[00:00:00] Speaker A: Welcome to Create wealth through Franchising. I'm your host, Kim Daly.
Whether you're a CEO, a military vet, a real estate investor, or simply in career transition and ready to take ownership of your future, with each episode you're gonna learn valuable insights and hear inspiring stories from within the franchise industry.
On that note, my guest stories are their own. And as a franchise consultant, I do not make personal brand endorsements or earnings claims, but I do educate, motivate and inspire dreams.
Now onto the show.
Welcome back to Create Wealth Through Franchising podcast and Kim Daily tv. Boy, do I have a special episode for all of you today. It's actually going to be a two part miniseries.
So here's the setup. We all invest in franchises because we want success in our life. We want to build time and money, freedom. But sometimes franchises don't always work out. There is a failure rate in franchising and that is the subject that I want to cover with you today in this two part miniseries by bringing in an industry legend, Mr. John Rachi. He's going to take the perspective of what are the successful attributes of a franchisor to enable stability and control in a positive brand experience for franchisees.
And I am going to take the part of the story that deals with the franchisee, what are the attributes of successful franchisees so that while we talk about success and what sets up success, ultimately we're also then defining why people will not be successful both at the franchisor level and at the franchisee level. So, John, welcome to the studio of Kim Daly tv.
[00:02:01] Speaker B: Well, thanks, Kim. It's, you know, but a big fan of yours for years and being interviewed by you or join you on a podcast is, it's a highlight for me. So thanks.
[00:02:13] Speaker A: Okay, so John, I mean I want you to set up with my followers a little bit about your background. Let's start there so they know who you are and why, why I say that you are a legend in our industry. Tell us a little bit about your background.
[00:02:25] Speaker B: I'm just a franchise guy. I just, I've been really fortunate to have been mentored by what I would refer to as legends in the franchising industry. I've been doing it 35 years by way of background. I started my career literally delivering pizzas. I was went on the Krispy Kreme donuts, part of the leadership team, took the company public and I wanted to go own a business. And at the time I had an opportunity to buy one van business and that we cleaned mechanical systems, heating and cooling for both Residential and commercial. And I didn't know much about it. And there wasn't a playbook for me to follow like in franchising. So I effectively had to write my own playbook.
And I was doing it. I was, I guess I wasn't that passionate about the business.
And this is probably a takeaway that I think it's really, really important that people, franchisors, they have to walk the walk and talk to talk. They have to believe in their business.
And I don't know if I believed in the business when I first bought it. I bought it as more of just an investment until my 6 month old son was rushed to the hospital with respiratory illnesses very severe. We could have lost our son.
And it turns out what needed to be done to help my son was a very service that this little business I bought did we actually provide a service to our own house.
And he, prior to him getting sick, I never did.
So again. It goes back to was I really invested in the business that I owned that I really believe in it? And when we did, subsequently it saved my son's life.
And as a father, I was so moved by the business.
I resigned from Krispy Kreme to scale this business and like the spirit of my book, to reach out, to find a mentor. Even though I was an executive at Domino's and an executive at Krispy Kreme, that doesn't teach you how to be a franchisor. I knew a lot about pizza, I knew a lot about donuts, but I didn't know how to actually build a franchise system. So I reached out to gentleman by name of David McKinnon who is a founder of Service Brands International. They were the parent company at the time to global brands like Molly made, Mr. Handyman, et cetera, et cetera. And I asked David if he'd be willing to mentor me. And not only did he mentor me, he partnered with me and collectively.
And this is also really important, we'll probably talk about it. The importance of having intellectual capital along with financial capital. So franchisor David and I partnered and I had the benefit of great experience and leadership from service brands. And this was in 2003. By 2006, we were the global leader in our space. Fast forwarding. I joined this company, it's now known as the Belfor Franchise Group. They're a billion dollar company. Then I spent the last probably 20 years of my career partnering with other young, enthusiastic, ethical, just really focused franchisors in all sectors. Everything from beauty to home services to light food and beverage to wellness. So I got the experience of really growing these brands and just helping founders. And so I.
That's probably my story.
[00:05:54] Speaker A: I'm give us some of the aggravates within franchising that you've been awarded over the time.
[00:05:59] Speaker B: Pretty coveted award in franchising is the entrepreneur of the year for franchising. And some of the past recipients happen to be two of my mentors. Founder Tom on in of Domino's pizza and David McKinnon of Molly made Mr. Handyman. But other winners were JW Marriott, Fred DeLuca, founder, Subway Jersey Mike's, I believe Colonel Sanders. And so I, I had the good fortune to win that same award as my predecessors, my mentors. Tom Monahan won it in 1992. Then I believe David McKinnon won it in 2002. Then I won it 10 years later to keep it going. And so you have three Ann Arbor guys all win this most coveted award in franchising. And then, then I was also honored. This next one was I was really proud of because it's just an entrepreneurship. It's EY past winner, founder of Amway, you know, but he won the global award. I. I wasn't that level, but I won the regional for EY and that's something I'm really, really proud of for my team. Unfortunately, can't put everyone on stage. I was just a recipient, but I really represent my teams all along the way and I wrote my book and I also something I'm really proud of is I started the only mentorship program in franchising for the IFA. And if you go to franchising.org today and you pull up friendship, that's my program.
And the one person who believed so much in helping others was a founder of Subway, Fred DeLuca, 44,000 locations. Fred joined me in helping to mentor young franchisors. So that's about it. It's, you know, I sit on some boards. I sit on the board for the U. S. Special forces, Green berets.
You know, I help transitioning special forces members. I run a mentorship program for Michigan football. I sit on some large kind of global franchise boards as well.
[00:08:01] Speaker A: And this man comes to Kim Daly when he hears that I'm starting a mindset in coaching academy. Here we are trying to figure out how we may actually work together because he's. John's also now getting giving back in franchising and in a mentorship role at a new company called the franchise mentor. And you guys know me, I'm always about how can I help more people achieve the American dream? Right. We all want that time and money, freedom. And franchising has completely changed my life. I think it's fair to say it's completely changed John Rachi's life. And that's why we're so passionate about making content that helps you out there get into this industry so it can, can change your life too.
So what we want to talk about today in part one of this mini series is failure in franchising, but spinning it more to the positive side. Like what are those successful attributes of a successful franchisor? So John has clearly demonstrated through his background that he understands the franchisor side of this equation. So we're going to toss this one out to you, John, to open it up. And I, I've asked him to come prepared with the three attributes. What are the three most important? Certainly there are more, but let's start with 1, 2 and 3. What are the three most important attributes that you believe every successful franchisor needs to have?
[00:09:23] Speaker B: Sorry, I'm not going to say three. I'm going to say four and one. The fourth one I'll start with. It's kind of what I just alluded to, what I learned when I started my first business is I believe the franchisor has to have a belief in their own business.
One of the things I'm going to talk about is a model needs to work. But I would also caution, I just don't believe successful businesses can.
The foundation cannot just be.
It's just about the financials, right? That's one of that. It's paramount that it has to work within the context of a franchise model. I believe that the franchisor needs to truly wholeheartedly be so bought in and believe in their end product.
Not just the financial, the economic side of it. They have to believe in it. I know firsthand I believed in the business I bought because of the economics. So I bought it. But it wasn't until my son had his issue that ignited a different flame inside me because it saved my son's life. And now the commitment level me as a franchisor, it went to a whole different level, you know, So I believe the franchisor, you have to understand their why behind the business. And if I'm a franchisee looking at a brand, I want to understand the why behind that franchisor.
[00:10:58] Speaker A: So in the Z suite, John, we, I, I am teaching people how to use, how results actually come in our life. So the world teaches us that results are come from effort Right. And it's strategy. And our entire industry and franchising is built on strategy. And I am not diminishing the value of a good strategy. Right. Not diminishing it at all. However, the results in our lives don't come from, from strategy alone. Einstein said strategy will take you from A to B, but your imagination will take you anywhere. So what did he mean by that? What he meant is when you think from your imagination, you're thinking from possibility.
And when you're lost in your daydream, something that's important to you, that you believe in, there's a different energy behind that and it's a different frequency. And everything in the world is frequency, especially when you're Albert Einstein. So this is actually quantum physics being brought into a business conversation. So the reason there's so many franchisees out there transacting and they're efforting and they're following what the franchisor says, A plus B. And they're getting a linear result from that. But they're not set free. They're not living the dream. They're not happy and in love with what they're doing. And that's what you were experiencing. I can explain that with quantum physics because the results don't come from A plus B. That's logical thinking. The results come from our active imagination, from what we firmly believe and who we believe we are. So if you, the fastest way to change your result in your business is to do what he just said, stop looking at it as a money grab and look at it as how can I serve other people and how does that make me feel? And when you show up with the power feeling inside of you, you are now delivering a different frequency behind what you do. And that can quantum leap your financial result. Sorry, I didn't mean to go off on that, but I had to get that in there. So I love that. And that's the first thing you said there. It's, there's going to be four, so that's going to be number one. The franchisor has to have a firm belief. I also think, John, and you can agree with me on this, that when you're a franchisor, you're building a culture on belief, right? Like you have to make all these other people who are investing in their hard earned life savings in your idea.
You're the culture leader of that, you know, and the greatest example I always give is Chick Fil A. As consumers, we don't even have to stand in a Chick Fil A. And we know what Chick Fil A stands for. Why? Because the culture is so palpable. Where did that come from?
True with Kathy, their founder. Right. Who had the vision for Sundays off and how we're going to treat people and we're going to be known for that human experience.
And so all these years later, those franchisees have carefully executed on the belief of their founder and the culture he instilled in them. And that's why you have a great American franchise brand in Chick Fil A. And that's what we all want to be a part of. But it starts with the leadership, the founder of the franchise, does it not?
[00:14:14] Speaker B: That's so well said. And I love the whole quantum physics type of connection. I mean, candidly, that's probably maybe above my pay grade. And you start talking Albert Einstein logic. But if you just dumb it down, it's everything.
Because as a franchisor, you have to believe in what you do. And then I let me. I had to put my franchisee hat on. What's so important for a franchisee in buying a business?
They have to believe in this business so much. Kind of what you had just said and true at Kathy. It's a great example.
What you experience inside a Chick Fil A, that's real. That is not because that's what they were taught at orientation or it's in the ops manual. And you're required to say what you're. You know, that it's our pleasure. It's. That doesn't come from that. It comes from they truly believe. And as a franchisee, not to digress, but everyone's going to have good days and bad days in business, right? You're not always going to hit your benchmarks that day.
But if you believe in what you do and you're excited to do it every day, then that's you're always going to have a good day, right? If you derive your only excitement, if you, if you determine, hey, I had a good day just because I I hit X number of transactions in the day, I'd be concerned for the person because you're not always going to hit that. But if you truly measure success by the way you service your customer, you may not have hit the number of customers you set out you're going to hit that day. But if you got true enjoyment out of servicing those that you serviced, you're always going to have a good day.
[00:16:01] Speaker A: Okay, so number one is franchisor belief, for all the reasons we've mentioned. So what's the second attribute that you believe a successful Franchisor must have.
[00:16:14] Speaker B: I believe, as a successful franchisor and a successful franchise system, it all stems from your franchisees.
And I believe it's the selection. It's the right. Having the right franchisees in the, in the system.
And so what does that mean exactly?
People for years would ask me, hey, John, as a franchisor, what do you think is the most important? You know, again, we're going to talk about this, but in. And you could argue which is more important.
And I don't know if. If one is necessarily more important because they're all equally as important.
But I always. What I find myself saying is make sure you have the right franchisees and make sure that your interests are alignment, are in. Aligned with one another. Expectations are aligned with one another.
Character and culture fit are aligned with one another because anything could be taught. You could teach anyone a business model, but I don't believe you could teach character. And I don't think you can really teach culture. I mean, that's all that comes from your selection.
So as a franchisor, it's not about the franchise fee. It's not. It's not. It's not. It's not about. It's you. You have to make sure you bring in the right franchisee for what's right for the culture, the heartbeat of your system.
Right.
If you focus on that as a franchisor, building your system, the right franchisee at a time, you're going to have a great system. I'd often have franchisees say to me too, John, what's, what's your advice in buying the right franchise or, you know, which is the hottest franchise, you know, the sexiest franchise today? And it's never about that. And I would say to said franchisee, it's about fit. You got to find the right franchisor that's right for you and your goals and that you will be right for them. I mean, it's a match, right? It has to be. Which is probably one of the reasons I probably admired what you do for so long.
You're the reason I believe Kim Daly is kind of legendary. What Kim does, it was truly about culture and it's about fit and making sure you've built your whole reputation mostly on referrals from successful, happy people. Referring. You know, it's just, that's that flywheel that people read about.
And that's because I think you do a really good job at finding a fit, you know, so I at back of the napkin math, I figured I've awarded over 4,000 franchises and I'd say 99% of them, I used people like you.
Why as a franchisor, why would I do that? It's because fit is everything to me. Like, I don't know how you wouldn't.
This is such a big decision for someone.
I mean, very often sometimes they're rolling over their whole 401k, they're investing, they're leaving a business, they're sliding it all on black. Right. So to say. I mean, you can't google your way to a decision like that. I mean, you need to really work with a professional. And I'm the same way as a franchisor, I'm not gonna bet everything on some organic leads that just came into my website. It's too important. It's way too important. I, I need to work with someone who does this for a living.
Candidly, with all the brands I've had, we tried doing it having in house development people and we were never good at it. Why? Because it's a special gift, it's a special art. It's, it can't be a part time department for us. I mean this. So I've always, now we shown you become a global brand like Chick Fil A and you can do that. But mostly, you know, there's 3500 franchise systems in America. 2600 of them are below 100 locations.
You know, I would rather see that franchisor invest their time and their cap, their capital in building an organization to support the franchisees.
Right. Not using our capital for people to sell franchises. I would rather find people who do this for a living, who really do a good job, know what they're doing.
Because it's the most important thing for me as a franchisor and it's the most important thing is for a franchisee it's all about fit and you can't, you can't shortcut that.
[00:20:52] Speaker A: So I think that from the franchisees side, the reason so many people go down the path and get so far and then they can't figure out how to say yes is because they're not working with someone like Kim Daly who is lending confidence in the process. Right. I'm going to challenge your thinking. I'm going to ask you to see the other side of the coin. I'm going to ask you questions that maybe you didn't think to ask yourself.
So when you get to the end, you feel like you've stretched your thinking. You've, you know, you've asked yourself all the right questions. And because you Know that I've done this to your 4,000. I've created nearly 1,000 small business owners here in the US over 20 years. Even if to challenge you is to help you figure out the right answer is no, because that's a good answer. Right. The second attribute is that the franchisor is really selective. They're not just awarding a franchise to anybody who fogs up a mirror. You know, they're not bragging about 100% close rates at Meet the Team Day. They're very, they're being very selective in their process of who they're bringing in to their family. Those of you who follow me, you know, I tell you the franchise is a vehicle and it's going to drive you personally, professionally and financially. But ultimately, what you're doing when you say yes to a franchise is you're buying a partnership.
It's always about who, not what. If you follow Kim Daly, you've heard that once, you've heard it a hundred times. It's always about who, not what. And here's the man, the myth, the legend, John Rochey sitting in my studio today. And what is John telling you? Even on the franchisor side, it's about who. Okay, so we've got two of the four down. What is the third attribute of a successful franchisor?
[00:22:41] Speaker B: I would say capitalization.
And, but this is not just financial capital. It's intellectual. And I would argue, I think they run neck and neck. You know, there's, when I had referenced that there's 2, 600 franchise systems out there below a hundred locations.
[00:23:03] Speaker A: Can you qualify what that means for the listener? Because they may not understand like what, what's the matter with that statistic?
[00:23:09] Speaker B: Yeah. So registered franchisors, there's over 3,500 in a variety of sectors and there's 2,600 of them that don't have 100 locations operating yet. When most people think of franchising, they think of, unless it's got golden arches in front or they're selling five dollar footlongs, they probably don't know it's a franchise. Which again, that's why I go back to why I love, why I've always worked with consultants, because they help people find, navigate this vast landscape of brands when they don't even know these brands exist or these sectors exist.
That said, there are a lot of great businesses out there. I mean, I, I love entrepreneurship, um, but the barrier of entry to be a franchisor is not that hard. Right. If you have a good, candidly, I Mean, if someone just has a model or a business and they're able to spend a couple hundred grand to have someone write, you know, franchise disclosure document and franchise agreements, they're pretty much off to the races, you know, that they could start.
[00:24:27] Speaker A: Is that where you want to put your hard earned life savings?
[00:24:30] Speaker B: No. Maybe.
[00:24:31] Speaker A: But maybe not.
[00:24:32] Speaker B: Yeah. And I always say that frightens me. It always frightens me because the stakes are so real.
They're so real. And I would tell people, don't, again, don't buy a franchise off the Internet. Don't, don't play the Google game because everyone's going to have a cool website, but that is the last thing you're focused on. And people are going to have some good spin reels and YouTube videos. And that's not how you do it. I mean, I spent the last 20 years helping to scale these businesses and.
But it was never just about the money, right?
But it's very important that a franchisor is capitalized. Now I'm going to talk about the financial capital for a second. I don't believe a franchisor should build their business based on selling franchises, getting franchise fees, because I believe poor decisions could be made at that point.
Right. If they're relying on just selling franchises to cover their expenses.
When you do that, I, the very first thing I talk about, the importance of franchisee selection, that's out the window now, right. Because they're focused on whoever can write a check. So that said, a franchisor, you need to take franchise fees off the table, right? That's not how the beauty of franchising is the royalty, the, the way that whole system works. Because I want the franchisor's growth and success to be dependent upon the growth and success of its franchisees.
Right. Just that very nature is I'm only getting a small percentage of you, what you're doing. So I have to be motivated and driven to ensure your success as a franchisor. If I award 30, 40 franchises, whatever it may be, these folks, they just went from their corporate conference table to their kitchen table, you know, their co workers are now their spouse, you know, and their children are, whatever. And so very quickly, as a franchisee, it could become lonely if you're done with, if you don't have a franchisor that is there to embrace you and support you from day one.
And you know, small brands, sure, maybe the founder and a couple of folks, but as soon as that brand starts to scale, you have a lot of people, a lot of dependents now Right. That need you, they need your time, they need your expertise. They need long before they're even open, long before they ever sell, you know, whatever the product is, they need that support.
So a franchisor needs to be capitalized enough to forward invest.
They, they have to have the necessary infrastructure in place to support the franchisees long before the franchisees are ever even open.
[00:27:41] Speaker A: Open and running and even after they're open. John, doesn't it take years for a franchise to really be a cash flowing equivalent to the royalty stream?
[00:27:51] Speaker B: The franchisor you mean?
[00:27:53] Speaker A: Right?
[00:27:54] Speaker B: Yeah. Yes, and that's a good point.
They will on average, a franchisor, you know, typically need about 100 operating operating system, you know, units, not how many were sold, how many are up and running to for a franchisor we always refer to as like when are we royalty sufficient? Like when does enough open units that the royalties that are coming in are covering all of our infrastructure and paying all of that.
You need about a hundred operating well so it.
[00:28:32] Speaker A: And profitable, not just open, but open and profitable for that like 6 or 8 or percent or whatever to be a meaningful number. Right?
[00:28:40] Speaker B: Yeah, well, yeah, I would say yes. My thing I would add to that is I think you're gonna struggle having a hundred open and operating if they're not profitable. Because if they're not, it's hard to even get that far. Right, Right. Because franchisees, if they're not doing well, you're not going to be awarding them, you know, so that's going to be the last thing I'm going to talk about is. It's, that's why I said there's not one that's more important than the other. They're all the same. If franchisees, the business model, I'm kind of jumping into number four, but I want to kind of finish this. But the franchisees, I mean they have to be profitable and the franchisor, they have to do everything in their power to make sure that they're building a business model that their franchisees will be successful.
That said, so when I taught your question like how many do you have to have open and operating as a franchisor? My, my benchmark is always I need a hundred operating really successfully.
You know, that's going to make sure all my costs are covered. Me having my costs covered as a franchisor, that's, that's not the responsibility of the franchisee. Right. That's my obligation.
So what I, that's why I say the franchisor has to be well capitalized. They, they had better have a balance sheet strong enough that the franchisees, I don't want as a new franchisee who just bet everything on this franchisor. I don't want them to feel the growing pains of the franchisor. They're going to have their own growing, you know, as a small business owner.
[00:30:13] Speaker A: And where do most franchisors are they making that money from corporate stores? Do you like them to have private equity? Like where are most franchisors getting that money be while they're spending, I don't know, whatever it is, five, seven years trying to get to those hundred units that are then profitable enough to be royalty sufficient.
[00:30:32] Speaker B: Yeah, so it's a great question.
You know, there's a lot of, you know, some, some folk, I mean I love brands or their corporate stores do so well, right. Because the model is so tight and locked in that it's spitting off enough proceeds that they can support a robust, well run growing franchise system. And that's ideal because is not what you want the franchisees to aspire to be like these, you know, machine corporate stores. That's ideal. But there's a lot of different ways. I mean what I did at with friendship and Fred DeLuca and I I would identify all these young brands. And so let's say Kim Daly called and Kim Daly had a great fabulous beauty brand and she had good corporate stores. And the first thing I would talk to Kim is I would ask these questions. I want to understand how well capitalized she was. First was are financially how well capitalized is she?
And then I would equally as important as intellectual capital.
Kim Daly could be really good at running six beauty shops right. In New Hampshire.
But that doesn't necessarily teach Kim how to scale these beauty shops in Jacksonville, Florida or Boise, Idaho, you know, and you don't necessarily know what's behind every.
Every in franchising.
You know, there's different seasons like you talk about it for parents out there. Small kids, small problems, big kids, bigger problems. Same thing happens in franchising.
And because Kim is really good at Kim's beauty shops, it doesn't necessarily give Kim the certification, the street cred to be really good at Kim's beauty shops nationally.
So what I found with my mentorship program, I ended up most of my time I would say to Kim, Kim, here's what you need to do. I'm going to connect you with beauty brands Global llc because they could use a Kim daily. They could use a brand like that. No different than what John Rachi did. I was an executive at Domino's, I was an executive at Krispy Kreme, but that did not give me the wherewithal to be a franchisor.
Nor, sure, I made a decent living at Domros and Krispy Kreme, but it did not give me the funds to be a large franchisor, but eventually be the global leader.
[00:33:16] Speaker A: And that's why, like so many people who may follow me, if you've called me and said, hey, I want to franchise my business, and I'm like, okay, I'm gonna talk you out of this.
This is why. And you're hearing it from, you know, the IFA entrepreneur of the year himself, not just Kim Daly. Right? Like, so there's so much more going into being a franchisor. The responsibility alone in terms of dealing with other people's life savings. For me, that's the only question I have to ask you. Are you prepared, right, to take on the responsibility of helping these people? First time business owners, the vast majority of them are, with all their fears and insecurities and they're leveraging their life savings in your idea. Are you ready for that? You know, then you add in like how much money it's going to take to actually lift the brand and the learning curve. You're going to need to actually build out your C suite so that you have all the right support people to support all these franchisees and all the different departments you need. Like, franchising in 2025 is like, that's a wild, wild west. It was when John and I first started in franchising, you know, myself about 25 years ago, him about 35 years ago. You can't just come to the table with a bright idea and a couple of corporate stores and go, yeah, well, you can. And that's why there's, you know, 2600 franchises with less than 100 units.
So anyway, it's so brilliant, it's so good. So let me recap. So we have. The first thing was we need the franchisor to really believe.
Culturally, they need the belief. The second thing you said was we need the franchisee selection to be tight. You really got to be concerned with the caliber of the franchisees you're bringing into your family. Now we're talking about financial responsibility. Just like any entrepreneur, you have to have more than enough money to get this thing up and profitable. That's a true statement. Whether you're in franchising or you're an entrepreneur. It's the number one reason businesses fail. People run out of money. So that's number three. So what's your fourth one, John? What's your fourth attribute to a successful franchisor?
[00:35:14] Speaker B: Yeah, and if I could, I just want to make sure on the third point on capitalization that's again it's both the financial as well as the intellectual because I would. You asked me the question about private equity and so forth. It's not just because there could be people who are throwing money at it, but if they haven't done it and they don't know what you know, to be a franchisor, you're a coach. You have to be able to mentor, you have to be able to teach, you have to inspire.
So you need both, you need the intellectual capital and the financial capital. And I do also want to talk about at some point, remind me the importance of talking about brand value and unit value. Well this is going to actually tuck into this.
So the fourth thing is having a workable business model. And we touched on that and really it's almost combined with the prior three but the franchise the model. So the corporate stores could be great but you have to be able to say can is this corporate store.
Will the unit economics work in a franchise model? Because a franchise model the franchisee has to be able to help, you know, support corporate has to be able to support the growth of the corporate royalties with royalties. Right. And building a brand.
Right. So they're gonna have to contribute to the brand fund.
So the, the business model, the unit economics from the. What the franchisee is buying may be different than what the franchisor's corporate store was.
And so that franchisee business model has to. Absolutely. It's everything.
I mean we talked about the other three important things.
Nothing matters.
Nothing matters if the franchisee isn't successful, can't make money, they can't make money. So you're not going to have the growth, you're not going to just. It, it begins and ends with that.
[00:37:20] Speaker A: So does that statement imply John, that there are franchises out there who have financial models that don't. Aren't really well thought out? I'm not walking you down a dark alley. I'm just trying to, I'm just, I'm just wondering like. And listening from the listeners ear what does that actually mean then in some.
[00:37:38] Speaker B: Are a lot of it maybe this, this kind of goes back to the third point and the intellectual capital like does that franchisor just because they may be well capitalized but do they truly understand, do they truly understand the franchising model, the franchise business they have to understand what does a franchisee need? That's why they have to, they have to understand what does it mean to be a franchisor. What does it mean to be a franchisee? How do you teach, coach and train? They're not employees. You can't just fire them. You know, they have to understand.
And you also have to be careful. There's some franchise or sadly, and I'm not saying it's by design, we talked about the very first thing was franchisee selection and making sure interests are aligned with one another.
Sometimes you have to be careful. A franchisor interests may not be aligned with one another. They may create their own revenue based on franchise. Instance, I'll use an example, not saying a brand franchisees have to buy the product from the franchisor.
Well, if said franchisor is making so much money on the product, they're happy. That may have nothing to do with how the franchisee is doing. The franchisee is just buying the product. So if the franchisor is making all the revenue off the product, it doesn't really matter how well that franchisee may be doing.
Right.
[00:39:11] Speaker A: So how does one, if you're exploring a franchise, John, that's a very valid point. When you're looking at how the franchisor makes money off of you, like item 20 or you're looking at your expenses or the royalty actually, how does the candidate discern if that's a red flag or not? Is it through validation with other owners?
[00:39:31] Speaker B: You know, and I, I feel like this is for your audience. This is not a plug on consultants, but it is just a reality, which is why it scares me when people like my son or daughter, if they want to buy a franchise and they saw something on YouTube or some, you know, a website or something, it would scare me because it doesn't tell the story.
So you want to use trusted, educated coaches. Advisor, can they, you know, consultants, you, you need that.
They need to understand the process, they need to honor the process, they need to ask the right questions, they need to do the validation, talk to other franchisees. For me, I'd also tell franchisees, don't try to be an expert, right? Don't try to all of a sudden for a life decision like this, think you're going to buy buying a Franchise for Dummies book. And don't do that. You know, find the right people, find the right advisors, do your homework.
[00:40:33] Speaker A: And when you come to the advisor, even if my service is free, like trust me enough at least to follow my lead, sometimes it's funny, John. Like, people will be like, but I always say, look, this is a free service. So if you don't like what I'm telling you to do, you aren't paying for this advice. You can do what you want. Because sometimes I feel that resistance, and it's just fear. Fear makes people's like, you know, ego kind of like that part of us that drives us combative a little bit. And sometimes, like, no, I want to do it my way.
A lot of times, like, I know the way, and I know my way is better. But at the end of the day, I'm like, look, it's your process. So if you feel you need to do that in order to feel good about it, have at it. But then when that doesn't work, come back and talk to me. It's not always a red flag or a bad thing when the franchisor is the manufacturer of the product or the equipment. Because oftentimes they take on the manufacturing as a way to control the manufacturing and the distribution. Because what happens in some businesses, they grow faster than their manufacturer could support, and that halts the growth of these stores. Right. And then franchisees are frustrated at the pace at which they can get open.
So then the franchisor goes to answer that problem or solve for that problem by taking over the manufacturing of that product.
Right. And so it's not always a bad thing that they might be making money off of the products you buy or the equipment that you buy. It's kind of a fine line. And I think the answer, if you ask me, well, how do I know? Where's the red flag? I say, you got to go validate with the other franchisees. Look, the other people who've already said yes to this, the proof is in their pudding. Like, are they happy knowing what they know now? Are they going to do it again? Are they reinvesting and building multiple stores? Right. So if they're willing to say, yeah, you know what, we've experienced some growing pains. But all in all, I'm so happy with this decision. I'm profitable, I'm definitely opening more stores, then it's going to even out. Is that what you would say to John?
[00:42:34] Speaker B: So now you're talking to the franchisor side. I mean, I'll tell people, don't count other people's money as a franchisor. I, you know, Domino's Pizza, we had our own commissary. We.
You were buying Domino's Pizza product, Right? Krispy Kreme, you were buying our donut. Mix. I mean, so I am all for the franchisor, you know, controlling the supply chain, controlling the quality.
That is a wonderful thing for franchisee to have.
But this goes back to like, I don't want the franchisor to be reliant on franchise fees to be successful.
That's a red flag. If I don't want a franchisor to be reliant on their distribution company to be successful, that's another red flag. I want a franchisor to thrive because their franchisees are thriving and then because they have a distribution company that's accretive to it all. That's you want your franchisor to be wildly successful.
The first and foremost, the franchisees have to be successful. And then I would tell a franchisee, don't count the franchisor's money because they have their strategy, whether it's supply chain, it's control, whether it's product quality, you want them to be. And I guess my closing thing would be this. I would say for years, if I had a dollar for every time I'd hear a franchisee say, oh, all corporate cares about selling franchises, I would say this to them. I said, it's not all we care about, but it's in the top two.
Right.
Number one is successful franchisees. Because if I don't have successful franchisees, nothing else happens. At least nothing good happens. Right.
First, most important priorities. I have successful franchisees.
Why? Because they're gonna, that's gonna give them good unit value.
Good unit value. Which, what does that mean?
The franchisee is going to have a certain profit margin. That's their unit value.
Someday they're going to want to maybe sell that business.
They're going to sell that based off a certain multiple of that unit value. The next thing is, as a friend, if a franchisor is doing their job and they're growing, you're going to create tremendous brand value.
Well said franchisee. Who has a unit value of X.
If the brand has did such a good job that you can't even buy one of those anymore, the brand value is so strong that franchisees unit value, you're going to add on brand value. So if you're selling that X multiple per unit value and then you top that with tremendous brand value. Chick Fil A right. You're going to add brand value on top of unit value. So the franchisees investment has gone up. Right. If a franchisor has really bad brand value, so it could be a number of things. One, they've never created. They've never sold. They've sold 15 franchises to their college roommates and their neighbor. And they're, they're stuck in that, I call it dead man zone. There's not enough royalties to come in, so they're just stuck.
So that franchisee, they're not getting the benefit of the brand dog, or said differently, if the franchisor is growing, but they're not controlling their supply chain and they don't have good system standards.
Franchisees who get upset because corporate's saying they're not allowing us to do this or this, well, that's a good thing, right? Because that's going to either help your brand value or hurt your brand value. So again, as a franchisee, you, you're going to have said value, which is why this is in the top four. You have to have a good franchise unit economic model so you can have good unit value.
But then you want that franchisor to be growing and thriving, managing the system standards, right? And just building this brand value because that's what's going to make the investment of these franchisees who just took their 401k invested to make it the one of the greatest returns of their life because they think they found the right business and that's thriving and they got in when they got in and the brand values through the roof. So it all has to work together.
[00:46:56] Speaker A: We've all had the personal stories and experiences with people in franchising who cashed out for 6, 8 multiples of their EBITDA because the brand value, the planet Fitnesses of the world, the massage Envisa of the world, right? We can go right down the list, right? There's that peak moment in time when the brands don't hold on that to that value, but they can. But mostly there's like this peak moment in time. As you know, as John said, when all the territories are sold and you have the most established store and customers and other people are like, I want to get in on this. And that's when you can just sort of be like, okay, pay me eight times my. Even I. You get it. You know, sometimes you get it. So anyway, I love it. And I've shared stories like that on, on this podcast before and I've interviewed people, franchisees who've shared amazing resale value stories. It's another part of the puzzle. When we're talking about building wealth and that American dream and franchising, here's the close right here. But when we're talking about building that American dream, it's another piece to the puzzle to consider versus entrepreneurship, where you might not have that sort of. You won't have the brand value necessarily that you would. Would in a franchise. So, as you can tell, this is a conversation that John and I could probably have. There's probably 10 more things if we had more time, we could add to this pile. So I want to give out a call to action for John because he has launched a new business called the Franchise Mentor. And clearly the man knows his stuff. So for those listeners who may be following Kim Daly because they're thinking about becoming a franchisor and they're thinking, wow, I need to get to this man. John Rache. How would people. People do that? John?
[00:48:34] Speaker B: Well, thanks, Kim. So, as you said, the franchise mentor is very new.
And I'll just backstory. It was after doing this for 35 years, building brands, my wife and I survived a life event this past January that we said, hey, we're going to just do things. We're going to kind of shrink our lives a little bit and simplify, and I'm just going to really help coach and mentor franchisors. That's probably what I'm best at.
So we're building out a website. It's the franchisementor.com it's not up yet, but I. People could reach me by the time.
[00:49:15] Speaker A: You'Re listening to this, though. It might be.
[00:49:17] Speaker B: It might be. If not people can reach me, it just.
[00:49:20] Speaker A: We can put John's contact information.
Yeah, we can put your email in the description below. Yeah, let's do that. So we'll put the website, because the chance that you're listening to this six months from the recording day and the site is live. And we'll also have his email address in there so that people can reach out right now if you're interested. Because while the franchise mentor business may be new, clearly the man, the myth and the legend is not new to franchising. So I thank you all for staying with us for the total hour. Come right back. We are going to have an inspiring conversation about the most, most successful attributes of a franchisee. So stay tuned for that, John. I'll see you in the next one.
[00:50:01] Speaker B: All right, thank you.
[00:50:03] Speaker A: You can find more content just like this on my YouTube channel at KimDaily TV. And if you're inspired to take the next step to explore franchises matched to you, please email me right
[email protected] TV. That's inquire@kimdaily TV.
