From A to Franchisee: The Podcast for Smarter Franchise Buying

What Is Franchising?

• Franchise Business Review • Season 1 • Episode 2

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Join Michelle Rowan and Mary Ann O'Connell as they explore the fundamentals of franchising. With over 40 years of experience, Mary Ann shares her journey from being Money Mailer's first franchisee to founding FranWise, a company that helps businesses become franchises. Discover the intricacies of franchise agreements, the role of the FTC, and the differences between franchising and licensing. Whether you're a budding entrepreneur or a seasoned business owner, this episode offers valuable insights into the world of franchising. Tune in to learn how to make informed decisions and navigate the franchise landscape effectively.

Host: Michelle Rowan, President and CEO of Franchise Business Review

Guest: Mary Ann O'Connell, President of Franwise

Resources for S1E2: What Is Franchising?

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Michelle Rowan (00:02.277)
Hello and welcome to today's episode. What is franchising? We are glad you joined us today and we have Mary Ann O'Connell on the podcast today to talk about what is franchising. She's the perfect person to help us break this down. Marianne O'Connell began her franchising career more than 40 years ago as MoneyMailer's first franchisee and then was hired as their vice president of franchise support services.

Today, she is the founder and president of FranWise. She's worked with over 200 brands and the top professionals in the world of franchising focused on strategic planning, franchise operations, process and procedure, franchise relations, compliance, manuals, and training. She is an active member of the International Franchise Association. She sat on their board of directors.

She's the past chairwoman of the Women's Franchise Committee, which is how we met, the Membership Committee, and the Supplier Forum Advisory Board. She was also awarded the Women's Franchise Committee's Crystal Compass Award, which is given to people that mentor women, both in franchising and within their communities. She is a frequent speaker and writer for many industry events and publications, and I'm very glad that she's also one of my dear friends. So she is...

taught me a lot over the years and has just been a great, we're actually even in a peer group together, so I feel very lucky. And when she's not working, she's active in her community. She can be found exploring Southern California with her camera or playing with her cats, Frankie and Tony. Her experience as a franchisee, as a member of a franchise corporate staff and a supplier to franchising makes her perfect to kick off this topic today on the basics of understanding franchising.

So Mary Ann, thank you for being with us today and you have your own podcast. Let's plug your podcast, which is more for franchise ors and people that are actively working in the franchise industry. But let's give a little shout out to your podcast.

Mary Ann O'Connell (02:10.37)
Thank you. Thanks for that lovely introduction. And yes, What's Your F-ing Business is also for people who are looking to franchise. So getting key insights from leaders of top companies.

Michelle Rowan (02:22.959)
Awesome, okay. So we're gonna start with the basics here. The idea is we're gonna assume that our audience doesn't know anything about franchising. So I wanna start with some of the important terms, I think. So we said that you were the first franchisee of Money Mailer. Let's define the term of a franchisee.

Mary Ann O'Connell (02:41.422)
All righty, because when I became, my partner and I became that first franchise, it was 1979, but the FTC law had not gone into effect yet. So a franchisee, I really think you need to start with what is a franchise. It is a derivative of a French word that means to license. And it is a way for a brand to expand itself to get

disproportionately large market share, but they do it with the help of other people's investments. So the franchisee is the person who holds the license.

And then by following the rules, just like if you have a driver's license, by following the rules, they get to maintain the use of that brand name for a set amount of time in a set area.

Michelle Rowan (03:35.609)
Okay, so you mentioned the FTC rule. So the FTC is the Federal Trade Commission. This is, I think, important for us to just talk a little bit about because there are business opportunities, there are license opportunities out there, but the FTC rule and franchising is really what I think separates the business model from the other two. So do you want to explain the FTC rule or do you think it's just enough to say franchising has much more regulation around it than a business opportunity or license?

Mary Ann O'Connell (04:03.97)
Well, a business opportunity, yes, it has much more regulation than that, but a franchise is a license. It is a type of license. And because we're asking for other people to invest their money in the brands, the FTC created the franchise disclosure document. And what it is doing is allowing a potential investor, basically, think of it as

the franchise version of a prospectus. They're getting to look at what is the offering, how much is it gonna cost them? I mean, I do this somewhat facetiously. The FDD is sort of the franchisor's dating profile. Hi, here, this is what I'm gonna give you. This is what it'll cost to take me on a first date. I'm high or low maintenance. Here's what it's gonna cost me to stay in there. Here's who I am.

Have I ever been bankrupt? Have I ever been in a lawsuit? You're disclosing who you are because franchisees are putting their hard earned money on the line. They want to know not only the profitability of the business, but who am I getting into business with? Do I think they're reputable? And probably do they share values that I do?

Michelle Rowan (05:21.121)
Awesome. Okay, so the FDD or the franchise disclosure document is a honkin legal document that the franchisor, which I'll have you define that in a second, is obligated to give anybody that wants to invest in their brand before they pull trigger on buying that brand. So they will sometimes hold it near and dear to them and give it to you at a particular point in that process. But it's also, I'll say it's

easier today than it was 30 years ago, 40 years ago to find a franchisor's FDD online. If they are franchising in what's called a registration state, that franchise disclosure document you can usually get your hands on earlier in the process. So, franchisor, define that. So, did you define the franchisee? So, they're the person that is investing in the brand. Yeah.

Mary Ann O'Connell (06:09.868)
They're the people, that's local storefront, that local truck, that's who you are dealing with on a local level. And I should state, they are independent businesses. Their names are not brand name in Costa Mesa, California. They have a company that would be like O'Connell and Company Inc. doing business as the brand name in Costa Mesa. So you have to make clear they're very separate entities.

Michelle Rowan (06:24.441)
Right.

Michelle Rowan (06:34.085)
Perfect.

Mary Ann O'Connell (06:38.382)
The franchisor comes about, I'm going to bring a couple of geeky things in here and remind everybody I'm not an attorney. I just play with them all day long. So you have to remember that it starts out with the USPTO, the United States Patent and Trademark Office. So in the 1930s, they created a thing called the Lanham Act to protect brands and registered trademarks, which according to the FTC rule,

Michelle Rowan (06:49.231)
Yes.

Mary Ann O'Connell (07:08.342)
In most states, you need to be registered trademark. They said in that law, you have to do everything in your power to protect your brand. So what that has meant to some is they were doing way too much and all of a sudden they were acting like those independent businesses bosses, but they're the ones that hold the trademark. They are the ones that have thought through the business concept and they have

standards. won't say rules and regulations, that connotes a control, but they do use standards, customer-facing outcomes to define who they are so there is a common experience to anyone who uses that brand. What does a storefront look like? How are people dressed? How are you greeted? What is the standard for returning your phone calls?

Michelle Rowan (07:53.115)
Perfect.

Mary Ann O'Connell (08:03.682)
What's the menu going to be, the ingredients, the recipes, all of those kinds of things are standards. They also can create best practices, which are suggestions on how you will get to those standards. So if it's behind the scenes, they suggest it. If the customer faces it, then they are 100 % in control of it. So it starts with that. Then the FTC, the Federal Trade Commission does control

Michelle Rowan (08:15.875)
Okay.

Mary Ann O'Connell (08:31.212)
how franchises present themselves, franchisors present themselves not only in their disclosure document, but very often in their marketing. Now swing by and say the states lay over another level. Every state has a little bit of a different take on it. If you've ever read an FDD, you'll see there are pages and pages and pages, state by state, those are looking at all those different things.

And then there are some local government changes that you have to look at. So there's a lot of pressure containing this franchisor so that they behave responsibly. Trust me, before 1979, if you ever saw the movie with Danny DeVito, Tim and, you know, they were selling aluminum siding and lying through their teeth. That was very much what was happening in the franchise business before. Now, very legitimized and scrutinized.

Michelle Rowan (09:24.557)
Excellent. So I'm going to try and summarize what you just said. You tell me if you agree. The franchisor is really the bigger brand and how that's going to scale and ensure that the customer has the same experience no matter what location or territory they're in. And the franchisee is operating their business with a license from that franchisor's brand in their local market. Does that align with what you said? Okay. Perfect.

Mary Ann O'Connell (09:50.35)
That's absolutely the succinct way to say it.

Michelle Rowan (09:54.265)
Now let's talk about franchise fees. How would you define those because there's different fees that are associated when you join a franchise?

Mary Ann O'Connell (10:04.78)
I think the franchise fees are key for anyone who was looking at an FDD and trying to make a decision on a brand. So you have, first of all, two basic levels. You have the franchise fee. That's that initial upfront fee that you pay to the franchisor simply for the right to put their name on your business. All right? That is all that is. It's rent, basically.

You paid that and with that you get the use of the sign, you get trained, you get their proprietary information. Then there are ongoing fees and I think the one that's probably known the most are royalties. The royalty, again a feudal word that used to come, you when you hunted in the king's forest and you shot a deer, you had to give the best cuts to the king. Same thing, but we're not getting the best cuts in as much as franchisors.

So you're paying generally a percentage of your gross revenue. Different franchises have different ways to do things, but that is the norm. And that is paid either every week or every month. They have different ways to collect it. It's all computerized. Now, if you use their tech stack, they are seeing what the sales are. They're calculating what that's going to be. And the other big one that is consistent is a national marketing fund of some sort.

So that think of it as a forced savings account that if you take money away from your gross sales every week, let's say, and you put like 2 % into this fee fund and everybody is pooling that in time, you can really market the brand either regionally or nationally depending on the growth strategy and the growth stage. And so it's a great way to build a local business's exposure by contributing to the fund.

And then there are tons of other ones, depending on what the business is. If those of you who have been looking for a while say there seem to be more fees than there used to be, there wasn't accounting rule change. And so some people broke those out. So it's how they're amortized. And it's very complicated and I'm not getting into that, but you might have tech fees. You're probably going to have some fee when you want to renew. You're probably going to have a fee to go to a convention or a conference, whatever you're going to call it.

Michelle Rowan (12:19.544)
Yep.

Mary Ann O'Connell (12:27.96)
There are lots of different fees. Make sure that you read through them and you understand what they are and then pay them on time and in full.

Michelle Rowan (12:36.855)
excellent. If you don't pay those things in full, you could be in default and you could risk not being a part of that franchise system. So it is important. I know too that I've seen the market marketing fees, the tech fees, you look at a lot more FDDs than I do. Do you have a general sense of that range of fees that you're that you're seeing? I'm thinking more specifically on the royalty side versus that initial fee.

Mary Ann O'Connell (12:45.954)
Absolutely.

Mary Ann O'Connell (13:02.582)
I do and I hate that I see a range and I'll tell you why. That means franchisors probably got some bad advice when they were setting things up and you know, as a new franchise or how are you going to know what you need to charge? And they may have gathered a lot of competitors, FDDs and said, well, if they're bringing in 5%, so will I. But I think if you look at the royalty, that is the monthly.

dues you pay for what might be attributed that being under that brand name, your sales were greater because there was brand recognition. If you're a brand new brand and nobody knows you, or if like when we were in MoneyMailer, was almost, mean, Valpak had been around for a few years, but for the world, this was a whole new way to advertise. Then the royalty shouldn't be as much because the brand hasn't gained the value. so franchisors,

It's not as if you have to pick the royalty on day one and stick with it forever. It can graduate every year when you are renewing your legal documents, which you must. It just means the newer franchisees are paying a higher rate than the older ones. And then when those older ones renew, they catch up.

Michelle Rowan (14:20.251)
That's great. So while you were talking about that, I decided to look at our data because we ask a question, the fees I paid to my franchisor are fair. Only 47 % of franchisees from our data strongly agree or agree that the fees they pay to the franchisor are fair. 29 % are neutral.

And then we have 25%, if I just did that right, I did 25 % agree or sorry, disagree or strongly disagree. And I think that that doesn't mean that the fees aren't fair. I think it's also perception. So I think understanding what you get for those fees, you made a good point understanding franchisees or people that are looking to get into a franchise could try and just do an apples to apples comparison of that when they look through FDDs and understand that. But I think it's a great.

practice to ask the franchisor, what are they doing for those fees that are being provided? So I think it's also common for a new franchisee to understand they're really helping me open this business and get things started. And then once they're in the business for three to five years, they'll start going, why am I still paying this fee? So again, you're in these agreements for usually 10 years. And so it is important that you just kind of shift the way you're thinking about paying those fees. You mentioned a good thing about

It's kind of like escrow or putting you're putting money away for anything that you do that this franchise or is doing a lot behind the scenes to support your business, grow your business. And that's why those fees are there. a big thing in franchising is when a franchise or hits royalty, what do they call it? Since it self-sufficiency, was going to say sustainability, but yes, it's a big deal when the franchise or hits that they should not be trying to grow based on that initial fee or selling that next franchise.

Mary Ann O'Connell (15:53.208)
self-sufficiency.

Michelle Rowan (16:04.635)
is a huge marker in the business when they are royalty sufficient. So I think that was a good explanation of that. Okay, so you were the first franchisee of Money Mailer, but it really was a different time. thinking way back then, why did you just, yes, when dinosaurs were roaming the earth, why did you decide to be the first Money Mailer franchisee? Were you considering doing something on your own and being a business owner, or how did that come about?

Mary Ann O'Connell (16:22.026)
You when dinosaurs roamed the earth?

Mary Ann O'Connell (16:33.262)
Oh my gosh, no, I was in my twenties. I barely knew how to get out the door in the morning. My partner at the time was in commercial real estate and it was having a really tough time in 1979. He was friends with the founder before he was the founder of Money Mailer. So the founder had been selling ad space in, or I'm sorry, buying ad space from Valpac.

for a racquetball club, this is really going back, a racquetball club that he managed and it occurred to him, he was sitting on the wrong side of the table. And so he came back to California and gathered some friends together at the Magic Castle. I was not at that meeting, but my partner was, and they went and they talked about it and there was no disclosure document. Everybody said, this is a good idea. And they cut up the world in those days.

Now, when we did get a franchise agreement, it was one page, eight and a half by 11 on two sides and written in perpetuity. Franchisers who were listening, never do that. It's not a good thing to do. So I came along for the ride. I was still in commercial real estate. I was doing leasing and I did both jobs. Sorry, I did both jobs for a year.

until it took off and then I ran the office and set up all the sales appointments and he took care of all the sales and the calculating what the discounts should be for the coupons that we were selling. So I fell into, I didn't know the words. I had no idea, but the more I was in it, the more fascinated I was because things were changing quickly. There was this new rule and

Michelle Rowan (18:13.155)
And so, okay, you just fell into it.

Mary Ann O'Connell (18:26.86)
I'm watching different people come in as franchisors and some being wildly successful and some of them failing miserably as happens in every brand. But just really curious, how did all this work? And I got bitten by a bug that has stuck with me for all these years.

Michelle Rowan (18:44.409)
Yeah. And again, I love that you have the perspective of being a franchisee, being on the corporate staff, and now supporting franchisors in our industry.

Why do you think it is that a lot of people don't know much about franchising? That were, I mean, if Money Mailer was in the 70s, I don't remember when McDonald's started franchising, but it's been around for a really long time. And I think there's a lot of misconceptions about it. Why do you think a lot of people don't understand what franchising is or immediately just think of the McDonald's, the large scale food, QSR brands, think kind of highlight all that. I know that.

we talk about in the industry, have to do a better job of talking about all the different types of franchises that there are out there. But it's kind of still, it feels like this secret. And I don't really understand why that is because we have so much impact on the revenue of the money that's coming in the country, the money that's going back into local communities.

Mary Ann O'Connell (19:42.476)
It's a great question. And if this is a totally unscientific or substantiated answer, but my feeling on this is that as franchisors, the franchisors have worked very hard to create these replicable methods of doing business. We always talk, it has to be scalable. has to be replicable. In that replication and trying to do it so it is seamless for a consumer to go.

Let's take one of the first ones that got big was Holiday Inn. know, when I was a kid, the dinosaurs and us would either camp out or we would stay in a no-name motel and you never knew what you were getting when you pulled off that night off the road. And then there was this consistent experience across the country. The consistency has been great for building a brand expectation.

but it also blinds the public to the idea that these are individually owned businesses, which I think has been the main thing that creates the friction in joint employment, which is a whole different topic, but we do it to ourselves. Now, some have been more open about, and if you have a movie starring Michael Keaton about McDonald's, then people are gonna pay attention to the fact that, they're all individually owned and operated.

Michelle Rowan (21:05.147)
Yeah.

Mary Ann O'Connell (21:10.926)
And some people get that, but then when there's something bad that goes on in the news, let's say when it was the fight for $20 an hour here in California, and people say, McDonald's was bad. No, you may have had some bad actors under a certain brand who were underpaying their staff or creating bad working environments. So you have to look and say the brand does this for the consumer experience and kind of buries the lead that these are independent businesses.

Michelle Rowan (21:40.239)
Yeah, well, and I think that's there are certainly some very large franchisee organizations out there that are not in their local markets. But I think a lot of franchisees are active and living in the communities that they run their business. So we need to we need just to keep talking and telling those stories about what they're doing. You mentioned joint employer. I don't want to go into that level of detail, but we are talking about what is franchising. And when you talked about the franchisor and the franchisee, you kind of touched upon it in that the franchisor.

can give you as a franchisee playbooks on how to hire people, how to train people, but they are not managing your employees. And that is the joint employer concern is if your employee as a franchisee does something bad, a consumer will not go after the franchisor because they are not managing, training, and building the culture within your organization as a franchisee.

That is on you, the franchisee as the business owner, to really own that experience. And I think it's not as big of a deal or a risk as it used to be, joint employer, but it is important to know, as Marianne mentioned, you would be, I would be Michelle Rowan doing business as my franchisors name entity. And that, that kind of really helps reinforce through your employees who their employer is, that you are part of a franchise system, but you are employed by me, you are trained by me and you're.

behavior reflects on me and my business. So I think, yeah.

Mary Ann O'Connell (23:06.126)
And one quick thing, those handbooks have to be written as suggestions.

Michelle Rowan (23:09.987)
Yes. Yeah. You mentioned, you mentioned back of house. So that's what I was trying to explain. Like that's your employee. That's how you run your business.

Mary Ann O'Connell (23:13.166)
Right. Yeah. But we suggest you train this way. We suggest you do this. And it can, it's all manageable. It's actually all quite manageable. It's, use your words, That's it.

Michelle Rowan (23:26.563)
Yeah. So I don't know a lot about licenses and business opportunities. I know that licenses have monthly fees, but it's not as regulated as franchising. Do you have any insight into the differences between franchising and licensing as far as negotiations when you're looking at that contract that you signed in a franchise agreement? Or what would you say the differences are on franchising and licensing? Because you talk to people that are coming to you for the first time and saying,

I think I want to franchise my business. Do you ever say, I know that you say, no, that's not a great idea, but do you ever say this makes more sense as a licensing model?

Mary Ann O'Connell (24:06.658)
Yes. And if that's the case, now I'm not an attorney, what I will do is refer them to an attorney to give them the details of the differences. But if it was easy to get away from being a franchise, everybody would do it because it's a lot less restrictive. So there's basically a three-legged stool that if you trip the wires on those three legs, then no matter what you want to be, you're a franchise. it's sharing the brand name, getting continued support.

Michelle Rowan (24:11.513)
Okay.

Mary Ann O'Connell (24:35.746)
and paying a considerable money on an ongoing basis for that support. So if you're going to buy something that's just a license, you might be able to use the name on it. But once they hand you a book that says, here are our best practices for running these, you're on your own. You don't get the buying power that a franchise or can bring you. You don't get the community that fellow franchisees can give you in terms of education, support, real world stories.

Michelle Rowan (24:53.262)
Okay.

Mary Ann O'Connell (25:05.646)
Yes, you don't pay as much as a franchisee, as a licensee. You may not pay as much in fees, but there's a cost to that. There's a cost in not having the backing of that franchise. The franchisor is constantly, if they're good, they're doing R &D in their market and they're being innovative and moving their brand to the top of mind, to being the leading edge.

They're the ones that are creating marketing. I what do we all know about marketing? So there are a lot of advantages and most people that come to me will say, no, I have to say you can't be a license. You have to be a franchise and then turn them over to an attorney to explain that. There are some, again, not getting into too much. There's a thing called a fractional franchise. So let's say you have a small part of a business. That would be great if it was inserted, if it was a food type served in another restaurant.

if it was a beauty system that somebody could use in a spa that's called a fractional franchise where you pay less, you disclose less, but if it's less than I think 25 % of their gross income, then they can get away with less disclosure and some other goodies and you can do it that way.

Michelle Rowan (26:21.839)
I've never heard that term before. So that's not like a subway in a Walmart. That is different than a fractional franchise. Okay, got it.

Mary Ann O'Connell (26:29.174)
Right, because that subway in Walmart is leasing that space in the front and they are a franchise. They just have what's called a non-traditional location.

Michelle Rowan (26:39.395)
on traditional location. Okay, perfect. So I hope that we have scared the bejesus out of most people because the idea is that you know exactly what you're doing before you invest in a franchise. That is our hope, that is our goal. And we hope that franchisors know what they're doing before they create the very expensive document of FDD and operation manuals and do everything the right way to support these business owners. But if we haven't scared you off and you are still intrigued by franchising.

Mary Ann how about some advice? What would you give to somebody that is thinking about getting into a franchise, becoming a franchisee? Do you have advice for them, either thinking about back to your 1970s Marianne self or today, knowing everything that you know, what advice would you give to someone? For many, for many reasons.

Mary Ann O'Connell (27:22.892)
I don't remember my 1970s. My first advice would be take your time and do a lot of research. Look at all the competitors that are in there. mean, if you love what you're doing. The second would be sometimes there are people out there whose job is to represent several brands. If you don't feel comfortable, if you don't get that tingly feeling just like when you buy a house,

Michelle Rowan (27:34.319)
Great advice. Yeah.

Mary Ann O'Connell (27:51.054)
If you don't get that feeling about the business, don't do it because times will be hard and you need that inspiration to get up every morning and do it. The other thing is please read every word of the FDD and the franchise agreement and come back with mountains of questions. If you don't have one, now I have worked for several franchisors after Money Mailer, in Money Mailer, we had a thing called 20 Questions, which was a riff on the name of an old game show.

When we gave them an FDD, if somebody did not come back with at least 20 questions, we know they hadn't read the document. And that was gonna be a problem farther on down the line. Do your homework. And then when you're making your final decision, we have to do a lot of, I'm not lying to ourselves, but bolstering ourselves to make a big decision. And so we think, I got this made. I'll do better than they projected income could be in item 20.

and I'm sure it will cost me less. I would say reverse your thinking. Look at their item seven, which is their starting costs and double what they think in your mind, double what you think it's going to take to get going and then half what you think you're going to earn. If it still makes sense for you in a three to five year window, go for it. If it doesn't walk away.

Michelle Rowan (29:12.793)
Yeah, great advice. I have a question for you though, because I thought you were going to say this and you didn't. How important do you think it is that a candidate has a franchise attorney review their agreement with them?

Mary Ann O'Connell (29:24.11)
100%. And a regular business attorney might not understand the franchise model and they think they're going to negotiate the contract and it really is not negotiable. So, yes, and very often ask your franchisor if they know of an attorney, it doesn't have to be in your state, if they know of an attorney who reviews franchise agreements and for franchisors, go find them.

There are lots of attorneys out there who will do this for you and go and get it reviewed.

Michelle Rowan (29:58.103)
Awesome. And also too, we do have those resources with Franchise Business Review. So we are happy to point you to people that have done well with other candidates we've spoken with and also for franchisors. We are here to support good franchising, responsible franchising. I just really appreciate just the kind of breakdown of what franchising is. This conversation has been great. Your time is always appreciated. You have so much knowledge and I love that you're always willing to share it with people so that they make

good decisions for their life. So thanks for joining us. Yeah, it absolutely can be. We see it every day. We see great franchising and we also see the flip side. So hopefully some people learn some stuff today. Thanks for joining us.

Mary Ann O'Connell (30:29.026)
can be great.

Mary Ann O'Connell (30:39.886)
It's been my pleasure.