Transcript
Speaker: Hi, Edith. um It's really great to have you on the show today. And before I even make an introduction, there's a question that's just burning on my mind right now. So I'm gonna i'm just going ask and let you tell us what you think, and then we'll get into introductions because this one is just just burning me up.
Speaker: So a couple of weeks ago, I had an episode on franchising and and you told me that you had also listened to it. um Before people consider to write a check for 50 to $200,000 for a franchise, that you've worked for 20 years at FranData. and And most of my audience has never heard of FranData.
Speaker: So taking that expertise, can can you just give us a 30 second version on what is FranData and why someone should or should not write that check or care about that check for a franchise?
Speaker: You would be surprised at how many very smart people, private equity firms and lenders have made poor decisions when investing or lending to franchisees.
Speaker: And that's because oftentimes it's an emotional decision for people or they think they're following some sort of consumer trend.
Speaker: So What I would say is that it is incredibly important to understand multiple layers when you're thinking about investing in a franchise.
Speaker: One is the franchise system itself, the stability, the model, the executives. The second is your own individual capacity.
Speaker: And then the third is your local market. And those three things from an an individual investor are incredibly important. From somebody, you know, there's lots of different type of investors, investors who are looking to build something big.
Speaker: um That's a totally different analysis than someone who is starting off and just wanting to start a business for the first time. owning a territory in a local market.
Speaker: So yes, there's lots of people who have made mistakes and there's things that you can do to de-risk the investment into a franchise.
Speaker: No, thank you. That that ah question off my chest, because that's the one that that was just burning in my mind as I was waiting for us to to go on air and to start recording. So now I'll be polite and I'll get right into the introduction. um As my audience knows, a few weeks ago, I had another episode on franchising where I talked a little bit about the entire view of the franchise system, not being an expert. And I promised at that time that I was going to bring an expert here on the show.
Speaker: And That expert is now here. So as an introduction for the listeners, I have Edith Wiseman here. She works or has worked at Fran Data for 20 years. And for 12 of those years, she has been the president and still is the president of the company.
Speaker: She knows franchising. and And I'm going to look at my notes here on my screen because I want to get this right. On her LinkedIn, it says, we know every franchisor and every franchisee and have an FBI like file on them.
Speaker: We have the right person here on the show. Now let's tap into your expertise. Welcome, Edith. Thank you so much, John. Yeah, um it occurred to me one day when I was walking to the office, I saw a pillow that said Fran Data and it said franchise business intelligence.
Speaker: And I was like, ooh, you just shortened that up. That's FBI. And that's true. but Our objective is to to know as much as we possibly can of the ins and outs of the franchise system, the performance, the pricing, and also all of the people who are involved. Because when you're joining a franchise system, you should be joining a network. And just like any club that you're joining, you want to make sure that like your values align, your work ethic align, because anything that they do that affects your brand that you're going to be operating is also and critically important to that investment.
Speaker: No, that's that's really good to know. Now, question is, ah who does Frandata work for? Is it for the investors, the franchise buyers, the the franchise owners?
Speaker: who Who do you typically support? So we have three customer segments. um One customer segment is franchisors. The second is lenders. And the third are suppliers. And suppliers could be private equity investors or investors, generally speaking. um as But it's really anyone who is either trying to sell to franchisees or franchisors or who is trying to like understand the market.
Speaker: That's great. So so it means that that from the audience perspective, it's a real treat for them to have you here because you typically don't talk to the franchise buyer. No, I love to occasionally talk to a franchise buyer. So, for instance, my my cousin and her and her friend and my girlfriend used to work for me as a franchisee. So I do like to talk to prospects and very much love to talk to franchisees, but they're typically not our customers.
Speaker: Right. going on to the to next question that I had, this is where I blend something you said with with my personal experience in the auto industry. You've said before that buying a franchise is not like buying a car, that instead it's like buying a business.
Speaker: And I love that distinction. What do many people actually get wrong about um the the the purchasing of a franchise when they're signing that agreement? Yeah, so a lot of times franchises are sold based on the dream of freedom.
Speaker: And while that can be something that you ultimately achieve, it's not what you buy when you first buy. So the way i would describe this is depending upon...
Speaker: what level of investor operator is someone looking to to get into franchising? So you have this um the person who's a a corporate ah refugee, so to speak. And the corporate refugee is looking for something to do as well as something meaningful to create ah income, to create wealth, et cetera.
Speaker: So that individual, is um making a very, I mentioned this earlier, a very emotional decision. All decisions are emotional. That said, you can't, like the emotion can't be the ultimate driver. So if you are buying a franchise in the same timeline that you would buy a car, then that's a problem because you do not have enough time to gather the information that you need in order to make sure that you are prepared for what that business will throw at you. Because if you're a corporate refugee, you know from your own business experience that things are not static. The world is constantly evolving. And so you have to think through, okay, what happens if my construction timeline gets delayed and I don't open,
Speaker: right in time for summer if I'm opening up a, you know, a ice cream shop or I'm opening up like my cousin did a sauna shop and you're opening it up in the middle of Texas in the middle of summer, like these, like life happens. And so you kind of have to triangulate and make sure that you consider all of the implications of how are you going to get through, first of all, this startup phase, the construction,
Speaker: If it's a service business, the learning, the getting the business getting the business, like you need to know everything that it takes, not everything, but as much as possible about what are going be your hurdles to to launch success to start off with.
Speaker: So emotions are something that that one needs to try to to put aside at least as much as possible. And then there are numbers. Yeah, so it the thing I would say, it's it's like you're making a practical decision about your life that is a 10-year commitment. Or like you have to know, like how long am I going to be in this? Is this a like a buy and quick flip? Because I think like frozen yogurt is going to have a quick run and then I'm going to sell. Yeah.
Speaker: Okay, great. But that's a that's that means that you have to have a plan for how to make that happen. And don't let the dream of freedom be your driver.
Speaker: Right. So that's that's exactly what I'm falling into. And then the other part of the dream, ah other than wanting to serve frozen yogurt, for example, is the money and the numbers. And, you know, people look at franchise opportunities online and, and you know, you you Google around and you find numbers like eighty thousand, hundred thousand dollars a year in take home income. I mean, are those numbers real? And and what do the Fran data numbers show?
Speaker: ah mean, the numbers are all over the place. If you think about, there is a franchise for every kind of investment level. That means there's a franchise for every profit level. um you know So there's, ah it because it depends, are you someone who's operating out of a truck? It's a one man business.
Speaker: Or are you building an enterprise where um you own 10 car washes? car washes So there's or 100 eventually fitness studios. So there is a huge continuum of potential. What I would say is that some people become franchisees because they're just investing in someone else.
Speaker: Right. So you can be a minority investor in a franchisee. So there's different ways to kind of get a cut at the pie um without like if you're like, oh, OK,
Speaker: I often am stopped in the airport or taxi cab and they're like, ah you know, people in the industry, like I go to a lender conference like I was just at and someone's like, oh, what do you think of this franchise? And I always stop and ask like, OK, what role are you playing? Like, are you keeping your corporate job or are you like quitting and going all in?
Speaker: um because if you're not quitting your job, like chances are your franchise won't be very successful um because you're it's a side gig. So if you're okay that it's a side gig and you're not gonna make a lot of money, but maybe someday you'll take it over. that's I've heard some people have that strategy, but I think most people um in that case, I would just invest in someone else. right, and say, um I'm not going to have the whole franchise to myself, but I can invest in someone else who I believe in. And I've vetted the concept and the market. So you've done all the additional research. And the same thing with someone who's going all in um is that you have to know, like, am I going to be the owner operator?
Speaker: But I also need to set out the plan, So one of the very successful franchisee with ah a maids concept also had been a franchisee of another brand, had also worked for the government, lots of different careers. And he said, when he sat down, he and his wife were the only people in the business, but he he he drew out, what is this business gonna take? What are all the roles that need to be fulfilled? And right now I'm in all of them, but my job is to get myself out of each one and put someone else in there.
Speaker: So if you're in a heavy sales business, right, like you've got to sell because you've got to get people to buy your service. It's not just like open up a retail store. You have to know sales because your ability to hire someone who knows sales quickly at the start is not very easy.
Speaker: And that can be a detriment before you even had a chance to launch. So those are just kind of big picture items that I think about. So you did mention vetting and doing research. So let's just say, you know, somebody who's 55 or 50 and over is sitting at their kitchen table right now and they have the the franchise disclosure document open, the FDD. what What would you say are the three items, even by number if you have them memorized, and and I know you do, they should observe, that they should obsess over um before they even think about talking to a franchise sales representative. and And could you also explain what the FDD is first for the listeners?
Speaker: and So the franchise disclosure document is a mandated document by the Federal Trade Commission to put in layman's terms the agreement that an unsophisticated investor would be agreeing to when they become a franchisee.
Speaker: And the reason why i say unsophisticated is because if you were a large corporation like Marriott, and you're entering an agreement with Starbucks, you no longer, Starbucks is not subjected to the same rules when they enter into an agreement with Marriott because they're a sophisticated investor. So most franchisees would be considered unsophisticated just based on like net worth requirements um to be able to qualify as a sophisticated franchisee.
Speaker: um So that document spells out, has 21 items that spell out in layman's terms what the agreement says and um the franchise agreement and any other agreements that will be signed. So if you are entering into a franchise that has real estate, chances are you're going to have to sign a collateral assignment of leased. And you're going to have other documents. If they require you to use certain suppliers, you might have to sign other agreements. So all of the agreements that you're required to sign should be included in the franchise disclosure document.
Speaker: um So the quick skinny of what are the key things for you to look at. The first one I would do is Aside from you should know what the business is. So that's, you could go to the website. um But I would go to and item two. You look at the executives, look at those names, read where they have been before, go to their LinkedIn, find out where else they have worked. And if they've only worked at franchise systems that have, you've never heard of, and they've never been successful, noteworthy in your head. h Interesting, worth exploring more.
Speaker: Then I would go to item 19. So item 19 is called earnings claims. This is not mandated. It could be empty. It could be there's some information, but it just says projections.
Speaker: It could be a full pro forma. It could be a full pro forma of every single store they have. um it could sorry It could be a a full P&L or of major line items, or it could be a mix and match. So like this is a um an area where there's large um differences in how ah companies share earnings. And there's lots of reasons for that.
Speaker: um One could be just the way they operate. So for instance, if they're a um Baskin Robbins or like a Carvel, sorry, where they're just selling ice cream. So it's like more of a product distribution. Then the royalty is based on the sales, not like the sale of the individual product, not the whole business. And so they're not gathering that date, that cost data. They're not even even gathering the sales data. So there's reasons, there's structural reasons why different companies can't report the same thing. But note, how much does this represent? Is this one store?
Speaker: Okay. And you have 200 stores? Like, why is there only one in here? um So just, these are things that anything that you seems like, okay, well, there's never going to be 100% representation because stores that just opened in the past year or for some businesses last two years are completely not um relevant to like an average because they're too immature in their development. um But there are some franchisors who actually share like first year sales. um So obviously more is better.
Speaker: but you just be really forensic in the way that you look at this data. Cause it is definitely being put together as this is like in part a sales document, um the franchise disclosure document.
Speaker: Then the second part, the third, sorry, section I would go to is item 20, which is shows how many like units a franchise business has put in each year for the last three years. And then how many have left the system, terminated, left for other reasons, what have you.
Speaker: This is a place where lots of people ignore. Like, oh, they closed 20 locations last year. Why? ah good question going on um And then the second part of item 20 is the list of franchisees. And just as I said earlier, trying to get a ah sense of like who's in the network, right? So if you're going into a service business and you talk to people who all have a contracting background and you don't, hmm,
Speaker: that might be cause for a, well, do I need, like what makes them need to have a contracting background? Like the franchisor might say, oh no, don't worry, we we'll teach you.
Speaker: but you're hearing everyone has a contracting background, so and they're successful. So I don't know, again, pause, question more.
Speaker: why do Why do these people have a contracting background and they're successful? So it sounds to me that that that you really have to do the research and and reflect you know that like a mirror to yourself and and to see if it makes sense, if it fits you and your circumstances. And as of of course, also the the the fundamental you know business ah success or or lack of success in that in that franchise or as business.
Speaker: Yeah, and that's, so that's not to say, right, for instance, um I'll take a like a cleaning business. um There are tons of cleaning businesses in every market, right? So just because there are lots of them doesn't mean that like you can't come out of the gate and be successful and steal market share, right? that that That's not what I'm saying. But if you're going into a business that requires a license,
Speaker: and you don't understand the licensing requirements or how long it's gonna take you to get a license or how much it's gonna cost, and you've already signed the franchise agreement, you're probably doing yourself a disservice because then all of a sudden, as the lender told me recently, the franchisor finds out that the the license costs $75,000 in that particular jurisdiction.
Speaker: ah That never happened in that business before. And so now you're talking about a totally different investment um, and timeline before you even get out of the gate. Right. And so then you need a longer working capital runway. and that's a surprise you don't want to have when you've already signed on the dotted line and you're already starting to spend money to like get up and rolling and then you can't go anywhere.
Speaker: Yeah. So, so speaking of having that, that timeline and and the, the, the money runway, um, This audience here is is over 50. So ah we think somewhere about retirement, we think about retirement savings, and there is a mechanism that's out there. I recently had a guest on on the show that that did exactly this.
Speaker: It's called ROBS, the Rollovers as Business Startups. And it lets you basically use money from your 401k to fund a a franchise acquisition without any early withdrawal penalties. So for a 55 year old who has limited um liquid cash, is is this an an option? is Is it a legitimate tool and is it something that you come across and and find people doing to to leverage their first franchise acquisition?
Speaker: Yeah, um I'm very familiar with the ROBS. um There's a lot of companies sorry, there's a few companies that focus on franchising um that help businesses start by using their 401k. And there there's definitely a use case for that. um And what I would say is that there's lots of ways to fund a business. And just knowing that each of those ways has,
Speaker: pros and cons, right? So for instance, if you're getting an SBA loan, the good news is that the lenders, before you even start and you have projections, you have the possibility to um get a business funded that is completely projection-based, right? So you're a first-time business owner, they're trying to leverage whatever experience you have, the business plan, the projections. So you can get an SBA loan with, and depending on the franchise, between 10 to 20% equity injection.
Speaker: If it's a really ah early stage franchise brand, some lenders might require up to 30%. it just depends. The downside of an SBA loan is that it's a government guaranteed loan.
Speaker: So guess what? The government's gonna find you no matter where you are at any time. So you default on that loan, but it's going to be pushed over to the IRS and yeah, they're going to get your money. door the knock of the tower So um the, the positive though, is that like, if you have first year losses, right? Like you can set up your corporation so that you have a tax benefit.
Speaker: um If you do a ROBS, you have to do a C corporation. So the benefit is if you can't get a loan or you don't want to get a loan, you're, then you can take out some portion of your 401k to be able to fund the startup.
Speaker: Now, the one downside of a ROBS is a lender is scrutinizing your business plan and they're scrutinizing whether you might be good for this business. When you're doing a ROBS, nobody else is scrutinizing you except for the franchisor and you. So I would, you know, like if you're going to get a ROBS, I would maybe go to an SBA, like SCORE office or just have someone else scrutinize your business plan to make sure like, are you completely bought into this business plan? Are you the one who's going to execute this business plan? Because the ROBS is oftentimes used in order to like speed up the the the whole sales process. So you buy the franchise, you get the ROBS, you fund it quickly, you start up, like it just compresses everything, which can be super helpful, especially if you're like, I need to start before summer hits, right? Like there are certain things that you need timelines for. um And if you don't have the ability to get capital elsewhere, then this is like a fabulous way also to potentially use it as an equity injection into ah an SBA loan.
Speaker: You also have to factor in that you're going to have servicing costs to the ROBS.
Speaker: Like there are transaction costs and then there's also like monitoring costs because you've got to do certain things every every single year to stay compliant. um So those are costs on top of costs. You've got then SBA closing costs and then you've got ROBS costs. So, um so just like, to me, it's just about knowing what you're getting into. i did have a franchisee say to me, gosh, thank goodness I didn't have an SBA loan because I could keep tapping into my 401k. And I was like, I don't know that that's a great thing. Yes, it does provide an equity, um like,
Speaker: Ability to tap additional equity, especially when, you know, businesses go through seasons and and then you're not getting a line of credit where you have to pay additional costs for for that capital. So. um So, yeah, so that so there's it's a it is a beautiful tool. It is heavily utilized in franchising. And i think it's important to know that there's also other tools. Like if you do have a stock portfolio, you can get a loan against your stock portfolio. um So there's different mechanisms um and just knowing all and then figuring out which one is the right one for you based on your own personal profile and financial situation.
Speaker: and the business that you're starting and the ramp period for that business. Because if, like I know there are certain franchises where they're not going to really cash flow, for like a year and a half.
Speaker: It's a great business, but that means you're gonna have losses for the first year and you're not gonna be able to get the tax benefit of that if you've done a ROBS. If you did an SBA loan, you would. so these are things to just consider. Okay, okay. One one question that I do hear from the audience on on the the question of franchising is, hey, I'm terrified of losing my my retirement if I make a bad franchise decision.
Speaker: Based on on your data, i mean, is that fear proportionate to to what's actually happening out there? what What do the real financial loss numbers look like that should people really be worried about this?
Speaker: When you say the word franchise, there's nothing that you can say that is universal to that experience. So um because not every franchise is the same.
Speaker: There's franchises that just started, right? So in our and I live in the D.C. area. There's a um ah pizza shop called Paisano's that I've but been to for years, and then they started franchising.
Speaker: Great. They had a few locations here in the D.C. area. I think they actually did it smartly because they didn't try to like open up a Paisano's in Washington State from Washington, D.C. They started selling around the area. So there already was some market recognition.
Speaker: But the fact is, it's a brand new franchise. The franchisor doesn't know what he's doing. They are heavily motivated to help their franchisees be successful, but they're still learning.
Speaker: So like there's everything is on the risk reward um like profile. So new franchisor, you're a new franchisee, that is the highest risk.
Speaker: Now, if you're a new franchisee in a new franchise, in a new category, that potentially is high reward, right? So in terms of financial, um turn aroundund You think about like Crumble, right? So Crumble came to market. When they came to market, i mean, those franchisees were making bank. I mean, they were making so much money um because they had a new marketing engine. it was very trendy. And so franchisees were opening multiple locations and they, I mean, i like swim, i like i envision, you know, Donald Duck, like swimming in his um his, you know, vat of of gold coins. um So that kind of phenomenon does happen, but then you do have a maturity process where then that starts to decline. um So then you have your franchises that are what I would say your meat and potatoes franchises, the ones with like a roofing business.
Speaker: Okay, well, every single business has its nuance that you need to dig and under. Roofing businesses, usually you're only going to have one customer.
Speaker: It's not a repeat customer. How often do you need a roof? Every 20 years? Okay, so you're constantly in a new business like mode versus, okay, I'm doing lawn care. That's a repeat customer.
Speaker: Yeah, well, everybody loves repeat customers. So there's gonna be a lot of competition for that. um So, and then you've got retail. So all of these factors change the profit um considerations for the business. So yes, there are certainly some franchisees who have lost everything, right? There's articles about it.
Speaker: There's um an article that I read recently in Franchise Times about a franchisee who, you know, had like severe emotional distress. And then there are franchisees like friends of mine who have been very successful and they're at a point where, you know, they're have only work a few days a week.
Speaker: And, and they're like, I could sell my business and do really, really well. um Or I could keep doing this and be really happy. You know, so you've got, you've got every, you've got every such scenario possible in franchising from being wildly successful to, you know, losing, losing your shirt. And so That's why I i tend to emphasize more the negative things just to make sure, because people get so excited. They're like, let's, you know, ah and I'm just going to plop some money into this franchise and I'm going to keep my job. It's going to be wildly successful. And you're like, okay, pump the brakes.
Speaker: ah Exactly. So it it sounds like ah it's really personal. I mean, it really means that that the individual has to do their due diligence in vetting this out, the the business itself, the the franchisor, how long they've been in business, but but they also have to really look into the mirror and and see what it is what it is that they want, what are what are their long-term goals, like you said, over 10 years.
Speaker: So thinking about the individual, um you've been You've been looking at at the franchise systems and and the franchisors and lenders for a long time.
Speaker: But when it comes to the individuals, the franchisees, is there a ah profile, ah ah let's say a specific person over 50, for example, who should absolutely just not buy a franchise? What what would that person look like?
Speaker: um If you don't like people, you should not buy purchase. I mean, it's just, it is like, if you're someone who's used to being behind a computer and um and not getting out into the market, um then, cause, cause even if, let's say for instance, even if you're buying like a retail um fitness studio, right? Like you still have to get in there. um and make sure your managers are doing the right thing. You have to pick the right managers. You have to deal with people all the time. You own a business and it's not just a one-man business. like
Speaker: You've got to be a people person. But that also means you have to be able to motivate people. You have to deal with their problems, right? So I know a guy who is a field consultant for Dunkin' Donuts who became a franchisee with a massage concept. He and his wife do this.
Speaker: His wife is like the mom to all the aestheticians and massage therapists. And he's doing the books and doing the marketing, right? So like they' they're with skills or really what make their business work. And he's on the, um, the committee for the franchisor about how do you, um, improve retention rates of your therapist because his retention rates are fantastic.
Speaker: Um, but he's also not nickel diming. Like he's, he's managing in a way that he's seeing the big picture of, of not only the business, but the people in the business. So if you don't like people and you've never enjoyed being a manager,
Speaker: like Chances are you're not going to be successful um owning a business um unless you're a passive investor. Fantastic. That's probably the you actually What woven into that answer, you really also happen to say what kind of person you really should be. which is which is which is great. So I'm going to respect your time as a franchise executive, knowing that you have a hard stop coming up. And I'm going to ask you now, just in kind of machine gun fashion, as as we close down the episode here, um what would be the five points of due diligence that
Speaker: that you would go through if you were a person who is over 50 and considering a franchise? Just machine gun them out, five five points that you would look at. Is there anyone else who's over 50 in the franchise system? Is there anyone else like you?
Speaker: Please introduce me to them. I need to get to know them. Number two, what are my own capabilities? Write them all down. What do you do and not like to do?
Speaker: If you do not like scrubbing your own toilets, don't buy a cleaning business. Just number three, look at the financials. Look at your personal your own personal financials.
Speaker: What do you need? There can't be a mismatch. If the franchise is not going to generate what your personal financial needs are, next. Four, you have to be willing to 100% give all of your time and effort if you want it to be successful. So if you're someone who is um needs to always do something different, like introspectively, like you're probably but not fit for franchising. But that's what I would ask is um I would look at the the list of franchisees. Has anybody been in the system for a long period of time? um And who are they? Because they've weathered every storm.
Speaker: um Ask questions like, are there any liquidated damages? If I buy this business and two years into it, I'm not successful. Will I have to pay royalties for the rest of the term of the franchise agreement?
Speaker: um And then have they ever actually utilize that liquidated damages clause if there's one that exists? I don't know, is that five? Because I could keep going. That was a lot. And i think it's a great i think it's a great, at least, ah you know first start platform for people to to start this this consideration process. and and And certainly, you raised a lot of points and questions that that people can look into and do further research ah you know on their own or or consulting with with other experts in the in the matter.
Speaker: um I think with that, Edith, I i want to thank you for your time, for for coming on the show and talking to the listeners and explaining from your perspective how franchising works and what are some of the benefits and advantages and some of the disadvantages and and people the persons. you You need people persons. I love i love that part.
Speaker: And John, I will say, because I tend to be more negative, um because I know people get so excited and rush into things. What I will say about franchising is that it does offer people the ability to get into areas of business that they have never had experience in and they have the ability to be successful.
Speaker: um And so that, but that has to, mix the right franchise, the right person. um and it does, i have seen people build extraordinary wealth um through franchise business ownership.
Speaker: And so i i love it. I've been at for 26 years. So, ah so this is, I just needed to end on a really wildly positive note because it it is a distributed method of building businesses. And through that distribution, people are able to benefit from a very strong, from a brand or a product or a way of doing business that they might not have ever had an opportunity to do on their own.
Speaker: No, that's great. It's great to end on a positive note. I really appreciate that. Again, Edith, thank you so much for joining. I'm going to close the episode now. And as I always say, Youth runs fast, but age knows the terrain.
Speaker: And that's a wrap.
