Transcript – Buying a Franchise

Is Buying a Franchise Right for you? 

Dennis Zink: Welcome to SCORE Business TV. In this series, experts share their opinions with
business owners on a variety of topics. Today, we’re addressing the benefits
about how to buy a franchise business. We’ll be exploring what a franchise is,
what types of franchises are available, how to choose the best one to fit your
needs, and the cost of buying into a franchise and operating a franchise.

Dennis Zink: Before we begin, I’m happy to introduce our two experts. First, we have Jenny
Sutter, a franchise consultant and owner of FranNet in the local market. FranNet
is a national SCORE partner that helps entrepreneurs find the best franchise to
fit their budget and their needs. Jenny is a Florida native with a background in
corporate franchise marketing. She now provides consultation on the franchise
discovery process, working with aspiring entrepreneurs to help them navigate
through the world of franchise opportunities.

Dennis Zink: Next, welcome Bob Melberth. Bob is a SCORE mentor and a franchising expert
with operations leadership in the hospitality industry. He’s worked for
McDonald’s, Wendy’s, Popeyes, and Beef O’Brady’s, just to name a few. He’s a
specialist in local and media marketing, and Bob has been a franchise business
owner/operator three times. Welcome.

Bob Melberth: Thank you.

Dennis Zink: What is a franchise?

Jenny, why don’t you start with that one?

Jenny Sutter: A franchise is essentially the right to use a brand name, trademark,
business services or products, marketing structure, training structure, business
processes in exchange for a franchise fee and ongoing royalties.

Dennis Zink: Okay. Bob, you want to answer that?

Bob Melberth: No, I think she covered it very well.

Dennis Zink: What’s the difference between a licensing agreement and a franchise agreement?

Bob Melberth: Well, I think from different points of view, from the franchisor or licensor’s point
of view, franchise is governed by the Federal Trade Commission, where a license
agreement is governed by contract law. The aspect from a franchise purchaser
or business purchaser is a franchise is going to be a little more restrictive in
terms of its structure following the rules that the franchisor establishes. That
license agreement, the licensee pays a one-time fee and perhaps some override
on a product that they control and distribute themselves.

Dennis Zink: What are the biggest misconceptions about a franchise?

Jenny Sutter: There’s quite a few of them. A lot of it is that they are expensive, so I would say
that’s probably the biggest one. Another is that they’re only fast food or retail.
There’s a lot of different franchises in a lot of different industries, so those are
the two biggest.

Dennis Zink: What is the success rate of franchises?

Bob Melberth: Well, there was a study done by the U.S. Chamber of Commerce that showed
over a 10-year period of time that 93% of the franchises were still in business 10
years after they started as opposed to about 45% of… actually it’s less than that,
it’s about 25% of independent businesses that are still in business 10 years later.

Dennis Zink: One of the things you mentioned, you talked about the process, and I’m
wondering, if you’re looking at a franchise, are you kind of locked in? Is there
any leeway to do your own thing, or do you have to follow A to
Z and you’re stuck?

Jenny Sutter: Each franchise is a little bit different in how restrictive they are as to
the process, but essentially you do have to follow their process, their rules and
regulations, but for some emerging franchises for instance, there is a little more
leeway to have your opinion on how things should be run.

Dennis Zink: If you come up with something new and you say, “Hey, this is really
working. I tried it in my store and it’s going great”, could the franchisor roll it out throughout the rest of the units? Or at least look
into it? Does that happen?

Jenny Sutter: You definitely should talk to the franchisor about whether it’s something
they want to create as part of their process.

Dennis Zink: Now, you mentioned restaurants, and I know you worked for probably at least
four restaurants, McDonald’s and…

Bob Melberth: I owned a couple as well.

Dennis Zink:  It seems there’s a lot of franchises with restaurants. Is
that the best way to have a restaurant these days? 

Bob Melberth: Well, I think the key point there is that a restaurant is a little more replicatable,  and the franchisor can have a lot of control over menu, pricing. There’s also some advantages in terms of being able to purchase for a chain, so that your costs of being in business versus a local single-operator’s unit would be greater for lower cost of goods, but I think primarily because restaurants…

Most people associate the big names… I’ve worked for a couple, McDonald’s,
Wendy’s, with franchising, I just think that’s kind of popular opinion.
The International Franchise Association says that there is about 97 different
industries that franchise their business concepts.

Dennis Zink: Wow. That’s unbelievable. How do you choose the best one? There’s so many
choices. Jenny, why don’t you start with that one?

Jenny Sutter: It really has to come down to personal fit. Not… A restaurant is not going
to be for everyone. They’re seven days a week generally. Not everyone wants to
work seven days a week. Does it meet their budget needs? Does it meet their
income needs? Is it going to meet their personal leisure needs or personal
project needs? It really does need to be a fit with the individual and what their
goals and motives and values are.

Dennis Zink: You mentioned that one of the misconceptions was the cost, that people think
it’s more expensive than it is. What’s the least amount of money ballpark you
can spend to get into a franchise?

Jenny Sutter: It really does… it really ranges. From newer franchises it could be rather low,
but it can get up into the millions of dollars, so a general range between $50,000
and up to a million. Now, that’s not to get into the franchise. That’s to get a
franchise up and running. The only difference between that and if you would
start to start your own business would be the franchise fee. That doesn’t run
millions of dollars.

Dennis Zink: Now, Bob, for example, I know two people that are in different franchise, I’m
not going to mention which ones, but one’s a hair cutter-type business, you
know who it is, too, and the other one you don’t know is a spa. What… they
each had to buy a certain amount of units on the front end, or at least they took
three units each of what they were doing, and I’m wondering, is that something
is typical? Are you better off getting units on the front end? Or can you have a
chance later on and acquire more units?

Bob Melberth: Well, for our franchisor, the most profitable way for them to grow is to grow
with existing franchisees. Some people approach the marketplace saying that
we’re going to sell a package of three stores or five stores or 10 stores at a time,
but that’s not the case with all franchises. A lot of franchises will only allow you
to purchase one, and then if you’re successful with that and you’re the kind of
community of franchisee partner that they want to continue to do business
with, then they’ll allow you to grow more and more.

Dennis Zink: Jenny, does it cost more for the second unit? Or is it discounted?

Jenny Sutter: If you buy them at the same time, so if you buy that three pack that Bob
mentioned, it’s… you’re going to generally get a discount. If you do it upfront. If
you buy one later, you may or may not get that discount.

Dennis Zink: Bob, is it typical for franchisees to sell to each other? Or do they have to go
through the franchisor?

Bob Melberth: Well, they do have to sell to a partner or a purchaser, excuse me, that is
approved by the franchisor. However, most transactions take place between
franchisees. That’s one of the advantages of a franchise because you’ve already
got a built-in sort of consumer base for your business should you choose to sell
it. Many franchisors also have what they call a first right of refusal, so if you get
a contract to sell your restaurants or businesses, then the franchisor has the
opportunity to step in and pay you that same price.

Dennis Zink: When you’re involved with a franchise as an owner, do you build equity?
Do you really have something to sell? How does that compare to just having a
business that’s not a franchise unit and selling it? Were the multiples better for
the franchise or not?

Jenny Sutter: Business is a business, so yes, you build equity as you build your business,
whether that’s your customer base or it’s your physical space, what your book
of sales is. Yes, you’re building equity, but again, a business that’s not a
franchise can do the same thing.

Dennis Zink: What’s tending to be the most profitable types of franchises? Are they
restaurants? Or does it just depend?

Jenny Sutter: It really just depends. It’s going to come down to the owner and how they
operate, whether or not they’re being profitable or not and how they run their
business.

Dennis Zink: I’m sure in the industry, if you have a certain… you’re among many franchisee
owners of the same system that there probably is a relatively narrow gap in
profitability, whether it’s 30% or 12% or whatever it is. Bob, can you comment
on that? Is that.

Bob Melberth: I think it really depends on the business model. If you’ve got to make an
investment in real estate, physical facility, equipment, et cetera, like that, then I
believe that the profit margins may be a little lower in that type of business. If
you’re offering a service and you perhaps are using your talents and skills and
that’s really the only cost you have, one of my businesses was as a consultant
and so I didn’t have a whole lot of costs built in. That one may have a better
profit margin, but you’re also limited to your 168 hours a week that you have to
deliver the product.

Dennis Zink: Mentioning costs, let’s look at costs from a different perspective, cost structure.
If I’m looking to buy a franchise, you mentioned royalties before, you
mentioned… I don’t know if you mentioned advertising. What are the different
areas where I have to pay in terms of the structure?

Jenny Sutter: Going into buying a franchise, you have to pay that upfront franchise fee, and
then beyond that, you’re going to pay ongoing royalties. Those can be
structured in various ways, whether it’s a monthly percentage of gross sales,
whether it’s a flat fee on a monthly basis. When they start, is it two years in? Is
it immediately? Those are royalties that you do have to pay, and then there’s
also… Not all franchises, but quite a few of them make you pay into what’s
called an ad fund or an advertising fee, so that also would be a percentage of
gross sales generally or a flat fee on a monthly basis. There’s even some that will
charge a technical fee, so depending on what kind of technical aspects there are
to the business.

Dennis Zink: With the fees adding up, what percentage are the royalties plus the advertising plus the other fees? 

Jenny Sutter: The average royalty is about 6.75, so between 6% and 7.5% is the average. Now,
they go higher depending on the kind of service or the kind of franchise that
you’re buying into, but then you also… it does again vary from an advertising
standpoint. Whether it’s 1%, 2%, or a flat fee, so it really does range on a
franchise-by-franchise basis based on what they’re providing you in return.

Dennis Zink: Let’s look at… Bob, did you want to weigh in on that one?

Bob Melberth: Well, the only thing I’d add would be, if indeed you operate to the end of your
term, because every franchise has an operating license term, five years, 10
years, McDonald’s was 20 years, you can renew that license if you’ve operated
properly and the franchisor wants to renew with you. Many times they do have
a renewal fee that would be at the end of your timeframe for your operating
license.

Dennis Zink: You’re saying that at the end… let’s say it’s 20 years for argument’s sake. Jenny,
at the end of 20 years, I have to pay for it again basically?

Jenny Sutter: There’s a fee, too, yeah, to buy into the franchise again.

Dennis Zink: Does it cost as much as the first time? Or is it discounted?

Jenny Sutter: In some cases, it does

Dennis Zink: Really? Okay 

Jenny Sutter: And in some cases it’s discounted. Again

Dennis Zink: Well, that’s interesting.

Jenny Sutter: Every franchise operates in a different way.

Dennis Zink: If you’re looking to sell and you’re on your 19th year, then it has a different
value for the buyer because they’re going to have to re-up at year 20 if it’s a 20-
year contract?

Jenny Sutter: Potentially, yes.

Dennis Zink: Jenny, let’s talk about financing. Is it easier to finance a franchise unit or a non-franchise business?

Jenny Sutter: It can be easier to finance a franchise business, and the reason is because
your traditional SBA loans, banks are going to require that you have a business
plan in place as well as some experience in the industry. If you don’t have
experience in the industry, starting your own business, it’s going to be tough.
Whereas with a franchise, even if you don’t have experience in the industry, the
franchise does, so it can become a little bit of an easier path to finance through
SBA. Now, there’s other options. There’s options through institutions such as
FranFund that offer what’s called a ROBS Program, and those ROBS Programs
essentially allow you to rollover your retirement fund, whether that’s a 401(k)
or IRA at no penalties, no taxes, and you can use that in order to fund your
business.

Dennis Zink: Wow. Can you do that with a regular business, too?

Jenny Sutter: You can, but that’s not specific to franchises, but it’s a great opportunity.

Dennis Zink: Bob, what have you found in your experience with financing? Is it easy to get a
loan? I understand that from one of our banker friends that they have a list that
they look at that says, “These are the acceptable franchises that we will loan
for”, and it’s a long list.

Bob Melberth: The SBA maintains what’s called a Franchise Registry. Banks who are working
with the SBA in terms of their guarantee for their loan, for the bank’s loans will
look at that registry list and if indeed your franchise is on that list, it’s a lot
easier to get the deal done. If it’s not on the list, the bank probably won’t loan
you the money.

Dennis Zink: Jenny, are there other franchise financing options? Or have we kind of covered
it?

Jenny Sutter: Obviously, self-funding and then whether you get it… money from family
members or an angel investor, but generally in terms of financing for your
business it’s going to be some sort of SBA loan or the ROBS Program.

Dennis Zink: They used to call it the UFOC, and I think it was Uniform Franchise Operating
Contract or something like that.

Bob Melberth: Offering Circular.

Dennis Zink: Offering Circular, okay, I was close. Anyway, today it’s the FDD. Can you explain
what that is and what does that stand for?

Bob Melberth: Sure. It’s a Franchise Disclosure Document, and it is a requirement of the
Federal Trade Commission. Franchises are governed by the FTC. They require 23
items to be communicated by every franchisor to every franchisee. This
document is required to be consistent franchisee to franchisee. People who
want to negotiate the franchise document run into some problems there, but
sometimes you can negotiate territories and things like that, but fees and the
rest of the structure of the business is typically governed by that document that
is, again, regulated by the Federal Trade Commission.

Dennis Zink: Jenny, does that mean if you’re buying into let’s say a McDonald’s franchise,
everybody knows what that is, are you getting the same deal as everybody else
that bought into one? Or does it vary by the territory?

Jenny Sutter: You essentially would be getting the same deal as you would for everyone short
of them having some sort of territory, if the territory is bigger, that maybe that
expands upon how much you have to pay, but you’re buying in the FDD from
McDonald’s is the FDD from McDonald’s.

Dennis Zink: Veterans are really good potential franchise owners, isn’t that right?

Bob Melberth: I’ve found that to be the case.

Dennis Zink: Why would that be?

Bob Melberth: I used to do a lot of work out of McDill and worked with the veterans looking for
businesses as a next career primarily because number one, they appreciate a
system, and that’s what you’re buying when you’re buying into a franchise.
Secondly, they’re disciplined people. They know how to work hard, and they
typically can take advantage of some other financing benefits that are available
only to veterans.

Dennis Zink: Who makes other good franchise owners?

Jenny Sutter: It’s all walks of life, I’ll be honest with you. Everyone from people coming out of
Corporate America, so former high level all the way down to anyone who just
wants to work hard. It’s all about the passion and getting into business. We see
bankers and accountants and firemen and teachers going into business. It’s all
about the passion.

Dennis Zink: You really don’t need the experience to have run that type of business before
except from a financing standpoint. They may require you to have that
experience. Isn’t that a catch-22?

Jenny Sutter: Yes, you want to have some transferable skills that are going to help you out
with the business that you’re looking for. It’s definitely not just coming in
completely without zero experience, it’s how are those transferable skills going
to be able to apply to the business?

Dennis Zink: I just flipped a coin and got the tail side and, why do franchises fail? Bob?

Bob Melberth: The franchises that I’ve seen fail primarily fail because, number one, the
franchisee failed to follow the system. Number two, a partnership fails and the
businesses split apart because of that. Those are the two primary reasons.

Dennis Zink: If I’m a franchise owner, can I talk to other franchise owners about what they’re
doing and what works or just tips and tricks that they’ve learned? Jenny?

Jenny Sutter: Yes. Absolutely. That’s what part of your getting into when you get
into your franchise. I like to say that when you’re getting into a franchise, you’re
buying a business for yourself but not by yourself, so not only do you have the
franchisor support, but you also have your fellow franchisees that you can call
upon and get a better understanding if you have a problem if they’ve
experienced the problem and maybe what their solution was.

Dennis Zink: My last question basically has to do with reversing the process. I’ve got a
business and I think, “Gee, this could be a franchise possibly.” Who do I call? Is
that something that you handle at FranNet?

Jenny Sutter: It is not something we handle at FranNet. I will refer that out. I will first refer to
an attorney who understand franchising. I think that that should be their first
call and understanding what their options are there.

Dennis Zink: Bob, did you want to weigh in on that?

Bob Melberth: Yes, I think it’s a good idea. We get in SCORE a lot of folks who come to us with
their business and think that perhaps that it’s worthy to franchise and they want
to expand. I think you should look at franchising as really a growth vehicle,
growth alternative for your business, but rules of thumb, you should be in
business a couple, three years, something like that. If you’re buying a business,
you’d want to look at three years-worth of tax return. If you’re going to sell a
cash flow, you need to verify that for the person that’s going to be purchasing it,
and that investor is also going to be looking for a return on investment. The rule
of thumb is if you can get at 20%… if you can demonstrate a 20% return on
investment, then I think maybe you have the financial model that’s worth trying
to franchise.

Dennis Zink: Is there any last comments you’d like to make that we didn’t cover, Jenny?

Jenny Sutter: I think we covered a lot.

Dennis Zink: All right, well, great. Thank you very much. You’ve both been very helpful in
covering this very complex topic and we thank you for your advice and your
expertise. Jenny, how can people reach you?

Jenny Sutter: You can reach me – My email is probably the easiest way,
jsutter@frannet.com, or just go to frannet.com and you’ll find me there, too.

Dennis Zink: Bob, how can our viewers reach you?

Bob Melberth: Well, viewers can reach me via the SCORE website, manasota.score.org, and I’ll
be happy to help.

Dennis Zink: Thank you. I’d like to thank our guests for appearing on this episode of SCORE
Business TV. I’d also like to thank our sponsor FranNet and FranFund. Please
tune in for our next episode. Until then, this is Dennis Zink, thank you and
have a great day. 

What follows is a transcript interview with Bob Melberth on Franchising. This is the podcast series Been There, Done That! with Dennis Zink

Fred Dunayer: Welcome to the SCORE Small Business Success Podcast, Been There, Done That! To get free mentoring services as well as to see the wide variety of resources available for small businesses, visit our website at www.score.org or call 1-800-634-0245.  Now here’s your host, Dennis Zink.

Dennis Zink:    Episode number 3, Franchising.  Fred Dunayer joins me in our studio today as co-host, SCORE mentor and our audio engineer.

Fred Dunayer: Morning, Dennis.

Dennis Zink:    Good morning, Fred.  Our guest today is Bob Melberth.  Bob has been a franchisee three times and is currently with the Entrepreneur’s Source, where he coaches individuals in selecting the correct franchise.  Bob has also been in a franchise operations and support role with large and small franchises alike, including McDonald’s, Wendy’s and Popeyes.  He has been responsible for almost two billion dollars in sales.  Good morning, Bob.

Bob Melberth:            Good morning.

Dennis Zink:    Welcome to Been There, Done That!

Bob Melberth:            Thank you.

Dennis Zink:    Bob, let’s start with the basics.  What exactly is a franchise?

Bob Melberth:            A franchise really is a method of distribution of a product or service that includes several points.  Number one, the licensing of a trademark or a trade name.  It does include what we call payment now and forever, which is a franchise fee and typically a royalty; a proven business system, training and ongoing support, a win-win business relationship and regulatory oversight.  That’s really what a franchise is structurally.

Dennis Zink:    What are the biggest benefits for someone getting into a franchise?

Bob Melberth:            I think the biggest benefit that I see is, number one, you have a proven business concept that you can explore and validate to be sure that it’s going to work for you, fits your skills and talents and delivers what the individual wants in terms of their success.  I think that another major factor is the intangible asset of being able to join a community of franchisees.  If you’re an independent business person, you’re by yourself and an independent business person doesn’t have a franchisor and a community of franchisees rooting for them to be successful.  An independent guy can’t go down the street and borrow product to sustain his business from a neighboring franchise; they don’t have that.  The value of that community is really priceless.

Dennis Zink:    It’s almost like having cheerleaders and coaches on the sideline.

Bob Melberth:            Absolutely.

Dennis Zink:    What are the biggest negatives to owning a franchise?

Bob Melberth:            I think the negatives are somewhat individual.  The negatives would be that if someone is truly very, very entrepreneurial and just can’t seem to fit into a set of parameters, they want to be the boss totally and make every decision, then really a franchise isn’t for them. It does have some structure that will vary based on the type of business.  Food, for example, are going to have some very strict guidelines about how to operate because of public safety being involved.  If you’re in a service business, then it’s a lot more flexible and the rules aren’t quite as rigid.  You can build your business how you need to.  You can see where that might be a negative for someone who really wants to work outside the lines, continue to create new products all the time, things like that, so that might be perceived a negative.

The other typical franchisee/ franchisor argument is around marketing.  In all my years, I’ve never seen a franchisee/ franchisor relationship not be adversarial to some extent around marketing.  Everybody’s a marketing expert, okay?  The franchisee says the national advertising program doesn’t work for me in my marketplace and yet you are asked typically to contribute to the support of that.  Because there’s money involved, there’s always an argument of how that money should be spent.  Typically, these marketplaces are much more similar than the individual franchisee believes and the franchisor just typically got a pretty well developed and proven plan of how to market that business.

Dennis Zink:    In general, if I were looking at either buying an independent business versus a franchise, how much control would I give up if I go into a franchise?

Bob Melberth:            As I said, I don’t think you give up control of the franchise because it’s still your business; you’re in business for yourself, not by yourself.  You give up some control if let’s say you go into a food chain franchise.  They’re going to dictate what the menu is.  If you are a chef, you may not want to be in a franchise because you’re going to want to create the menu.  Other than that, there’s going to be operating parameters that are typically pretty broad and you can work anywhere in between that.

When it comes to operating your own business, you’re still in total control of that:  who you hire, who you fire, how you structure your business.  Obviously, you’re going to want to perform in a way that doesn’t jeopardize the rest of the system.  Those would be the only broad parameters where you might be limited.  Certain types of advertising and things like that that might be considered risque or something like that might be prohibited in a franchise, where an independent guy doesn’t have those restrictions.

Dennis Zink:    Does the franchisor give you an idea of what kind of ratios or how much to pay at different levels; the managers versus the people that are serving food?

Bob Melberth:            Sure, sure.  It comes from two things.  It comes from the marketplace.  We’re using food examples, but there are in our portfolio, eighty-seven different industries, only about six of which are food, because of the different categories of food.  All of that can be either gained from knowledge of the marketplace and what industry you’re working within in the marketplace, as well as the entire body of franchisees, who are out there executing the brand, have parameters.  You can do your research and find out what all the other franchisees are paying for this cost or that cost.  In fact, that leverage buying power is one of the real strengths of becoming a franchisee.

Dennis Zink:    What are the hot franchises now?

Bob Melberth:            I get that question a lot, about what’s a hot franchise and I tend to steer people to industry.  There’s no real answer, because the hot franchise is whatever is best for you, because that’s the one you’re going to believe in and be most successful at.  Annually, they write about what are the top five industries that are really strong in franchising at this point.  Off the top of my head, there about five that I think right now are really pretty strong.  Elder care, because of the demography of the country and it’s shift.  Anything having to do with elder care is a strong industry that the demographics just continue to support.  Another is staffing and personnel services.  In the other countries that have health care systems like we’re moving into, the percentage of temporary workers in the work force is four to five times what it is in the United States, so that’s a very strong industry with a good trend to continue to be strong.

Dennis Zink:    That may increase with ObamaCare.

Bob Melberth:            That’s what I’m talking about, exactly.  In England and in Canada, the temporary work force represents four and five percent.  In the United States today, it’s about one percent, so the outlook for that particular industry, which is really strong right now anyway; the numbers in that industry are pretty impressive.  There’s only an upside to that in terms of the industry.

Dennis Zink:    What typically does a franchise cost?  Give me a range if you would.

Bob Melberth:            Sure and I’ll give you ranges around industries.

Dennis Zink:    Sure.

Bob Melberth:            Obviously, a service industry where you as the franchisee really are providing a service and there’s no physical asset other than your knowledge and your skill that you’re delivering, those are lower costs.  In our portfolio at Entrepreneur’s Sources goes from about twenty thousand dollars up to about eighty thousand dollars.  That number represents the franchise fee plus an estimate of hard operating costs and a projection of three months worth of operating capital.  That’s really to get the start of your business, it’s in that range.

When you start to add things where you start to have some equipment and the total investment will range from that eighty-five or so thousand dollars to probably two hundred thousand dollars, maybe two fifty.  Maybe starting to get into retail with furniture fixtures and adding inventory.  The most expensive are typically restaurants or things that are capital intense in terms of equipment, plus inventory, plus a lot more moving parts in terms of labor as well.  I would say that that range will go from about two hundred thousand to three hundred fifty, four hundred, maybe even five hundred thousand dollars as an initial investment.

Fred Dunayer: That doesn’t include any real estate costs or anything else that are associated with say a fast food restaurant, right?

Bob Melberth:            What I’m talking about in terms of … it can, because depending on the way that the business is structured, I’m talking about cash up front or cash you might need to be able to invest in or get financed to make the business go.  McDonald’s, for example – I worked for them for eleven years – everyone thinks they’re terribly expensive, but the franchisor, McDonald’s, typically owns the land and the building and the franchisee just pays them a rent.  In that scenario, their costs are only the furniture, fixtures and equipment to get started.  That’s the hard cost they get into, so it really varies by brand.

Dennis Zink:    Who selects the location?  Does the franchisor give you a choice as we’re looking at three McDonald’s locations, for example and how does that work?

Bob Melberth:            McDonald’s is a little different than everybody else in the industry, because they do step up and they own the building, they own the land, so they make that decision.  Then it’s awarded to a franchisee within their system, typically.

Dennis Zink:    How about everybody else?

Bob Melberth:            Everybody else typically will help in varying degrees.  It will go from saying let’s identify area of opportunity and Mr. Franchisee, you go out and find two or three spaces that you think will work and then we’ll send a real estate representative there to evaluate those, to the point where a franchisor will send a representative into the marketplace, select a location and even do the lease negotiations, so there’s a whole range of services in that real estate, it just depends on the brand with which you’re associated.

Dennis Zink:    Is there a degree of truth, if McDonald’s is on one side of the street, then maybe Burger King or Wendy’s will be on the other side, sometimes?

Bob Melberth:            Absolutely.

Dennis Zink:    So they don’t have to reinvent the wheel.

Bob Melberth:            Absolutely, yeah.

Dennis Zink:    Just change the street.  How do I find the right franchise?

Bob Melberth:            That’s a great question and there are a lot of franchises available out there.  I think the IFA, the International Franchise Association says there’s well over thirty-five hundred franchises in the United States, so there’s a wealth of brands to pick from.  I think it’s really driven by an individual’s needs and that’s what our approach really does.  We help our people identify what income they’re looking for, what kind of lifestyle they really want to lead and even talk about longer term wealth building and equity positions as you would leave a franchise to help define what business model might be most suited for them.

You want to look at something that you can use your transferable skills within, that apply to that, but so many people continue to confine their search to what they’ve done in the past.  They don’t realize they’ve got a skill set that they’ve developed over a career that when they start to look for a franchise, they can apply in many different business models, so we work with our clients to help them do that.

Then, of course, your resources dictate what you can afford.  Finally, I think in the process of validation, one of the last steps is getting a chance to meet the leadership of the franchise.  They call that in most brands a discovery day.  I think as a franchisee or prospective franchisee, you want to go meet the leadership who are going to be responsible for keeping the brand vital and keeping your business moving forward, because you’re going to be out there executing it.  It’s one of the beauties of franchising and not having to be independent and do that all yourself.  You’ve got a team of people that are going to keep that brand vibrant and moving forward and relevant to the industry, so you can go ahead and execute.

Those are the key things that I think people go through.  You want to find an environment that’s safe to do that discovery and that’s what we help people do.

Dennis Zink:    You mentioned resources and I just was wondering, how available is financing for franchisees?

Bob Melberth:            It’s becoming more available than it had been over the past few years.  Not that I think commercial lending is loosening up, but I think that there are alternative means to financing that have come up that a lot of people are now being able take advantage of.  A statistic was quoted the other day at our conference of fifty-two percent of the franchises purchased were purchased with retirement funds.  There are methodologies where you can roll your retirement funds over into a new corporation that makes an investment in a franchise and not suffer any early withdrawal penalties or any sort of taxable event, so that’s become very, very popular.

There are SBA vehicles out there now that are being utilized and some are even unsecured, that I know that clients of mine have taken advantage of.  As well as creative things like … and it’s not one I like, but it is available … is that there are companies out there that will put together several low or no interest for a period of time credit cards that you can draw against and then eventually you’ll pay a higher interest rate, but for a period of time, you’re not paying any interest against that loan.  If you think you’re going to be in something that can ramp up quickly and be profitable and you can pay it off quickly, you won’t be paying a very high interest rate.

You have to get a little creative.  There are some more vehicles out there than there used to be in terms of traditional lending and now the traditional lenders are starting to get wind of that and being a little more open.

Dennis Zink:    How safe are franchise companies?

Bob Melberth:            There’s no guarantees to anything in life, particularly being in a business, but the success rate of a franchise versus an independent business, let’s say, is remarkable.  The U.S. Chamber of Commerce did a ten year study.  At the end of two years, about fifty-five percent of the independent businesses had already failed, where only about four percent of the franchise businesses had failed.  Over a course of ten years, about eighty percent of the independent businesses had failed and the success rate was over ninety percent for the franchises.  You ask me why is that?  Well –

Dennis Zink:    Why is that?

Bob Melberth:            Why the difference?  First of all, lack of resources and typically that means money, so people run out of money.  One of the reasons is; independent versus franchise is, when you start an independent business, you don’t know how much it costs, where a franchise, you absolutely can define how much it’s going to cost.  There will be some variables when you talk about real estate, but at least you’ll have a research background to review before you make any of those decisions.

Then, people feel like they have to be an expert in everything to be successful in business.  That’s truer in the independent business operators case than it is with a franchisee, because the franchise community then allows you to access lots of different levels and types of expertise to help you run your business and you don’t have to be the expert in everything.

Finally, I think that in independent businesses, people have a tendency to work more in the business and the franchise creates an environment where you’re working on the business.  Michael Gerber wrote a book called “The E Myth” and the “The E Myth” talks about the entrepreneurial method, you can do something you love and you’ll be successful and he says that’s a myth.

Dennis Zink:    I read that book.

Bob Melberth:            Did you read that book?

Dennis Zink:    I did.  What are franchisors looking for?

Bob Melberth:            Franchisors are looking for generally a good broad spectrum of business skills.  They’re looking for business owners, they’re not looking for technicians, another one of Mr. Gerber’s terms.  They’re not looking for somebody who’s necessarily expert in their business or their industry, because they’ll train you on how to become expert.  They’re looking for good, solid business people who have a drive to succeed, can follow a system and have the ability to execute a system.

Dennis Zink:    What happens, I buy the franchise and I decide this isn’t right for me, I want to sell or get out, what are my options at that point?

Bob Melberth:            It is an asset that you own and here’s another comparison to independent business ownership; if it’s something unique, you have to educate whatever marketplace you might be offering the business to.  In a franchise, you have somewhat of a built in customer base already to which to offer the franchise.  You’ve got all the other franchisees in the brand that would like to live maybe in Sarasota, where they can say, okay, I’d like to acquire that franchise, so that’s the first place you market it.  Then the franchise owners themselves are typically fielding lots and lots of inquiries about the brands, so they’re having new people come in and somebody from Sarasota inquires about the brand and say, oh, we can help because we’ve got somebody who wants to sell in Sarasota.  It is a good business structure from which to be able to get out of, because you can sell it more easily, I think.

Dennis Zink:    Thank you, Bob.

Bob Melberth:            You’re welcome.

Fred Dunayer: You’ve been listening to the SCORE Small Business Success Podcast, Been There, Done That!  The opinions of the hosts and guests are theirs and do not necessarily reflect those of SCORE.  If you would like to hear more Podcasts, get a free mentor, view a transcript of this Podcast or would like more information about the services we provide, you can call SCORE at 800-634-0245 or visit our website at www.score.org.  Again, that’s 800-634-0245 or visit the website at www.score.org. You may also contact me directly at dennis@Time4Exit.com