The Wolf Of Franchises: What It Really Takes To Achieve Success As Both A Franchise Owner And Franchisor

by | Dec 18, 2023 | Podcast

FM 7 | Wolf Of Franchises

 

The Wolf of Franchises joins Dru Carpenito, and they get real and raw about the realities of what it takes to succeed as both a franchisee and franchisor.

What does semi-absentee really mean, and what do prospective franchise owners need to beware of when they hear this word?

Why do the minority of franchisors share profitability metrics in their Item 19?

Why do only the small majority of franchise systems successfully scale nationally?

And more.

This is a fun and informative episode.

Listen to the podcast here

 

The Wolf Of Franchises: What It Really Takes To Achieve Success As Both A Franchise Owner And Franchisor

I’m joined by the man behind the mirror and the man behind The Wolf of Franchises. Welcome. It’s been a while.

It’s good to be on.

Good stuff. This is a highly rehearsed orchestrated show. We’re going to get real and raw here. We’re going to talk about some different topics to get into. We’ve got a lot of interesting things to cover. You’ve been busy this 2023. Is this your first full calendar year doing what you’re doing or was it 2022 where you are at full time building your platform and an audience?

That’s a second full year. Officially, we went full-time on it in October 2021. This is the second full year doing the Wolf. We got Krokit now live. We’re about two and a half years into it.

As you started this journey as the Wolf, did you envision getting to where you are now where you’ve developed this platform that we’ll talk about that franchise companies can dig into? Not to mention helping a lot of people get good exposure to franchising and put on the radar that maybe they didn’t have before.

The honest answer is no. I did not think it would turn out like this. I don’t want to say I wasn’t doing this thinking it was going to fail but throughout COVID, I was an avid side hustler like working at a franchise development company and learning a lot of interesting things about the industry. That was a ton of exposure I got by talking with so many franchisees that we were working with for one of our brands. I was also helping scout emerging franchisors. I’ve done a few different things in the media world on the side.

Eventually, I started to believe in the idea of franchising and no one was talking about it. I thought, “Let’s give this content niche a shot because it’s a good strategy that we’re trying to build an audience if you have to pick a niche and you want to be known as the person for that niche.” You can pick anything like B2B sales or FinTech. You name an industry and you can try to do that. I figured franchising is pretty niche and I got this knowledge of the industry. I thought maybe it could do well but turning into what it has is not on my radar.

What has it turned into now? Did you make a pretty big pivot earlier this 2023 to leverage your platform? I’m going to clarify for anybody tuning in. It’s Krokit, not Kroc It.

It was Nate and everyone does call it that. It’s meant to be a play on Ray Kroc. My lawyers, of course, rightly so advised me not to spell it like Ray Kroc because they don’t want it. It’s an unnecessary liability. At the franchise sales where I used to work, we would use Kroc like Ray Kroc as a verb. The first time I heard it, there was this big Orangetheory. They owned 40 or 50 locations. It was week two of my journey within the franchise development company. I remember asking the CEOs, “Someone owns 40 Orangetheories. How is that even possible?” He’s like, “He bought one and Kroced it.” I was like, “He Kroced it. What the hell does that mean?”

He’s like, “He’s the great Kroc. He’s the great Krockery McDonald’s.” It stuck with me and I always thought it was a funny verb. Now I spelled up it with two K’s and everyone calls it Krokit. It is Krokit, folks. That is the name. We launched that publicly at the end of May. I haven’t spent a dime on marketing, only leveraged The Wolf of Franchises ecosystem to get exposure for it.

We’re into six figures of annual recurring revenue and that’s logically two products. We have a research platform for franchise buyers and/or people in the industry who want to get some data on franchises. We scrape a ton of FDD data and plug it into the software. It’s super easy to access it versus using the state of Wisconsin website, which I’m sure a lot of people are sticking with in the meantime.

We also have a newer product focused on franchisors and all their franchisees. We have an API that allows franchisors to integrate their accounting software and all their franchisees’ accounting software as well as the POS systems so you can aggregate all the financial data and understand the health of every franchisee. Franchisees get to benchmark as well. There’s value on both sides, but it helps automate M19, streamline operations, make coaching easier on a month-to-month basis, and again, understand the health of your franchise at any given point.

Whereas a lot of traditional holders, not only to say old school, a lot of franchise systems out there rely on P&L data that franchisees send in at the end of the month. They download it from QuickBooks or whatever it is and send it in. There’s a lag of at least 30 days. Your system integrates in real-time with QuickBooks or whatever the financial management software is, the POS, and everything else. Franchise companies can get real-time access to how their franchisees are performing.

If there’s a spike or somebody, all of a sudden, starts toning it one month, they’ll know pretty quickly. They can talk to that franchisee about what they’re doing and figure out if there are best practices and streamline it out to the rest of the network. If there’s a franchisee that’s not performing well or hitting the benchmarks, they don’t have to wait 30 days. Sometimes, in the franchise world, that 30 days, you’re going to burn through some cash and it can be meaningful. You’re plugging that gap. It is how franchise companies should be thinking about Krokit at the end of the platform you developed.

It’s the time and the data because franchisees are onboarding and integrating their QuickBooks or whatever the platform. It takes only 3 to 5 minutes. It’s super quick for franchisees. Once they do that, we have that connection between Krokit and the platform so the data, as soon as it’s updating in say QuickBooks, is updated in Krokit about a half hour later. We’re constantly refreshing our server. It’s timeliness to the data but then the automation. You don’t need franchisees to export via CSV, an income statement, and then email it to you. You don’t need to aggregate at all. Our software takes care of that too. You’re saving time and you’re getting real time access and insights.

Where did that idea come from? How did you come up with that idea from starting as a franchise buyer resource? That’s integrating with all different types of systems and all that stuff.

It came from the research platform. The store version of the story is what I knew within my audience, specifically the newsletter where we can collect a lot of data on our users. We have a good number of franchisees reading the newsletter. It’s very common as you know and a lot of your audience probably knows that a lot of folks who buy one franchise buy another. We knew franchisees were going to be a good target audience for our research platform because they want to find their next concept but we didn’t want them to churn. The research platform’s annual subscription is a little under $300 a year. It’s not expensive at all.

A lot of folks who buy one franchise buy another. Click To Tweet

We didn’t want franchisees to use the software to find the next franchise and then unsubscribe because then they’d be like, “I got to go build ten units in this new brand I bought. I don’t need to research brands for a long time.” We built the accounting software API over the tension mechanism. The thought was they could do that, integrate their QuickBooks, and get a KPI dashboard.

We had this feature where if you owned a McDonald’s, you could type in Burger King, Wendy’s, etc. and it would compare how your stores are actively doing versus the average of those competitors based on their FDD data. Honestly, the feature was a total dud. I reached out to these users. I was like, “What’s going on? Why aren’t you using the feature?”

The consistent feedback I got was 5, 6, 7, 8 times and it was from franchisees’ small brands but also some bigger brands like Wingstop, Zaxby’s, and a few others. They all said, “This is a cool feature. It’s nice to have but I’d rather see how I’m doing versus my other franchisees, not my competitors.” They want to know if my labor is at 40% of revenue. I think I’m doing a good job, but someone else is at 25% and they’re profiting more. I need to know that so I can improve my operation. We went down a rabbit hole of how to best do this then we realized franchisors have a big value out there. It’s evolved into what it is now from that point. Ultimately, it was the franchisee users who were saying, “We want to see how our other franchisees are doing.” It snowballed.

That’s cool. You build a good audience with a lot of different folks in there. There’s experience mostly in that operators and plugging into the ideas that they have. It’s very wise and a good move. You spun that up pretty quickly. It didn’t take you very long to build the franchisor and integrate a piece of it.

In the grand scheme of things, no. It felt like an eternity over the summer. We did this from a product standpoint. It was a pretty hard pivot. The research platform is still alive. We still have more data coming in all the time, but we paused on the road map there. It took us from June and our first franchisor onboarding was mid-September. That’s three months. In the grand scheme of things, that’s not a long time. It felt like a long time as a startup with a small team and we’re all hungry for success. We thought it was going to be a month. We overestimated the product and all the nitty-gritty questions and nuance that come with it. We’re in a great spot now on onboarding brands.

That’s execution. That’s a lot about the team that you guys have put together. To spend something like that feels fairly complicated with the integrations and the APIs and pulling it all together. Distill it down to meaningful information at the unit level, the system level, and the whole idea. What’s the feedback from the franchisors that you’ve been engaging with on this platform and talking to you about potentially using the platform?

It’s been positive. The biggest thing is every franchisor doesn’t want something like this. The biggest problem is not a problem. You mentioned getting income statements or profit loss statements sent monthly via email. We’re talking to some big systems like hundreds of franchisees. They get it once a year at the end. That’s it. It’s impressive and scary at the same time. It’s impressive because the FDDs look solid and the teams are impressive but at the same time, it’s scary because they have no real insight into how these branches are doing. Once at the end of the year, it’s typically self-reported too.

There’s a bit of friction with some of these franchisees that have been operating for 10, 15, or 20 years and they’re like, “All of a sudden, I’m going to integrate my accounting software. I haven’t had to show you anything except for Christmas time.” We speak to the franchisees as part of it and there’s a little bit of hesitation. I’ll say that. That’s the biggest thing. We did spend three hard months pausing one of the research platform roadmaps.

I firmly believe that in a new franchise, if you’re starting out now or you’re starting to sell your first franchise, you should already have a system like this in place because then you don’t become like the older franchises. The technology maybe wasn’t there yet when they started so they didn’t have the opportunity. The longer you wait, the bigger the headache it’s going to become.

FM 7 | Wolf Of Franchises

Wolf Of Franchises: In a new franchise, if you’re starting out now or you’re starting to sell your first franchise, you should already have a system like this in place.

 

Culturally, you will have pushed back from franchisees. They’re not used to that level of transparency but it does become a need to have. We’ve reached out to brands who are like, “Thank God, I love that this exists. We need it.” It’s the conversation of how they convince maybe the 10% of owners that are going to push back because this is a new way of doing things.

It’s not Big Brother in it. That’s where the idea came from. The franchisees get a ton of value because they can see how they’re benchmarking against the top 25% or whatever it may be of the rankings and the system from all they’re caught. They’re not revenue but labor, cost of goods for supplies, and market. This one franchisee in the Midwest is spending a lot less on marketing than I am and they’ve got the same revenue numbers. Why is that? Part of the benefit of a franchise system is that franchisees can call that franchisee in the Midwest and be like, “What are you doing? I’d love to pick your brain.” That franchisee is going to share most likely what they’re doing. There are benefits throughout every level of the system.

Hundred percent. We’ve even gone a little further to make it even more attractive for franchisees because we have this first-party business data. We are able to tie in lenders on the back end so we built a whole application workflow. If you’re a franchisee, before you even open your unit and create a QuickBooks account or whatever the accounting software that you’re using is, you can go into Krokit and apply for SBA Loans. We have four big SBA lenders that we can connect you with using our workflow and our tech. You can acquire insurance through us all digitally.

In that, for the franchisor, it has been a lot more popular than we realize because we can guarantee compliance versus if you leave your franchisees to find someone locally, you don’t know if they’re getting the right coverage and enough coverage. We’ve got all these other FinTech applications. The way we’re going is that franchisor or franchisee data use case, but then be on that. It’s automating and trying to modernize it. A lot of this back-office stack is very much still done on pen and paper in some respect. It lags time-wise.

If you’re a franchisee in this system tuning in to this and you want to be able to benchmark your performance against other franchisees in the same system, you don’t have good visibility to that right now to tell your franchisor to get in touch with the Wolf. Again, it’s Krokit, not Kroc It. That level of detail from the franchisee’s perspective first is powerful. That’s the thing. The franchise systems are the good ones that start to grow. The innovation starts to happen at the franchisee level. It’s less about at the corporate level because they’re maybe not in the trenches as much.

The good franchise systems that are tied into the feedback and the best practices that are happening at the ground level at certain franchisees’ locations can identify it quickly, systemize it, roll it out to the rest of their franchisees, and keep rinsing and repeating. Not to mention the stuff that’s not working well that they think may be working. That’s how the momentum starts to go. No offense to the founders. Dear founders, no matter how good you think your business model is, as you grow and get more franchisees, it’s going to evolve and good franchise systems embrace that evolution and get the feedback from the franchisees.

I completely agree. It’s a good point. The founders should expect. You’re going to learn things in different markets. I was speaking with a franchisor/founder. For some reason, in Utah, they’re model flat out and didn’t work. It’s been the only market so far and they ended up finding a few reasons for that. That’s going to happen. I’d also like to say that for any franchisees, we do have an offer. If you intro us to your franchisor, we give you a free year of Krokit’s research platform. That’s free FDDs and data for a year. If we end up signing a contract with the franchisor, you get Krokit’s research platform for life for free. We think it’s a pretty sweet deal. Feel free to reach out to me if there are any questions on that.

By the way, it sounds like if you have Krokit integrated within your franchise system, it’ll help you make a lot more money as a franchisee having access to that data. As you’ve been putting it together, you’ve been aggregating a ton of data or you’ve got access to pull this data, you’ve come across some pretty interesting insights as it relates to franchising. In franchising, there are always 3 or 4 statistics that nobody knows where they came from.

You hear it like, “That sounds good. Somebody else said it so I’m going to say it,” whatever it may be from the franchise success rate of how many systems to get to 100 units or whatever it is. You’ve pulled the data over the past couple of years and have done a thorough analysis. You put out an interesting email earlier in 2023 in your newsletter around some of the database insights that you’ve pulled that might contradict some of these fun things that keep getting thrown around the world of franchising. Some people say there are 4,000 franchise systems in the US. Some people use the word 3,000 but don’t know where the data is coming from but you, through your analysis, landed on about 2,200 active franchise systems in the US.

It’s 3,000 actually.

Your newsletter has been updated since then.

I preface before that newsletter. It’s still available on the website so you all can read it. I preface that in Krokit at the time of publishing that newsletter. We had 2,200 franchises.

Three thousand is legit. That number is legit. It’s not 4,000. It’s 3,000.

I think 4,000. I don’t know where anyone gets that. We have had/still have contacts at FRANdata. I don’t know what they publicly publish but within their system, they’ve only had 3,000 and change. Maybe it’s 3,050 or it gets to 3,100. There are not always franchises or stalling saying, “We’re not actively franchising anymore,” and then there are new ones coming up every year, but they’re around the 3,000 mark. I know that for a fact. We, at Krokit, are at close to 2,500 now. That covers all the big brands. There are no massive franchises hiding out there. We have them all in our system. I don’t know where because we’re scraping every state website.

We even have a few other sources online that have been discovered that I don’t think a lot of people know about. We even work with some of the state departments like Virginia, Washington, and a few others who will first, in small amounts, sell you FDDs that you can’t get online. We’re working every source imaginable and I don’t see where people are getting 4,000. The FRANdata fact is the most interesting because they’ve been doing this for many years. They only have 3,000 active franchises in their database. Where’s this extra 25% coming in? That’s a big jump that people are making.

Whether it’s 3,000, 4,00, 3,100, or whatever it is, the other interesting stat that you found was the median number of locations across all franchise systems, including the big boys like McDonald’s. Let me ask you this. Do you include Chick-fil-A in your numbers with franchisees since they’re unique?

I do.

It includes all the big boys. What was the median number of locations that you found that the thousands of different franchise concepts have open across the board?

Thirty-eight. The average, I’ll note, is 222. It skewed because you got the big boys like Chick-fil-A, McDonald’s, Subway, and 7-Eleven, however many they have. The medians are more interesting. It’s two-fold. There are a lot of takeaways for one franchisor or founder. I’ve noticed with some founders, that they think they’re going to get the franchise, they’re going to sell a ton of units, and they’re going to sell off into the sunset for a few years. No. This status is telling you that it’s pretty damn hard to grow because the typical brand only is 38 locations open.

That’s not a great spot to be in. I don’t know if you agree with that, but you’ve got support staff and training that goes with all these 38 franchises operating. Who knows? Did you sell to them organically? Did you not sell to them organically? It’s not a great spot to be in. For the franchisor or founders, that should say, “This is pretty hard to grow and get a national expansion.” For franchisees or franchise buyers, you want to make sure your franchisor gets dialed in because ideally, you’re buying into a brand that gets a lot bigger than 38 locations.

FM 7 | Wolf Of Franchises

Wolf Of Franchises: For franchisees or franchise buyers, you want to make sure your franchisor gets dialed in because ideally, you’re buying into a brand that gets a lot bigger than 38 locations.

 

No doubt, especially if you think about it from an exit standpoint down 8, 10, 15, to 20 years down the road. If you think about selling your business cashing out, any buyers are going to look at the trajectory of the growth of the entire franchise system. If it stalls out, it’s typically not a good thing in the eyes of a buyer, which could significantly affect your valuation and ability to sell it. There are so many different things and the founder is in it for the long game. Are they going to grit this thing out to get this to a critical mass of where the system could be? It’s interesting.

The dynamic of working with franchisees, as founders start to transition into a franchise, is completely different than what they’re used to. Some get it. Some build a team of people who have franchising experience and know-how a franchise system should operate and can insulate the founder candidly from maybe having to deal with franchisees directly because they’re not the best person to do that. They figure out the gaps in the system that break as they continue to expand because there are some breakages as you start to replicate the business with franchisees.

There are a lot of factors. Not to mention the capital. I would bet that might be one of the key reasons why franchise systems stall out. It’s not a cashflow-positive business until 3 to 5 years down the road. You need to have growth for that 3 to 5 years. Through those years, if you don’t keep growing, you’re not going to be making a ton of money off the franchise system as a founder.

That’s a good point. I respect the hustle and all that. They come in usually bootstrapped capital. Most people aren’t raising money to franchise.

You give away franchise fees to brokers like myself and FSOs. We’re not making money off the franchise now. They typically need to have an extra source of capital. In the perfect sense, they’ve built this unit. That produces a healthy amount of cashflow at the unit level, which is the business model of franchising. They can use the cashflow from those company operations to fund the franchise growth. I think a lot of the franchise systems that stick around for a long time embraced a little bit of a crawl-walk-or-run approach with this new FSO. I’m starting with some business partners called Excel Franchise Development.

That’s the approach that we’re strongly encouraging the brands to take. It’s like, “Get 5 or 6 franchisees out there over the first 12 months. Figure out what breaks. Fix it. Over-support these folks to make sure that they’re super successful and profitable. Guess what? They’re going to get more support than the hundredth franchisee is going to get. That’s the way it’s going to be. Get that Foundation set and then you can start to dial up the growth.” To go from no franchisees to trying to get to 100 franchisees by skipping that step, there’s a lot of risk in that both from a franchise buyer perspective and a founder’s perspective.

Brokers are good. Everyone should be trying to strive for some balance of where your deals are coming from. Brokers are part of them. As you said, if that’s the only source, you need to keep growing. You need to eventually get self-sufficiency from the royalty stream, which takes a while. You want to balance organic while brokers are entering you to quality leads. You shouldn’t be turning them down, but you need to plan, too. I don’t know how many folks are thinking through that capital plan versus thinking they can sell units and they’ll figure it out as they go. The numbers show that most franchises don’t figure it out. That’s the end. It’s like startups. Most new businesses or startups fail to some degree. It’s not a surprise in a way but most franchises aren’t going to make it to the promised land.

There are a lot of people giving founders a lot of different advice too and they don’t necessarily know which advice to follow and embrace. I’ll give you a story. With Excel, we’ve been talking to a lot of emerging brands. I don’t mean any ill will when I give this example. I won’t use the company’s name but I’ll give an example of a super young emerging franchise that got some weird advice. They have this business model that is a food-light concept where they’re serving prepackaged coastal food. It’s seafood. They had a lot of success opening up in 13 or 14 corporate locations, all down the East Coast. They want to start to franchise.

The advice that they got from somebody was, “We want to grow more market share than the coastal markets, even though that’s what’s been working for 5 to 10 years. We’re going to go Inland. We’re going to go into the Metro areas. We’ve seen data and customers ordering our stuff online. We think we have a customer base and that’s the model we want to franchise.” Somebody told them, “Get away from the stuff that’s been working for you for 5 to 10 years. You know how to operate a coastal seasonal market inside and out. Make this thing work. It’s a good business for the right person.” They’re like, “Our franchise model is going to be completely different than what we’ve been operating.”

Me and my business partner were like, “Are you going to open some corporate stores to prove this out?” She was like, “What do you mean? No. The franchisees are going to be operating inland.” We were like, “There could be some risks there.” She’s like, “What are you talking about? Everybody else has said this is a great idea. Our franchise attorney said this is a great idea.” We’re like, “From a purely operational perspective, you need to take on the responsibility. If you’re going to franchise a deviation from your model has been working, you need to pony up the cash, prove this thing out, operate it, and figure out what it takes to operate it in a non-coastal based market.”

She was like, “Thank you for telling us that because nobody told me.” She didn’t know any different. People have been glorifying this whole franchise expansion thing. Who knows what’s going to happen with that one? We’re not working with them. It’s a super early emerging franchise. They don’t know any different.

The early stages are so key because they set your trajectory up. It’s like what you said. You could end up going left when you should be going right. By the time you realize it, it’s probably too late or it’s going to set you back years. The biggest thing here is thinking of the founder’s perspective. That’s very impressive. The founders can stomach through all those pivots and changes and have the patience to restart and rethink things. There are a lot of different players that dabble in helping these new franchisors go to market. To put it lightly categorize it, a lot of the advice I hear is weird and I don’t think the founder’s and the franchisor’s interests are always at heart.

I won’t name the company, but I had a conversation. Here’s a question. How expensive do you think it’s “should be” to franchise? The person was calling me saying they got quoted over $200,000 to set up their FDD, an Ops manual, and some other things. That sounds like a lot of money for that. I don’t think it should be that high. I told them, “It shouldn’t. I know lawyers who have partnerships with other companies that’ll do an Ops manual.” They’re like, “Our legal fees will be X. The Ops is Y. It’s under six figures.” Anyway, I’m digressing. I’ve never been even there. It’s a lot of capital.

Getting the FDD thrown up and some Ops manuals are the easy stuff. In the grand scheme of the total investment that it takes to stand up a national franchise chain to get to, call it royalty self-sufficiency. Some units are 50. Some units are 100. It depends on the AUVs of the franchises, but they’re looking at, over the course of a 3 to 5-year period, $1 million if not a $1.5 million investment. I had a big talk with a guy who ran the Ops for a very large private equity platform company that owns a number of franchises.

He’s like, “We did the math inside and out and it’s $1 million.” That’s not coming out of pocket $1 million in year one. It’s as the system grows, you need to hire franchise operations professionals. At some point, you’re going to bring some of the marketing in-house versus outsourcing key elements to vendors. The staff is labor. As the system grows, the founders need to be prepared to reinvest the capital that’s coming in from franchise fees and royalties into building a team of people to support that size system. If you do the math, it’s $1 million but FDD and the Ops are the easy part.

That’s what I mean, especially at that stage. I don’t know how some of these founders are funding the early investments, whether it’s from casual or their corporate stores. It’s a $150,000 delta between some of the quotes I’ve seen and what it should cost you. This is the other thing. It’s so hard. How is a new founder supposed to know that this lawyer is trustworthy and competent within the franchise realm?

It’s very difficult for them to assess that. There’s an angle there. Assuming you get the right lawyer, be a bit leaner and don’t go crazy unless you have the cashflow then sure go for it. I would say don’t over-invest in the Ops manual and the world’s greatest FDD until maybe you’re a few years in. See how it goes first before going all out.

Be a bit leaner and don't go crazy. Unless you have the cash flow, then go for it. Click To Tweet

Founders, your franchisees aren’t going to read the operations manual. They’re going to call you instead when they have questions. Ops manuals are probably one of those things that’s evolving into videos and online trainings.

It should be digital.

I’ve heard so many founders. They’re like, “It’s in the operations manual.” They didn’t pay you to read a freaking manual. Suck it up. Deal with it.

That’s so true.

It’s such a wild world. If there’s a founder tuning into this, it’s like going to a doctor. Get multiple opinions before you make big decisions. The Wolf can give you an opinion. I can give you an opinion and there are other people that have opinions, but they’re opinions. You got to figure out what’s best for your company and yourself and all that stuff.

It transitions into, “I’m a young franchise brand. I’ve got the most amazing business model. Only I know how great it is. My franchise attorney told me I can’t put any numbers in my FDD. I can’t put any numbers in Item 19 to help other people understand what the unit economics of my business model look like.” There are a bunch of franchise attorneys who tell founders that. It’s like, “You’re signing up for some pretty slow growth if you can’t put your numbers in your FDD.”

What were the stats that you found of all the FDDs that you reviewed and the percentage of franchisees that number one disclose any form of financial information that they don’t maintain and number two disclose? We’ll use the word “profitability” because there are a lot of games that franchise wars can play with the true profit of their business looks like. Anyway, what were the stats that you found?

“Eleven percent” are sharing profitability. A little less happening was that 45% of franchises didn’t share anything financial-related in their FDD. I should have made that clear in the newsletter now that you’re asking me about this. It’s crazy the things that I put in there and I’m like, “How is this helpful? Why don’t you put in the financials where they’ll put average foot traffic or average quote?” It’s okay. We don’t count that. I don’t count that as legit. Maybe there’s going to be some pushback on that. Tell us how much your franchisees are making. That’s it. The advice that is being given is scary. The stats are that 45% aren’t sharing financials and 11% are sharing profitability.

It is crazy. It’s 11% to 3,000 different franchise brands. That’s a little over 300, 330, or something like that and profitability numbers in their Item 19.

Pretty much. The whole, “You’re not allowed to share numbers,” doesn’t even make sense logically. Imagine buying a business down the street that you want to acquire and the seller is like, “Sorry. I think the SEC is the regulatory body for an independent small business sale.” Technically, the SEC oversees that. For you to do something shady, they’d be the ones who would step in to decide a ruling on something. Imagine if the seller is like, “I’m not allowed to share anything.” It’s like, “You’re never going to be able to sell your business if you can’t tell the new potential of how much your current sub shop makes.”

Yet, franchising was in our own little bubble where there are tons of concepts that they’re selling like $300,000, potentially a $1 million-plus investment. They’re saying, “We don’t have any data. We’re not going to show you.” It’s crazy because it works sometimes. There are brands that grow like a rocket ship. I would love to be a fly-in-the-wall for these sales calls to hear how they’re even getting candidates over the line. That’s a whole other conversation, but it doesn’t even make sense logically why and how that rule could ever safeguard or would be franchisee.

I understand the perspective. It’s the ruling. You can’t make projections on future earnings. If you’re a franchisor and you have real data that you can prove with QuickBooks or whatever your financial system is, maybe Krokit could help you with that, why would you not be able to share past performance? You have to stay within the guard rails of not talking and using that to project the future. At least gives a candidate an idea of what is possible if they open to the franchise.

We’re not attorneys. None of this is a legal advice. From what I understand, I’ve been on the franchisor side and been involved in putting together Item 19s.

As have I with lawyers, big ones, and smaller ones.

The data has to be representative of the business model that’s being franchised. You have to disclose what you are disclosing. That’s where it can get a few franchise companies that do disclose financial information. This is a whole separate conversation because different franchise companies interpret the word profitability differently. Some of them use the words net operating profit. Some of them use the words net revenue after expenses. You have to read the notes and understand what is being disclosed.

To keep it simple, I’ve seen a lot of people as I’m helping them and guiding them through the process of evaluating different franchises. They’ve come back to me and said, “I’m going to go with this franchise even though the numbers, the Item 19, and what I’ve been able to validate with the franchisees aren’t as good as these juicy open-to-interpretation numbers in the Item 19 because they’re more transparent.” That word transparency is a thing that can resonate with a lot of perspective franchisees. Of the 11% that shared profitability numbers, I wonder what the percentage is that of actual full transparency P&L level data.

That’s a great point. I’ve gotten burned on that myself a few times. For my newsletter and the Thursday newsletter I send out, I’ll do a breakdown of Item 19. I only cover brands that have Item 19. There was one in particular where someone responded and then ended up on Twitter. They’re like, “Look at the footnotes.” They didn’t include 3 or 4 key expense line items in it and they had their own definition for net income in the footnotes that I missed. I was like, “How is this even legal for someone to display a profit and loss statement that selectively skips over some very key line items?”

It moved too quickly when I was writing that newsletter. You have to be careful. Get every FDD reviewed by a franchise attorney if you’re thinking of buying a franchise. They’ll call these things out. Most importantly, I think you’d agree with this, assuming there are franchisees in the system. Speak to as many of them as you can. They’re going to be your best resource. It’s far better than an FDD, than me, than you will ever be to understand what’s possible as a franchisee of a given brand.

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You would put out another interesting email on a very fun word to say in franchising. What does the word semi-absentee mean?

It sounds so good.

What was your take on the state of the word semi-absentee getting thrown around in all the franchise circles?

It’s funny. It was a confluence of a few folks who are franchisors and have been sharing stories that they’re competing with brands that are clearly giving false narratives to candidates. They’re saying that you can keep your day job. You’re going to run the business and it’s going to turn into a multi-million-dollar portfolio for you.

They’re upset. They’re like, “This is BS. I refuse to play that game but at the same time. I am losing candidates to these other brands.” It’s going to end poorly. I don’t call anyone out. I keep it professional but it’s more to be on a mission to make sure that people have the right expectations. At the same time, on Twitter within the small business, there’s this whole entrepreneurship through acquisition community. People are trying to buy up independent small businesses as a way to achieve wealth.

There’s a lot of the same stuff that you’ve seen in franchising. There’s a lot of like, “You buy it, hire a GM, and then you’re good. The SBA loan, 90% are covered by them.” Meanwhile, it’s like, “This is a lot of money. You’re on the line if it goes south.” There’s a guy who I’m friends with named Jon Matzner. I thought was perfect. He’s like, “Imagine if someone said, ‘YOLO. I’m going to have a bunch of kids. It’s cool. I’m going to hire a nanny.’” That would I think most humans would be like, “That’s a bad parenting strategy.” You’re going to have human beings or little babies and you’re going to be mentally okay with letting a nanny take care of everything.

It is pretty damn similar to thinking you’re going to work in a corporate job and you’re going to let some person you hire take care of your financial baby. It doesn’t work out like that. Forget it if it’s a strategically good move. To me, human emotion doesn’t work out that way. You’re going to be all day every day being like, “What’s going on with my business? It’s month one. How much money did I make? What are my debt covenants with the SBA?” With all these different things, you’re going to be like, “I got to be there 24/7.”

That’s usually what happens to people who try that route. They’re like, I can’t do this semi-absentee.” You can earn the “right to be semi-absentee” like big multi-unit operators were buying a new brand and they already have a management team in place. They grinded their way over years to build up to that level of cashflow where they can easily afford to put someone in place from day one of the fifth brands that they bought into. That was a rant but that’s thoughts.

Many people can get caught up in whatever the widget is that a franchise is offering, especially when there’s a new one that comes on like the one we talked about earlier. We’re not going to get into it but if it’s new, it’s okay. It’s an interesting space, an emerging space, and an emerging franchise company, cool. It’s seductive, to be honest with you. When they pump out a juicy Item 19 that may or may not be based on franchise data but more corporate data, the whole big question is how these guys are going to help them. How do the franchisees replicate these numbers?

For the first-time franchise buyer, it’s seductive and then you throw in, “I can hire somebody to manage this business.” I have seen that there are a small handful of franchises out there that can operate from day one through a manager-run model. It happens. A lot of food, health and wellness, and beauty. There’s a labor force you can tap into and hire a manager. That doesn’t mean that you’re not involved as an owner.

You’re going to be super involved and you’re getting the phone calls when the toilet is not working, even though you think your manager should call a plumber. You’re the owner and they’re calling you because that’s how things work. That happens or the manager doesn’t work out. Are you willing to step in and operate this business? The thing I’ve seen is a lot of businesses that traditionally, no matter how you slice and dice it, there isn’t any way these things can be semi-absentee. My opinion would be home service. Home service is a very hard category to get into semi-absentee. The trade-off is they’re lower investment.

They can’t scale but they typically scale with grit from the owner, especially the first 12 to 18 months. You’re not going to hire somebody, most likely, that can come in and put the grit in that’s going to be needed to operate a business that doesn’t have a physical location that’s getting 50% of their customers because they pick the right location with the right shopping center. That’s drawing in the foot traffic. They operate in a different way. That’s the trend I’ve seen. These people are getting into home service franchises that are semi-absentee and I’m like, “That one doesn’t compute for me.”

That’s a good distinction to make too with home services. I started my career in the HVAC world so I know. At least in the Northeast, I know the HVAC game and what it takes to be a contractor. I’m dealing with homeowners and sending out quotes and all that good stuff, especially starting a business in that sector from scratch. A GM doesn’t have the incentive to put in the work and have the patience to go through all the headaches that you’re inevitably going to face.

You are right. Certain brick-and-mortar models can get away with it to an extent because at the end of the day, as you mentioned, you’re still the owner and you’re going to get phone calls. If someone quits, you’re going to have to hire someone new or you’re going to have to step in temporarily. You’re never fully free and clear. Home service is a scary one.

I met with somebody and had coffee with them. He reached out. He’s in Charlotte and he’s looking at some franchises. He wanted some opinions and he’s looking at a home service franchise that was pitched to him as a semi-absentee. Thankfully, it came out during validation. There’s nothing semi-absentee about this business. If you’re going to be the owner, be all in. He got it but until he heard that from a franchisee, he was thinking he wasn’t thinking anything differently. I started telling him the story when I went to a home service franchise.

I’m like, “This is the shit that goes on when you go to a home service franchise. 1) The text messages start at about 6:30 in the morning. 2) When you’ve got people out in the field all around town doing stuff, the chances of s*** going wrong are much higher.” When my guy was pulling out of a parking spot when he had lunch and decided to rip the front half of a brand-new Lexus off with it because he didn’t take enough clearance to get out of the parking spot, that s*** happens. Every job is typically different so it’s not like it’s rinse and repeat. There are some home service franchises that are much more rinse and repeat but every job is completely different.

The chances of s*** going wrong are much greater when you’ve got people out in the field, but when you have your customers and employees within the same four walls of a brick-and-mortar concept, it can lend itself assuming that the revenue potential can get there to support having a team of people, including a working manager from day one. It’s a lot easier to manage the business from the simple fact that the customers and the employees are on the same four walls operating the business, servicing customers, and doing whatever they need to be doing.

There are trade-offs. There’s no magic bullet with all this stuff. There’s no perfect franchise. There are so many different angles to look at and so many different layers to look at with all this stuff. Candidly, what you found is if you want to get in with a quality franchise system, you’re fishing in a pretty small pond.

Yes and no. I had a different newsletter that said five hot takes on the industry. Sometimes, you’re fishing for a good content idea and that’s what I came up with. I said most franchises aren’t worth it. I said 80% to 90% I don’t think aren’t “worth it.” I got a few responses that were angry. They were like, “You have no idea what you’re talking about.” I disagree because 80% to 90%, let’s say flip it, that means 10% to 20% are “worth it,” which still leaves you with 300 to 750 concepts. That’s a long list if you’re going to analyze and pick a business. There are still plenty of options. From an industry perspective, it’s not great for franchisees.

Percentage-wise, most of this is crap, but the 20%, 10%, or whatever it is make it all worth it because those are fantastic business. There are good franchises out there that can be incredibly impactful, not only for the franchisor but for the franchisee and the communities that they’re serving. When it works, it’s beautiful. I do think people need to be like, “That’s why I like working with you because you help them pick and narrow down a list.” It’s a good list and they try to make it happen in their market, but that’s the mindset. It’s not as wide and as big as a lot of folks make it out to be.

FM 7 | Wolf Of Franchises

Wolf Of Franchises: There are good franchises out there that can be incredibly impactful, not only for the franchisor but for the franchisee and the communities that they’re serving.

 

The other thing we probably haven’t talked about too much and maybe we can wrap it up with this is we’ve talked about franchisors, founders, and some real and raw stuff that people are thinking about getting involved with franchise companies. Somebody told me this. He’s my business partner with Excel FD. He told me this and this rings so true in it. If you think of franchising in thirds, a third of it is the franchise, the founder, and the team. That’s there to support the franchisees. A third of it is the actual business model. It needs to be a replicable business model that can be replicated. The last third is the operator itself.

All this stuff, even if you found a franchise that checks every single box that we’ve talked about that you should be looking for in a franchise system, you still got to operate this thing. There is a big look in the mirror, “Am I willing to sign up for the first year is going to suck?” They plan on it. Hopefully, it doesn’t, but anything new like if you’re starting a new business, franchise companies are going to help shortcut a lot of the stuff and get to where you want to get to faster. You still have to operate this thing so the last third of this whole thing is getting involved with a franchise for the right personal reasons.

That’s so true. I’m glad you said that because you should expect it, not even suck but there are growing pains. You are starting a new business when you’re doing that so it’s not going to be instantly cashflowing overnight. If the expectations are set up correctly and you pick the concept that you can get behind, that’s super important when the days are a little bit tougher versus if you’re thinking about it from a spreadsheet perspective and even going back to the semi-absentee thing if that’s the expectations, it is a rude awakening and that can mess it up. That last 33% of the operator can be totally the wrong fit, given the potential surprises that maybe they weren’t ready for.

That’s probably where most, if not the most, variants in franchising are. It is operator-to-operator. When you start validating with these franchise systems, you start to hear like, “There’s an actual top third, middle third, and bottom third of performers. Not everybody is performing the same way with these averages and medians.” No, there is. There’s a spread.

It’s wild, too. We’ve been onboarding franchisors to Krokit. This is nothing related to the data on the platform but an anecdotal conversation with the CFOs and COOs of these brands. As you go who we’re talking to, they’ll say things like, “We have this franchisee who totally went outside our guidelines in our playbook for picking a site and now their rent is double the amount of the average.” It’s right off the bat there.

You have a franchisee who is paying whatever the rent should have been, $10,000 or $8,000 a month, and is paying double. That’s $100,000-plus of lost profit because they decided not to follow the actual playbook that all the other franchisees followed. It’s things like that. You’re right. They make a difference and it can vary greatly from operator to operator. Pick the right system. Follow the rules because they’re there for a reason.

That was fun. If anybody wants to get in touch with you about Krokit or any opinions and advice, how do they do that?

A lot of ways. One is Krokit.com. You can fill out a form to request a demo. The button is on the homepage. It’s the big red button in the top right corner. DM me on Twitter. Apply to my newsletter. If you subscribe, that’s me on the other end of it. The WolfOfFranchises.com website as well. We have a form that you can submit if you want to get in touch. A lot of ways you can do that.

I appreciate you coming on. Thanks for the chat.

It’s always fun. Thank you.

 

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