What Makes a Great Franchise System? A 37-Year Perspective Franchise Friday with Michael O'Driscoll

So I can't think of a better person to ask this question to. I'm going to give you a big softball here and you take it wherever you want to. What makes a great franchise system?

Well, first of all, I don't think there's any one definition, right? And that's a really, it's a cop out answer. But franchising itself is not an industry per se, it's a method of distributing goods and services. Right. People often, and certainly the franchise sector perpetuates it a little bit where people think it's some kind of industry sector, but it's not. It doesn't have any official classification in most federal governments around the world. If you went into the Bureau of Statistics, you wouldn't find necessarily franchising as an industry category. You might find a mention somewhere in there. But franchising as a method of distributing goods and services exists across many industry categories, if not most. These days there's pretty much not much that hasn't been franchised or in one form or another. So it is very difficult to define necessarily what good looks like, because what's good in home services might not necessarily be the same standard of practice that you would see in quick service restaurants, for example. So although there are some universal principles in the sense of how do you treat your franchise owners, your franchisees, have they invested in an underlying sound asset? You know, it doesn't matter whether you're been at franchising for three years or six months, if you're a franchisor, the person that is granting the franchise rights, it is absolutely essential, first and foremost, that the underlying business, the thing that is being franchise, is sound. So is it something that some guy just started and went well for six months and then started offering franchises? Or is it something that has a trading record successfully over a few years at least, preferably longer, so that there is a substantive underlying business asset that has a degree of uniqueness to it that is replicatable across many markets. That in essence is what a good franchise model is. Now, having said that, it is also by its nature very entrepreneurial. So people take risk in expanding businesses using the franchise business model. And when I say risk, it's classic entrepreneurial risk. They have limited capital even though they might have a successful underlying business, but they use the capital of franchisees to expand the network of those franchises and build scale inside that brand for the benefit of themselves and the franchisees. So that was what in. In it's. That's kind of a bit of a classic definition of franchising. If you will. Now these days it's thankfully way more sophisticated. There are still the entrepreneurs that rip in there with a business idea, see an opportunity or they owned a business and they think I want to scale this thing. But I want to do it fast and I want to do it on a shared capital basis. So that means using franchisees capital rather than build a big corporate head office. I want to keep it lean and I want to grow rapidly. So you know, it's not uncommon for new franchise systems. If they get their franchise program right to grow by a hundred percent plus per annum. You know, that's the nature of the model. What you have to be is savvy enough to support that growth. Because growth hypergrowth is as challenging to support as business declines, although one is better to work on than the other. So in franchising in that sense these days has become a little bit more sophisticated. There are laws that you have to comply with in the United States, there is disclosure regime that you have to embrace. There are brokers that you had consultants that you might want to deal with. It's a very sophisticated and mature marketplace for people to own small businesses who and grow their businesses. Most of the people that buy franchises these days are reasonably well informed because it is such a ubiquitous method of doing business now. It's not some kooky sitting on the side way of doing things. It is deeply entrenched across many industry categories. If you walk down main street somewhere, you'd probably see 7 or 8 out of 10 of those businesses in one form or another a franchise. These days it's very ubiquitous, right? Very common method of doing business. But what makes a really good one for me is the underlying asset must be sound already, preferably with at least three years of training underneath it. Then you must look at the leadership of that franchise company. Do they know what they're doing now? You can give them a few points for being new to franchising and learning as they go. As long as they do the right thing. Like join the International Franchise Association. You go and seek education about what good franchising looks like, network with people that have done it before. Maybe hire people inside their organization that have some experience, particularly when it comes to marketing. Because the lifeblood of all franchise good franchise systems is their marketing methodology. It should be proven known. They should have people dedicated to that function who know how to help franchisees run local marketing programs in their territories that drive their top line growth. That's really, really important. So if you're looking at a franchise system you want to scrutinize, what are their marketing chops? You need to know that they know how to help you acquire customers. That's really, really important. So you look at their marketing. Systemization is a word that's used in franchising. So I look for things that have been early adopters of systemization. Have they got a little operations manual, even though they might not have been around for a long time? Have they bothered to document policy process as a learning? Do they have a dedicated training function? Not everyone does that these days. That's really important. Have you taken your intellectual property and have you developed it in a way that is easy for adults to learn so that they know how to spend a few weeks being taught your business and they can reasonably go out into the field and operate that business even though they've never done it before. So that's really, really important. So that speaks also to the quality of the underlying asset. It needs to be that replicatable business that is not difficult for people to operate. They don't need a PhD, they don't need an MBA. They need their capital, they need their right attitude, they need their character and resilience and they need their discipline to apply themselves to the implementation of an annual business plan. So for me, when I'm looking at what makes a good franchise, I look at those things. But I also look at who is it that I'm dealing with on a day to day basis. If I'm a franchise owner or franchisee, you know, is it the owner of the business or the founder, is it a general manager, is it an operations business coach style person? And I make sure I try and connect with those people, right? And as best as you can. Good franchise models hire people that come from the sector, not just with franchise business model experience, but if it's a fencing company, they know something about building a fence business or they know something about how to build a fence, right? Because you need that technical expertise and that's what people are investing in. They're actually investing in you and your people and the intellectual property you've created that teaches them how to run a business and have a better than average chance of being successful? So I look at all of those things. A lot of people will, you know, write in big capital letters culture, you know, what is it? Do they resolve conflict in a healthy manner, which is something I've heard you talk about before. Are they able to move past things, points of difference, actually collaborate and find ways of cooperating together for the benefit of all the stakeholders in the Business. I think that's, I, I think people really need to look closely at that. Who are the people I'm dealing with? Not only their experience, but their character, their philosophy about business, what's their vision for the business? Are they here just to flip it quick, make a few bucks and move on to the next thing? Or do they actually have a long term commitment to building a viable asset that is successful for all the stakeholders? So there's some of the things that I look at when I think of when I'm thinking about what is a successful or what makes a good franchisor. They're some of the things. I mean, you can go into great detail about each one of those points, but at a high level, particularly when people talk to me about what's a good franchise. I wish I had a couple of bucks for every time I've been asked that question over 37 years. I wouldn't be sitting here. But you know, I tell people, you've got to, you've got to do your homework. I'm still surprised people come into franchise models without doing sufficient homework. You gotta understand, what do I get and what don't I get? Right. The second part of that is what do they do and what is my responsibility?

Right?

Because you're a business owner, it's your business. You've taken a franchise license from someone, but they don't run it for you. You have to run, right? You have to be accountable for that. Business ownership. That's the other thing I look for in good franchise businesses, right? Is how. What's the health of the franchisees? They might all be new, but is their attitude right? Are they participating in meetings? Is there a lively and constructive exchange of ideas and problem solving? That's the kind of thing I also look for for a relative mark of is this a high quality franchise system? Not all about the franchisor. If they've got franchisees, what do they like? You gotta ask that question as well.

I think that's an incredible point. Much of what you just spoke to leaned towards the emerging new brand perspective. Obviously, if you're going to join a, oh, I don't know, a Meineke, a Mako, one of those big, you know, 50 year old brands that has thousands of locations, the systems are going to be set, the business practices are going to be set, you're going to be operating within a construct that's been refined over many, many decades and there are definite advantages to that. What might be some of the advantages to joining an emerging brand? Of course Homefront Brands that we're building together in partnership, we're building that. And while the companies that we've put into the platform have been operating some since 2006, 2007, as a platform, we are emerging and we've got great new systems and you know, so there's opportunities, I think for people to join kind of a fast growing emerging platform. What might some of those opportunities or advantages be?

Yeah, yeah, you're quite right. There is a difference between if you're a franchise owner, your assessment and what you might expect if you're joining an emerging system. And an emerging system is it's got a few definitions attached to it that it's, you know, the range is broad. But and versus a mature system, say like a subway who's been around for like 50 years or 60 years or whatever it's been and you know, very prescribed processes, policies, benchmarks, a heavy systemized and successful way of doing things. Right. So there should be a higher degree of predictability to that. You might not get a big steep growth trajectory depending on the market that you're going into or of whether you've bought an existing site or not. But an emerging franchise system comes with a different set of risks. Obviously it's a newish style business. It hasn't been around for 50 years. The underlying asset might have been trading for many, many years. So the thing that they built the franchise, the business that they built the franchise business model on, hopefully it's been around for quite a long time. Very successful trading record, a lot of know how in there. But at the same time, when you come into an emerging system, it's pretty typical that not everything is worked out 100%. Right. The franchisor is still building their expertise, they're still building their, their expertise about the franchise business model. They'll have deep expertise about, you know, the, the business that's being franchised and you know, know not, you know, the operations manual might not be a hundred percent. They might not have everything documented. The training might be done not by professionals but by individuals and subject matter experts in the business, which is perfectly okay. They might not have a massive team, might be very, very lean. You know, you might be dealing with the founder or you might be dealing with just a couple of people. They, you know, they, it's the old story, they don't know what they don't know at this point in their journey. Although I still argue that it's become more sophisticated than that. So what should you expect? Well, you should expect that and accept that you're going into an emerging system, it's not all fully baked. There's stuff that needs to be developed. As the system grows, as they appoint more franchise owners, as more trading volume goes through those franchise owners and they acquire more customers, they get more capabilities to analyze that data and understand how to get better at acquiring customers and growing the top line. And then you've just got throughput through the franchisees to be able to benchmark all of the KPIs that you need to benchmark to understand what the pathways to profit might be for those franchisees. Very hard to do in the first year of operation, but gets better as time goes on. So it's kind of like it's the ultimate representation of entrepreneurialism in the franchise business model where you have emerging franchisors. If you get in at that ground floor opportunity, rightly if you're in there for a while and you're successful, you're probably going to see greater returns over that period of time because you've taken the risk equation and you've gone early rather than later into an established mature model which has more predictability to it, but perhaps not the same growth trajectory or return. So it's all about the risk profile you want to take.

Right.

I know at Homefront we've got some very sophisticated franchise owners that recognize it for what it is. Underlying business assets are very sound, been trading for a long time. It's a sophisticated team. We've gone the extra step to hire well ahead of revenue and get all the expertise and the leadership and the technical subjects like lead generation that we believed we needed to be to go faster to that enterprise, mature level of organization. And I think that helped us attract that caliber of franchise owner. We've got very sophisticated owners, very successful senior executives or people that have owned many businesses before or other franchises. But they're savvy enough to recognize the ground floor opportunity and what that means over a 10 year period of their franchise agreement. So I think it just gets down to risk profile and what your appetite is. And with an emerging brand, yes, absolutely, you will carry more risk in there, but you should, all things being equal, see a greater reward at the other end of that journey.

That makes a lot of sense.