Mark Vandegrift 
Welcome to the latest episode of FranSimple, the podcast designed to make the concepts of franchising simple. I'm your host, Mark Vandegrift, and with me is the president of FranSource and the all-knowing, knowing when to franchise bro, Steve. Hello, Steve.

Steve Vandegrift 
How you doing, Mark?

Mark Vandegrift 
Good. Hey, today I thought we'd tap into your superpower. You probably didn't even know you had a superpower, but that's knowing whether a business is ready to franchise or not. I think many may find it hard to believe, but we regularly turn away prospective clients who want to franchise their businesses. And it's not like this hard no, like we won't work with you, but you know, you have the 15 question quiz on the website. And we also then have this kind of filter, this vetting that we go through when you know a new prospect comes through. But you know, so we don't go no, we're not gonna work for you, but we do suggest they do some things before pursuing franchising as a method of expansion. So Steve, let's just start with the obvious question. Can virtually any business be franchised?

Steve Vandegrift 
Well, from a purely structural standpoint, many different types of businesses can potentially use franchising as an expansion method. You know, we'd like to say that it's a business in a box, if it's a business in a box, it potentially can be franchised. Of course, we see franchise systems in restaurants, home services, healthcare and wellness, professional services, retail certainly, B2B services, just to name a few. But we've also helped businesses franchise that we really never even thought about until they contacted us, such as concierge medical medical practices, pediatric occupational therapy clinics, and even a residential and commercial backup generator business. They were all businesses or practices that were pretty much a business in the box. So I think the better question isn't simply can this business be franchised? And I know you hear me say that a lot of times to clients. It should this business be franchised from a system standpoint, from a leadership team standpoint, from a consistency standpoint. I mean, every business needs certain characteristics to make franchising practical. It should have a model that another owner can learn, be trained on, and replicate. It certainly should have identifiable systems and procedures for consistency's sake. The economics, obviously, they need to offer a reasonable opportunity for both the franchisee and the franchisor to succeed. And there needs to be a compelling reason, I believe, for someone to invest in the franchise instead of starting a similar business on their own. That distinction I believe is very important.

Mark Vandegrift 
Yeah, we've had let's see in the last quarter alone, I think we've had a plumber and electrician come through and I'm thinking this is gonna be good. But there are plumbing and electrical franchise systems out there.

Steve Vandegrift 
That's right. But they had systems, they had as we like to say, they had a position in the marketplace, so they could be franchised. But if you're just a copycat plumber, you're not gonna stand out in this industry and it's gonna be a mess. And so as you say, we're willing to advise clients of that. If they elect to work with another company, that's entirely their choice. But we explain our reasoning. And I'd like to think that they respect us for that. In fact, we've had prospective clients that said we really appreciate your input and insight. We're gonna work on this, this and this and we'll come back to you. And we've had clients like that come back to us one year, two years later, and they were ready to go. And we agreed.

Mark Vandegrift 
Yeah. Good. Well, let's go through a few questions that always come up. One of the ones that I think we run into maybe more than any others is whether a business that exists needs multiple locations before the owner should even consider franchising. What's your take on that one?

Steve Vandegrift
Yeah, I feel that way. But at the same time, if you have multiple successful locations, it's certainly gonna provide valuable proof that the concept works simply beyond the founder, right? But there isn't a universal rule that says a company must operate a certain number of locations before considering franchising. The other advantage of having a second, third location is it does show proof of concept. The reality is we franchised many concepts, it only had a single location. But they all had certain characteristics that we believed were necessary for franchise success. They may have had a unique operating system. A number of them were like that. They might have been the one of the first in the industry that's going to franchise it. But they had all these characteristics that are so important for franchising. So what really matters is the quality of the operating history, the system, and how honestly how dependent the owner is or the founder is for the business. So for example, if the owner can leave the business for a couple weeks and the operation continues to hum along, it performs effectively because all of the systems, employees, and the management are in place, that's meaningful. If everything stops when the owner leaves, however, there may be a d additional systemization needed before pursuing a franchise expansion program for sure.

Mark Vandegrift 
Yeah, a few of those concepts come to mind, that's for sure. Yep. Well, you know, we could go through a list of specific things, but what do you think are, I don't know if it's one thing or many things, what are the most important characteristics or attributes of a strong franchise concept?

Steve Vandegrift 
Well, I'd look at several characteristics. One certainly would be duplicatable. Can someone reproduce the business successfully in another market and it could be twelve states away? Certainly the second one would be teachability, right? Can the franchisor train a franchisee how to operate the business within a reasonable time period and at a reasonable cost without requiring that person to possess the actual founder's unique skills? So a third, systemization. Are there defined procedures for delivering the product or service, hiring employees, managing customers, the customer experiencing, purchasing, marketing? The list goes on and on. And a particular strong one is the day-to-day operation actually systemized? Fourth, it's going to be economics. There needs to be enough economic potential within the models to support that franchisee, franchisor relationship. Fifth, very important to us, is marketability. Will prospective franchisees understand the concept and see a compelling reason to investigate it? In other words, one of the top three questions that I always tell prospective clients a franchise prospect will ask is how do you how do you drive what systems are in place to drive customers or clients to your location? And then finally, I'm going to bring up sustainability. We want to see something that has the potential to remain relevant rather than simply benefiting a few owners for a short lived trend. It's important that we see that sustainability or longevity, no question.

Mark Vandegrift 
Yeah, and I'm gonna add, are you at an a regional or national level brand perception?

Steve Vandegrift 
Yes.

Mark Vandegrift
Because we have so many concepts walk in and their marketing is weak, their brand is weak, their website's weak, and they just need strengthen. So that's another filter that we apply on a regular basis. 

Steve Vandegrift 
Most definitely.

Mark Vandegrift
Yep. So operation system, marketing system, and then we get them to their of course their franchise sales process, but

Steve Vandegrift 
That's right.

Mark Vandegrift 
Those are recent episodes we've just had talking about that. If anyone needs to go back and listen to those. So, profitability, I think you brought up. How important is that? And give us some detail on that because people look at their books, you know, they build a business and they don't realize the profitability that is reported is not necessarily the profitability they've experienced. So how important is profitability? And then give us the nuance that's involved in that upfront.

Steve Vandegrift 
Sure. Well, profitability, I talked about economics. Profitability, certainly, it's extremely important. But profitability really needs to be examined carefully. We're not simply asking whether the concept is making money. We definitely want to know it's making money. But we need to understand the economics of the business when operated from a from a franchisee perspective. So, you know, one of the things that we love to do with prospective clients, and we'll sign NDAs, but we'd love to review their P&L for a couple reasons. One, we want to see the bottom line right? And I've had these conversations with prospective clients and I give the example. So, you know, when I ask just off the top, what's your net percentage, net income? Percentage. You don't need to even share dollars right now. And the reason I ask this question, I tell them, is because let's just say you're doing 7% net. Well, the issue there, if we can't find expenses in your P&L that the franchisee won't incur, then what's gonna happen when they have to pay a five or six percent royalty fee, a two percent brand fund fee, et cetera. And very recently I had a prospective client, the owners called, and they said, Look, we're either thinking of investing the capital we have into the business or we're gonna franchise. So we went through some discovery. And ultimately that was one of the people that came back to me when I said that comment and said, well, to be honest with you, we're at seven percent. Well they had talked about all these other things that they could take that capital to really increase revenue and increase profitability. And I recommended that they do that and come back to us when they were ready. And again, that was one of the prospective clients that was very appreciative that I wasn't trying to twist their arm. So a franchise location, they may have expenses that the original business doesn't have, as I mentioned, right? The royalties, brand fund fees, et cetera. And in item 19 of the FDD, if a franchisor provides, let's say, a profit and loss for the financial performance representation, the attorneys also have to include franchisee related expenses at the bottom. So you're gonna see an expense for the royalty fee. Let's say you're doing a million dollars and you're charging five percent. Fifty grand is coming off the bottom line, right? The brand fund fee, et cetera. So those things have to be considered. But the franchisee may also have different occupancy costs, labor costs, they're going to take on financing, so they have debt service, and their operating costs may vary. So that's why it's important to understand the underlying unit economics rather than simply saying our location is profitable. And when financial performance information is presented to prospective franchisees, it also needs to be handled properly within the franchise disclosure processing requirements under the FTC rule. And that's why I mentioned those franchisee-related expenses. Now, what I'll quickly point out as well with the FPR is franchisors are also permitted to basically delete any expenses that a franchisee will not reasonably incur. And same goes for revenues. But expenses. We had a client or a prospective client, they sent the P&L. This is just in the last week or two, went through it in detail, and I saw website development cost. I saw developing of an app cost. Those were about a hundred thousand dollars. A franchisee is not reasonably going to incur those expenses. The franchisor made the investment in the website, they made the investment in the app. Yes, they may pay a small monthly fee just to maintain those systems. But at the end of the day, we were able to take a hundred thousand expense and put it directly to the bottom line. But conversely, revenue. We have a client, they do special events, they do festivals, and not just operate brick and mortars. But they're not going to permit their franchisees in the first year to do it because there's a lot of moving parts when you do that. And so consequently, we also had to deduct the I'm going to call it festival revenue from their profit and loss. Now, in spite of that, offsetting the expenses we could delete, they look strong. So again, there's a lot that goes into it when you're looking at what is the financial aspect, what's the profitability of a business.

Mark Vandegrift 
Yeah, that makes sense. There's a lot there and you talked about the nuance of removing things like marketing and website development, things like that. And those are what we would call investment in the concept, but not something the the franchisee in fact the franchisee benefits from it because they get to use those things and the the cost has already been sunk. So that's yeah.

Steve Vandegrift
That's right.

Mark Vandegrift 
Well you mentioned a that a business should not be overly dependent on its founder and that always sticks with me because we've run into a few of those. Why is that such an important consideration?

Steve Vandegrift 
Well, simply put, because a franchisee can't buy the founder. Now the founder could be involved in the training, et cetera, that could be great. And sometimes the founder is the reason the original business works. That's a concern. Maybe they're exceptional, right? I call them a unicorn. Maybe they're an exceptional salesperson, chef, technician, designer, a relationship builder. That's wonderful for the original business, but it creates a challenge for franchising. The goal really is to take what the founder knows and convert as much of that knowledge as possible into the systems, the standards, the training, the processes, the tools, and certainly the support. So, in other words, franchising requires moving from a personality-dependent business to a system-dependent business. And that's where we excel. And we've taken cases like that, and through our development process with our detailed operations manuals that number in the hundreds of pages, not a hundred pages, we've been able to help them successfully franchise. But it's not going to work for every founder specific business.

Mark Vandegrift 
Well, okay, let's go to the operations manual. What role does the franchise operations manual play in determining whether a concept is replicable?

Steve Vandegrift 
Well I would say a major one. The franchise operation manual really forces us to answer an important question. Can we document how this business actually works? We're documenting standards and procedures involving areas such as opening and closing, daily operations, customer service, staffing, training employees, purchasing inventory, equipment fixtures, furnishings, quality control, marketing. The list goes on. So the process of developing the manual often uncovers operational gaps. And with our 30 years experience, we're able to help our clients recognize. We've had clients that they didn't have a lot of written documentation, they had multiple successful locations. Our job was really to help them understand the level of detail we need in that operations manual if they want their franchisees to be successful. And that can be extremely valuable because franchising isn't simply about documenting a business, it's an opportunity, as we like to say, to examine the business, identify inconsistencies and build a more systematic operating model. What we love to hear, there's a lot of compliments we love to hear, but one of the most major compliments we like to hear as we get through the operations manual process is owners saying it maybe a different way, but they all are basically saying the same thing. Even our core business improved as a result of this process. You made us think about things and questions that we hadn't thought about for years, and they feel really good about that.

Mark Vandegrift 
Good. Well, what about the size of the market? Is that important in terms of whether your concept is franchisable? So let me ask that maybe over a different way. How important is the size of the market for the product or service?

Steve Vandegrift 
Okay. well, market potential is certainly important, but we can't confuse a large industry with a strong franchise opportunity. A business can operate in a huge industry and still lack, let's call it meaningful differentiation, right? That's important to us. Conversely, a specialized concept, and we've had a lot of those, can potentially succeed within a well-defined niche. We really want to understand who the customers are, why they buy, how frequently they buy, whether demand exists in multiple geographic markets, that's some of our market research, who their competitors are, and what again differentiates the concept. It's so critical. So the question really becomes: is there sufficient customer demand to support expansion? And can the franchise clearly communicate why customers choose it?

Mark Vandegrift 
Good. Well what makes a franchise opportunity attractive to prospective franchisees? You mentioned differentiation, but I'm sure it goes a little deeper than that.

Steve Vandegrift 
It does. you know, prospective franchisees aren't simply evaluating a product or service. They're evaluating really the overall business opportunity is the best way to say that. They may look at the brand, the business model, initial investment, training support, the operating complexity, certainly, even lifestyle considerations, leadership team, the culture, and even potential economics. One of the most important questions a franchisor should ask: why would someone pay us an initial franchise fee and ongoing royalties instead of opening a similar business independently? And I kind of referred to that previously. So there really needs to be a compelling answer. The value, it might come from the brand, proprietary systems, training, purchasing relationships, technology, marketing, or a combination of those things. That's what's most important.

Mark Vandegrift
Are there any warning signs that indicate a business isn't ready to franchise?

Steve Vandegrift 
Absolutely. So warning signs might include number one, inconsistent profitability, poorly documented procedures. Now we can help them with that, thankfully. Heavy dependence on the owner, an extremely difficult operating model where you need two years of training to learn how to do it. There may be unresolved IP issues, intellectual property, or inadequate management resources, or even uncertainty about the concept's competitive positioning, where are they positioned in the market? Another warning sign is when the primary motivation is simply we need franchise fees to fund the company. And unfortunately, we do get those calls where at the end of the day we understand that's why they're looking to franchise. It's going to save them. But it's not because they're not going to be able to attract qualified franchisees, they're just going to duplicate their failure. So franchising requires investment from the franchisor because they're entering a long term relationship in which the franchisees will depend upon the systems, the training, the leadership, the support. So selling franchises is certainly only the beginning.

Mark Vandegrift 
Well what's the danger in franchising too early then?

Steve Vandegrift
I like that question. I believe franchising is going to magnify strengths, but it also can magnify weaknesses. So if you have an operational problem in one corporate location, you have one problem. If you duplicate that unresolved problem across 20 franchise locations, you potentially have 20 problems. That's why preparation is so important. So before expanding, the franchisor should really identify any weaknesses, improve systems, establish standards, develop training and support programs, or at least start thinking about it, and really create the overall infrastructure that's necessary to support franchisees. I always warn founders that their role may change that first year or two until they grow their team. They are going to be heavily leaned on to really support those franchisees. And if they don't have other many other team members that can step up and provide that support, they're going to have to completely change their role in the business.

Mark Vandegrift 
Well, and on the other side of it, we know a business owner can wait too long to franchise. What do you see in that regard?

Steve Vandegrift 
Well, some owners they spend years waiting for everything to be perfect and businesses as we know are rarely perfect. The objective really isn't perfection, it's readiness. So once the concept has demonstrated viability, the operating model can be replicated, the appropriate systems are in place, the economics certainly make sense, and the management team is committed, willing and able, I like to say, to support franchisees. Then it may be appropriate seriously consider franchising. The key is making that decision deliberately rather than reacting simply because customer says, I love your business. Can I buy a franchise, right?

Mark Vandegrift 
Well, we're gonna wrap things up today, but I always give you your one opportunity to leave us with one thing. So here's my question. If a business owner today maybe they're listening today thinks their concept might be franchisable, what do you recommend their first step should be?

Steve Vandegrift 
Well, I would certainly suggest contacting us, quite truthfully. At the end of the day, we can do a a franchise feasibility assessment for them and really evaluate their entire business, the operation, the financial performance, et cetera. So before spending significant money developing franchise documents or marketing materials, you need to evaluate the business objectively. So look at look at your concept's operating history, the unit economics, the competitive position in the marketplace, the IP, the management team, the various systems that you already have in place, and what would the training requirements be? What about the investment requirements and a potential franchisee profile? We're doing a project now for a client where we're identifying the ideal franchisee. We're also identifying and establishing the criteria for territories, and we're also doing territory mappings so that we both can understand the potential size of that franchise. And then again, there's the potential, the expansion potential itself and then supporting the infrastructure is the other thing. Then you can identify the gaps between where the business is today and where it needs to be responsibly to support franchisees. So I believe the first question shouldn't be how quickly can we start selling franchises. It should be what do we need to build so our future franchisees have the systems and support and training they need to operate the business successfully. I believe that mindset can make a tremendous difference.

Mark Vandegrift 
Well and after all of that, the one thing I heard was call us first.

Steve Vandegrift 
We help people figure out whether they should franchise and we don't mind having to tell the hard news that for this, this and this reason, but we'd rather they know that so they can you know, dig deep, work on the system, and come back to us and and even occasionally touch base with us and tell us what you're doing. And many prospective clients do that. They'll ask for a little input. We'd love that. We'd love to be able to share our knowledge to help them build and grow an even better business. 

Mark Vandegrift 
Good. Well, let's wrap up today's episode of FranSimple. Thanks for joining us, Steve. And as always, thanks to our listeners. This is our last episode of the season, if you can imagine that. So we will be back probably around the end of January with another season of FranSimple. But until then, please like, please share, please subscribe to FranSimple, the podcast designed to make the concept of franchising simple. And until next episode and next season, may your business expand through the power of franchising.