Building a Winning Franchise System Insights from Jeff Dudan & FRANdata’s Edith Wiseman #227

I'd like to start by pretty specific premise and that would be helpful to our listeners here on Unemployable. And it's this, what characteristics and maybe what benchmarks make a really good franchisor? And maybe they're different at the emerging level, at the intermediate level, and then kind of at the mature brand level, something that's been around for decades. But can we talk about that? And this can advise emerging franchisors what they need to shoot for and maybe it can advise franchisees what they need to look for.

Sure. So that's a big question. So I'll try it. I'll try and start with the. I think anyone who's looking at a franchise when they're evaluating across kind of the life cycle of where a brand is, they have to realize that anything that's emerging will be higher risk and anything that is mature is likely to be a lower risk, especially if they have a high level of unit success rate. So we just start there. And the reason that I say that is because just sheer number of locations across large geographies has a provenness to it. With that said, though, an emerging brand that's maybe new to an industry, the return potential could be higher than a mature brand that has been in the market longer. So it's that very simple equation of higher risk, higher reward. So I think it's helpful to just kind of lay that landscape that, you know, there still can be some high reward with mature brands. But in studies that we've done looking at return metrics, emerging brands can offer a higher return, especially if it's in a new category. And then those returns start to go down as the ability and the provenness of that system matures over time.

That's an incredible point. And I hadn't. It's an obvious point that an established brand with 40 years of operating history is going to have a very predictable outcome. You can just look at the hundreds or thousands of locations and say, well, if I follow the plan, I can expect that too. You also see over time that there's a normalizing of auv. You don't have this in an emerging brand, say three to five years old, that maybe put a hundred new owners out there, 20 a year. Over that five years, you're going to have some people that are starting up, some people that haven't figured it out. Then you're going to have some people that are having wild success and then 60 to 70% of them are in the middle trying to find their way to get up there. If You've been operating for 30 or 40 years. Look, everybody's going to be in a much smaller distribution because the system is the system and people have figured out how to get saturation out of the marketplace. They all run the same marketing programs. But here's something that's interesting that you said that I didn't realize or I hadn't really fully thought through. In an emerging brand, if it's a new category, the ability to acquire customers to a new and emerging blue ocean type concept should be much easier and much lower customer acquisition cost. The other thing is, is that you not only would get preference in available territory, I mean if you want to go into one of the 50 year old brands and say I want to buy downtown Charlotte, it is not available and it's unlikely that any major market is going to be available to you. So you're going to have to find a way to get into the through a secondary market and then maybe start to buy your way into the bigger markets and play that game. But for us at Homefront Brands, when we launched our brands which were all basically emerging kind of incubation brands, the whole country was open. So people could maybe get a larger award in a more preferential territory which then if the system is successful, those will have a higher resale value and maybe a higher yield during operating.

So yes, I would agree with what you said and I'll just reemphasize it is higher risk, those two. So and one additional point on a mature brand. So if you take a brand like Shipley's or Bojangles or any one of those brands that are have a lot of units, but they're very concentrated in very specific geographic markets, maybe even Dunkin Donuts as well. Going to new territories makes that brand kind of go back to the emerging kind of viewpoint. Because bringing Dunkin to California where the base of customers is not there, creates a higher risk equation. There is a little bit of like how big and how national because those marketing dollars have not typically been put towards a national campaign where there's new markets. So yes, but there is. So, so I think that's just helpful for people to know going in that there's going to have to be a little bit more marketing push to make sure that those units can be successful.

How does a franchisor truly understand their franchisee satisfaction?

Well, they have to talk to them and actually survey them and get that meaningful feedback, I think. So it's really important to know that franchisees and franchisors are never going to Agree on anything, meaning everything. Sorry, I didn't mean to say that they're not going to agree on every.

I almost changed careers. Don't do that to me.

Edith, I had a very interesting conversation. So we did a study recently on field operations support across some of the largest brands that are in with storefronts. And everyone looks to Chick Fil A and Starbucks. And as these are top tier in terms of like supporting locations, and even still any brand that is best of the best, there's still a level of friction between the franchisor and the franchisee forever. It's the nature of relationships we don't necessarily like the franchisor owns the brand and is dictating the direction and strategy of the brand. And so not everyone's going to agree on that. And so I think that I just say that because franchisors need to understand that how franchisees think to get that local intel and at the same time the franchisor is going to take that information and really figure out what's best for the system. So it's important for franchisors to always get feedback on from franchisees, both from the fields, the conversations that go on day to day with corporate. So to me that's a never ending feedback story cycle. But yes. So that's a long winded way of answering your question.

If there's always going to be friction, that would indicate that leadership is going to be critically important in maintaining alignment with the franchisees so that everybody can win together. What have you observed across the brands in terms of their leadership styles that might be the most successful? Is it brands that find ways to use carrots like economic incentives, marketing, co ops, training trips, president, you know, top incentives for top performers to pull everybody up when it, when do, when do brands use the stick? Meaning if we can't all agree, that's okay, but we still all have to align. And you know, if 70% of the system is in agreement, 30% is not, then you've got to kind of drag the 30% along because you have to provide a unified front to the marketplace. You gotta provide consistency in product and messaging and all of that things. And then when is it appropriate for a leadership team just to use a big hug?

I think a hug is all the time. Who doesn't love a hug? Especially one that's a full embrace, but no patting on the back.

Okay? Okay, well, how long? Three, how long is too long?

So franchisors, when we talk to franchisees about what it is that they both appreciate about A franchisor in terms of any change in the system that is required because of the marketplace and what they want more of from their franchisor. What we hear are, first of all, that the franchisor comes in and experiences the business. Right. So that the franchisor isn't just like dictating changes that they are in the business, meeting the franchisees, really involving them. You know, there's. During one of the study that we did, one franchisor shared with us the number of times that the executive team is visiting every single franchisee to just to see the operations and really experience the operations. So that if a franchise, it's kind of like going to the doctor and you say, like, oh, here's my pain problems. Like, then they know I see the pain that you're experiencing, like, and I'm feeling it with you. So I think that's one thing that is franchisees say they really appreciate. How do franchisors, It's a whole ecosystem, like you said, giving incentives. Franchisors try to arrange franchisees to help one another. That's a really key component that helps to bring people basically build the network. Right. Like, as a franchisee, you're building a network of other business owners who understand your business in a way that, like, typically, if you're on your own, you wouldn't have. And so to be able to build that network and have your franchisees on speed dial to say, hey, this is what I'm experiencing. How are you dealing with this? Like, that is. That is, I think, very helpful for a franchisee to do themselves, but also for the franchisor to help facilitate that type of relationship. Let's see, there's lots of things that franchisors do to help incentivize good relationships with their franchisees and creating Facebook pages so people can talk about, you know, have a community.

Yeah. Well, it's very difficult to measure franchisee sentiment. And because in a survey, if you're asking the right questions, you're going to be asking them to what are the improvements we need to make? If you're a franchisor that is committed to continuous improvement, you're going to have feedback, is the breakfast of champions. You're going to find a way to eat it every day. So whether it's through your surveys or whether it's through your engagements, you're also going to, as Mary Thompson says, there's a top line, there's a bottom line, and there's a front line. And you've got to get unfiltered feedback directly from the front line. We talk at Homefront Brands about franchisee experience versus franchisee satisfaction. Because my observation is over 35 years of building businesses that the best business owners are rarely satisfied. So if we want to build a system that is going to attract sophisticated, high net worth, serious capable business owners, we're going to have some antagonists and we have to be okay with that. Not only that, we have to, we have to embrace them. Because if you just want all the bubbles and unicorns coming at you, of all the people, I mean, I've the happiest franchise owners are the ones that find a balance between what they want to get out of the business and what they're willing to do. And it's usually somewhere around the 40th percentile. They're comfortable, they're making X dollars, it's twice as much as they made in corporate America. They get to do what they want, do their hobby on the weekends. They've been able to staff the business appropriately and maybe they're in a 20, 15 to 20 hour a week situation. They're making twice the money they made and they're really happy. Well, as a franchisor, I mean we get paid on top line. So we want impatient, challenging, aggressive business owners that are going to go out and build it. So for us, franchisee experience means that every franchisee, many franchisees have their last day. So it might be five or six, seven years. They've built a great business, they want to sell it. Sometimes it's two decades down the road for whatever reason that they decide to transact. The kids don't want it, they're ready to retire, somebody gets sick, whatever it is. But we would want them to say that their investment and their time spent with us was a good commercial use of their time, their energy, their money and their opportunity costs. We would want our franchise owners to say that every change that we made and everything that we did was, was with their consideration and with their intent, their best intent. And it was actually clearly best for them. And if it's best for them, then it's best for us. We would want them to say that we were committed to continuous improvement and we didn't have to be pushed to push ourselves into trying to make the business better. We didn't treat it like a crock pot, we didn't set it and forget it. And the last thing we'd say is that we were good people. And I've had that in situations where we've gotten to be in an antagonistic situation. And, you know, I'm looking at the person across a table or on a teams call and they're just say, you know what? This didn't work out. I don't think I got everything that I was actually thought it was going to be. Whether that was on my expectations or it was on your, you know, your delivery. But you guys are good people. So I know that we can find a way to just, you know, figure a way to work this out. I want to go back and get my job and I'd like to find a way to, you know, exit this with honor and sell my business, whatever it is. So, you know, those are the kind of experiences that we want. And again, because there's the satisfaction, I mean, is great, but if, if everyone's too happy, then nobody's too challenged.

So that is, there's a lot there. You want people who are motivated business owners.

That's right.

The one, the one question that I think is helpful is, would you do this again?

Would. Would they do it again? Yep.

So, because there's a, like, there's a lot between, you know, like, I would like to do this or, you know, everybody. I have a friend of mine who, who quit her the Franchisee association because she's like, I'm just tired of people, you know, complaining. I just, like, I'm, I want to run my business and I want people who are coming to bring good ideas and you know that. So there's a lot between starting your business and getting it up. But just saying, like, would I do this again? Is I think a big, a good indicator of a successful relationship and outcome.

Yeah. How should franchisors think about selection of franchisees? You've been at friend data for quite a while. You've seen an emerge, just a, just a revolution in the industry. It's totally different than it was even 10 or 15 years ago in terms of the velocity of number of brands that come in, the number of brands that go out. This, this, the rise of the FSOs leading to accelerated franchise development, where people accomplish things in two years that used to take them 10 years to accomplish. That comes with a whole set of problems and challenges, not only to the cash flow of the franchisor, but the ability to support that many owners all at once. Making sure that you had it all right, because that if you didn't have it all right from the beginning, then there's going to be a switching cost for the franchisees. And now they get, now they get switching fatigue and they're just, you know, Feel like they've been jerked around a little bit at the end of the day, I mean, if you give my experience is if you give the right franchise owner a reasonable program to execute, they will do it. So let's just say that 20, 30 of our people are superstars. 20, 30% of our people are superstars right out of the gate. How have you seen brands increase that percentage to 50, 60, 70, 80%, or maybe even chick fil A is probably 100% success rate.

So I. So there's. There's two parts to the equation. So there's the franchisor picking the right fit for the business. And not every business has the same fit, right? So I remember, you know, I just went to a restaurant conference. Everybody there is like half the. Half the people own a restaurant. And a lot of people say, like, God, I would never want to own a restaurant. You're basically opening your doors and you're hoping that your marketing is strong enough that people are going to come through versus people who are hardwired to say, like, I'm going to go get the business. Like, I'm gonna go door to door. Like, you're gonna be really proactive versus trying to do partnerships and driving marketing and hoping people show up. So there are people who are more comfortable in a retail environment and because they may have had restaurant experience and they understand hospitality and they understand food cost margins and how to, like, what, really watch every single penny. Like, that's a very different person than someone who is joining a service brand where you have to be more proactive and the sales are a different trajectory. Right? So like in a restaurant business, you open, the sales are highest in the first two weeks. In a service business, they're the lowest in the first two weeks. So nothing. These are very different type of people. So there is not a one size fits all. I do not think that someone who is going to run a restaurant is going to be as successful running a service business. That being said, there are greater numbers of franchisees that are crossing industries, but I think that's just a business acumen and being able to hire the right people to execute a different type of business. So they're essentially like hiring someone who has that expertise. Um, so there's. So your question is, how do you get franchise systems to go from 20% to 30% of the best? And like, Chick Fil a is someone who gets 100% of the best. So Chick Fil a has the benefit of being so well known that everybody tries to. Wants to own a Chick Fil A. But they have very specific criteria about the type of people that they want in the business. So they know. So first of all it's culture, culture first. So the type of people that they want are going to be service oriented, care about human beings, successful in being self motivated. So a franchisor has to really understand what it is that they want. So the culture of the franchisor, what that is and make sure that the franchisees who come in align with that culture. The so using Chick Fil A, their franchisees self organize and they invite the franchisor to come to their meetings. Cause they already want to be a part of a community and they want to be the best that they can and they want to share, they don't want to be competitive. Like all of these things are vetted from the front end. So the franchisor has laid the foundation to say this is the type of people that we want. And the more that the franchisor sticks to that prescription and ensures that that culture that they want from the franchisor is going to translate down to the franchisee which then translates down to the people that the franchisee hires. Right. Like this is a domino effect. Then they'll be able to see that the increase in the performance of their top performers.

Yeah, it really comes down to discipline and making sure that if they don't fit the profile that they don't get the deal.

And I'd say first making sure the profile is right and like always vetting that like, and confirming like this is who we want. Because you know, new brands can sometimes come up with one and then switch it and then change it, you know, because they're trying to figure it out. So you know, oh, we thought like, oh we thought that guy would do great but really that was horrible. So let's readjust our profile to make sure that we're selecting the right people and yes, being disciplined about executing on that profile.

Well, interesting. If AI enables a broader analysis of successful franchise owners and the characteristics of them and you have some testing, personality testing, Myers, whatever it is, what that's really going to do is it's going to narrow the subset of good franchisees even more which is going to make growing franchisors even hungrier to compete for the best operators.

So I agree to some degree with that. Absolutely. But I'm not sure everyone has the same profile. So I guess there's the good news that right, you know, a profile for a in home healthcare franchise system is going to be different. Like I'd say, like the trust industry is going to be different than someone in the restaurant business. Right. Or someone in retail. Retail, you know, retail batteries. Right. So these. So I think the good news is that they're not. Everybody's looking for exactly the same type of person.

That's certainly fair. Edith, talk to the franchisors who are listening about what fran data does to help them build better brands and maybe some use cases about how companies have used your services to solve a problem.

Sure. So I have two recent testimonials that I think really describes us very well. Zaxby's calls us data ninjas and Panera Bread says our research is phenomenal. So franchisors use us in essentially three different ways. One is to improve financing outcomes. So we credit risk rate every single franchise brand and we help franchisors improve their franchisees access to capital and the cost of capital. So we just did a study recently about our credit scores and the actual interest rates that franchisees receive. And over the course of a life cycle of a loan, depending upon the investment size, it's upwards of over $150,000 that a franchisee will save on interest costs alone if they're part of a high scoring system. And since it's used by banks that have they do 65% of all franchise SBA loans and that increases every single year, it's pretty meaningful. And then we also help existing franchise e o' ers go after existing franchisees. So we have a database of 500,000 franchise businesses and we know all of their owners and their contact information. So franchisors can, if their franchise system is fit for having a, you know, the great term mumbo, multi unit, multi brand franchise operator, we help facilitate that.

I would like mumbo jumbos, big ones.

I met a jumbo mumbo this week and I said, can I please be your friend? He's like, I'd love to be your friend. So a jumbo mumbo. And then the third is basically best practices research. As they shared, we've done studies on things like impact policies, remodeling incentives, best support for field operations for starting franchise systems. So it's third party commission and how do you charge royalties? So like, the topics are quite vast. They're very franchise focused. But getting insights across many different experiences and brands really helps franchisors gain perspective and have confidence in moving forward with initiatives or challenges that they're facing.