Franchise Partnerships: Top 5 Reasons to Say Yes—or No Franchise Fridays with Jeff Dudan #204

Hey everybody. Welcome back to Franchise Fridays on the Unemployable Podcast with Jeff Duden. When it comes to launching a franchise, is it better to own 100% of the risk or 50% of the reward? Many people consider partnership for one reason or another and get the deal done. But in my experience I've seen a variety of reasons people partner and today I will review the top five reasons franchising partnerships form and at the end I will give you my very best advice on how to set yours up for long term success. And of course, if you're interested in learning more about the incredible opportunities at Homefront Brands, just click on the link below or go to homefrontbrands.com and take the next step towards achieving your vision with our family of brands. By the way, I want to give you a free copy of my book Discernment the Business Athlete's Regimen for a Great Life Through Better Decisions. If you're here today, you're probably at an inflection point and this book will help you think it through and understand what are the decision filters that you need to use to make this very important, life changing decision? Now let's get into it. Five reasons or situationships to get a partner in your franchise business. Number one, you're fearful or uncertain if you can do it on your own. And I have to tell you, if that's the case, I'm already concerned. That's probably the worst reason to do it. Look, we all like to be part of a tribe, we all like to do things with other people. But if this is driving your decision, you really need to pause and check in with your level of commitment. When you go into a business, it needs to be something like you want to own. You want to own the business, you want to own the responsibility, you want to own every piece of it. You want to be the ones making the shot. And if you're fearful to do it without somebody else, then look, when it gets hard, how are you going to internalize that and overcome that fear? Entering business ownership, especially for the first time, requires you to be fully committed to yourself. And it is hard. And your level of success will be dependent upon you more than anything else. You want to make sure you're fully invested in the outcome. And while a partner can give you a sense of comfort of not going it alone, this is where I have seen people cut bad deals out of fear. And remember, cash is king, but equity is the kingdom. So be intentional about why and whom you share equity because those decisions will shape your Long term outcome, for better or for worse. Number two, you can't afford it on your own. You need a partner. And look, maybe that's the second worst reason, but I can almost make a case that like if that's the way for you to break into business ownership and you can cut a deal that's good for you and good for your investor, this is a way to make it happen. The key here is absolute clarity. Are they a partner with a defined responsibilities in the business like a role, like a job, like you're going to do this role in the business and they're going to do something else? Or are they just money people, a silent investor? And if so, how will you structure repayment, compensate them during the growth phase and protect the business relationship? If I I'm investing money in a business, there's a few things I'm looking for. Number one, I want my money to be first money out. I want my money to accrue even if it's not paid some sort of an interest payment. Because wherever that money is not working for me and it's working for you and your business, I want the cost of that capital to be recovered. So, and then maybe most importantly, when you think about an investor partner, what, what recourse do they have against you personally if something goes wrong? Do they get to take over the business? Do they get to take your house? Like how do you share the risk and reward and balance that out? But at the end of the day, look, people need money to start businesses. I think that you can say the power of broke is important and try to do everything on a shoestring and you should be really tight with your money. But at the end of the day, sometimes it just takes money to get going and there's good debt and there's bad debt. So you got to make sure that you're thinking it all the way through if you're going to borrow money from somebody else or a business partner that you're going to give equity to to be in the business with you. Number three, there is strategic alignment rationale for the partnership. So this could be a good reason for a healthy partnership. And I have seen this work very well. This example, it could be that your partner owns a complimentary referral business that uses these services often. For example, one of my company stores with my advantaclean business I sold to a waterproofing business. They were under the house doing waterproofing, we were under the house doing molds. Both of the businesses grew because of the mutual referrals that we were able to generate and the leads that we were able to share. So that's a great situation. And if the expectations of the business relationship is valid and clearly defined that this is the way that it's going to go, and if there's any fees or money that change hands between those companies, those referral companies, then that's great, you can do that. Another example, although I recommend this less because I found these to devalue quickly, is if a strategic partner has access to people who would be important to the success of the business and they agree to make introductions or get access to target customers. This is important, but in my experience may not be worth equity because after some initial push and initial introductions, the volume just doesn't seem to be enduring. So I would consider these situations carefully. It sounds like a good idea, but at the end of the day, if they're just going to flip you a name or make an introduction, then that's something that is not worth a long term business partnership number four. Now we're getting into the good reasons here. You are building an empire and you need an operating partner. Look Outback Steakhouse did it this way. Chick Fil A does it this way. This is a fantastic reason to take on a partner. You are the controlling interest. You are a business builder, or at least you aspire to be. And you want to increase your chances for success and decrease your timeline to success by finding someone with expertise and giving them an incentive to join you and operate this business. Basically build it for you. You will be paying them out of the business, but they can also have an equity incentive. And it's an incredible way to give someone an opportunity to earn equity in exchange for bringing their talent to your organization. Now, you may require them to invest capital or you might not. And you certainly want to make sure that you have good agreements around performance expectations. How much for how long and what's in it for them and what do you expect? Pay attention to the vehicles here. And by vehicles I mean how do you structure this deal that are going to be tax efficient for the operating partner, but also hold them accountable to stay to the very bitter end whenever that is. Because with the risk of forfeiture at least it's not an easy way to consciously decouple if things don't work out instead of leaving you with debt equity, meaning like you gave them equity to build this business and they didn't and now they're sitting on your cap table as an owner of your business. That's debt equity. You're not getting anything for it. It's just going to cost you at the end of the day when you go to sell the business. And you don't want that on your cap table, especially where people are no longer providing services. So operating partner, exceptional way, especially if you have other businesses or if you want to build multiple businesses or maybe if you want to maintain some employment that you already have, getting an operating partner, structuring it the right way is a very valuable way and a very proven way to have a partner in the business. And then, look, the last one is just what it sounds like. Probably what all of you started the conversation thinking about here today is just a committed relationship where you go to work and you divide and conquer. I like these situations in my experience, especially when you get it right, launching a new franchise. These businesses tend to ramp faster and achieve desired results and stability quicker. It's because there's two people that are working together to build the business. And not only is it that bandwidth that's gained, it's also the shared vision, shared fate and mutual accountability that makes quick work of the work and helps a business enter the marketplace with velocity. Now, there's a couple of ways that I've seen this and I've seen it where there's two people that had worked together before. They're both professionals, they come into the business within a businesslike manner and they have good expectations and ones in sales and ones in operations, and they know their roles and they know their place and they're equally at risk. With skin in the game. Like that seems to work really good. I also see this with spouses and partners that come into the business. And look, sometimes it seems like a good idea to work with a family member, a spouse or a partner. But at the end of the day, you better have the same clarity around who's going to do what. And if somebody doesn't do what, what happens then? So just be careful in that little nuance situation. If you're dividing and conquering and you're going this like a 50, 50 partnership, I'd recommend 4,951. But, you know, so somebody can ultimately make the decision and the business can continue. The last thing you want, you know, you want. There's three types of businesses. Wild, successful businesses, great, immediate failures, okay, But a business that just muddles along with lack of clarity, lack of results, lack of money. It's, you know, if I'm going to be broke, I don't want to be tired too. That's the worst type of business. So getting clarity up front and make sure that everything is getting in place to make that business work. And if it doesn't work, you know how to break up. Breaking up is hard to do. So as we talk about that, here's a few prenuptial, premaritable partnership tips. Because good agreements upfront head off bad disagreements down the road. Number one, agree on the waterfall. If you don't know what I mean by that, then you need to know what I mean by that. How does money go out of the business when the business makes money? How does money go out of the business when the business is sold? Who gets paid first? Are there any preferences? Meaning does somebody get more upfront because they put in money? If somebody funded more of the business, do they get your work? Do they get their invested capital back first? So, you know, it's, it's, people go into this with a very basic idea that, well, if you own 60% and I own 40%, that's how the money comes out. That's not really the way it works when finance gets involved and you have to be very deliberate upfront about what the waterfall looks like on the back end. And of course you how any salary, compensation, reimbursed, expenses, all of that stuff comes out of the business. Good agreement up front will head off those bad little festering disagreements down the road. Number two, clearly differentiate between any operational responsibilities or requirements to work in or provide any services to the business in an ongoing capacity. And people that have an advisory or consultative role and that's all they're going to do, that's all they agreed to do, what do they get paid? You know, as importantly, get very specific about any compensation that is connected to either one of these roles. Look, don't you know, I've been involved in an advisory role in a business and provided the advisory. Maybe it was followed, maybe it wasn't. The business didn't do well and now they're like, well, then you've got to come in and run the business. I said I'm not coming in to run your business for you. I said, I gave you the advisory, I made the investment. It, for whatever reason the business is, is not meeting expectations. But that doesn't mean now that I have to go from an advisor to an employee right now. Maybe that person needs to be replaced as an employee or we need leadership or we need to wind it down or spin it up or sell it off or something. But at the end of the day you've got to know, like, what are the expectations of Are you an opera? Are you, are you playing a role in the business day to day? Or you just, you know, once a month or as needed, advising or consulting, Very important. I see this getting confused. And when things start to go rough in a business, that's where these things get highlighted. Kind of the same thing. Buyout formulas. Look, as I said, breaking up is hard to do, but when you have to, you don't want to put the business at risk fighting over what is it worth and who is owed what to do. Move on. You should have a clear path to an easy way to value the business. And there should be some predescribed way to break up. Because when, if you get partners, fighting over a business that may be underperforming or muddling along or even if it's going great, like that puts a huge strain on the business, the employees, everybody knows what's going on. It can put capital constraints on the business if you have banking relationships. So you want to make sure that, like, there's an easy way for people to get off the bus if the bus isn't going to the station that they want to go to. And then, last thing is, look, no free lunch. When somebody offers to help, especially if this is a friend or a family member, take the extra time to work out what is that worth? Their time, their expertise, and predetermine how that person will be rewarded for their investment or assistance. All of this goes back to the great word, the C word. Clarity, clarity, clarity, clarity, clarity. I hope this has been helpful for you because so many times we get involved in all of these situations at Homefront Brands. People come in and they're, they're doing it with a partner or a spouse or a friend or an investor or some private equity group or whatever it is. And we want to make sure that, that, you know, whatever the structure is of partnership that people come in with, that it's going to be something that's good, healthy, well thought out, and that, you know, we're not going to get in the middle of some partnership dispute about who's supposed to do what or who's supposed to get paid what. So do your homework. It's not hard to do. Give me a call if you want some advice on that. This has been Jeff Duden. We have been on the unemployable podcast. This has been Franchise Friday. Go do something great. Let's get you unemployed in the best way possible. Have a great day. Thanks for listening.