Posted on Jan 01, 2011
How to Franchise Your Business
If you have ever thought about franchising a business, this webinar will help guide you.
During the webinar we will answer the following questions:
- How to decide if your business is franchiseable
- How much capital is needed to franchise a business
- Why you need to work on your business, not in your business
- How hiring the right advisors can make or break your business
- Why your Franchise Operating Manual is the critical component of your business
- Best ways to market your new franchise
- How "Selling a Franchise" has changed in the last year
- How to organize an effective training program
- How to find quality franchisees
- How many franchises can I sell in year 1
- How to deal with renegade franchisees
- How to achieve your end goal or plan an exit strategy and much, much more. Plus, you will have ample opportunities to ask your specific questions.
Who will benefit most from the webinar "So You Want To Franchise Your Business"?
Entrepreneurs / business owners in need of critical information about franchising a business.
New franchisors who need a few great actionable ideas as to how to grow their businesses to the next level. Consultants and other service suppliers to franchise systems looking at how to improve services to their clients.
Harold Kestenbaum, a 30 year veteran of franchise law and a board member of four major franchise companies, has teamed up with Adine M. Genn, an award-winning journalist, to teach you the secrets that will turn your business into a successful franchise. Borrowing on their book, So You Want To Franchise Your Business, Harold and Adina will give you a step-by-step guide to franchise success.
For those of you who would prefer to read the official transcript, enjoy!
Mary: Welcome to So You Want to Franchise Your Business. We're waiting for several more participants, but I think in the interest of time and the amount of material that we want to cover we're going to get started right now. Some of you who have registered for the conference are here, so we're going to get started right now.
So again, hello, welcome to you. My name is Mary Tomzack. I'm the president of FranchiseHelp and the host of this webinar. For those of you who haven't attended a webinar with us, I'm going to just give you some of the ways that the presentation is going to work. Everyone was sent an outline with the slides. We sent this through your email, and that described the discussion points that we're going to go over today. Some of you probably printed this up and you may follow along with that. Or if you're logged onto the ReadyTalk site, you will be able to see all of the slides on your computer screen.
Most certainly you're going to have some questions along the way. To enable you to get your questions answered while we're going through a particular topic, we have a chat button which you'll be able to see on your screen. So at any time when you have a question, you will have the opportunity to email this into us. I have to tell you, as moderator, I have a lot of control over this. So I will be stopping the presenters when I think it's an appropriate time, but we'll try to make our best efforts to get your questions answered when we're on that particular topic. Please keep in mind though that we might not be able to answer each and every question as you email them into us. But if there are some questions that we don't get to, we will reply to you in a personal email. So rest assured that all of your questions today will be answered one way or another.
Additionally, at the end of the presentation, we're going to give everyone an opportunity to ask questions when we unmute. We use the unmute button, and so you'll be able to call your questions in. I'll give you instructions how to do that when the time comes.
The presentation today will take approximately one hour. I'm happy to tell you that and introduce you to a recently published book, and this is what the webinar topic is based on. It's called "So You Want to Franchise Your Business." The co-authors are Harold Kestenbaum and Adina Genn. And I'm also happy to tell you that, as a registrant to this conference, you will be receiving a copy of the book shortly in the mail.
Harold Kestenbaum is, as some of you may already know, Harold's sometimes known as "the franchise guru." That's a pretty impressive title. Adina Genn is a business journalist. If you take a look at the bios that we have up on the slides, you can get a lot more information about both Harold and Adina.
Harold Kestenbaum is counsel to the New York law firm based in Long Island of Ruskin Moscou Faltischek. Harold's also on the board of directors of many other franchise companies. As a personal aside, I've known Harold almost as long as I've been in franchising, which has been 13 or 14 years now. Harold and I have actually worked together on franchising some new businesses. Harold has been involved in all kinds of businesses, be they regional, national, or international franchise companies. So he's a great source and knows an awful lot about how to become successful as a new franchisor.
Adina is a well-known business journalist. Besides co-authoring "So You Want to Franchise Your Business," there are two new books that she has either authored or co-authored. One is called "Everything I Know about Business I Learned at McDonald's: The Seven Leadership Principles that Drive Break Out Success." Maybe when Adina comes on, she can tell us if that's already being sold in the bookstores. I'm not sure because it says November 2008. She is also the author of an upcoming book called "The Everything Franchising Book."
If you're attending this webinar, I think you probably already have some idea about all the positive attributes of using a franchise model for your business, some of which you'll find on slide three in the introduction. Expanding a business which you already own which is successful. Getting capital from the franchisees that you're going to sign on. The motivated management, which you will have again with the franchisees and not a typical employee. And of course, the big, big thing about franchising that all of a sudden you will be branding your company and all the power that goes with it. It's not my job here today to talk about this, but you'll find out a lot more about this when you receive the book through the mail as I mentioned.
We have a lot to cover, so let's get on to the actual presentation. Adina, I believe you'll be the first to kick it off with the very basic question that I guess everyone has to answer up front and that is, "Is your business franchiseable?" So please come on and discuss that, Adina.
Adina: Okay, great. Thanks, Mary, and welcome everyone. To answer your first question, the book about McDonald's is already available in bookstores and online at Barnes & Noble and Borders and Amazon.
Mary: Okay, great.
Adina: So is your business franchiseable? I'm supposing everyone listening in owns a business or is supporting someone that has a business and wants to franchise it. And maybe that business is a craft shop or a gym or a pizza shop or a doggy day care, but it's successful and people come in and say, "I want to franchise this." Or you realize, this would work anywhere. At this point you have to ask yourself, "Is my business franchiseable?"
What does that mean -- is my business franchiseable? A franchiseable business is one that is profitable. It has the ability to be replicated, and it has a documented system that is easy for others to follow. That's a very critical component, because if people don't understand step by step from the way you treat customers to the way you market your business to the way it runs, it's just not going to be a business that can be franchiseable successfully.
And the next question people often ask is how much money does it cost to franchise a business. And that I'm going to turn over to my co-author, Harold Kestenbaum.
Harold: Thanks, Adina. And I'm happy that all of you could be on the webinar today. That's a question that's asked all the time, and quite frankly, there's really no fixed answer to that. Certainly the amount of money that's required to put the documents, the manuals into place can cost anywhere from $50,000 to $100,000 depending on who does it and how detailed you want it to be. There are companies out there that do that. But certainly that's not all that's required. It's going to cost more than that, because when you franchise your business, obviously you need to sell franchises and you need to budget in the marketing factor that's going to go in. Typically, you probably would want at least a 12-month budget in terms of advertising and marketing expenses to do that. So if you wanted a ball park range, you're probably talking anywhere from $150,000 to $250,000 would be a safe number. I've seen it done for less, and I've obviously seen it done for more.
Mary: Harold, this is Mary. We're often involved in this question too. Aren't there many other costs that come up that maybe a would-be franchisor isn't looking into? Like, for example, we'll have someone say, "Okay. I'm going to do up the franchise documents." And they think that, because franchising does involve certain legalities, that that's all they have to worry about. So maybe you could talk a little bit about some of the other activities and what else you're going to have to have in place in order to be able to kick off your franchise system.
Harold: Sure. I had this question come up the other day. The legal documents are what you need initially, because in the United States, for those of you who don't know, you cannot sell a franchise unless you comply with the Federal Trade Commission, which is promulgated in a revised new rule that became effective on July 1st. So that's the first component to doing your franchise program. But as Mary said, there are other components.
Clearly if you don't already have an operations manual or an operating manual, systems and procedures in place, that's a document that really needs to be done. Some companies prefer to do it themselves. Others would not mind and probably don't have the time to do that, so they would hire an outside company to do that.
Obviously, in today's economic world which you didn't have when I first started doing this, you need to have a website because every franchise company that's out there marketing now has a website. Many are interactive. Many contain franchise information, etc., etc. Most of the time, although it's not as important today with the Internet as it was 15 or 20 years ago, you need a marketing brochure to send out to people. I know some companies are foregoing that and saying, "Well, just go to my website and you can see everything you want to see about the company." I'm not sure that's the best way to do it. Some people like to see a document right in front of their face and would prefer a hard copy of a nice four-color brochure.
Then again, as I said, the marketing component and today it's Internet, it's trade shows, it's print. All formulate the marketing budget that I said probably you need for a 12-month period. What that marketing budget is really kind of depends. I've heard people talk about $5,000 a month. It probably could be more. It could be less. But I guess, if you're going to start calculating numbers, that's the place to start.
So Mary, you're right. There are other documents than just the legal documents.
Mary: Harold, and Adina maybe you want to jump into this also, would you say, because this is something that we run across quite often, how much of a staff do you need if you're transitioning from a business to a franchise business? Do you think you have to hire specific staff just to deal with the franchise aspect, or do you think you can get away with how you're currently doing business? What are your thoughts on that?
Adina: I know I've interviewed many, many franchisors at this point, and it seems that the ones that have become truly successful are the ones who had the great idea, maybe it's the unique coffee shop or the pet care company, and they've partnered with someone who has built up franchise systems in the past. And those to me are the ones that have been really successful because they know their concepts. No one else knows their concepts like they do. But they run into so many issues they never expected. It's good to partner with someone who has that expertise who can point them in the right direction and make sure they're making wise decisions.
Mary: Okay. That being said, Harold you're still saying though the basics for franchising your business can still potentially be done for less than $100,000?
Harold: Can potentially. And by the way, I think Adina's right. The days of the single person franchise company is really not something that's going to get off the ground pretty quickly. The one-man show who comes with a great idea or a great location is going to need help. And I think she's right. These numbers are basic startup numbers. Again, we're assuming that the person already has a successful operation in a successful location. If they don't, then the costs change dramatically.
Mary: Yes, and actually you just hit on something. And I don't know, maybe I'm stepping on something that you're going to talk about later, but probably it was in with Adina's first topic of what is franchiseable. And so often we hear is an idea franchiseable? And I think you spoke a little bit to that Harold now because the one person business or increasingly we have people saying, "Ah, I have this great idea." But what is your opinion on . . . is an idea ever franchiseable, Harold?
Harold: We talk about this in the first chapter of the book. If the person who wants to franchise a business has not been in operation for at least a year and making money, then their business is probably not franchiseable notwithstanding the fact that everybody comes in there and says, "I want to buy one. Where can I get one?" The days of franchising an idea are probably history. And I think that that's not something I would even venture to work with. There's got to be an existing operation. And again, making money is important. To have an existing operation that loses money, that would not be very franchiseable.
Adina: Also it would be hard to get people interested if you're not already a proven system. If it's just an idea on paper, I would think maybe you could find one or two people, but I know it's so competitive to find quality and qualified franchisees that just going out there with an idea wouldn't be enough to get the stars that are going to really help build your system.
Mary: Okay, thank you. All right. Adina, would you mind going on now to the next topic then? Why you need to work on your business not in your business.
Adina: Sure. And this seems to be a real eye opener I think for anyone that starts looking into the whole business of franchising. Once you've decided to franchise your business, you're no longer working in your business. You're working on franchising. If you've got the great pizzeria or you've got the great tutoring program, and those are becoming very successful, you're no longer looking to build your own tutoring practice in your community. You're now in the business of selling tutoring franchises to qualified people, and you're also in the business now of supporting those franchisees.
That can take all of your attention, and there are so many decisions to be made. You're going to run across so many people that are interested in your concept. You're going to be trying to market your concept to the right people and that seems to consume franchisors' day. Once you do have a person in business, you want to make sure they succeed. There's a lot of hand holding. So your responsibility again, if you're trying to build your own practice or run your own shop and deal with your own customers in your own shop, there just aren't enough hours in the day to do that and also market and support your system.
And the thing is, if you do direct all of your attention to marketing and supporting your franchisees, you're largely going to help your system sell itself. Prospective franchisees are going to speak to your existing franchisees. Maybe they'll take a trip out and see what their unit looks like. If you have a happy franchisee, your system will almost sell itself as I said, because they're looking for a system to buy and you may be one of many and you want your franchisees or existing franchisees to sing your praises. And that's how a system grows.
It's also important to make the right decisions in growing your system. I've spoken to a number of franchisors who were so happy to receive a check or the prospect of a check from someone wanting to buy in and they didn't necessarily pay attention to where those people were located. So say you're in New York and you have someone interested in Texas. Well, now all of a sudden, you might find yourself having to fly out to Texas to help the person select a site or to make sure that their operations are running profitably. There's just so much work involved and that seems to be, as I said, the real eye opener. You're changing your whole mindset as to how you've ever run business.
Mary: Okay, thank you, Adina. And I just want to reiterate the beginning part of what you were talking about, Adina. And I think this is essential to becoming a franchisor is you're expected to know your business. And in the example you give, you're expected to know how to make pizza and how to set up the business and everything else. But you have to change your mindset. You're no longer a pizza parlour owner. You're a franchise system person. You're a franchisor. And often that leap or that change in mindset doesn't always become apparent. So for all of you who are looking to start your new franchise, it's going to be very important. The running of the business, operating the business, knowing the business, that's a given. You're supposed to know how to do that. But then, you're going to be running the franchise. So it's important to concentrate on that.
Harold: Mary, if I may. It's not a coincidence that we use the pizza shop as an example. One of my earliest clients in franchising was a company called Sbarro. When they started out, the three brothers worked in the pizza parlours and they were making making pizza and calzone and everything else. And then when they made the decision back in 1977 to franchise, the three brothers realized that they can't be in the store every day and that they needed to be running the franchise company and have other people manage the stores. They learned very quickly that franchising is indeed a separate business, and they were very successful when they learned that that was the way it had to be.
Mary: Yes. Exactly, Harold. All of the most successful franchise systems, I think, have made that leap, that changeover in how they're going to operate their business. So it's really important if you're looking to franchise your business. So Harold, do you want to continue with the next slide, which is hiring the right advisors?
Harold: Yeah. We spend a lot of time in the book talking about this, and even today people don't pay attention to that very much. I frequently run across these people who do want to franchise their business and who have already hired their uncle or their cousin who's a lawyer, who's never seen a franchise agreement or a franchise disclosure document in their life to try to do this. And it's obviously a gigantic mistake. All you're doing is paying for it twice, because then when a professional who's been in the business gets a hold of it, basically it's trash and they have to redo it. So clearly the advice is to start the right way rather than the wrong way, and the right way is to hire experienced people who have been in the franchise business for years. That starts with your attorney and goes to your consultant, if you use a consultant to do your operations manual as we talked about earlier or your website or your brochure. We've interviewed a number of really top flight professionals in our book who talk about this. It's not something that's rocket science. But it's common sense but people don't realize that. And I'll tell you one other thing. People do try to cut corners and save money. So they either don't hire the right professionals or they try to do it themselves, which is really a big mistake.
Mary: Yes, I can attest to some people we've talked to. Harold, what do you think about, because we get a lot of calls about this too, about using a template for the franchise document and then maybe try to muddle through yourself or with your staff? Does that ever work?
Harold: No, it never works. Not only does it never work, but you wind up doing the work twice because then when you realize you have to hire somebody who knows how to do it and they'll take it and put it in the garbage and redo it. So you spend twice as much time and money trying to cut corners, and it just doesn't work. And it's interesting, state examiners today are really taking documents that are poorly done and basically sending them back saying, "We don't accept this. We won't even comment on it. Get it written correctly." So if you don't start off correctly, it's going to take twice as long and cost twice as much.
Mary: Thank you. Adina, let's move on to an important part of setting up your franchise and that's your franchise operating manual.
Adina: Right. Well, the manual is a very critical component to the success of a franchise system, because you know how to run your business, you know how to make the successful tutoring practice, but your prospective franchisee doesn't and what might be obvious to you isn't necessarily obvious to other people. It really helps to work with an expert in writing operations manuals. I've spoken with franchisors who have hired writers, but they aren't necessarily operations manual writers. So the manual might have looked pretty, but when push came to shove, the franchisee really didn't understand how to get from say point A to B because they were missing A and a half, if that's a term.
They need to have someone that comes in and documents everything that's done in every function of the business. They also need it to be written by someone who can teach that. You want to be able to teach it to everybody that's going to be working in a unit. So it's not just directed towards the franchisee. It's also directed towards the franchisee's employees, and the more specific the better. I think I had said this earlier. I know one franchise system they put up signs that only the employees can read. It's a fast food company, and they have signs up that say "Smile" so that the employees are smiling at the customers and creating a nice experience. There are just so many different, minute points that need to go in there.
Another thing is it doesn't even necessarily stick to a written manual anymore. A lot of people are doing this online. And this way as those update, they can just put it in an email, let them know to check the company site, there's new documentation. Or maybe it's even done on video so people can see, "We have a new process for baking bread. Well, here it is. This is step by step. This is what we're doing." So the more specific, the better.
Mary: We're seeing a lot of that, particularly, Adina, the use of intranets for updating manuals and putting in the newest procedures, where earlier most everything was done in printed format and you had to send it out to the franchisee. So I think with intranets and other website type usage you can get the information quickly to your new franchisees.
Mary: And I would also add the manual, like you very nicely told us, it is a very difficult document to get together, because, like you, I've written books and I think it's harder to write a good operating manual than it is nearly to write a book because it has to include everything that someone coming into the business without your knowledge is going to be able to use to be able to run that business. So it's so important and it's so important for a new franchisor to have a really good manual put together.
Adina: And when you do it with the intranet, I believe you can tell, you can verify that everyone's received the latest update, which is a nice feature.
Mary: Yes, absolutely.
Adina: The other component to this that people might forget is that the operations manual in and of itself is not enough. There's training that has to go along with that, both the initial training and assuming your system can support this, field operations, having people come in and see how things are really being done. And maybe the manual needs to be updated and that won't be obvious unless you have people in the field observing how things are done, the best way for them to do it or seeing why your operations manual maybe has some holes in it, what needs to edited, corrected, fixed.
Harold: Clients of mine are almost continually updating the ops manual when things change and styles change, tastes change. But I've seen operations manuals that go even beyond just operations, and there's a marketing component, there's an employee component, there's a training component. Some of them can be very, very detailed.
Harold: Clearly the more detailed the better. But Adina, you're right. They are continually changing. They're moving . . . we call it a "moving document" because it could change on an annual or a quarterly basis.
Adina: And the marketing, to pick up on what Harold is saying, the marketing piece is also critical, because if you don't spell out exactly how you want your brand, your logo to look or the shade of yellow on your wall or how someone can send out an online marketing piece, if you don't have that documented, your brand is really going to get diluted and that's just going to hurt you in the long run. So the more specific you are in every avenue the better.
Mary: Exactly. Thank you. Well, I think now we're going to move on to, once you have everything put together, how you're going to market and sell your new franchise. In that respect, we have a few questions from our participants that I'd like to take. So Harold and Adina, please one of you or both of you . . .
The first question is from Karen. Karen has a question saying, "How do you take an existing franchise, they have six locations, and get it to the next level nationally?" So this is someone it's a little bit different than what we're discussing. Not in the early stages but already six locations. I'm assuming they're all franchised or some of them are franchised. How do you get it to the next level nationally? Meaning and in with that, where would you put your dollars? Would you spend your money on websites, on other marketing, on media? Do either of you have some ideas . . .
Harold: Sure. Well, the first question, which I couldn't answer but Karen could, is what's your budget? And let's assume for the moment you have no budget, you have money to spend. Today, I think the Internet is clearly, and I've seen statistics on it, the number one method for selling franchises has become the Internet. It has surpassed print. It's way beyond trade shows. And clearly that's probably the best investment is to make your website so interactive and attractive that it's going to attract people to you.
There are a number of portals that focus on franchise sales and franchise lead generation. One is Be the Boss, Gator. There must be 30 or 40 of them. Selecting a couple is probably something you need to do some homework on. Many of them charge by the month. Some do packages. Clients of mine go on for six months or a year, and they give them a discount and there are all variations to that. That's one way and I think one of the better ways to get your chain beyond the six units that you have.
I don't know, based on your question, if the six are located in the same general area or they're very spread out. But if they're located in the same general area or a metropolitan area, you may want to get a PR firm involved to get the name out and the word out so that it attracts more franchise leads. And PR is a great way to market your franchise. We talk about that in the book and I think it's a wonderful way to do it.
Your six franchisees if they're successful and they like the system, and I don't know if it's a retail operation or not but what Sbarro used to do is in all their locations that they owned they put a card at the register, "For franchise information call the headquarters." It wouldn't be such a bad idea if you discuss with your franchisees for them to do that. Again, people walk in, they like what they see. "How do I buy one?" There it is. Here's a card, take it and fill it out.
I just was out in California for the West Coast IFE-MFV trade show, and I will tell you that the turnout was less than stellar and quite weak as a matter of fact. I don't know what it's going to be like in Miami in January, but I'm not sure that spending the kind of dollars that these companies were spending was the best way to put their marketing dollars, because it did cost them a lot of money and the traffic flow was quite weak. I've heard some feedback already to that effect. And some people who were there said to me that they will not come back. So I'm not sure that trade shows would be the way to go when you only have six units out there. Mary, I don't know if you have anything else to add, but those are my initial reactions to that question.
Adina: In listening to you speak, Harold, it was reminding me of one franchisor that we know that does his own corporate road shows. He partners with several other non-competing brands and they rent a hotel, like a ballroom, and market it in whatever region they're in. If it's in Central New Jersey, they'll hit Central New Jersey, the business papers and maybe some radio ads. And I think they have a banker who will help you figure out, I guess maybe not these days, but somebody that would help you with the financing end. And they'd have maybe four different franchise systems. They each get about fifteen minutes to speak and they each agree beforehand that, because they're all vying for the same people, if one or two are successful, it's a success. I think maybe they kick in $4,000 or $5,000 and they take it around the different . . . I guess it's based on what regions they're interested in hitting up. So if you want to stay in . . . they say to grow concentrically. So if you're based in New York, you might not want to go further than Pennsylvania initially. So you partner with companies in that neck of the woods. As you grow, you're going on to Delaware and beyond. So that's just another guerrilla tactic that is working for this particular franchisor.
Harold: I think Karen mentioned that these six locations are in four states. That's okay. You could focus on those four states. Maybe you want to grow within those four states to get more franchisees, so you may want to target those four states maybe with an active PR campaign in each state or maybe do what Adina just said, do a road show in each of the states and have the franchisee in the state come and participate and maybe provide them with a little incentive if you sell any deals in those states. It's not unheard of. Franchisors do that all the time.
Mary: And I would agree, getting back to your question earlier, Harold. I think public relations, in this economic climate, is one of the best ways to publicize your franchise. In the case of Dorothy and probably some of the other webinar participants, getting out the PR releases, you can hire a person or an agency and they get spread all over the websites and Google picks them up, Yahoo. It's a rather inexpensive way to get people talking about your franchise and seeing it and we're finding today that that works very well. If you have a special industry, getting your clients' products or services into the industry magazines, newsletters. And in this case, with Karen's which is in four states, any sort of news item you can get into your local papers, I think that would really be helpful, especially if you want to keep it regional for the moment.
Harold: Do you want me to take Dorothy's question about this service business?
Mary: That's going into Adina's topic, but I think this would be appropriate. How do you market a service franchise where there's no product to sell? Is it any different than a product franchise?
Harold: It's not really, but actually Dorothy has a target market that I would probably kind of focus on. You could buy a list of existing paralegals and target them and do mailings to these individuals. I know in the tutoring type franchises, a lot of my clients do that with teachers. They'll get mailing lists and send out direct mail pieces to teachers to see if they're interested in going into their own business, which is tutoring which is compatible with being a teacher. And that's basically who their target is. So if you're targeting a specific group, that's one way to do it.
Mary: Okay. And for those of you, I trying to interrupt, sorry Harold. But I just wanted to say that Dorothy has a business where they're offering a franchise to freelance paralegals and wanting to know is there a different way, a particular way that they should be trying to gain franchisees from that. But perhaps Adina, we've already looked at the next slide, which is best ways to market your new franchise. Is there something we didn't cover there yet that you'd like to talk about?
Adina: Well, I think the grass roots marketing ideas . . . there all you need really is imagination, and it could be very effective whether it's a product or a service. Maybe Dorothy can offer a free consult. I know like in Harold's example with the tutoring, I believe people were suggesting . . . Harold holds these forums with franchisors and one of his clients was trying to think, "How do I build awareness for this? It's a service. It's not like I can stand outside and give out samples of ice cream." So it was how about giving a free information session? They don't cost anything, and you can really ignite interest in customers and often it's customers that become your franchisees. So that's something people should always look to, especially in a tight economy. You have your imagination and creativity, and I think people can really come up with ways that your competitor isn't thinking about.
Mary: Okay. Thank you. And then, I think in the interest of time, we'll move on although we could be talking about marketing for a long time. Let's move on to the next topic. Harold, how has selling a franchise changed in the last year?
Harold: Well, I think I kind of touched on it that right now the marketing technique de jour is the Internet, and I think that's not going to change. I think it's only going to get stronger. And I think there are more Internet portals coming up every day -- SellYourFranchise.com, BuyFranchisecom. There must be dozens and dozens that you could latch onto to sell your franchise.
But one word of caution when you do that. You're going to get leads from all over the world. And what's quite interesting is more and more of my clients are getting leads from all over the world and talking about now going across the pond and north and south and every which way. Based on the problems we are having with our economy, it hasn't filtered down internationally quite yet. There's a lot of money overseas, and they're getting very tempted to do that. So when you do the Internet, be prepared. You're going to get calls from Qatar and from Dubai and from Singapore and from everywhere else you can imagine. That's one of the negatives if you're not ready to do that in doing the Internet marketing is you're going to get leads from everywhere.
Years ago you could pick up "The Wall Street Journal" on a Thursday and they'd have full pages of franchise ads. Now it's down to a half. And in "The New York Times" on Sunday it used to be the same thing, and now there's maybe one or two ads. So clearly I think franchisors are going away from print media. It gets expensive, and they are finding many more cost effective ways to market the franchise. Like I said earlier, PR is one of those ways as is the Internet. Trade shows can get expensive; even the small ones. My clients are not getting the traffic that they once got at these trade shows. And I've a feeling that if this continues to happen, there'll be less and less of the trade shows being put on.
Mary: Harold, would you explain a little bit your first point there -- don't sell units, award them.
Harold: One of the traps that new franchisors have, and over the years it's gotten many into trouble, is that when you're all ready to roll it out and sell, you sell it to the first person that walks in the door who has a check and who can breathe. And that's not the way to do it and that's not the way to market franchises. You really need to award them to qualified people and who have money. It's unfortunate that a lot of clients of mine, and I'm sure other lawyers have found this out, that when the franchisor is really hot to take the money, they overlook the quality and the qualifications of the person they're taking the money from. You've got to be very careful, and it's not the worst thing in the world to pass on somebody because they have money and have no other qualifications. So it's really kind of a patience game, and I know nobody has patience these days. But you've got to have patience, and you've got to award them to the qualified people who have money or who have the ability to get money.
Mary: Okay. And I think Harold you already touched upon, actually, slide 12, about how many franchises can I sell in year one? With some of your comments about all the international interest and maybe you don't even have one franchisee and you're going to go 5,000 miles away to sell the first one. Maybe you want to talk a little bit about that and then we'll go . . .
Harold: It's very tempting these days when somebody from Singapore, I had a call today from a client that somebody is ready to do something and they're not, to take that check for six figures or whatever it is and sell them the franchise. In this economy, it's hard to resist that. And if you tell the client to resist it, they're going to look at you like, "Are you out of your mind? Here's a guy with $100,000 and I'm selling it to him." You could talk till you're blue in the face. They're not going to listen to you. So the economy has forced companies to do things that they probably wouldn't have done two or three years ago. And that's one of them.
Mary: Is there any average or reasonable amount of franchises you can expect to sell?
Harold: I've seen statistics that say expect to sell between seven and eight the first year.
Mary: Oh, that sounds good.
Harold: And that's probably a decent amount because that's more than you can handle when you're starting out of the gate. And usually that number builds up exponentially as you go. As Adina said earlier, if you have successful franchisees, selling the next 10 or 20 won't be that difficult once you get the first 6 or 7 out there who are successful. Believe me, I have had clients come to me and say, "I want to sell 500 the first year." And I say, "Excuse me? It's not going to happen." And it never does. They have all these wishes and dreams and aspirations, but you've got to really bring them down to reality.
Mary: That's for sure. 500 in one year. I think, from my point of view, if you can sell seven or eight the first year, that's a pretty good start. Maybe we'll have some questions on that at the end of the presentation. Okay. Now if we can go back to slide 11, which maybe we should have touched on a little bit earlier, but certainly the success of the franchise system is going to depend upon how well you are training the new franchisees. So Adina, that's for you.
Adina: The well trained franchisee will become your ambassador to your brand. So it's just critical that you don't cut the training short. Many, I'd probably say, Harold you can correct me, but I think all franchisors have training at their headquarters. It's going to depend how complex your system is. If it's building garage organizers, that's complex. If it's a restaurant concept, that could take, I think I spoke with someone who said up to eight weeks of training. Or maybe you have a dog training system and maybe that's just a few days. Although probably I would need eight weeks for that. But you definitely have training at your headquarters. And one thing someone said to me was even throughout the training they're assessing the franchisee. Is the franchisee getting it? You want to find this out now. You don't want to wait until . . . even though you've already signed the contract, and Harold you can interject there, but I know that I've spoken with some people who were able to go back to the franchisee and said, "This doesn't seem like the right fit." And the franchisee agreed and I think they were legally able to . . .
Harold: They refunded the money and they signed releases. The client who I know who did that knew right off the bat, after a couple of days of training, that that franchisee wasn't going to do it.
Harold: They weren't paying attention. It was almost as if they were there because they had no choice, not because they wanted to be there. And this particular franchisor, who is very bright and I like him a lot, knew immediately that this was not going to work. He had a nice conversation with them and said, "Look, I think it's best that we give you your money back and you go home because the last thing we want to do is have you go out there and fail because you really weren't interested in what we're doing." And the person agreed. And they got their money back and they left.
Adina: Right. It seems to work out better that way than to start a partnership with problems. At some point, maybe initially you're doing the training, but at some point you're going to have people doing the training and you should have those people be on the lookout for you as well.
The other training is at the franchisee's site. Some concepts are not physical locations, they may be a home office base. But they hit the road, they go out on calls. Sometimes they're helping them set up accounts. They're just showing them in real time what this is like and no longer in the laboratory anymore.
And as we said earlier when we were talking about operations manuals, training is not a one time deal. It's continued support. Sometimes it's at a company retreat once a year or whatever seems to be suitable. And it's also taking advantage of the Internet, having that training online, having the lines of communication open so that if there's a problem, if someone isn't catching on to something you know right away. It doesn't necessarily mean you're dissolving the partnership, but it's so you can jump in and help them and support them and that's really what successful franchising is all about.
Mary: Okay, thank you. And Adina, continuing on with that. Now that we have the franchisees trained, and honestly it's something when consulting with new franchise assistants you hear this quite often -- what do you do about renegade franchisees?
Adina: Right. I know that's a problem because the franchisee is not your employee. This is your partner. Maybe you think dissolving it would be the greatest thing, but most franchisors look to not do that. They want to remain hands on so that they're staying several steps ahead of a problem before it gets worse. If there's a problem, it's open communications. It's finding out what the problem is especially in this economy. Maybe they're having trouble paying the rent. Maybe you, as a franchisor, can speak to their landlord and get their rent reduced or maybe you can find them a smaller location or in some instances they can find a complementary brand to partner within that site. There's lots of different solutions, but the important thing is to remember that it's the communication. Even though your instinct might be to run away from a problem, it's just going to magnify if you do that. And there could be solutions and you as a franchisor may really be able to help them. It could also be maybe they're not displaying their products right. There's so many different solutions that might turn things around and might really save that relationship.
Harold: I think, Adina, you're right. The most important thing, and I tell this to clients all the time, is communication. Don't hide from your franchisees. Communicate with them. Find out what's going on, what the problems are. Visit with them. You mentioned GarageTek and there is a home improvement industry and it's not doing very well these days obviously. So what the president of the company did was he actually went on the road and physically went to every single franchisee in the country to talk to them about what's going on and how he could help them and they really appreciated that. So a renegade franchisee is not going to be a renegade much longer if you're able to go out there and communicate with them, make them feel comfortable. And if that doesn't work, then maybe the alternative is to sell the business and get out of the system. Maybe it wasn't the right fit to begin with and maybe he should sell the business. One of my, he's not a client, he's a friend of mine, his philosophy is if you don't like what's going on, sell the business. Sure, it's easier said than done in this economy. But there are people out there who would buy an existing franchise. So the solution is to sell and get out.
Adina: Right. That's a great solution actually because maybe the person doesn't want to be there anymore, and now you're giving them a new source of money they might appreciate.
Mary: I would say I have a slightly different spin on this as well having dealt with these problems. I think the so-called renegade franchisee sometimes comes back to the franchisor in that they haven't spelled out how the franchisee's going to run their business and without sounding too authoritarian they leave the franchisee with too much leeway. And we've spoken to new franchisors who say, "They're refusing to do this. They're refusing to do that." In the case of a fast food company, they were supposed to have take-out service. The franchisee said, "No. We're going to put in tables. We're going to do this," and jacked up all the operating costs and then were unsuccessful. So sometimes I think the renegade comes about because they haven't done what we talked about here in the beginning part of the presentation is having a good document, having a good manual and spelling out for the franchisee what they should be doing to be really successful.
We also have a question that deals with this, again from Karen. I think you gave an example, Adina. But how would you handle, we hear this all the time, a franchisee who depends on the franchisor too much? I don't know if this is what you have Karen, but there are some franchisees who will call you 20 times a day. Any suggestions about that Harold or . . .
Harold: Yeah. Well, you know something, I'd almost rather have that then a franchisee who doesn't speak to you at all. I know, in your mind, they're not paying enough royalties as against the amount of time you're spending. But at the end of the day, those are the franchisees who will appreciate you more, will give great reports to people who are looking to buy the franchise for the first time, and I guess I would say those are the kind of loyal franchisees who call you all the time because they need your help. So, in a way, I think that's a good problem to have rather than the reverse. So I wouldn't be that upset or angry that franchisors are getting franchisees who lean on them too much.
Mary: Okay. Thank you. And one more question that was emailed in before we go to the last slide. Jeff. What should an operator budget for labor in year one for the franchise management team?
Harold: For the franchise management team? That's a good question. Again, it depends on the infrastructure that you have when you start. And I know clients of mine who have three and four people already in place when they roll out the program and what they're maybe missing is the franchise salesperson if they want to go in-house. And others who don't want to go in-house would farm that responsibility out to a broker, and there are many franchise brokers out there who will sell the franchise for their commission so you don't have to spend what today is probably $100,000 to $150,000 on a veteran franchise salesperson so you avoid that expense. So probably if you hire somebody in-house, that's probably going to be one of the main management positions, unless of course you bring in a trainer and you don't that yourself. You may be talking about an additional $200,000 to $300,000 if you want to bring all those people in if you don't already have them.
Many of these people who do the franchising for the first time have some of this stuff in place, and the only thing they're really missing is the franchise sales component. They'll do the training in-house. They don't have to hire trainers. So the reality is if they're a real entrepreneur, and I'll give you an example, back to my days in Sbarro. They had everything in place and all they did was hire a franchise salesperson. The three brothers did the training. They did everything except the franchise sales. So it really depends on the company and what stage they're in when they start the process.
Mary: Thank you, Harold. And maybe we can move on to the last topic, which is how do you achieve your end goal or plan an exit strategy once you become a franchisor?
Harold: It used to be that a lot of franchisors wanted to be a public company and sell their stock and cash out and make millions. But today, you can't say that because it doesn't exist anymore. And quite frankly, there are a lot of companies that, while they once had the dream of going public, are not doing that for a number of reasons, not the least of which there is no public market for a lot of these new startups. But two, the cost of being a public company these days is astronomical. I sit on the board of a public company now, and it's not a franchised company yet but it will be. I won't be involved in that end of it. I'm just on the board. The cost of complying with the Sarbanes-Oxley reporting requirements will probably run them $1.2 million for fiscal '09. That's unbelievable. Before Sarbanes-Oxley it didn't cost anywhere near that, but it is now. So the idea of becoming a public company and selling out and going home and sitting on the beach is not quite there yet and may not be for quite a while.
Now other companies, and I'll use Sbarro again as an example, they sold out two years ago to a private equity firm for hundreds of millions of dollars because there are private equity firms out there that are looking for mature franchise systems to buy. So their exit strategy worked. They were once public, they went private, and then they sold out. They made it both ways. Not every company can do that.
The other way is to sell your company. I get emails all the time. "I've got an investor. They have a lot of money. Do you know any franchise companies for sale?" Well, that's certainly another way to exit your business and make some money and do something else or just retire. And that's happening a lot, but the problem is that the companies that are looking to buy these franchise companies are really not offering the kind of numbers that the founder of the company thinks the company is worth because, as we all know, the founder thinks it's worth far more than it really is. And that typically is a problem because they will never get the valuation that they think they deserve.
Mary: Harold, one of the points we have up there is selling to a franchisee. And I guess there've been many occasions of that in the past where, especially if you have a multi-unit franchisee, don't they sometimes take over the whole company?
Harold: Yeah, that'll happen. There are some franchisees . . . I remember years ago the Godfather franchise system where they had a franchisee . . . no, no, no. Sorry. Pizza Hut. Pizza Hut has a franchisee that's a public company. And yeah, there are systems where the franchisees are as big or bigger than the franchisor, and sure, that's a potential acquisition by the franchisee. It's not unusual for that to happen.
Mary: Okay. Thank you, Harold. And I think at this point, because we're running a little bit short on time, we're going to let the phone lines open to anyone who has a question. I don't know how they're going to stack up, but I'm sure we'll wait in line to get it. So if you have a question, something that hasn't been answered in our presentation today, please hit star 7. Star 7 on your phone pad and we will be able to hear your question. So you can do that right now if you do have one. Or you can continue to email. But for the calls and questions, hit star 7 on your telephone.
Karen: Hello. Can you hear me?
Mary: Yes, I can.
Karen: Hi, this is Karen. Sorry for all the questions around that. Wanted to let you know, and this is kind of a long question, but we actually have a publishing business. We publish "Modern Babies & Children" magazine, and we have six franchises all together spread out over four states, which was the purpose of that question. We're at the point now where we're looking to get bigger. In terms of infrastructure, we're not quite sure in terms of how to set it up. We know we most likely are going to need somebody to be selling and marketing additional franchises as well as somebody continuing to work with the existing franchisees. I guess I was looking for thoughts on that. Is there something that we're missing there? An additional person. Less people?
Harold: Well, Karen, how many people do you have right now?
Karen: We have six franchises.
Harold: How many people in-house?
Karen: We have eight people all together in various roles from a customer service manager, etc., etc. to manage . . . one of the franchises is owned by the corporate entity, by us here in the Baltimore area. So we're kind of doing dual work in terms of running the immediate area as well as running the franchise business overall. So I was very interested in what you were saying about separating the two and making them two very separate businesses.
Harold: Yes, that's true. I'm not sure at your size you could afford to bring a salesperson in-house, at least one that's a quality franchise salesperson. Have you considered using a broker system to do it and paying a commission?
Karen: We have considered that. How has your experience been with that?
Harold: Pretty good, actually. There are some good ones out there who do a very nice job, and you don't have to bring in somebody who's getting paid anywhere from, and the lowest I've seen is $75,000 to as high as $150,000. I'm not sure that at your size that's something that's cost effective.
Karen: And if you have enough people to do your training, if you have two or three franchisees to be trained at a time, if you have enough people to do that, I'm not sure you need to hire anybody at this point.
Karen: Awesome. I appreciate it.
Harold: Try to save your money.
Mary: This is Mary, Karen. I can give you a few recommendations by email if you'd like, and you can follow up on that.
Karen: I really appreciate it.
Mary: Some broker units and some people who might be able to assist you in selling your franchises.
Karen: Wonderful. How do I get my email to you?
Mary: No. I'll email you. I have everything.
Karen: Okay, wonderful. Thank you.
Mary: You're welcome. Good luck.
Karen: Thank you.
Mary: Anything else? Again, if you'd like to ask a question, please hit star 7. Anyone else?
Okay, if there's something, since we're already a little bit over the time, if there's something we haven't covered today, feel free to email us at FranchiseHelp, and we will get the questions to Harold and Adina or we will answer it ourselves. We appreciate your attending today, and we hope it has been a productive session for you. Thank you again.
Adina: Thank you, Mary.
Harold: Thank you all.
NEXT POST: FDD Compliance - What You ...