range.
Terry: The reason for the high and low variables, people ask, well why is there a range? Because of certain factors where you might live and relating to traveling to the training, those costs will vary. If you have a location and there's rent involved or leasehold improvements involved, those expenses will vary in different parts of the country.
Clay: Item #8, lightening round Item #8, in Spanish the ocho. Here we go. The restrictions on sources and product services. This page really gets specific about three things as it relates to procuring the products and services needed to make a business run successfully. First, which products or services the franchisee is required to purchase from the franchisor. Two, which products or services the franchisee is required to purchase from approved from third party supplies and third, which products or services the franchisee is free to purchase wherever they like. So Terry, what's the benefit of the potential franchise owner of knowing all this kinds of goodness? What's the benefit here?
Terry: Well, which we talked about, the transparency is the key so you understand, your eyes are wide open. But more importantly a franchise is really a recipe that we're licensing you the right to use. In any recipe the ingredients and where they're paying and the quality and caliber and the managing of those ingredients have a direct impact in the result of that recipe. For the franchisee it's important to understand that the franchisor knows and has documented the best way to secure those types of supplies and they control some themselves and then they allow you to go outside.
Clay: Let me give you an example of what not to do. In my office we, we're going to call it "stickergate". We had to get some stickers and so we said we're going to get some stickers. We ordered the stickers, stickers come in from weird supplies, they look terrible. Colors are off, things are bad so then we said we'll order from a different supplier. So we get some more stickers and then they're bad, and then another and so it's like the third time now. Then I'm going "Let us document and let's carve that into a stone tablet and henceforth we will always order our stickers from this ...", you know. Because it's like you realize how much time you wasted by ordering stickers from the wrong place three times.
In franchising it's documented sometimes, you say you have to buy your banners, signs, auto wraps, from this person.
Clay: The franchise owner might be saying "Well why? I know a dude, he can do it cheaper." You might get it wrong three times first and so it's all about because the franchiseor makes their money off the royalties so the faster you're successful the more money everyone makes. I love that relationship.
Terry: It's important because those key elements make up the success factors of the business. Lots of times there are savings associated with how the franchisor has negotiated those vendors and those suppliers for you and they want to make sure those savings are passed through so that the franchisee can be more profitable.