161. Create a Business That’s Built to Scale - Here’s How!

0:00Franchising is the ultimate way to scale fast, empower other entrepreneurs, and grow your business into a powerful success. But when's the right time to franchise and who should consider it? Today, we'll explore how franchising can transform your business and create new opportunities. This is Ryan Atkinson, and you're listening to the Up the Podcast, where we can cover the secrets of building and running successful businesses. Joining us today is Dr. Tom Dufour, the CEO of Big Sky Franchise Team, who has helped brands like Jamba Juice and Massage Envy expand through franchising. With his extensive expertise, Tom will share key insights on how franchising can unlock massive growth for your business.

0:34Tom, I am so, so excited to have you on here today. Thank you so, so much for being here. Thank you so much for having me. I really appreciate it. We got to set the stage about who Tom DeFore is, because you've helped many well-known brands like Jamba Juice and Two Men in a Truck franchise their businesses. Can you tell us a little bit more about your journey, how you got started in the franchising world? Sure. It's a great question. And my story in getting into franchising is not all that different from most people in franchising when you speak with them. It usually happens by accident. It's not something that someone set out to do.

1:10So for me, I've spent pretty much my entire career in franchising. And when I was an undergrad, I was a business management major and knew that I wanted to get into some form of management consulting. and it just so happened to be that my first opportunity was working for a company that helped other businesses and business owners turn their company into a franchise system. And so from there, I fell in love right away with the business and have stayed in franchising ever since. Interesting. I think you have like an interesting perspective to it because like you've been a franchisee, you've been a franchisor, you've been a consultant.

1:50How has that franchise trifecta like shaped your approach to helping businesses scale through franchising then? Yeah, I think my experience in having worked with franchisors as a consultant, helping them launch these small businesses to grow, as well as working with large brands, having been a franchisee and being a franchisee and actually paying your monthly royalties or weekly, if it's weekly, the brand and system I was with, it was monthly royalties and going through training and hiring staff and following the process. And then at the same token, and also being involved with a small franchise system on the franchisor side of things, it really changes your perspective.

2:31And I would say that the biggest influence for me has for sure been the experience as a franchisee. And it's a reminder as I'm advising and coaching clients that are franchising their business or that are franchisors that this is, franchising is not a money grab. It's helping someone else to accomplish their dream. It's helping someone else to start a business and grow and remembering as a franchisee what it was like to pay my 7 % plus my advertising fees, plus all the other requirements and so on that's part of running the system. So that has really helped temper and keep perspective that it's about helping franchisees win.

3:18essentially, if you can help the franchisee win. The rest of the franchise model works. Talking about franchises on the podcast, it's always so exciting because it really expands beyond the McDonald's, the Chick-fil-A's, the Burger Kings. Because when building a franchising, I feel like a lot of times they're thinking of just food chains, but it obviously expands beyond that. But before we dive in more into franchising, if you had to explain in the simplest terms what exactly a franchise is, how would you describe it? I would describe franchising, and this comes up often in terms of what actually defines a franchise.

3:53How do I know whether this is a franchise? Or sometimes people will say, maybe is it licensing or is it some business opportunity? And at the core, franchising is a method of distribution. And that is where it gets confused with other forms of distribution, such as licensing or dealerships or distributorships or business opportunities and so on. There's a big list of them. At the core, franchising is an enterprise becomes a franchise when the three main parts are combined. And it's the use of when someone else, if for a business owner that maybe ends up listening in, it would be, well, are they using your business name, what you do business as?

4:33Number two, are they using your business systems? And number three is the payment of a fee upfront or ongoing for them. we're talking more than a few hundred dollars one time. We're talking about an upfront or ongoing fee. If you check yes to all of those, chances are you probably fall into the franchise category. Certainly there are some exceptions to that, but generally that's the situation. When you think about the pros and cons of franchising, because someone might be listening and be like, okay, I'm starting to build this company or I'm building my company. And maybe this is set up for franchising, I don't know.

5:10before they even consider that. Can you talk to us about the pros and cons for business owners looking to franchise their company? Sure. Well, there are three main reasons and drivers that are the pro side for turning your business into a franchise. The first is money, and it takes money to open up more locations. And so in franchising, the franchisee is investing to open that location. So the franchisee is essentially a mini investor into the system is one way to view it. The second is management. And so that franchisee that comes in, they are managing the business, the day-to-day operations, and having consulted with tens of thousands of successful entrepreneurs and CEOs and business owners around the country and around the world, far above and away, almost always the number one pain point is staff and people and either finding, hiring, retaining the right people to keep it at the company to keep it going.

6:10And so with franchising, you get a vested owner, and in many cases, a vested owner operator, that is the person that when someone doesn't show up for whatever reason, that franchisee takes that responsibility to fill that shift or find a replacement and so on. And then the third pro is what we call multiply. So I like alliteration. So it's money management and multiply. And franchising just gives someone the opportunity to expand at a much more rapid rate. And headline stories, I'm sure most of your listeners have seen franchise headliners where it says, oh, such and such brand sells 50 franchises in a year or 100 franchises in a year.

6:50Now, those are the exceptions, not the norm. But for most small business owners, what I've found is if they only ever sold one franchise a year, for most, that would be viewed at almost an exponential type of rate for them to go. Maybe they've been operating seven, eight years. If they had opened one a year, they'd have seven or eight already instead of, in most cases, one. So those are the pros when you start thinking about, oh, wow, this is great. In addition to, obviously, you get some benefits to the financial side of things, of course, for the royalty revenue that comes long term. Some of the, I would say, disadvantages or the cons to franchising is if the founder of the enterprises is not interested in being a coach or a trainer, that's a problem.

7:36You have to be getting into this because you love your system and you really want to help others use your system as a conduit to build a business of their own. And number two, you want to have that driver to serve other customers in other markets. And if you don't have that drive where you see your product or service serving other local communities around the country or around the world, it's hard to convince someone that franchising is right for them. And then the final piece is when I think of cons, a lot of owners I've met with over the years that don't end up franchising or do franchise and have a hard time with it are those that are unable to let go of the daily operations where they're the superstar owner, which is great.

8:22I love that. I'm an owner operator in my business today. I love my business. So I relate with that. I really get it. But if you're unable as the owner to let go of that, it really can make franchising difficult. And if that's the case, I would say maybe you should pause or not franchise at that point. I absolutely love that. And what's really exciting about this is like, you're dropping a ton of insights here, but you're also going to be having your academy course where you talk about all the franchising stuff there. So I'm super excited for that course actually to come out as well. A point that I just like that you discussed was you have to get into franchising if you like to be a coach, if you like to train people, like to develop their skills.

8:58I think when you think about entrepreneurship, that's like one of the most crucial skills that you need to have when you are starting a business, if you are going to hire talent is being able to coach and be able to train. And that even matters when you're franchising as well. Yeah. You spend any time scrolling on any social feed, YouTube, Instagram, any social feed you're on and you're a professional, it says, well, if you have three years experience in whatever field you are, be a coach, be a coach, be a coach. And it's all well and good. I always think for the entrepreneur, franchising is the original way to capture and bottle up your intellectual property that you've created in a business that you love and now expand it or scale it through franchising while being a coach.

9:41You're coaching in a business you already know just about everything there is to know about it. One thing that comes to mind here, I want to drop a few examples of companies that are franchising. I dropped McDonald's, the Chick-fil-A's, the Burger King's, but it obviously expands beyond that. So can you give us some specific examples that people should look for when they're just on their drive of potential franchising opportunities? Sure. So I would say for someone that's listening in, that's maybe ends up hearing this and thinking, okay, well, maybe I want to buy a franchise, or they might be thinking I'm in a business where maybe I want to franchise my business, but I'm not in food.

10:17So can I even franchise it? And the reality is in today's franchise world, the diversity in types of business offerings is the most robust I've ever seen it. I've been doing this over 20 years now, and it continues to expand and grow dozens and dozens of industries. In fact, more than half of all franchisors that are offered are some form of service-oriented business. So it's not necessarily in food or hospitality. Now, those still exist and they can be a great option for someone. Since COVID, for roughly the last four years, the number one category of interest for potential franchise buyers has been home services.

11:03So these are home service brands such as a painting franchise or a window washing or a landscaping or a pest control business or something in that regard where there's some home service availability. So it is very broad, very wide. And my thought is if you're looking to buy a franchise, most often where I like to start is what kind of lifestyle are you interested in living as just kind of a starting point and then build from there because you'll find a lot of different industries can meet that. And then if you're thinking of franchising your business. If your business, any industry you're in, if you want to expand, it's worth considering franchising.

11:40I think you ought to. It doesn't mean you should, but you should at least consider it. We've had a few interviews on a podcast of home service companies like Jordan Montgomery, Carter Pink's Windows. These are home service companies that are franchising at a great scale. And it shows the opportunity that it expands beyond just fast food chains. But I want to take on the part of someone's like, okay, I'm going to start a home service business or any type of business, and they're thinking about franchising their company. Let's dive into that process. What are the first steps a business owner should take when deciding to get birth their business into a franchise?

12:10Sure. So I think the first part we like to look at is the viability of franchising, is how can you just at least run a quick litmus test to see, does my business qualify to be franchised? And there's not necessarily a legal, per se, requirement around that, but the general benchmarks we use, we have three big check boxes that we use to help companies and owners think about, well, do I qualify to franchise? And the first we like to see is pretty basic and simple, you would think, but it's, do you have a profitable prototype? Essentially is, do you have a business operating and is it profitable?

12:47And that is, in short terms, a proof of concept, right? You want to be able to show someone that you've created and operated it. Now, there are many factors that we can dig into, some of those financials and so on, but from a high level, a profitable prototype. And oftentimes owners will say, well, my tax return shows I didn't make any money. I'm not as concerned about the tax return because every owner takes what I call owner benefit out of their business in different ways. Some are taking draws, some are paying salary, some are doing insurance or a bonus or whatever they're running through their business, however they're structuring it.

13:22So think of it as owner benefit? Is it profitable in that sense? The second checkbox I look at then is, can you teach someone how to do this? Which we were talking about before about being a coach. In one regard, it's, can you teach? One. And number two, it's really, are you willing to teach someone how to do it? Is maybe a better way to describe that. And then the third big bucket or checkbox we look at is, is this something where there is an existing customer base for your product or service on a national basis. At minimum, we want to see regional. Sometimes it's regional and ideally international.

13:59Who knows where this ends up going long-term? And that just means basically, are there customers who would buy your product or service if you're based in Texas? Will they also then buy this in Ohio or Washington State or Florida or wherever it may be? Let's talk about that aspect, because that kind of goes back to like building a business plan about like, what markets are you going to serve? Like, who are you going to serve? All that type of stuff. So when you are thinking about like franchising your company, like how does a franchise business plan defer from a regular like startup business plan?

14:31Like what key factors should be included in that franchising business plan? Yeah, that's a great question. So when you're franchising a business and this is a process we take our clients through and it's something I advise whether we do the work or not, someone's doing it on their own. We call our product the franchise blueprint And ultimately, a franchise business plan differs from a standard business plan because it's focused on the franchisee economics first. What do we expect a typical franchisee to look like? And so we look at the quantitative aspects. What are these quantitative components for a franchisee?

15:07And in most cases, we actually discount the revenue, profitability, and other numbers generated at the founder's location. we find that most founders their individual location will likely fall in the top 10 percent of let's say 100 franchisees they'd likely be in the top 10 so we need to discount that to say well what would an average franchisee look like once we figure out that franchisee model then we build the franchisor model which is the model that you would be getting into as a franchise system which is what does this look like for the franchise or how many franchises do you think you're going to sell over what time period?

15:45What kind of staffing do you need? What are things like, what should you charge for your franchise fee, for your royalty? What should your territory structure look like? And then we start getting into some of these qualitative aspects, training, support, franchisee buyer profile. So this is not how you run the day-to-day operation of an individual location, which a typical business plan is structured on. This is saying, what does this run as a franchisor system. You're in a new business now and you're in the franchising business, not in the, if you're in the home services, food business, whatever.

16:21You're not in that business anymore. You're in the franchising business. I think there's like a lot there just because like when you think about building a business plan, one, do you advise like every company to build out a business plan? I want to start with there as well then. Absolutely. I mean, for our business in general, almost every client we've worked with, as long as I've been operating, we build out a franchise business plan to help them through this process. And I think it's critical. I mean, it's the old adage, right? If you fail to plan, then you're planning to fail. I mean, it's really straightforward.

16:52There's so much that goes with the business plan. It's like you plan, but like, there's also a lot of stuff that can happen where like, you can't expect it to happen. But there are ways to mitigate some of these challenges that come with franchising. So So like what professionals should business owners look for when work wins franchising? I imagine lawyers, accountants, consultants play critical roles. But are there any other business owners should consider when working with professionals? Absolutely. So there are in franchising, most quality advisors in franchising refer to the three C's in franchising.

17:25It's the consultant, the counsel and the CPA. And so those are going to be three big things. A consultant like our group and what I do really comes in to help advise on operations, strategy, building manuals, documents, all of that. Your attorney and the lawyer is going to prepare the legal documents for franchising. And then franchising has ongoing compliance. Every year there's ongoing compliance and things you need to do. Plus, having a lawyer help sign documents. I always view the franchise closing or signing similar to a real estate closing. and there are a lot of I's to dot and T's to cross.

18:03And so making sure that's done correctly. And then the third is just having a CPA to help with this. And in franchising, not only just for general business practices, filing taxes and things like that, in franchising after a franchisor has been operating for a while or depending on the state they're expanding into, they have to have a franchise audit completed by a CPA. And it's a whole process that person, the franchise company has to go through. And so making sure you have a reputable, quality CPA group is important. It sounds like someone might be listening to this right now. And listeners, I am definitely mindful.

18:40You guys might be thinking, oh my God, this sounds super expensive. I don't know if I can do this, but let's kind of debunk that, demit that if we can. Once you know what you want to do here, it requires an investment, obviously. What are the typical costs involved with setting up a franchising company? So the costs that are typically involved in setting up a franchise company between hiring a consultant if they want to more of a do it for you type service where you're going to hire professionals to make sure you're taking the best step forward and keeping your path narrow. That's what I always describe is when hiring professionals like us, your zigs and zags are going to be a lot shorter versus trying to figure it on your own.

19:18And by the way, that's the whole main sales presentation or marketing pitch for when you're selling a franchise is if you buy a franchise, you help keep that franchisee's pathway to success shorter and more narrow with fewer zigs and zags. So when someone's thinking about the costs to get involved with this, we typically budget between consulting fees, lawyer fees. And I like to budget in there even the first couple years of advertising, marketing, budgeting. If you're budgeting somewhere around about$100 ,000, that's all in everything, including working capital and marketing for a few years to get this thing charged up, you should be in a good spot.

20:00Now, depending on how you do it, it could be less, could be more, but I think that's a good benchmark. And for most businesses, that's the same or less expensive than what it would actually cost to open up another operating unit of whatever they have. And then with someone that's going to buy into a franchise, are there any like ongoing fees and costs that they should consider or they should know about before they actually do that. Tom, you're dropping phenomenal advice here. And I'm very excited for like your academy course with this as well, because I think franchising, I want to say again, it's like super interesting.

20:29It's like a whole topic in itself. I think it's a great avenue for entrepreneurship. But of course, there are legal fees and everything that goes on beyond it. But yeah, talk to us about what you can expect if you're buying into a franchise then. Yeah. So ongoing fees is you if you're buying into a franchise system, the first is just general business fees. You're going to have to pay any city tax, sales tax, whatever kind of stuff, right? Just normal business stuff that you're going to do, whether it's a franchise or an independent, doesn't matter. Beyond that, then for a franchise, your biggest fee as a franchisee for most systems is going to be your royalty.

21:04And the royalty is typically a percentage of top line revenue that you're going to pay to the franchisor each month or each week. It's generally monthly or weekly. And that ranges for a fixed location, franchise will generally range between about four to 7 % of gross sales. And then for a service-based business, or usually a business with some higher margins on it, will oftentimes range from about 7 % to 12%. Now, that's a general range. Some are more, some are less. Of course, there are always exceptions, but that should at least help someone sort through that. Other fees include an ongoing marketing fund.

21:43Each brand kind of calls it something different, an advertising fund, marketing fund, brand Development Fund. It's 1 % to 2 % of sales, typically. And then there are technology fees in today's world, where it's going to include a lot of franchisors. Instead of having franchisees piecemeal a tech stack in today's world, they're actually just lumping it all together as one fee for maybe a CRM or a point-of-sale system or an email marketing platform or some technology tools and systems for the business. Yeah, it's always there. And you brought up a certain point that I do want to talk about because I do want to talk about different opportunities in different industries.

22:21So when you think about margins, it's almost a buy into a franchise for their very first time. And they're only worried about margins. They don't care about being passionate about what they're in. What would you have them look at? Usually businesses that have high margins in most cases tend to be service-related businesses and they tend to be niche or what I call unattractive businesses. So if someone says, well, I just want a high margin business, I don't really care, chances are the work you're gonna be doing is, I can give a good example. I owned a franchise in the restoration industry where you'd come in emergency services, a pipe breaks in a home or a property, something, right?

23:04Maybe there's mold or whatever all over the place and you gotta come in and clean it up. usually these dirty businesses, they tend to have higher margins because people don't want to do that. There are franchises that do crime scene cleanup. I mean, that is not a business that someone necessarily would go after, but they also, because very few people want to do it and it's unique, they generally have higher margins compared to, let's just say, a local sub shop where you have independents and franchises and just a lot of competition going after that customer. I want to hit on the crime scene one.

23:43I think that just proves that there's really is like a business idea for anything if you're willing to get your hands dirty on that. Yeah. And it's an industry just to use. I know it is morbid, but when you think about it and it could just be someone, an old lady or an old man just happened to die in their home. Somebody's got to come in just, you know, there's a mess that's left that's got to get cleaned up there. I just want to specifically ask this question because a lot of people that do listen to this, they want to make money with entrepreneurship ventures. That's why a high majority of people probably get into entrepreneurship.

24:15What's like the cap here? Like, are you able to make, if you do it correctly, up to 10 million,$50 million? Is this caps just with like all the royalties? Like what is the actual earning potential for someone's personal lifestyle? Okay, that's a great question. So there are a lot of factors to this and it is going to depend. It's the classic consultant answer. It depends. However, however, I can give you some general ideas for someone who's maybe starting that search or getting into it. for someone who's coming in that's going to own a single franchise and they're going to own and operate it. Most franchise systems are going to produce, in my experience, a range that I've seen somewhere between about$50 ,000 to a couple hundred thousand dollars in income a year.

25:00Okay. That's just what they're going to produce. It is what it is for most businesses. There are exceptions and so on, but think of it. Some people say, well, I'm buying a job. Well, you kind of are. So if you're going to own and operate it, I encourage you to not just look at dollars and cents, but consider the lifestyle you want to live and the type of people you want to be working with, the types of customers you want to serve. There are a lot of factors that go into it. So that's one, if you're an owner operator. Then you can start expanding and building on that into multi-unit operators. And I can give a really good example.