Franchising: What You Really Need to Know

 

I am Joel Libava, the Franchise King! In a minute, I’ll tell you how that nickname came about. My background is that I was in the food business for a really long time. I had some radio and television experience as a young pup. And then I got into franchising.

Then All of a Sudden, I Wasn’t

I actually managed some franchise auto dealerships. Then, all of a sudden, I wasn’t. I was fired, downsized, right-sized, whatever you want to call it. It was a very, very bad situation anyway, so when it happened, it was a relief, a huge weight off my shoulders. It felt wonderful. But one second after that, the fear set in, and I was sitting in the general manager’s office wondering what the heck I was going to do next. I was asked if I wanted to keep my company car for a week or so, so I could find a job, which was very nice from the sick place I was at, but I said “no.” So I was walking out the door, briefcase in one hand and my little girl’s car seat in the other hand, walking next door to—big surprise, McDonald’s, a franchise—having to call my dad to pick me up. There was just no other person to do it. I felt like such a loser.

What happened in that moment was I said to myself, “I don’t want to feel like that ever again. Never again do I want that sense of powerlessness.” So I didn’t know what I was going to do. But I knew what I didn’t want to do anymore, and that was just work for a bunch of jerks for whom I was helping to create wealth. And I just didn’t want that anymore.

Staying in The Family Business

My late father, Jerry Libava, was the first franchise broker/consultants in the country. And he immediately asked me if I wanted to join his firm. And I said, “Eh, I don’t know, I know the management side of franchising, but I don’t know the brokering, the matchmaking part.” And he pressed for like two months. My wife was not too enthusiastic about it; it’s not like there would be money coming in right away and I had to throw a little money into the business.

But finally I decided after learning a little more about it, “You know what? I do want to work with my father.” It was a way for me to say to myself, “Huh. I have to take a shot now.” Because I was in such career pain. So I ended up being a franchise broker. And then I wasn’t.

It was starting to get uncomfortable. People I was helping to get into business—that I was being paid a big commission from the franchises to do—were going out of business. It just wasn’t feeling right. So I left that franchise brokerage outfit as a franchisee and decided to go out on my own as a broker for a little while, just to see if maybe if I did it on my own if it would be any different. It wasn’t different.

At this time, my late father, Jerry, was diagnosed with lung cancer. Before I left this brokerage group, I told my father and he said, “Just do it. Joel, the franchise whores you are working with don’t give a crap about whether you’re independent or with a group or not. They want leads. They want people to become franchisees.” And I said, “Really?” And he said, “Yeah.” And he turned out to be right. He said, “I support you. You don’t need to be part of this franchise organization anymore. You’re better than them. You know what you’re doing. You know how to market yourself. Just do it.”

Is Franchising For You?

So I did. And after the franchise brokerage thing left my system, as an independent, I said, “There’s got to be another way.” I took a big risk and I decided to create a business model around my expertise. So I just became a franchise advisor. I called myself an advisor and I started charging for my expertise—hourly, multi-hour packages.

Quickly, all of a sudden, I get a phone call and email from Wiley Publishing (John Wiley & Sons, Inc.), and they say, “Hey, we’ve been reading about all the stuff you’ve been doing. It’s time for a new franchise book.” A book deal that came with an advance landed on my doorstep. That’s been fantastic. Getting a hardcover book. And this was before people were really self-publishing their books; this was the end of 2011 when it came out, so it was really good timing.

So that’s what I do now. I help people figure out if franchising is for them. I show them how to go about doing it in a safe, intelligent way, without getting a brokerage commission on the back end. It’s really clean.

What Are the First Steps in Buying a Franchise?

The true entrepreneur in a franchise relationship is the franchisor, the person who came up with the business idea. There are entrepreneur-ish things that you can do as a franchisee, but one of the things I teach in my course and in my book is this: Make sure you understand who the true entrepreneur really is. It’s not you. It’s the person who came up 1-800-DRY-CLEAN or Servpro disaster restoration services, or whatever. They are the true entrepreneur. You are someone who is willing to say, “You know what? I’m going to drop my ego down a notch. I’m going to be okay with following this person’s vision and this person’s business plan so I can get up and running fast.” So there are entrepreneurial things, but the true entrepreneur is the Marc Cuban type of person. Or Elon Musk, who’s going to be blasting people to the moon and Mars.

Are You Employed by the Franchisor?

I like to call it a partnership. You are equal partners in the success of the brand. The franchisor came up with the concept, the business plan, the business systems, all the proprietary information, the owner’s manual, etc., and your job is to implement it. I use the word job, but really it’s your role. Your role is to implement it and reach your dreams and goals by using someone else’s system. And it’s the greatest business model in the world if used correctly by the right person.

How do I Find the Right Franchise for Me?

Instead of going to all 175 franchise opportunity portals and clicking around tile ads—“Hey, that looks like a good one”—and you could do that and maybe get lucky. But I say slow down and make sure that you understand yourself very well. Make sure you are a rule follower, number one.

By the way, I have a franchise quiz on my website that people can take for free. Like 5,500 people have taken it over the years. It’s just a simple quiz. I want to make sure that they are okay with the rules and that they understand what they’re getting into. And then I score it personally. Like an idiot, I don’t automate it, but I feel I should put my personal touch in. So I grade them, one by one, and email them the score. So that’s on thefranchiseking.com. You’ll see it; it’s the Franchise Quiz.

Anyway, after looking taking that, or after taking a tough look at yourself to make sure that you will follow the rules, work to figure out what your strengths are. I’m talking about personal traits and professional skills. Simple. Get a piece of paper. Start writing stuff down. What are you good at? What are you not good at? Rate your ability in sales; are you a good salesperson? Are you a better operations person?

Once you get some of those things written down, then you start matching those things to franchise opportunities that you feel you will utilize skills at. It’s just a more sane way of looking at franchises, because there are well over 3,000 different franchise opportunities. The chances of you finding the right one just by going to a franchise opportunity website—and there are some good ones!—but the chances are pretty low. You really have to know what you’re getting into and know what you’re good at.

Okay, let’s say that you have rated yourself as having a very strong sales personality. You know you’re a salesperson. Some of the traits that you wrote down might be outgoing, people person, energetic, etc. I would start looking for the franchise opportunities that may be in that space.

The first thought that comes to mind would be business-to-business. Something that requires you to go out and find customers and clients, as opposed to them coming in to see you. Them coming in to see you means retail, food, etc. You going out to see them is business-to-business, like a sign company selling signs to businesses. You have to go out and find big clients, like football stadiums that go through signs all the time, baseball stadiums, or school systems. You have to go out and find clients if you own a sign business.

It looks like retail because it might be in a strip center or a light industrial park, but it’s a sales business. You will have to go out and find clients because people don’t walk into a sign business saying, “Hey, I need a sign for my stadium.” No—it’s really business development Monday through Friday. So I would look at businesses that would allow you to use your skills.

If you are more of an operations or a management person and you’re not as outgoing, maybe you want to look at something in the food business or in retail where people are coming in to see you. There’s not a lot of sales involved.

I’ve Found my Franchise. What Next?

It’s real simple: fill out the contact form. It’s a big step, even to do that. It’s one thing to talk about giving them your name and email address and thinking they’ll call you. But it’s another thing to actually fill it out and be like, “Wow. A franchise or salesperson is going to be calling me or emailing me and I’ve decided that, well, I’m fairly serious.”

Get over that hump and just have a conversation with the franchise salesperson or the franchise development person. They usually arrange it with you; if you have a spouse or a partner, I would have them on the first phone call for sure. If you’re fearful, imagine how they feel, full of fear they are, since they really don’t know anything.

The first conversation is simple. See if you like each other. See if you like each other. The franchise development person will give you a basic outline of the business and ask you about yourself. Talk money will come up, if you qualify. That’s something that’s really important.

Do You Have Enough Money to Franchise?

Today I would like to see someone with a minimum net worth—assets minus liabilities, the minimum net worth—of $350,000. It’s not a lot of money, considering the fact that lot of franchises are $200,000 plus. So $300,000 net worth and liquid I would say $60,000–$75,000, because you’ll have to put your own money in.

So make sure you have enough money to do it. “But Joel, there are franchises that only cost $50,000!” Okay, there might be a coaching franchise, something that’s home-office based, that costs $50,000 or $75,000. But if you’re not a coach-type person, if you’re not a salesperson because you’d have to go out and find clients, then it doesn’t matter how low-cost the franchise is; you’re not a fit for it. You’re going to lose your money anyway. At lease make sure you have enough money for it.

Also, have enough money stashed away from that first difficult year, at least one year of what I call “start-up hell.” It’s tough. You’re not making any money. You’re not going to make any money in most cases. Have money set aside for household expenses and also to keep the business up and running. Make sure you have enough to buy the franchise.

Can I Get a Bank Loan?

It’s not happening. I have many people email me and ask, “Now, I don’t have enough money on my own; is it possible to get a loan?” No. It’s not like you’re a bad person and you don’t have enough Monday; it’s all about the bank and risks. If you don’t put your own skin in the game and fairly good amount, they’re not going to help you get financed. They’re just not going to do it. You’ve got to have money.

Should I Hire a Lawyer?

The lawyer and the location are at the end. A lot of people will contact me before they’ve bought my programs and say, “I like two franchises and I’d like you to refer a franchise attorney to me.” But there’s no reason to, not yet. Once you’ve made the decision that you’re pretty much going to buy the franchise, after doing your research, then it’s time for an attorney. But not too early. I teach folks how to do research and I show them who to call, how to call them, and what questions to ask, but that is sometimes a three- to four-week process just for that.

I should bring up that for the entire process, figure 90 days from beginning to end. From first submitting the contact form to the yes or no decision, it takes about 90 days. Maybe 60 days if you are downsized and not working and you have more time to get the due diligence done.

Is the Franchise Contract Negotiable?

Some franchise salespeople will tell you, “Well, the franchise contract is non-negotiable!” Don’t believe them, okay? It may not be negotiable at all, because all the franchisees should really be on the same contract, but a good franchise attorney may be able to find a couple of things that he or she can negotiate for you. Maybe you can get an extra zip code as part of your territory because you’re in Montana where you need more space, etc. And maybe the franchise agreement says you can only have certain zip codes. So there are some things you may be able to negotiate on.

You need to write a business plan. A formal business plan is needed if you’re going to get a loan. You should be applying for a loan, doing the business plan as you’re getting close to saying yes or no.

What Other Costs Should I Know About?

Let’s say that the franchise opportunity you’re looking at has a total investment of $250,000. So $50,000 of that might be the franchise fee and you pay that up front. The other $200,000 of the $250,000 is to open the business, get fixtures, lights, signage, inventory, computer systems, phone systems, maybe a security system. That will be part of your total investment.

You invest that money, you get a loan for a portion of it, and you open your doors. You’ll have ongoing expenses. You have to pay a percentage of your sales to the franchisor. Let’s say the $250,000 franchise has a royalty percentage of 6% so 6% what you sell, your revenue, goes right to the franchisor. That adds up a lot, times 500 franchisees across the country, paying 6% per franchise, that’s how the franchisors make money; they don’t make money from the up-front franchise fee.

So you’re going to have utilities; HR, which is employees; maybe benefits, maybe not; you have maybe $2,000 rent payment to make, maybe $3,000 or $4,000, whatever it is; replenishing your inventory; and there are just a ton of fees in there. When you write a business plan, you know what those are and you put those in your projections.

Once you spend at $250,000, you still have ongoing expenses. And, since you are not working for anyone, your household exposes still need to be taken care of, so make sure you have money set aside for that or a working spouse or partner. This is stuff that I talk to people about ahead of time, to make sure that they’re on the right page and understand what they have to do.

The transition from employee to employer is a big one but it’s a good one, and it’s going to be a lot of fun. Because freedom and control is possible with a franchise. Way more control than if you work for someone else.

Does the Franchise Help with Marketing?

Marketing and advertising templates are ready to go. Here you go. Here’s how to advertise. We’ll set up a Facebook page for you; we’re going to give you your own micro-site for your area. It’s all set up. It’s not instant money, but at least you’ll have some activity because people do know you. It’s usually a nice, big grand opening too. The mayor’s there, the City Council, the Chamber of Commerce. You know, it’s a big splash, so it’s important.

Is There any Training For the Franchise?

Yes. There’s formal training when you purchase a franchise, and you sign the agreement, and you send in your franchise fee, and your loan, and everything’s ready, they will tell you when the next training dates are. Plan on spending three or four days to a week at franchise headquarters. It’s formal training. Some of the smarter franchisors now are having you do some free training on the internet, doing it online. And that’s helpful. There are training programs that I’ve seen that are two to three weeks. It just depends on the franchise. Figure a week, four to five days.

Will I Have to Hit Certain Sales Targets or Milestones?

Good question. Yes. There are sales targets you have to hit, and if you don’t, they’ll get on you. You can be terminated if you don’t hit those marks. The cool thing is you don’t have to guess if a franchisor has these things, because it’s right there in the agreement. Everything’s disclosed to you upfront.

If you are intelligent enough to hire a franchise attorney, even though it costs money, the franchise attorney will say, “By the way, did you know in the second year, you have to be doing $340,000 in revenue or they can terminate you?” “No, I didn’t see that.” Well, there’s 400 pages; of course you didn’t! It’s really important to get that person behind you saying, “By the way, did you know this?”

But once again, franchisors don’t want to have franchisees out of business. Hopefully they’d be smart enough to want to work with you. Maybe they could sends a field rep to your store and say, “Let’s find out what’s going on here.” What are you doing right and what are you doing wrong?”

Can I Ever Sell the Franchise?

Yes, absolutely. Some people have maybe a 10- or 15-year plan. “In 10 years, I’m going to sell this thing and move somewhere warm, or move somewhere else. Or I want to create a legacy and have my kids buy into it and sell it to them.” There’s a lot of ways to do it. But you should have an exit strategy in mind. If you’re a 55-year-old, downsized executive, maybe you want the 10-year in-and-out. You’re doing business, you’re gaining equity each year you’re doing it, and you can sell it, and fluidly.

Is it Easier to Buy a New or an Existing Franchise?

You should know that when you buy an existing business, whether franchise or not, it’s a really long process. It’s a lot more complicated. You’re getting a couple sets of lawyers involved and getting an accountant involved. There’s just a lot more into it. But it’s nice to be able to walk into a place that already has revenue coming in. Just be prepared: it’s a little longer, more intense process.

Final Thoughts

If you’re going to buy a franchise or potentially buy a franchise, try to avoid going to 100 different franchise portals and clicking around the crazy until you get carpal tunnel syndrome. Chances are, you’re not going to find a franchise right away like that.

Start with you. My biggest tip is to start with you. Make sure you have the budget for this. Make sure that you know what your strongest personality traits are, what your strongest professional skills are, and then try to match yourself to opportunities that allow you to use them. Do this slow and steady. You don’t have to rush through this. Don’t buy a franchise because you can’t find a job. Please just buy a franchise because you want to be your own boss and you like the idea of using someone else’s system.