With Mark Siebert, CEO & Sr. Franchise Consultant iFranchise Group, Author of Franchise Your Business, The Guide to Employing the Greatest Growth Strategy Ever
The American economy thrives on the millions of small businesses out there, many of which are successful to the point where owners think they have a business model that can be expanded but aren’t quite sure how to go about expansion, raise capital, or decide if franchising is an option. To investigate franchising further, Steve speaks with Mark Siebert, an expert in franchising, about his new book Franchise Your Business: The Guide to Employing the Greatest Growth Strategy Ever where Siebert lays down the strategy for determining if a particular company has what it takes to enter into the franchising arena.
How To Franchise Your Business Successfully Like Massage Envy
The foreword to Franchise Your Business is written by the founder of Massage Envy, a very successful massage franchise. John Leonesio, the founder of Massage Envy, came to Siebert about a decade ago after he had one location open for several months, that was just turning the corner on profitability but showed all signs of being potentially profitable. John wanted to expand and Siebert put together a very aggressive franchise growth strategy. Today, Massage Envy has over 1,200 locations across the U.S. and abroad, and has grown into a multi-billion-dollar company through franchising.
What Makes A Good Franchise
In Franchise Your Business, Mark Siebert says not all businesses can be franchised, especially if success depends on one or a few experts. To expand as a franchise, the business model must be replicable, must work in a variety of different markets, and must make enough money and provide an adequate return on investment for its franchisees after royalties.
Return On Investment
Owners should not think of franchising until they have a profitable business. After it’s profitable, think of a franchise as you would think of an investment rate of return. To succeed, franchises must return at least 15% to 20% after royalties, employee salaries, and all other expenses.
The Nuts And Bolts
In franchises, the franchiser provides extensive training to the franchisee, an operation’s manual, ongoing support, and a national marketing campaign to generate business in local markets to make sure their franchisee is successful. While models differ across industries, franchisees are looking to go into business for themselves but not by themselves.
McDonald’s is perhaps the world’s most famous franchise. Additionally, there are thousands of brands that people know but don’t even realize are franchises. Some familiar names that Mark Siebert has worked with include tried and true food brands such as Buffalo Wild Wings and Auntie Anne’s Pretzels, and innovative new models such as Sky Zone which now has 360 locations through franchising.
Franchising works in many different industries such as janitorial services, carpet cleaning, lawn care, hotels, gyms, etc. For instance, Anheuser-Busch spoke with Siebert about franchising their Belgian Beer Cafe, which now has a few international locations.
Line Up Financing
Franchisees often need upfront money, a lot of which they raise through SBA loans, home equity loans, or so-called “Rob’s programs” which access 401 (k) money. Occasionally, franchisers get involved in financing, but that’s the exception rather than the rule.
Prepare Your Business For Franchising
In Franchise Your Business, Mark Siebert says potential franchisers should take a test at iFranchisegroup.com on whether their business meets basic requirements, and then develop a good strategy. Franchise success depends on picking the right fees and royalties, not random percentages, because even a 1% mistake in fees, multiplied by hundreds or thousands of franchises, can add up to millions of dollars in lost profits.
Before signing up their first franchise, franchisers need to develop and file regulatory documents, develop operations manuals, marketing plans, collateral, service, and support infrastructure, a franchise development plan, and good quality controls. Upfront costs alone run from about $50,000 to $200,000.
If you’re looking to get into the franchising business, Mark Siebert’s book, Franchise Your Business: The Guide To Employing the Greatest Growth Strategy Ever, spells it all out for the aspiring franchiser and franchisee.
Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.
Steve Pomeranz: One thing you can say about America is that it is rife with small businesses. There are millions of small businesses out there and many of them are very successful. I guess it comes to a point in a business person’s career when they say, “Hey, you know, I think this is a model that can be expanded, but how do I actually do that?” I’ve got one store, or maybe I’ve got two stores. How do I get access to capital? How do I decide whether perhaps considering franchising as an option?
To look at that and to investigate that further, I’ve asked Mark Siebert to join me. Siebert is an expert in the franchising business. His book is Franchise Your Business: The Guide To Employing the Greatest Growth Strategy Ever. Welcome to the show, Mark.
Mark Siebert: Thanks, Steve. Thanks for having me.
Steve Pomeranz: The forward in your book is written by the founder of Massage Envy. I think most of us know that that is a franchise, and we see these stores popping up all over the nation. Tell us a little bit about that to get us started.
Mark Siebert: Sure. John Leonesio, who is the founder of Massage Envy, came to me probably about a decade ago. We had, at the time, one location and had been opened for several months, but that was about it. It was just turning the corner on profitability, but we could pretty well see that it was going to be a very profitable venture at the unit level, and he wanted to expand. He had a new business model; he was doing something a little bit different. We put together a franchise program for him for a very aggressive growth. Today he’s got probably— he’s since sold the company—but Massage Envy has probably 12 to 1500 locations open. They’re a multi-billion dollar company at this point, and they did that by franchising.
Steve Pomeranz: Not all businesses can be franchised. If you’re providing a service that’s particular to you as the owner where people are coming just for your expert advice or something, I think that would be hard to duplicate. Is that correct or can even those kinds of businesses be franchised as well?
Mark Siebert: You’re absolutely right. You cannot franchise any business. There are certain things that we look for in determining whether or not a business model is, in fact, franchisable. We look for things like is the business model duplicable? In that vein, we’re looking at is this just something that is in the founder’s head or is this something where we can put it down on paper, create a system and do the same thing. We look at whether or not it’s going to work in a variety of different markets, whether or not the business has enough credibility in the eyes of a potential franchisee that they could sell franchises. Most of all, it’s about trying to make sure that the franchisee can make enough money, even after we take out a royalty, to provide them with an adequate return for their investment.
Steve Pomeranz: What kind of return should a business have before they even decide that franchising is the right kind of model for them, what kind of returns on investment?
Mark Siebert: Let’s start by saying that you don’t franchise until you’ve got a profitable business that’s making money. From there, say, if you think of it the way that somebody would think of an investment, if I were going to invest in the stock market, I’d expect a certain rate of return, maybe long term a 10% rate of return. You’ve got a greater level of risk for franchisees. At a minimum, I would say that a franchised business, after paying someone a royalty and after paying a manager’s salary, just to make sure that it’s a reasonable comparison, you have to have at least a 15% return, maybe 20% return, depending on who your targeted franchisee is and the perceived level of risk.
Steve Pomeranz: There is so much to consider. If I were going out to buy a franchise, I would be pretty wary. I’d have to look for certain conditions and certain qualities of the business. Turning that around, if I’m indeed the business owner, and I’m going to now start franchising my business, I have to think in terms of what the buyer would want to experience. Give us an idea. Give us a list of some of those requirements, the quantifiable requirements for both sides.
Mark Siebert: The way the business relationship typically works is that the franchiser is going to provide pretty extensive training to the franchisee. They’re going to provide an operation’s manual; they going to provide some initial training and some ongoing training and ongoing support; they are going to often times have other elements of the value proposition as well; so it might be developing a national marketing campaign or something they can use in their own local markets to generate business. It’s about making sure that their franchisee is successful. Since franchising spans so many different industries, it’s hard to say one particular support model that a franchisee would be looking for, but, basically, the franchisee is looking to go into business for themselves but not by themselves.
Steve Pomeranz: This is Mark Siebert. His book is Franchise Your Business: The Guide To Employing The Greatest Growth Strategy. He’s also CEO and Senior Franchise Consultant of iFranchise Group. One of the most famous franchises that we all know is, of course, McDonald’s. That has lasted for so many years, and it was actually one of the original concepts when Ray Kroc walked into the McDonald’s Brothers Store, and I guess the light went off, and he said, “I can do this in any location.” What are some of the other businesses out there that have been just so successful using franchises?
Mark Siebert: There are probably a thousand different brands that people know that they don’t even realize are franchising. Some of the clients that we’ve worked with or that I have worked with in the last couple of decades in the food service business—it could be like a Buffalo Wild Wings or an Auntie Anne’s Pretzels— but they are unusual industries. For example, your listeners may be familiar with the company called Sky Zone, which is an indoor trampoline park. That was a concept that really wasn’t even around a decade ago. People go into these things, and they bounce around on the trampoline.
Steve Pomeranz: To their heart’s content.
Mark Siebert: To their heart’s content. Exactly right. It was a concept where they came to me. Again they had one location out in Las Vegas; today they’ve got 360. They’ve done that through franchising. It’s an industry where you wouldn’t sit there and think this is right for franchising, but if you’re got a business model that works in pretty much any industry—janitorial services, carpet cleaning, lawn care businesses, hotels—if you think of a brand in one of those industries, chances are it’s franchised.
Steve Pomeranz: I remember some years ago finding out that Denny’s was a franchise. Denny’s has been around since my childhood, and I just expected it to be just a regular company that opened up all these stores. I had no idea that they were franchised. Are there any other companies that we would be surprised? I noticed on your list Anheuser-Busch was one of the companies that you consulted with. What was it that they were looking for?
Mark Siebert: With Anheuser-Busch, they had a what’s called a Belgian Beer Cafe, which is an international franchise. They’ve actually franchised that in places like Dubai, in the Middle East, where you wouldn’t really think Beer Cafe. They’ve done a nice job of franchising that particular concept.
Steve Pomeranz: What about financing? Is the franchiser expected to do the financing for the franchisee, or do they get independent financing?
Mark Siebert: For the most part, it’s independent financing. A lot of it is done through SBA loans or home equity loans or what they call Rob’s programs, which is a program designed to access 401 (k) money. There’s a lot of Rob roll over, SBA stuff that is used. It’s usually done from the franchisee side and not the franchiser side. There are occasionally franchisers that get involved in financing, but it’s the exception rather than the rule.
Steve Pomeranz: I have a store, I think it’s expandable, and I’m thinking about franchising. What conditions, what do I have to do to this store to get it into shape to franchise?
Mark Siebert: I think that the first thing that you want to do is really make an informed decision as to whether or not the business is, in fact, franchisable. If your listeners went to iFranchisegroup.com, there’s a test, a franchisability that they can take there. If they believed that it is franchisable, there are certain things that you need to do. You need to have a good strategy. Franchising, the way that it works is, you’re going to take fees, and you’re going to take royalties, and a lot of times people pick numbers at random, but a 1% mistake on a typical franchise program multiplied times hundreds of franchisees can be millions of dollars. You have to make sure you have a good strategy.
There is a requirement that you do certain legal documents. In franchising, sort of like a securities offering, you have to have a disclosure document that goes along with your franchise agreement, and you’re going to need a specialized lawyer to put that together for you. You’re going to need to develop operation’s manuals—if you don’t have them already—that are going to lay out what the systems are and the way in which the franchisee needs to follow your brand standards. You’re going to need to develop marketing plans and brochures and other collateral materials that will be focused on finding franchisees. You need to make sure that you have an organization that’s geared toward how do you sell and service and support franchisees, so the people know their roles, they know how to properly qualify franchisees because you don’t want to sell one to every everyone. That, I guess, is the basics… is make sure you have a good strategy, good quality control, you’ve got something in place to market and sell these and that you’ve got the legal documents needed under the law.
Steve Pomeranz: As a franchiser, you’d better have some money ready to go because you’ve got to get attorneys, you’ve got to get probably consultants to help you set up the manual, marketing plans, all of this takes money and takes capital expense for you to get yourself in shape and, actually, to fine tune your own business, to make sure that everything can be replicated and duplicated. Just even before you sell your first franchise, you’ve got a lot of work to do.
Mark Siebert: You’re absolutely right. Franchising is a low-cost means of expansion where you use other people’s capital, but it’s not a no cost means. You’re going to spend $50,000 to $200,000 if you freely want to get aggressive with your growth to get into the franchise business and have some money set aside for marketing the franchise.
Steve Pomeranz: Got you. My guest Mark Siebert, Franchise Your Business: The Guide To Employing The Greatest Growth Strategy, also CEO and Senior Franchise Consultant of iFranchise Group. That’s the small letter i, the word Group. Thank you so much for joining us Mark. It’s been very informative.
Mark Siebert: Thanks so much for having me, Steve. I enjoyed our time together.