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Posted on Jan 05, 2011

Stan Friedman Teaches FranchiseHelp Readers How to Buy a Franchise

Let’s face it: most potential franchisees, unfortunately, don’t have a clue about how to buy a franchise.  Even Wharton MBA’s, retired corporate financiers, and owners of multiple small businesses – all successful businessmen and businesswomen with platinum resumes and proven business smarts – are, as a group, surprisingly uninformed about the franchise investment process.

Why is that? Well, few have gone through the actual steps of evaluating and investing in a franchise system or have taken the time to better understand how franchising differs from small business. Without the right experience – or the advice of experts who have been there before – it’s easy for even the most impressive business person (let alone the average potential franchisee) to get in way over their head.

To help potential franchise investors figure it out, FranchiseHelp invited Stan Friedman of leading franchise software systems provider FranConnect to share his extensive expertise. Stan understands the franchise process better than most: he’s a franchising veteran with a multitude of industry honors and positions to his credit, including an invitation to the White House on behalf of Blimpie, the Chairmanship of the Professional Athlete Franchise Initiative, and the Chairmanship of the National Buffalo Wing Hall of Flame.

Most important for FranchiseHelp readers, Stan knows how to break down and explain the often complex process of finding and investing in a franchise using everyday language that anyone can understand. In our interview, FranchsieHelp dives in deep and extracts Stan’s insights on everything from how to determine what franchise might be right for you, to how to conduct a rigorous investigation of a franchise opportunity BEFORE you commit your life’s savings, to what it’s actually like to open your own franchise location, and much more. Watch (or read the transcript) below for a master lesson on the franchise buying process.

For those of you who prefer to read the interview, below is the official transcript...

[Matt Wilson, FranchiseHelp]:    Hello everyone. Welcome to I'm Matt Wilson, and I'm here with Stan Friedman from FranConnect, a great management system for franchisors. We're here to talk about the actual buying process of buying a franchise. If you are looking into buying a franchise for yourself, a business that you're looking to run or putting under management, Stan's the guy who's going to explain that process. I'm going to ask him some detailed questions. I'm just going to sit on the other side of the table here and say, "Hey, look Stan, if I was to buy a franchise, what would I need to know?" We're going to walk you through all the details. Stan, how are you? Thanks for joining us.

[Stan Friedman, FranConnect]:    Doing great on a Friday afternoon. Thanks for having me.

[Matt Wilson, FranchiseHelp]:    Excellent. No problem here, Stan. I really want to start with the due diligence process and educating yourself. We started FranchiseHelp because we realized that the potential franchisee wasn't dedicated enough. They were just filling out blank leads. It was a shot in the dark that they would come across a franchise that actually fit them. We want to help educate this franchisee. If you were looking for a franchise yourself, what's the first thing that you would do?

[Stan Friedman, FranConnect]:    First I would do before looking at the franchise, I would take an introspective look at myself. I would try to start first with what is it that motivates me and excites me and drives my passion. What is it I want to do when I'm not working? What is it I wish I had more time to do when I am working? Because typically, people who have jobs are doing what they must do in order to satisfy their needs and their financial requirements. But if you could do things that you wanted to do and make money for doing them, you wouldn't think of it as a job. You wouldn't think of what you were tied up with as a 40 hour week where you're watching the clock. You would be thinking that I'm doing what I love. That's what I want to do more of. Get paid for doing what it is that drives your passion. Then from there start thinking about what kinds of concepts and franchise offerings might find you or might give you the opportunity to find yourself doing those things you're passionate about and actually getting paid for doing it.

[Matt Wilson, FranchiseHelp]:    Very cool, Stan. I like the attitude. I like the mantra because there are too many people out there who are just sitting watching the clock. They could be doing something that they actually enjoy. Plus they could be running the show themselves if they buy into one of these franchises. Could you give us an example of someone maybe that you've worked with in the past or just a brand that you think would be a lot of fun to run?

[Stan Friedman, FranConnect]:    You know, there are so many right and there are no wrong answers to that question, because the truth is that's an introspective thing. Something that an accounting person who loves to play with numbers would certainly be somebody much different than anything that drives my passion. But for that person, something that has to do with tax preparation might be a great franchise offering and opportunity.

[Matt Wilson, FranchiseHelp]:    Sure. Not for me, but that sounds good.

[Stan Friedman, FranConnect]:    Well, that's my point. There are no rights or wrongs. It all starts with an introspective look at yourself. What is it you would want to do more of? If you love sports, maybe you want to work with i9 Sports Store or TSS Sports Photography, something that puts you out there on the field. Professionally running Little Leagues or programs like that or managing those things. Not for everybody, but for the right kind of person who takes an introspective look at themselves first, they can then start to see what in the price points that they can afford. It might be brands that they may never even have heard of.

[Matt Wilson, FranchiseHelp]:    Okay. So people can come on to FranchiseHelp. We're developing quizzes, that kind thing that can help people take an introspective look at themselves. Now, once you're actually doing your due diligence. You find a couple that might come up on the franchise selector that say, hey, I could be into this. This sounds like fun. We just interviewed a company called SailTime, where in the British Virgin Isles you could be operating a fleet of sailboats. That sounds like a pretty cool franchise to me. I would do that in a second. Now that we're doing our due diligence, what are the things that you need to look for in a franchise to make sure that it's your safe bet?

[Stan Friedman, FranConnect]:    A couple of ways I turn here, not the least of those is, what does it cost? What would the cost be to get into a concept of the kind that you may have discovered that you think you might have passion for? The last thing you ever want to do to yourself is something that can be likened to what happens to so many people when they go look for a first or second home. They don't first go get themselves qualified to find out what arena are they in terms of how much liquidity do I versus how much that franchise might require. How do I look at my net worth? Do I have the financial wherewithal to be able to get into this concept? If you go and look at houses before you find out how much house you can afford and you're out there riding around looking at six, seven, eight hundred thousand dollar homes and then find out that your financial situation will only let you live in a $150,000 home . . .

[Matt Wilson, FranchiseHelp]:    You're in trouble.

[Stan Friedman, FranConnect]:    . . . anything that you looked at before is going to look as good, or anything that you look at now is going to look nowhere near as good as the things you looked at earlier. Don't spoil yourself by not financially finding out what it is you can actually get into. Keep yourself within the constraints of those financial requirements so that you don't put a strain or yourself or your family by trying to overreach and do something that you're not equipped to afford.

[Matt Wilson, FranchiseHelp]:    Okay. So if you're going in to meet with your financial advisor, first thing you're obviously going to need to know how much cash do I have. Right? Then there's some more creative ways that you can start to look at getting capital for a franchise.

[Stan Friedman, FranConnect]:    Sure.

[Matt Wilson, FranchiseHelp]:    First thing with that cash, how much cash do you need? I know some franchises you can buy in for $15,000, and others have six and seven figures attached to them.

[Stan Friedman, FranConnect]:    Sure and that's the point I'm making is you want to do some due diligence on what type of range can you get into. How much have you got that you can actually put at risk? How much of that is available in liquidity? Then looking at different concepts, you may find some that are home-based and don't have any equipment associated with them, others that may be brick and mortar concepts where you've got to sign a lease.

[Matt Wilson, FranchiseHelp]:    Sure.

[Stan Friedman, FranConnect]:    They've got an equipment package. You've got to do construction, have contractors doing build out. Architects drawing plans. There are different types of concepts that have different types of requirements. So first things first. Where's your heart's space? Find out what kind environment you would like to be in. Find out what it would cost to look at certain brands that might fall into that space and see if they're within the reach of your ability. Then find out, thirdly, what a day-to-day situation looks like for somebody in that space, because, you know, it might not be that the day-to-day work that franchisee does in a business from the outside before you know about it, say it's a sports franchise, it might be that you end up being on the bench with kids doing Little League, and coaching and the like. Yet that kind of franchise might be about photography or about management of sports leagues, not actually coaching. You want to make sure that you understand what the day-to-day life looks like of somebody in that business right now to be sure that it really does fit the bill for the passion that you've got and that you're not mismanaging your own expectations, thinking, man, I get into this business, I'll be running leagues. Maybe you won't be. Maybe that's not what the franchisee is.

[Matt Wilson, FranchiseHelp]:    No, that's exactly right. You have to be very, very careful. So, now that you have your personal finances figured out. Okay, say you have X amount of dollars, you're going to need to cover the rest. Some franchises they'll let you have other investors, to pool your money together. Some people, some franchises will help you obtain loans for this. Now, you're going to have some cash and then you're going to have to make a payment to the franchise every month. Is that generally how they work?

[Stan Friedman, FranConnect]:    There are two types of payments that are typically associated with owning a franchise. There's an initial fee. The initial fee is your point of entry.

[Matt Wilson, FranchiseHelp]:    Does that have to be cash?

[Stan Friedman, FranConnect]:    Yeah, that's always going to be cash. I don't know of any franchise concept that will finance that. That's what gives you the rights to have their trademarks, to have their operating system, to have the benefit of their play book, if you will, to teach you how to learn their program, how to operate it, to have the support, and to have the rights to use their brand as their representative in your franchised area. All of that is what an initial fee gives you. Then there will be monthly fees that are called royalties. That's where the franchisor gets a percentage of the sales that you've generated using his systems, his trademarks, his assistance, and his operating manual. Basically, 6% or 7% or 8% or 10%, that's what royalty could typically be. What that really means is that every time you ring up a dollar, the franchisor will get 10 cents or 6 cents for giving you the operating system and the support to manage it.

[Matt Wilson, FranchiseHelp]:    Okay. Say you're not making any money. Say you open something up, you pay the initial fees, and it just takes a while to get going off the ground. Am I going to have to be paying or is it strictly a percentage?

[Stan Friedman, FranConnect]:    Most franchise concepts will give you a little leeway for your ramp-up.

[Matt Wilson, FranchiseHelp]:    Okay.

[Stan Friedman, FranConnect]:    But a great many will have a minimum monthly fee that is associated even during start-up. That's why part of your due diligence is to be certain that you not only have the money that it's going to take to make the initial payment to the franchisor but that you've got enough working capital to get through that start-up period. You have to be very, very meticulous in your research, talking to other existing franchisees that already have one of those to see how long did it take them.

[Matt Wilson, FranchiseHelp]:    Okay. So, if I'm looking to talk to an existing franchisee, where can I go? Do I just walk into a Subway or a Jimmy John's and say, "Hey, I want to talk to the owner." Are there avenues set up for potential franchisees?

[Stan Friedman, FranConnect]:    Yeah, my recommendation is if you walk into a Subway, ask for a $5 foot long. If you want to learn about what a franchisee does at a Subway, then that's part of the process that the franchisor will help facilitate for you. They will provide you with a document called an FDD, which is an acronym for a Franchise Disclosure Document which the law requires that a franchisor give to a qualified interested party that is wanting to learn about the ownership and operation of that business. That disclosure document has included in it all history of the franchisor's executive team. It has any prior litigation issues that might have needed to be reported that involved the franchisor and its franchisees. It gives you full disclosure on the financial health and well-being of the franchisor and of the operating company. It also will give you an Item 20, a list of all the franchisees, the current franchisees will be listed in that document by name, phone number.

[Matt Wilson, FranchiseHelp]:    All of them, and you can just call them?

[Stan Friedman, FranConnect]:    That's both existing and former franchisees as well. So you can find out why somebody left the system, if in fact they did. It's a great wealth of information. It's provided to you to give you all that you need to be able to make an intelligent decision with all the i's dotted and all the t's crossed.

[Matt Wilson, FranchiseHelp]:    That's great. So, a franchisor can't just say, "Oh, yeah, call my buddy. He's a very successful franchisee." They'll actually give you and the FDDs are all available on FranchiseHelp. So you can go and see, hey, I'll call the people who have failed or the people who didn't like it, the business wasn't for them, and get their feedback. What percentage would you say of franchisees actually do this type of due diligence? Do you think everybody does this and calls franchisees who have dried out or got burned out?

[Stan Friedman, FranConnect]:    I would hope so. Because, literally, you know, you're playing with your legacy. You're playing with your savings. You're playing with maybe a second mortgage or putting your house up as collateral.

[Matt Wilson, FranchiseHelp]:    Sure, your family's well-being.

[Stan Friedman, FranConnect]:    Yeah. I think it's pretty important to talk to these people and find out from them what it is you should know. I think, too, before you go making those calls, you should learn everything there is about that business. You'll have gone to the franchisor's headquarters, attended what's usually called a discovery day program. Learn what the drivers of the business are and what it is that you would have to do as a franchisee to drive the business to make the revenue that you want to make so that you can fall off to the bottom line with enough to satisfy your dreams. The bottom line to me is, before you know the questions to ask of an existing franchisee, you really don't know how to gauge their level of success or failure.

If you went to a discovery day program and a franchisor told you, these are the six or eight things that are the drivers of our business. In order to succeed, you have to spend time doing personal marketing or you have to spend time doing business to business marketing. You have to have a catering program, say, if it's a Subway or a food type of a concept. You have to do your Val-Pak or you have to do doorknob hangers. Whatever it is, you need to know what the drivers are so that when you make phone calls to existing franchisees you can ask them, "Are you doing these things? Is it working for you?" If you've got somebody on the phone who said, "Nah, I'm just not making any money," but then you asked them, "Well, how's your catering program?" "Well, I don't do that." "How's your Val-Pak?" "Nah, I don't really do that." Well, are you talking to somebody who's doing for their own business what you would do as well as you would do it? Maybe it's not the franchisor's fault so much as it might be the person on the other end of the phone not rising to the level of opportunity that the franchisor provided.

[Matt Wilson, FranchiseHelp]:    Absolutely. Then taking a look at, okay, what was the training that this person got? Did they learn from it? Was this person maybe just not cut out for the job? So taking a few case studies on your own I think is very important. So many people think, oh, yeah, I'm going to buy a franchise. This is a proven business model. Sure it is, but you have to do everything exactly right. The opportunity has to be there, the location has to be right, and it's just as risky as starting up a regular business from scratch. You have to ask all those same questions.

[Stan Friedman, FranConnect]:    Everybody gets the same toolbox. Everybody gets the same offering, but here's the X factor. It is that not everybody does the same with it. If you and I were neighbors and we had nothing between us but a fence between our homes and we both went to a nursery like a Pikes Family Nursery or a Home Depot or someplace and bought a bag of seeds and you took half the seeds and I took half the seeds, planted them in the ground on either side of that fence, and we say let's get together, Matt, in about four to six weeks and see what's coming out of the ground.

[Matt Wilson, FranchiseHelp]:    Sure.

[Stan Friedman, FranConnect]:    We walk back to our respective back yards. My side of the fence is a weed. Your side of the fence is a flowering bloom.

[Matt Wilson, FranchiseHelp]:    You didn't know I was an old lawn boy, Stan.

[Stan Friedman, FranConnect]:    Same ground, same dirt, same seeds. You watered, you gave shade, you put vitamins and nutrients in the ground. I planted them and said grow.

[Matt Wilson, FranchiseHelp]:    Sure, the same instructions were on the back of that bag of seed. Told us what to do. We paid the money for it, but nobody's, there's a certain level of handholding that can go through this process, but it's not going to be perfect. It's not going to be done for you.

[Stan Friedman, FranConnect]:    Franchisee, any concept, has to be the executor of the program. Franchisor can be like the coach sending in the play. You're the quarterback. You have to run it. You have to execute it, and you really have to be certain before you sign on with any franchise concept that you've got the left as well as the right side of your brain in synchronistic harmony. Don't make a decision because it feels good. It's not like going out and buying a car. You get the smell of the leather and you get the keys for a test drive. You just get all psyched up about the emotional aspect. The worst thing that can happen with that is you go back and you maybe lose some money on a trade-in when you turn that car back.

[Matt Wilson, FranchiseHelp]:    Right.

[Stan Friedman, FranConnect]:    It's a lot more difficult to get out of a franchise relationship. You don't want to go there. You want to really, first, do all the due diligence. Get the left and right side of your brain in sync. If the emotion is high, that's a good thing. You need that passion. It's the second most important thing to money, is to be passionate about what you're getting into, but you also have to dot the i's, cross the t's, and make certain that what you're getting into provides a real and viable opportunity if programs are executed properly and that your expectations are properly managed in terms of what you can reasonably expect this opportunity to deliver back to you for your investment of time and money.

[Matt Wilson, FranchiseHelp]:    That's exactly right. This is why there are no consultants who are going to help go and buy a car and get a good deal and not get a lemon. But for buying a franchise, there are plenty of people who have been through this process, day in and day out, that will help you make an informed, educated decision. So I think that's very, very important. Let's move on to closing the deal. It's the most exciting part of all this, because this is when they hand you the keys. Can you walk us through that process?

[Stan Friedman, FranConnect]:    It's going to be different for different brands and different requirements and different companies. But basically, you should definitely visit a home office and see all the people, the department heads and the support people that are there to drive the business and help you learn your way after you've been properly trained to continue with the ongoing support and things that you want your franchise to be behind you delivering. Walk around that office. Don't just listen to the talking heads that franchisor parades in front of you. Take a look around the cubicles. How happy are the people that work there?

[Matt Wilson, FranchiseHelp]:    Okay.

[Stan Friedman, FranConnect]:    How does the franchisor treat his franchise employees? If he's not taking real good care and building a culture in his own office of happy campers, what can you expect many, many states away? Not even directly connected but just as an affiliate of the company, as a licensee. Look at those things, read between the lines. Go through the training, go through the curriculum, learn all that you can. Literally connect yourself to as many others that are within that system, from the people that you called early on before you made your decision to buy, to others who may train with you at the same time, to people who you meet on the team at the home office. Don't let any of those things be static photographs. Let those become the beginnings of many, many lifelong relationships. You can tap into other people that you've met along the way. When a particular issue comes up that may confound you, you may find somebody else in your system that's already cracked the code on that, that you can reach out to. That's part of what you're getting with the franchise.

[Matt Wilson, FranchiseHelp]:    Yes, every small business owner and entrepreneur needs mentors. There's no difference whatsoever with the franchise. Go through and not only do that diligence but start to network. There's a great list right in that FDD. Other people who have done other types of franchises, this is all very important. To leave people with when you're signing on that dotted line, what's the last thing that you should be looking for? Whether it's in the agreement or whether it's your last second thoughts, what is it that you want to leave people with, Stan?

[Stan Friedman, FranConnect]:    I think you just need to really understand that when you get into a franchise concept, you're really hitching your wagon to somebody else's engine. That franchisor had a vision, and he had a dream to take that vision and build it and grow it. You, as a franchisee, are helping him fulfill his dream, which is literally what's the basis. It's the whole genesis of what a franchise relationship is all about. The franchisor is like a developer. He sees this thing when it's finished in his mind's eye. It's just as plain and clear as can be. The only way he's going to get that concept built out to fulfill that dream is because he's brought the right people to the right place at the right time to help execute in their local markets a store at a time or a location at a time, all working together in synergy and in harmony. That's how a franchising concept and system comes to be and comes to bear. You, at the same time, by hitching your wagon to his engine, are agreeing that you have a shared vision. You have shared values. You have shared ethics. That you are going to do your part at the local level to tow the line and help protect and build that brand. Collectively, when everyone else that has made the decision that you've made to become a franchisee does the same thing the same way, the brand grows exponentially. The franchisor's vision for building this big development and this big program comes to pass and you're part of your franchise territory along with those of all the others that have become franchisees individually have helped take you to the Promised Land as well. Everybody wins when everybody pulls together and understands their role and then fulfills it.

[Matt Wilson, FranchiseHelp]:    Stan, very well said. We want to create win-win relationships here all around at FranchiseHelp. Thanks for joining us today, I really appreciate it. This is Stan Friedman, Senior Vice President of FranConnect, a great management system for franchisors. Stan, thanks for joining us, and I appreciate it.

[Stan Friedman, FranConnect]:    My pleasure, Matt. Appreciate you having me. Thanks so much. Best wishes to everybody out there looking to buy a franchise.

[Matt Wilson, FranchiseHelp]:    Hey, thank you very much Stan.

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