What Makes a Franchisor Successful and Desirable to Work With?

Welcome to the premier of the Atlanta Small Business Network’s brand new original series, Atlanta Franchise Today with host Leslie Kuban, expert franchise consultant and owner of FranNet Atlanta. Atlanta Franchise Today is dedicated to bringing entrepreneurs and business owners the best practices and tips for their franchise goals. This series will bring you the best franchise insights, methods, and practical tips to help you along your journey. So, tune in every Thursday at 8:00 am Eastern time for expert interviews, industry analysis, and answers to your most pressing franchise questions.

Transcription: 

Leslie Kuban:
Hi everybody, this is Leslie Kuban. Welcome to the very first episode of Atlanta Franchise Today. I’ve enjoyed a 25-year career in franchising and find it’s still a wildly misunderstood form of entrepreneurship. So I wanted to kick off the show with a known and respected industry expert. My guest is a 35 year veteran in franchising. Some of his clients include some of the largest brands in franchising, such as Subway, Arby’s, and Great Clips. He’s written five books, 90 articles about franchising and entrepreneurship. Today he’s founder and CEO of Franchise Performance Group, which is a consulting firm specializing in helping franchisors recruit more and better franchisees. I like to call him the professor of franchising, as well as my friend, Joe Mathews. Welcome to the show, Joe.

Joe Mathews:
I appreciate it, Leslie. And having known you, I think all 25 years of your 25-year career, I’m honored to be the first guest.

Leslie Kuban:
Maybe even a little bit before that too. Well, Joe, for our viewers who don’t know you, will you just say a little bit more about you? And at Franchise Performance Group, as we said, you help franchisors recruit more and better franchisees. Just tell us a little bit more about that.

Joe Mathews:
Our firm is a real boutique specialized… Consulting firm specializing in growth strategies for franchisors. The same thing, Leslie, like not everybody’s fit to be an accountant. Not everybody is fit for every business opportunity. So we find the misnomer in franchising or any real business. And sometime when people are looking for a job, they look for a job fit, but if they’re looking for a business, sometimes they think, well, I’m out to search for the business that will make me successful. Like somehow they have nothing to do with their own success and it’s all on the business.

Joe Mathews:
And it’s really not the case. Just like a career, it’s all about fit. So what we do is we help franchisors determine who is and who isn’t the fit in that brand. So that’s the quality of the match. And then we through marketing and recruiting, help them find more of those people to create a more powerful brand.

Leslie Kuban:
And we’ve both worked with so many franchise brands over the years and what we both know is that you have to be excellent at two businesses. You have to be excellent at the product and the service that your franchisees are offering to their customers, whether that’s cutting hair or making pizzas, but you also have to be excellent at the business of franchising. And we’ve talked about how there’s a wide gap out there in the marketplace of what makes for high road franchisors, as you’ve talked about in some of your books, and not high road franchisors. So tell us a little bit about how do you know you’re a good franchisor and how do you know you’re ready for franchising?

Joe Mathews:
Yeah, so a couple questions. So let me answer the first one as it relates to franchise. Let’s define what a franchisor is. So you’d made the comment, which I’m agreeing with, that yeah, every franchisor is in two businesses. So one is the consumer-facing model where they’re selling a product or service. That’s actually not what we’re talking about. The second model is the business of franchising. So we would define the business of franchising as the franchisor’s skill level and success level in recruiting, training, developing and leading a team of entrepreneurs to build a bringing.

Joe Mathews:
Now, notice what’s missing from that definition is the product or service they’re marketing. So we would say every franchisor is in materially the same business. Recruiting, training, developing, leading, and I’m going to even add resourcing a team of entrepreneurs to build the bring. So a good franchisor is one that demonstrate the high level of proficiency and skill at doing that and a bad franchisor is one that doesn’t.

Joe Mathews:
I think franchising is a two-metric business. So one is their franchisees are winning financially. So think about a franchise for a second the same way you’d look at a stock. It’s an investment product on some level. So what’s the return? It’s got to be predictable, it’s got to be acceptable to the whatever the constituency is, and it’s got to be sustainable for the long haul or why do it? So a lot of franchisors, if they’re not great franchisors, there’s a big… The results are unpredictable. Some people are winning big, some people are losing big, and there’s not a lot of rhyme or reason. It’s that their systems aren’t tight. So what they should be doing is managing the results towards the middle. What’s the average franchisee doing? Okay, there should be some high-level predictability, which is why you have a bell curve.

Joe Mathews:
Second piece is what’s the franchisee-franchisor relationship? So a lot of franchisors really don’t respect, in my opinion, or value the time, money, and effort a franchisee puts into the business. They’ll use language, it’s like, “My brand, my system, my customer.” Well, that’s not being a franchisor, that’s been an indentured servitude sharecropper model. The skilled franchisor is going to say, “Look, and we exist for the sole purpose of developing you the franchisee, okay, as an entrepreneur and giving you a good return on your investment. And you exist for the sole purpose of using our products and systems, okay, and adding value to the customer. Adding more value than we’re all extracting in price.”

Leslie Kuban:
And what makes for a good franchisor, changes over time. And we’ve talked about the growth inflection points of franchising. So how do you know when you are or are not a good franchisor down the road?

Joe Mathews:
Just like there’s product life cycle, there’s a franchisor brand life cycle too. And at these different inflection points, the chain doesn’t have to change, it has to reinvent. So it’s kind of like what got you from A to B is now a barrier for B to C. So we break down franchisors into the following segments, startup, emerging growth, which is really the bulk of the market, regional, and then national franchisors. And if you have a breakdown on these inflection points, then you become a turnaround brand, or once you’re a successfully completed turnaround brand, a resurging brand. So we would say there’s six basic buckets.

Leslie Kuban:
And is there a rough breakdown of all the franchisors that are out there, what they represent percentage-wise in each of those different stages of growth? Any guess?

Joe Mathews:
About 80 something percent of franchisors would be startup and emerging growth, which we would define as under 100 territories or units or franchisees.

Leslie Kuban:
So most of the franchisors on the market today are what we would call emerging brands.

Joe Mathews:
That’s right. And then out of the people who make investments in franchises, so most franchise cannons opt for the larger regional or national brands of 100 to say 3,000 units, territories, franchisees, or more.

Leslie Kuban:
So Joe, given most franchisors on the market today are in this emerging category, what kind of capitalization does it take? What should their balance sheet look like so they’re poised to then grow to be a national or regional brand?

Joe Mathews:
Yeah. One of the challenges about reading a franchisor balance sheet, it’s kind of like any other privately owned business sometimes. The object is that you can use the corporation’s delta assets, so you don’t always get the picture. But a franchisor should have access to, either on the balance sheet or through funding, one to two million dollars. Because I’ve never seen a franchisor not invest that money to build the infrastructure necessary to get into hyper-growth or accelerated growth to take them from an emerging growth brand where they may be profitable, but they’re not setting the world on fire, to a regional national brand where the customers know who they are, where they’re getting into really good digital marketing, mass media, and other things that a franchise cannon is going to be looking for to add massive value clipped that results in good, uni-level economics for the franchisor and for the franchisee both.

Leslie Kuban:
And I think that’s really important for aspiring franchisors to understand. As you and I know, too many brands go to market with their franchise licenses for sale when they really don’t have that kind of capitalization that they need to have to provide that value to their franchisees, to be that high road franchisor.

Joe Mathews:
A lot of franchisors get into franchising with the thought of, “Hey, I’m used to be in the business of selling $10 pizzas. Now I want to sell 40, $50,000 licenses.” And they figure that the license fee revenue is going to capitalize their organization on a go forward, so they think their franchise is a financing strategy. It is not. Unless they walk in with one… Have one to two million dollar battle chest, either through lines of credit or other sources of financing or cash in the bank, that they’re going into the business every bit as under-capitalized as a franchise candidate would be going into if they were under-capitalized with the same level of success. So the odds are stacked against them. The franchising community doesn’t need another under-capitalized franchisor the same way the customer doesn’t want an under-capitalized business.

Leslie Kuban:
Yeah. Yeah. And this leads to another related conversation about the other side of the equation, which is the fees that franchisees pay to franchisors in return for the systems that they are benefiting from to use their business. So there’s a phrasing in franchising called royalty self-sufficiency. Will you speak to that a little bit? And why is that important?

Joe Mathews:
That’s a great question, Leslie. Royalty self-sufficiency is a measure to determine whether or not the franchisor is financially healthy. So the idea is bigger royalties are the continuing fees that the franchisees pay in. Royalties. Does that capitalize the corporate structure and initiatives without having to sell franchises to keep the lights on? So then that allows a franchisor to be more selective on who they bring into the system. Remember we talked about it’s about fit. So if a franchisor, which is the parent company of the brand, they’re not capitalized right, they’re under intense financial pressure to let people into the system that don’t fit. And then that creates brand risk for the franchisor, it creates failure or depreciates the value of other franchisees’ investment if the failure rate gets up there. Customers lose confidence in the brand.

Joe Mathews:
So it kind of creates that negative spiral, where royalty self-sufficiency allows them to be a little bit more selective. It shows proof of concept to the investor so they get more and better franchisees. And it’s kind of one of those inflection points that creates accelerated growth in kind of a more of a virtuous cycle upward.

Leslie Kuban:
And that has to be virtuous and balanced for what the franchisees pay and what the franchisors are offering and for the franchisor to also be profitable. It’s important I think. Something that I say to my clients is that you want your franchisor to be profitable. There’s nothing good for franchisees if the franchisor is struggling financially. So it is an important balancing act in terms of fees assessed and what franchisees get in return and what it costs the franchisor to provide those services to their franchisees.

Joe Mathews:
That’s right. And Leslie, often the franchisor model is more profitable as a percentage of sales flowing through to the bottom line than the franchisee model. And that’s not bad as long as the franchisee gets a good return on their investment. But a lot of franchisors never really map it out. So that’s why I talk about value chain. The royalties… As long as the franchisor is creating more value for that royalty or the franchisees extracting more value than they’re paying, then the model works. The second they feel like they’re paying rent and they’re not really getting anything back of real value and they have the feeling, because it’s all perceived value, that they would be doing better off had they not been attached to that brand, if they were independent, that’s where the chain and the brands start to die.

Leslie Kuban:
Joe, you and I both get calls frequently from entrepreneurs who are interested in, or they’re exploring franchising as a way to scale their company. And many of our viewers on Atlanta Small Business Network are entrepreneurs looking to grow. When you get those calls, what’s the first piece of advice that you give an entrepreneur who’s thinking about growing through franchising?

Joe Mathews:
My first question I ask is, do you have a battle chest of one to two million dollars to invest in a franchise? Yes or no?

Leslie Kuban:
Yeah.

Joe Mathews:
So that’s number one. And then second is, do they have the temperament? Because a lot of franchisors, if they have proof of concept or scale, it’s already through a strong centralized model. Power’s concentrated on the top, the CEO makes the decision and everything circles down. And then where you get the kind of the… You’ve got the general manager or management servicing the customer.

Joe Mathews:
So picture that pyramid, the second you become a franchisor, it’s turned on its head. Now you’ve got the franchisee, who is the CEO, responsible for satisfying the customer needs and the franchisor exists to support, train and develop, so it’s a bottom-up approach, the franchisee who exists to add value to the customer. So that’s a total culture shift.

Leslie Kuban:
It’s a different role.

Joe Mathews:
And then if they do a really good job of recruiting entrepreneurs, entrepreneurs say no. There’s a certain rugged independence, I’m going to call it, in wanting to do things your own way that goes along with small business entrepreneurship that a lot of franchisors aren’t thinking about when they get into franchising. I tell franchisors, when you’re supporting your franchisee, build a resistance into your model, because it’s a way of life.

Leslie Kuban:
Well, Joe, it’s been a delight to have you on the show today. Really appreciate your time and input. And folks, thanks so much for joining us and we look forward to having you again on Atlanta Franchise Today.

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