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 guru of franchising, Steve Vandegrift. Steve, welcome.

Steve Vandegrift 
Thanks, Mark. Our topic today is really one of my favorites. It's really our main focus when speaking with prospective clients and really helping them determine if franchising their business is the right time, the right concept, and basically ready to franchise.

Mark Vandegrift 
Yeah, we it's interesting because you know we're all about differentiation. And I find that the overlap is incredible in franchising because if the concept's not differentiated in several areas, then you end up having kind of a weak franchising concept. And you and I have always talked about the three-legged stool. And once the legal, of course, is out of the way, having the operations, the marketing, and the franchise sales actually systematized. So I think that's what we're gonna talk through today, kind of break it down item by item. But the key word I think we want folks to take away w from today is really systemization or having a system for operations, Franchise sales, and marketing. So, Steve, let's start out. you get these calls all the time, and I'll refer folks to the France Source 15 question quiz that really helps. but when someone tells you they want to franchise their business, what's the very first thing that you evaluate?

Steve Vandegrift 
Well, you might be surprised to hear this, but the first thing I look at isn't revenue or even profitability, although we do want to get into that as we go and help clients evaluate whether they're ready to franchise. It's really all about duplicatability, in other words, systemization as you mentioned. So can another franchisee following our documented systems and receiving proper robust training produce similar results? If the business depends entirely on the founder's personality, their relationships, unique expertise, etc., it's probably not ready to franchise yet. Doesn't mean it couldn't be, but it might not be ready yet.

Mark Vandegrift 
So do you think there's like minimum revenue that's required or a certain number of locations that the prospective franchiser should have open? What do you think is a good indicator that would help folks know whether they're ready to franchise or not?

Steve Vandegrift 
Well, it's not necessarily about minimum revenue or a number of locations that are already in existence. There's no magic revenue number. I've seen businesses with one exceptional location become successful franchisors while companies with ten locations struggled because honestly they lack systems. I believe what's more important is consistent profitability, proven systemization and operations, and confidence. That a franchisee can truly duplicate the model. Now, that being said, profitability is of course very important. In fact, we love when clients and we'll certainly sign NDAs, but when clients are literally willing to share their PLs, obviously there's additional costs that franchisees are going to incur, royalty fees, technology fees, brand fund fees, and even with the item 19 financial performance disclosure, franchise owners are required to take their PL and they have to include those additional expenses. So if a business is written, this is why I say the revenue is as important, certainly in the overall scheme it is, but it's more about that net percentage of profit, the EBITDA number. Because if you're running a 7% net profit and we add in a 5 or 6% royalty, a 2% brand fund fee, a technology fee, you can see the franchisee's net profit is basically going to be zero. So there's no profitability, which means there's no return on investment. And we certainly talk to clients about that, or prospective clients, and we've encouraged them to really you know, devote their resources, their capital to really ramping up the revenue to the point that it is now profitable from a franchisee standpoint.

Mark Vandegrift 
Interesting. Well, you know, you talk about that margin and net profit, but we also know that you have to replicate the business. And so we we presented the operational systems that we mentioned, the operations, the marketing, the franchise sales. But let's go to just operational at this point. What really have you seen from the strongest of franchisors regarding their operational systems that should already be in place before they begin franchising.

Steve Vandegrift 
Well, every critical function should be documented. So that includes certainly daily operations, hiring, training, customer service, marketing, technology, even financial reporting and quality control. I like to think of it this way if you disappeared for ninety days, in other words the founders, could someone else operate the business successfully using your systems?

Mark Vandegrift 
So you're talking about documenting things and let's say someone walks in the our door here and says, Well I got every last thing documented. What do you typically find is most important for documenting processes and where are the gaps? Where what exists there?

Steve Vandegrift 
Well, truth be told, most of our what became clients had some documentation, but not certainly at the level that's required for franchising. And this is why we're so well known for our robust, comprehensive, customized franchise operations manual. So documented processes are essential, but the majority of our clients do not come to us with a franchise operations manual. They'll often say, I know I need this, but we don't know how to write it. Well, our process allows us to extract and learn the information from our clients so that we can in fact make the entire business documented in a way that franchisees can be trained and can successfully operate the business. And so we really consider that our responsibility. We've had clients with 2025 locations that are all corporate. They too had very little documentation. They might have checklists, worksheets, et cetera., some SOPs, couple pages. Our job is really to help them understand the level of detail that they need to get to to successfully franchise their business. I mean the franchise operations manual really becomes the blueprint or I like to say the Bible of every franchise location. So if the processes exist only in the founder's head, consistency becomes impossible and inconsistency is one of the fastest ways, honestly, to damage a franchise brand. So it's essential that the entire business be documented. Otherwise, franchisees are either it's gonna be the Wild Wild West, they're not gonna see it in the operations manual, they're gonna do whatever they want. Or they're constantly going to be contacting the franchisor saying, I don't see this in the operations manual. How do I deal with that? And in either case that's not good for a franchise system.

Mark Vandegrift 
So I mentioned gaps in my f previous question. When you typically board a franchisor client and you I start to identify those gaps, do they usually see the gaps? And if not, how important is it for business owners to identify those gaps and fix them before franchising? Like what in our process takes care of finding and identifying those gaps?

Steve Vandegrift 
No, that that's a great question because it's incredibly important. But again, having done this for almost thirty years, we know how to capture that information from our clients and and certainly for sake of time, we don't have time, but we'll we'll devote an entire podcast to the development of the operations manual. Because franchising can magnify both strengths and weaknesses. So if you're struggling with staffing, customer retention, profitability, or operational consistency now those challenges only become larger when multiple franchisees are involved, especially if they experience the same issues. And so again, with our process, what happens for almost every client is w as we go through this, and we've had clients many, many, many high percentage of our clients say, you know, coming out of this process and developing the operations manual and the systems, even our core business improved because a lot of things we were doing orally because we were in charge. ut they recognize that going through this process, we've had clients where they we start asking about a checklist, a worksheet, et cetera. And they realize that we need to develop those as part of the development process in order to ensure that every franchisee operates their business consistent with the franchisor prototype locations.

Mark Vandegrift 
So help us walk through now the operation side of it and how it connects back to what you said at the beginning with net profit, margin, making sure that that spread is big enough to allow a franchisee to turn a good profit. give us a sense for that connectivity and how important is that unit level profitability. I mean, we know it's important, but give us a sense for that connection from operations now back to that margin and net profit.

Steve Vandegrift 
Sure. Well, first of all, unit level profitability is critical. Franchisees are investing to earn a return. So you need to demonstrate that the business model produces attractive financial results consistently, not just during a few exceptional months. Now the exception to that is you know we have clients that are in destination cities, etc. You know, they make a majority of their money in a three, four, five month period. So in those cases can you imagine if a franchisee is located in a 12-month market, they sometimes outperform the franchisors, especially if the systems are in place. So if the business is in a dis destination location and it makes most of their hay, like I say, during the busy season, that certainly can be a different story. It doesn't preclude them. We've had many, many clients in that situation. And their franchisees in twelve month markets, like I said, would outperform the franchisor, which is proof that the business is systemized and they can be successful in operating that business.

Mark Vandegrift 
So if you look at the I guess let's call it the average. So the majority of clients that walk in the door, you've mentioned before that a lot of clients, they their profitability isn't there initially, but then you look at their financials and you realize, well, they had a big investment in a website or they had a big investment in something else connect the true operations of the organization to how that's presented to the profitability that a franchisee can have. I think that's important because this alignment of operational system and the proforma that's presented, there's a lot of things that can come out of that. Maybe give us a sense for how someone considering franchising can think through their profit and loss statements.

Steve Vandegrift
Okay, and really the I would say the question is, can a great concept overcome mediocre financial performance? And the answer is usually not. Franchisees by opportunity, right? But they invest based on economics. Even the most exciting concept will struggle if the financial model isn't compelling. Now at the end of the day, with the item nineteen financial performance representation, the majority of our clients are surprised to learn that they don't have to present their profit and loss as is. In fact, the FTC franchise rule allows franchisors to to basically deduct not only any expenses that they reasonably expect a franchisee to incur. We have clients that the in the reporting year they had a hundred thousand dollars in creating an app or developing an app, redoing their website, et cetera. Well franchisees are not going to incur that expense. So we've had clients where we looked at their straight up profit and loss, and they might have a six or seven percent e bid of for that previous year. Then we start getting into the exclusions. And suddenly, because it's the website, it's the app, etc., when we exclude those expenses and we have to disclose that in item nineteen, that's fine as long as you disclose it. Suddenly they're up to a 17, 18, 20 percent net profit. Now we're talking strong financial performance. And so it is a critical part of the consultation we do with clients because at the end of the day, most of our clients need to exclude some expenses. In some cases, they need to exclude revenues, believe it or not. We have a current client now. it's a food and beverage concept. They actually do festivals, and they do not want to permit franchisees to do festivals for at least their first year. They have to improve their their performance at the unit level and then go through additional training to conduct festivals. So we had to deduct that festival revenue. And yet at the at the end, at the IBITA number, the numbers were still tremendous. So that's how we deal with that.

Mark Vandegrift 
Well, you know, a lot of people have an eye to certain financial metrics. What do you think, from your standpoint with your thirty years of experience now, what financial metrics matter most to well, let's say it to the prospective franchisee when they're looking at you know, the pro forma?

Steve Vandegrift 
Well, a number of them include strong gross margins, predictable operating expenses, healthy cash flow, certainly reasonable startup costs, and an attractive return on investment. Franchise buyers, they want to be confident they can recover their investment within a reasonable time frame, which we say we typically recommend be sometime between three and five years. We've had exceptions to that rule. When a when an investment's two million dollars, but they're doing three million dollars in revenue a year, et cetera. it can vary. But for the majority of franchisors, you want to look at a return on investment of three to five years. But of course, that can vary, as I said, by concept.

Mark Vandegrift 
So I'm sure many business owners think franchising means they'll simply sell franchises. Like I'm set up now, everyone's gonna roll in my door. What's the reality?

Steve Vandegrift 
Well, franchising typically changes the owner's responsibilities completely. You go from operating locations to supporting your franchisees. And that's one of the things that when w we're educating f pr prospective clients about franchising, about the franchise development process, that we talk about quite a bit. We've had restaurateurs. They love nothing more than being in the kitchen ten hours a day. And we explain that in the early stages they're gonna have to shift their responsibilities, their position, et cetera. In essence, their customers or their clients, they become your franchisees. So success now depends on training, coaching, providing support, including marketing support, technology solutions, compliance, and at the end of the day, really helping others succeed. And we love nothing more than we're contacted by a prospective client. They spend half of the conversation talking about how excited they are to help other people become successful in a business that they love. They take great pride in that. And that's the clients we want to work with. Because at the end of the day, you need to train and be prepared to train and support. So we always say when what makes a great franchisor when we go through our franchise presentation, one of those is having the management team that has the ability and willingness. That's the critical thing to provide that high level of support and training that franchisees require. That's why they're purchasing a franchise.

Mark Vandegrift 
So it sounds like a pretty major mindset shift, right? So what's required in that regard?

Steve Vandegrift 
Right. Well, at the end of the day, the owners and their key management team personnel, they have to transition from working in the business to building an organization that supports other business owners. They're no longer just business operators. They become educators, mentors, and certainly brand stewards.

Mark Vandegrift (
So with all of this, we always see mistakes. What's one mistake you see most often?

Steve Vandegrift 
zthe big one I think is owners assume franchising solves growth challenges. In reality, franchising is gonna amplify. And so if your business lacks systems, leadership, operational discipline today, franchising won't fix those problems. It will expose them. And that's part of the job that we have when we know the concepts sound, the financial sound, but at the end of the day we need to make sure that all of those challenges are corrected and oftentimes we do find challenges during the development process and we help our clients resolve them. There's usually a solution.

Mark Vandegrift 
So referring back to your 15 questionnaire or 15 question questionnaire, it's not all just about the dollars and cents and the systems and all of that, but really having a major mental shift, a mindset shift. If a business owner is wondering whether they're ready to franchise, what's your like global advice that you can provide? I know every circumstance is different.

Steve Vandegrift 
Well, to keep it basic, I would say start by asking yourself three key questions. S can someone else duplicate my system and be trained within a reasonable time period and at reasonable cost to duplicate your success? Another is are my systems documented or at least repeatable that a company like ours can assist them in documenting all of those systems? And then finally what we just discussed in my prepared to train and support franchisees, not just sell franchises. So if you can answer yes to all three of those, you're probably ready to explore franchising. I would say most definitely you can explore franchising. If not, you need to focus on strengthening your business first. Operationally, we can help you document documentation-wise, right? We can help identify the shortfalls. So the stronger the foundation, the stronger your franchise system will become and continue to grow. Vitally important.

Mark Vandegrift
Well, that's excellent advice, Steve. So I always say what's your one takeaway? And I'm gonna do your takeaway today, which is franchising isn't simply about expanding your business. It's about creating a business model that others can successfully replicate. Did I pick up on that correctly?

Steve Vandegrift 
That's exactly right. When you build the right systems first, you're setting both yourself and as importantly your future franchisees up for long-term success. So you're exactly right.

Mark Vandegrift 
Good. Well, let's wrap up today's episode of FranSimple. Thanks for joining us. And as always, please like, share, subscribe. Did I say share yet? Subscribe to Fran Simple, the podcast designed to make the concept of franchising simple. Until next episode, may your business expand through the power of franchising.