← Unemployable with Jeff Dudan
Unemployable with Jeff Dudan
Before Buying a Franchise, LISTEN TO This! With President of FRANdata Edith Wiseman #233
00:22:41
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- [00:01]
A
Well, we wouldn't be franchisors without franchisees.
- [00:06]
B
Absolutely.
- [00:07]
A
Let's speak to that audience a little bit. So if I'm a franchisee or not even an existing, but maybe a prospective franchisee, but I have the desire to build a mumbo multi unit, perhaps multi brand, it could be within the same brand we have, there's big operators. But if I have the desire to build something meaningful, create generational wealth, create a franchisee empire, and they are all over the place. I mean good operators know how to operate and within a franchise system they know how to follow the plan and they know how to expand it. How would you counsel them on how to approach and solve for this outcome? Because there are you, there are 4,000 brands to select from within which you can build. They all have different scalability. So how do you evaluate their scalability? There's different, like you said, operating requirements, they're not going to be a good fit for all, for all of them. How do they match themselves up? And then you got to get into the funding thing, like what's it going to cost and how do I achieve that? So where would you even start? If I came to you and I said, hey, I just sold a company for $50 million and my next go around is I want to build inside of franchising, how would you counsel me?
- [01:21]
B
I would say congratulations, first of all on building a $50 million company. And then I would say, okay, what, first of all, what skill sets are you bringing to the table? And I'll say everything that I'm about to say comes from franchisees who have either been very successful or those who have failed. And so I have learned.
- [01:47]
Them what makes it work, Right? So in the case of a franchisee who's coming in, they run a successful business, the first question is are they bringing any of that infrastructure with them or are they, they starting from scratch? So if they're starting from scratch, then they have to realize that any, they probably already know this. So, so sorry, I'm talking down to you, $50 million owner. But they have to understand with each business what all of the roles are and what roles they're going to have to be in. Right. So build out that org chart and what roles are they gonna have to be in and understand what are the most important roles during that startup phase. So if it's a business where a service based business where the roles are heavily on sales and getting new business, like in a service business, either they have to have that skillset or they have to know someone that is going to have that skill set that they can hire because that's going to be the hardest thing, getting out of the gate versus in a, you know, retail environment. Like that's more customer acquisition from a marketing and partnership perspective. And so those, those who's going to be filling what role? I think that's the most critical thing. I have talked to franchisees who have failed because they hired a salesperson and you know, they're doing drugs at 9am in the morning and having to fire them. So there's, I think it's, understand what strengths you have. If you're a finance guy and now you have to go out and sell like it's not going to happen. So you've got to make sure that in that startup phase, until you get cash flow positive, what are the key critical sets and how are you going to solve for that? So that's number one.
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A
Okay.
- [03:38]
B
Number two would be and what does the market, what does the competitive landscape look like? So in your market, right, are you going against some pretty significant players in the market or is it very fragmented? Every single, like successful franchisee that I've talked to before, they go in the market, they know. So if they've got a higher, I don't know, minimum wage, people that might be evaluating working at, you know, the Wegmans. So like understanding who their competitors are from a labor perspective and so how they're going to deal with that hiring challenges and then also competitively for their own product or service. Like who are the competitors? Because you, no matter what, everyone has competitors. That's great. That means that people actually want the service because they're businesses. But at the same time, you have to know how you're going to position yourself in the market and talk to the franchisor about that positioning in your particular market. And then the third is making sure that you have enough cash to get through to break even. Right. So. And also add some more cash on top of that. Because life is uncertain, right? I mean, it's more uncertain now than ever before just because there's extraneous things that you and I can't control. We can't control tariffs. We can't control if the government's open. You know, I just got driven home by a tax. I live in the D.C. market tax. Cab driver drove me home. He was waiting for five hours for me, his one customer all day.
- [05:20]
A
Oh, wow.
- [05:21]
B
So no planes coming in. So my point is, is he doesn't like nobody. There are things that happen that no one can predict. So you have to have extra cash to make sure you can get through what that period and make sure that even if something happens, you're still fine and you can still continue to grow your business.
- [05:45]
A
Let's talk about durability just in, in general.
- [05:49]
So, number one, it's easier to build a business into a growing market. Back to your point of, in an emerging brand that's got a new or unique service, it's going to be a blue ocean. So it's going to be easier to get customers to the extent that customers are educated about it. But then you, when you say, all right, well, and you talk to the guys that sell or award. We don't sell franchises, we award them haircutting or food or all of these things because, hey, everybody has to eat every day. Hey, hair's always going to be growing. But when you get into these types of businesses, you realize very quickly that they're mature markets. They've been operated, they've been optimized for decades by franchise systems. And you're com. You're competing for stylists, you're competing for the labor. The margins can be smaller and you might have to open 3, 4, 5 of these things to make what would be considered a, a reasonable return for your time, your energy, your money, your opportunity cost. So, yes, everybody has to have it every day. But that's why those are so mature and saturated in terms of the marketplace. And then there's other things like certain fitness concepts or that, you know, I, I like to say, here's my durability thing about homefront brands, right? There's going to be 150 million more people in this country by 2050. There's already a shortage of the houses, many of the houses in many growing markets that people want to live in. There's, there is a supply and demand challenge. Less people, yes. Less young people are learning to per. To do the trades. So there's a supply and demand curve which is going to drive the pricing up. And when you have all of this new home building, that's going to happen and you've got this population increase. Everybody has to have a place to live that's going to bring new homes, that's going to bring infrastructure, schools, retail, all of this building and all, every single homefront brand participates in that economy. So you will never find a Homefront Brands nestled comfortably between a Blockbuster Video store and a Curves fitness franchise because there is no obsolescence in home services. So I make the case that home services is durable. There's a 10.3% compound annual growth rate as far as you can see in these services. So if you can get into this and compete and put your shoulder against the wheel and build a great service business, that it's something that you should be able to, you know, not have to worry about. Obsolescence, meaning people don't like the workout, I don't like the cookie anymore, these types of things. So when, when people are making. So durability and obsolescence is a legitimate risk if you're looking to invest to build an Empire. Because 20 years from now there has to be a customer set and it's gotta be a relevant product.
- [08:32]
B
Ah, yes, absolutely. And I think that's why there's an arms race to own the home.
- [08:38]
A
Yeah, yeah. Oh, there is. Okay, tell me about that.
- [08:42]
B
Well, we've seen an explosion home service brands and growth of units and all of them are part of platform franchise companies. And the objective is to have a service that's within all parts of the home so that you understand that consumer from all aspects of their needs within the home. So that's been happening over the last, I don't know, more than a decade, this growth. And so yeah, that's.
- [09:16]
The arms race to own the home.
- [09:20]
A
How would, okay, speaking to this franchisee, let's pretend that they don't have $50 million, let's pretend that they're kind of a normal builder, but they still have aspirations to build a large franchisee base of businesses.
- [09:35]
What kind of approach to funding something like that? What are some of the mechanisms that good franchisees have access to to help them fund and grow a franchisee platform for themselves?
- [09:49]
B
So I'd say it depends on the startup costs a lot of and how much capital they're bringing to the table. So there's a couple of variables that might dictate the right answer. And it also depends on the franchise system. So, so I'll put those two into perspective. So if you have a high performing franchise system with a good kind of credit, that means like the franchisor, even in a start and even an emerging brand has shown consistency to keep franchisees in business together between the franchisee and the franchisor, that being a successful outcome, then the franchisee is going to have more options. So being able to get an SBA loan that is government guaranteed, it means a bank that may not otherwise want to lend to a startup business, which banks don't want to lend to startup businesses because they're highly risky, period compared to. So the SBA guarantee makes it less Risky because the government says, hey, we're going to.
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We have an insurance product that says like if it fails, bank will give you 75% of what you lent out. Who doesn't want that kind of assurance?
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A
Right.
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B
75% is pretty, it's pretty great. And then a lot of times banks actually sell off that, the rest of that to the secondary market. So they basically offloaded all the risk. So that can be very attractive for franchisees. Then of course, there's home equity lines of credit that some use to finance their business, some use k financing. So basically, if you have a 401k, you can roll it over to either use as an equity injection to an SBA loan or use it to fully fund your business and to have some additional cash to help you weather those storms. Or you know, I would never say fund it with credit cards, so don't do that. And don't get a high interest loan to put you into a problem space to begin with. And there's, there's always friends and family. So definitely that's always an option to have people who believe in you say, let me help you. And maybe you give some equity in the beginning to help get that funding. Especially we see a lot of second generation franchisees. And so maybe that funding is coming from dad, who's a franchisee of another system. Yeah. So those are kind of, I'd say, the key ways that people use to, to start the business.
- [12:28]
A
Okay, so one of the things you would ask a franchisee is who's your daddy?
- [12:31]
B
Absolutely. Or who's your mom?
- [12:34]
A
Okay, fair enough. Just want to make sure I heard it correctly. All right. All right, good. Here we go.
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All right. Sorry, I tickled myself there.
- [12:46]
B
Spirit.
- [12:48]
A
All right, now let's. Maybe it would be beneficial for.
- [12:54]
This prospective franchisee to, to think about risks. And so there's been a couple of concepts lately that are loosely in the health and wellness space, but they're more semi medical. And maybe they do things like help people temporarily with certain types of aches and pains or maybe they have some therapies. Maybe there's hormone therapy. You know, there's, there's these semi medical things that, you know, as we get into longevity and pain relief and there's. I got involved in a laser business that was good for, you know, circulation. I mean, there's all these great medical treatments are out there and as they become validated or at least marginally validated, then, you know, somebody tries to put a franchise system around them. So you get, you get into this franchise system. You build a class B location in sort of a medical facility. And now you're going and you're bringing these customers in and then boom, here comes a, here comes a medical. Here comes a regulation that says that we can't recommend this as a, as a process. So there's real risk. So when you think about emerging, it's like, oh my gosh, this incredible new product that's going to help so many people. But again, outside of your control or even the franchisor's control, there could be regulation that, that threatens that business. And of course there's that. And, or, you know, for a franchisor like I was in, I had a, a restoration remediation business called Advantaclean. And we, we were early to the mold remediation craze. Right, everybody, black mold. Here's a story. You know, somebody grew two heads in a basement in Cincinnati somewhere from black mold exposure. And now there's all of this regulation that comes out about you've got to do this, which helped us a little bit because they're really forced in real estate closings and in water damages. I mean, they created protocols where mold needed to be done. And then all of a sudden it created licensing requirements in different states. So now we couldn't just open up in different states because somebody had to have experience or industrial hygiene experience or whatever it was. So, you know, and licensing requirements pop up. I mean, we. There was a new building code that came out in 2025 and one of our brand. There was a very specific code in that building code that deeply impacted nationally one of our brands. So now we had to create new products to get around that building code in places like California and Nevada and things like that. And the. We couldn't have anticipated it. The franchisee couldn't have anticipated it. It just, you know, but then you have to deal with it. So there's regulation risk that can happen in most, in most businesses, I would think. If you're in painting or carpeting or something, I think the risk is low. But if you're in medical or something that's new and hasn't been regulated yet, then there's more risk there. You've already mentioned the staffing risk. Where are you going to be able to find enough of the people at the right price to make the model work? There's a risk from AI. So let's just say you're in a franchise that builds websites. Well, okay. Or even does accounting. So we don't know how AI is going to disrupt those Industries. But I can guarantee one thing, it'll be faster in the future than it has in the past. So your time to react. You know, I had an AI expert on the podcast. It was great podcast. Jeff Woods. I highly recommend it. I don't know episode 230 something but 226. And if anybody's looking for it, but you know, the question is.
- [16:28]
The rate of change from AI going to correlate to the rate of recovery from our workforce? Because the rate of change is so fast. But how quicker? You know, we recovered from whaling because whaling died down slowly. And then we got into, you know, Industrial Revolution and then we were, you know, aol, you know, dial up and, but it's, I mean literally, if you look at the Internet revolution or the, the tech revolution from that perspective, I mean we had to, we had dial up and then we had to build copper wires and then we had to build infrastructure. I mean it, even though it grew extensively over 10 years, you know, up to 2000, from 97, 98 to 2007, when you know, all the fangs popped up, Facebook pops up, Twitter, all these pop up, that was 10 years. You know, the rate of change of IA is 10 weeks, you know, where you're getting that level of change. So you need to think deeply about your business and how that's, and that again right back to home services which is going to be, you know, it's not undisruptible. But the rate of change, you know, I think could be more predictable inside of that. And then you've got this whole thing of discretionary versus non discretionary. You know, is it, is it a have to have or is it a nice to have? I mean in two, if you were, if you were in the hanging big screen TV franchise in 2006, 7 and 8, you probably didn't do too well because nobody had to have a 40 inch 800 pound plasma on their wall. So what, how do you, I mean I, I, you know, this is, I'm supposed to be interviewing you, but those were, those are some of the risks that I think about from a franchisee's perspective. Would you comment on those or tell me what I missed?
- [18:06]
B
Yeah, so I think it's really important to know who your customer demographic is when you are buying any franchise business. I look to McKinsey does the consumer Insights study. It's public, you can look online. The point about discretionary versus indiscretionary is really important and I would further dig down into that because part of it is where are people Gonna spend their money. Right. So sure, your air conditioning blows out in fourth of July, which happened to me and did I immediately call a franchise and the franchisee came and fixed it the next day? Absolutely. Like that is not a Choice in July 90 degree weather in Washington D.C. okay. So, but then there's there, there are choices that people make even when it's not. When it's something would say like discretionary versus non discretionary, where people only have so much money and where are they gonna prioritize their problems?
- [19:02]
A
Right.
- [19:03]
B
And where are they gonna prioritize their, their choices for their, you know, how I'm gonna treat myself. And I think it's super important. The reason why I talk about McKinsey is because they talk about by age category where people are going to spend money.
- [19:21]
So where they're going to splurge. Right. So am I gonna splurge on cookies? You know me. No, my age category won't, but the younger age demographic will. So. So I think it's important to know your customer and then know how customers make decisions about what's important to them. And that wallet share, right. So if you're going after consumers that have, in this environment are higher end consumers, they have a bigger wallet share, they can spend more money, they can execute on more of their priorities. So I think those are kind of how I think about. It's useful for a franchisee to take all those things into consideration.
- [20:08]
A
Right. If consumer debt goes up and the economy slows down, are people going to push out their hair color another few months? Are they gonna quit their Pilates studio? You know, it's, which one of those is gonna be? I mean, at the end of the day now, if you're in haircutting, people need to get their hair cut. But you know, the flowbe does exist.
- [20:27]
B
So funny enough, it really depends. So I'm in the category where apparently I don't care about my wellness as an older woman. So I wouldn't, I would give up my Pilates apparently. But if I was younger, I would not be giving up my Pilates. Cause we care more about the way we look when we're younger, right?
- [20:45]
A
Yeah. So it, I mean, but at the end of the day, in the order of magnitude in the food chain, you know, are people going to eat out less and what is that going to be? So it's, I think it's a huge data crunch to know what people are likely to do and then how that impacts. I know that during COVID the moving and storage industry didn't do particularly well or either was coming out of COVID But fitness, you know, fitness, Covid changed the, the numbers in fitness. I mean it changed the way that people get their fitness. And you know, it's just, there's, there's some predictability. But at the end of the day, if you're going to be investing your life and your life savings in something, then it and you want to really commit to build something over 10 or 20 years, then these are some of the things that to the greatest extent possible, you need to minimize your downside.
- [21:45]
B
Absolutely. And I'd add to that that within any industry there's always winners. Right. So if you look at the sit down restaurant space has been declining year over year, but in the last couple quarters, in the last year, Chili's has been knocking it out. So there's piece to this that is execution so you can always win over consumers. Same thing in Fitness Planet Fitness didn't skip a beat, really didn't miss any customers throughout Covid. So there's, even though the vast majority of fitness brands really took a beating and the vast majority of sit down restaurant, there's a piece that's also like know your consumer, know what they're able to spend and then speak to them where they're at. And that is across any industry. Right. So just layer that on top.
- [22:38]
A
Awesome. Okay.