Episode Host: Henry Lopez is a serial entrepreneur, small business coach, and the host of this episode of The How of Business podcast show – dedicated to helping you start, run and grow your small business.

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This episode of The How of Business podcast is sponsored by The Franchise Guide.

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Transcript:

The following is a full transcript of this episode. This transcript was produced by an automated system and may contain some typos.

Henry Lopez (00:13):

Welcome to this episode of the How of Business. This is Henry Lopez, and on this episode, I’m going to highlight what I call the four franchise benefits. These are the four areas or possible components of what a franchise can offer you that I think are at the top of the list on what’s most important when you’re considering investing in a franchise. It’s not everything, and there are of course additional things that might be more important to you or for the type of franchise business that you’re looking to invest in, but I think that certainly these four areas are critical that you evaluate the value or the benefit that they might bring you as you consider a franchise. You can find all of the Howa business resources, including the show notes page for this episode, and I’ll have this download, the four franchise benefits at the show notes page for this episode.

Henry Lopez (01:00):

And also to learn more about my one-on-one and group coaching programs, go to the how of business.com. I also invite you to consider supporting this podcast on Patreon, and please subscribe wherever you might be listening so you don’t miss any new episodes. As a bit of background on franchises, in my experience, my very first business back in 1991 was a pizza franchise in the pizza delivery and takeout industry. Ended up having three different locations throughout the nineties with my partner Rene, and so I became very intimately knowledgeable of how effective franchises can work. I’ve been a part of then other franchises and helping my clients with franchises, and I’m currently a minority partner with my cousin in a franchise called Office Evolution. And we have a location in plantation, Florida. So as I’ve looked at franchises, both as a franchise owner and advising others and franchises, I’ve boil it down to what I think are four key franchise benefits or areas to look at when you’re evaluating a franchise and the value that they might offer you that franchise might be able to offer you in all four of those areas.

Henry Lopez (02:08):

Now, it’s not to say that those are the only areas are the only areas that you’re going to evaluate a franchise on. There are many other components and other variables that depending on what you’re looking for and the type of franchise in the industry that of course you have to consider. These are just, as I summarize it, the four key areas in my opinion, that I look for at a minimum as I’m going through an evaluation or helping a client evaluate a potential franchise. The franchisor, the company that offers a franchise, their job is to provide you with the systems. That’s the critical part of it, A proven system, but also a brand and training and ongoing support and other components of ideally a proven business concept. You as the individual franchisee, you’re providing of course your effort, your money to get your location started and that investment of your time and effort to run this business according to the rules and the ways that the franchisor provides and their training, and ideally and hopefully have a successful location and maybe multiple locations of this franchise system.

Henry Lopez (03:15):

And so the franchise model, which has been around for some time, is really an opportunity to leverage a proven concept. You don’t have to invest in or go through the effort of trial and error to define a concept that a market might want and pay for. Now, of course, there are no guarantees. The franchise might be very successful in other locations, but you might be challenged in your particular location. There are no guarantees just because it’s a franchise, but there’s a higher probability of success overall because you’re leveraging a proven concept. And that helps us hopefully get to profitability faster. And ideally, we’re bringing to market something that has already been proven that people want and are willing to pay for. And then of course, we have the ongoing support from a larger organization and a group, a network of other franchise owners. So the four franchise benefits that I want to focus on and that I look at most closely include the systems.

Henry Lopez (04:16):

Every franchise must offer at least that developed core documented systems that are repeatable, that they will train you on and that you can then replicate in your location to operate a successful business. Then you have the brand you have potentially leverage and perhaps as critical as anything is the network, the network of other franchisees that are going through or have been through the same things that you will be or that you are as a small business owner. So those are the four franchise benefits. Let me break them down a little bit here one by one. So let’s talk about the systems, the quality of the systems offered by the franchisor that you’re considering. That should be the most important thing that you evaluate. And there’s a lot to this word systems. It’s the obvious, the documentation, the procedures, the recipes, whatever might apply to the type of business that you’re looking at, all of the how to do it, that should all be documented and transferable.

Henry Lopez (05:15):

And with that and part of systems, I mean also the training, that initial upfront training to get you up to speed, to open the doors all the way through ongoing learning, applying new technologies or new menu items or new services that might be offered, that ongoing support from anything from the product or the service to sales and marketing. All of that comprises the systems. That’s primarily what you’re investing in as a franchisee. That’s the proven and repeatable business model essentially. That’s the key. And if you’ve been listening to my podcast for some time, you know how importantly I focus on the separation of an idea from a business model and how the business model has to support the ability to make a substantial profit and the ability to scale. So that’s got to be part of what you’re investing in. A franchise is proven and repeatable and scalable.

Henry Lopez (06:12):

This business model that they’re offering you this systems, it’s going to result in a shorter time obviously for you getting up and profitable. A good franchise often requires no experience in that particular industry. In fact, sometimes that can be an advantage because you’re not bringing into perhaps habits that are not as productive, so little or no experience in a lot of these franchises because they’re going to teach you how to do it and the systems that you’re investing in are going to help you operate the business effectively to attract and serve that specific client that they’re going after. So when you’re evaluating a franchise, you have to look at the systems because that’s the core of any successful franchise. Otherwise, it’s not really a viable franchise investment.

Henry Lopez (08:17):

The second key benefit that a franchise should offer you as a franchisee is the brand, the branding. When you invest in a franchise business, you need to consider the value of that brand that it may or may not have, particularly in your area or specifically in your area, which ideally has been established and continues to grow over time. You are now, as you join the franchise system and become a franchisee are going to add to the building of that brand reputation over time. But what is it currently? Now I’ve opened and looked at franchises where there were no other franchise locations in that area. So you’re pioneering that area, you’re opening that area, and that’s understandable. That’s okay. It’d be even better if that brand was already established in your area and people recognize the name. That’s such a huge advantage from a marketing perspective.

Henry Lopez (09:09):

But if it’s not, what are the plans for it to do? So what are the plans to leverage the cooperative contribution of other franchisees as a particular area gets developed? So the questions asked as it relates to branding is what’s the value of the brand in your area? And if not, what are the plans for how the brand will be developed beyond what you can do individually? Is it a positive reputation? Obviously that’s the big thing, but what has been out there? What is there out there about this reputation? Of course, now with digital media, we have a lot of ways to check that from comments and reactions on social media to obviously Google reviews for other existing locations. It’s important that we look at those things. If we’re buying an existing location, which is another way to get into franchising, then a lot easier.

Henry Lopez (09:58):

You can obviously look at exactly the reviews for that particular location. If you’re going into an area where there are other franchisees near you, then definitely you want to look at that reputation because that’s the reputation that’s going to impact or affect you either positively or negatively the most. And then what does the marketing look like? So many franchisors, in addition to the royalty fee, also require you to pay into a marketing fund. The key is if they do have a cooperative marketing fund, how is that money spent? How do they decide where to spend it? Where have they spent it in the past? What types of marketing or advertising has that money been spent on and what value has it had to grow the brand over time? Now, this is an area where again, some franchises, especially if they’re newer or newer to your state, let’s say, there may not be any brand value.

Henry Lopez (10:54):

And so that doesn’t make it a bad franchise. You just have to be aware of that, that you’re not getting at least initially that potential huge value of plugging into an existing brand. The third benefit that I think is important for you to consider when you’re evaluating a franchise is what I call leverage. So leverage is all of those opportunities that you have as an individual franchisee to take advantage of opportunities of scale that may be provided by the franchisor and by all of the individual franchisees collectively. And that could be in sourcing, it can be in negotiating marketing agreements or contracts. It can be in buying power with advertising. All of those things can help us lower our overall cost of purchasing those raw materials or those services. And so a franchise can come together and ideally the franchisor, if it’s applicable, facilitates that leverage of buying power.

Henry Lopez (11:55):

I mentioned my first franchise investment that I made. My first business back in 1991 was a pizza franchise. And so our biggest expense, as you might imagine, was cheese. And if I had to go and operate independently and buy that cheese, I would pay nowhere near as competitive a price as we did because we were part of a group of about 60 franchisees in the Dallas-Fort Worth area. So that buying leverage, the franchisor was able to facilitate for us and store that cheese with the distributor so that we got significantly better pricing as a group than I would’ve ever been able to negotiate individually. Now, the type of franchise you’re looking at may not have raw materials, so that may not apply. So are there areas where that might apply either in acquiring machinery or equipment or discounts and partnerships on service partners? Where are those opportunities and is the franchisor taking advantage of those for the benefit of the franchisees?

Henry Lopez (12:55):

The thing related to this to also look for is are you having to buy your supplies or materials through the franchisor and that’s your only option? And are they marking it up such that you’re paying even more than you would if you were to go and negotiate on your own? You want to avoid that of course, if at all possible, unless it absolutely makes sense. What are the opportunities to leverage the economies of scale that would simply not be possible to you as an independent small business owner? And that can be a huge opportunity. And one of the benefits of owning a franchise, the fourth benefit to consider is network. The network of other business owners. The benefit of a strong and cooperative needs to be a network of people that really do want to help each other, but that network of other franchisees, other business owners, it can’t be overstated.

Henry Lopez (13:53):

How powerful that is. This network of your peers, of other people who are striving to achieve similar goals with the same type of business. That can be invaluable to you as you endeavor to start and grow your individual franchise unit or multiple units in the case of an area agreement. But this is critical, and you are going to have a tremendous opportunity to evaluate this as you’re doing your validation, as you’re doing your research because every franchisor should and must for that matter, provide you access and set up reference calls with existing franchise owners. And those are tremendously valuable calls for all kinds of different data points that you’re going to collect, questions that you’re going to ask, but you’re also getting a feeling you’re listening for and you’re seeing, what type of community is this that I’m considering becoming a part of? Are they generous with sharing of their knowledge?

Henry Lopez (14:47):

Are they open to bringing in new members? Do they want your success as well? And what franchisee would not, right? Part of the franchise model is the more of us that are successful together, the more we all benefit. So look for that, listen for that. Observe that. Does the franchisor facilitate that in the way of, for example, conferences, annual conferences? Most larger franchise organizations will do that. That’s a wonderful opportunity to connect with your peers, to share information and support each other. I’ve got a free download for you at the show notes page for this [email protected]. It’s called for Franchise Benefits. It expands more on these four areas that I’ve just highlighted here, and also there’s a whole page of additional specific questions to ask related to these four benefit areas. But these are good questions to ask the franchisor as well as the existing franchise unit owners that you might interview as part of your selection process.

Henry Lopez (15:50):

So I encourage you to get this free download at the show notes page for this episode at thehowabusiness.com. So as I said at the beginning here, there are certainly other important benefits and criteria that you’re going to use and that you should use when you’re evaluating a franchise, including of course, their history, their track record. And if you’re working with a franchise consultant like my trusted partner, Giuseppe Grammatical, the franchise guide, he’s expert at walking you through understanding what’s most important for you. There are thousands, literally thousands of franchise options out there. The question is, is it a right fit for you and where you are in your business journey? And so he’ll help you go through that process of determining what is a good fit for you. And remember that as a franchise broker, he doesn’t charge you a fee. He’s paid a fee by the franchisor if and when you decide to actually engage and buy a franchise.

Henry Lopez (16:47):

So he’ll help you through that whole process. So go to the show notes page, download my free guide here, the four franchise benefits, and also reach out to Giuseppe grammatical and get a free consultation with him to help you navigate finding the right franchise for you. As with any business opportunity, of course, there are no guarantees for success and there are trade-offs. When you own a franchise, you have to adhere to. There are policies and procedures, you’re committing to a franchise agreement, which is often 10 years long. So you got to make sure that you do your homework, that you research correctly, that you get the help you need from a franchise consultant to make sure that to the best of your ability, you pick the right franchise for you. But these four franchise benefits I think are key to that evaluation, in my opinion. A franchise that offers comprehensive proven systems, a strong brand or the ability to build a strong brand, an opportunity for collective leverage, and the network of other franchise owners that is supportive and committed to each other. That’s a franchise that has the potential to help you realize your dreams of successful small business ownership.