What Makes for a Successful Franchise?

Welcome to the FranSimple podcast, where the world of franchising is the topic and the concepts are made simple. Join Mark and Steve Vandegrift on this first episode as they break down what franchising is and why it can be a powerful business expansion method. 

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Transcript

Mark Vandegrift
Welcome to the latest episode of FranSimple, the podcast designed to make the concepts of franchising simple. I'm your host, Mark Vandegrift, and with me is my brother and an all-time expert on franchising, Steve Vandegrift. Steve, welcome.

Steve Vandegrift
Well thank you Mark, good to be here.

Mark Vandegrift 
It's our second episode already, if you can imagine. 

Steve Vandegrift
I know it's amazing. Time flies.

Mark Vandegrift 
Seemed like yesterday we recorded the other one.

Steve Vandegrift
It does.

Mark Vandegrift 
Well, last time we basically covered what franchising is from maybe a fifth grader or a 12th grader point of view. We got into some deeper concepts, but where we left off was what are the key indicators that a business is ready to franchise? And we talked a little bit about your 15 question quiz that you have on your website. And we talked about the systematized or systematic way that businesses operate. Having maybe more than one location is a good sign. Having the trademarks, the IP kind of locked down. One of the ones that we didn't cover too much, we mentioned it, but was marketing and brand. And you know, coming from the world of Innis Maggiore, you know, shameless plug. That's what we're all about and making sure that a brand is ready for franchising. So from that standpoint, you've seen a lot of franchise concepts. OK, what are the key indicators that a business is ready to franchise from the standpoint of a brand? What are the things that you look for?

Steve Vandegrift
Well, I'll tell you, Mark, that that one's a great question because when we're talking to prospective clients, one of the things that we ask them along the discussion is, I'm curious, have you ever had a customer or vendor say, boy, I'd love to open one of these in my city, which is, you know, a city over or something. They've had people come in out of state. Boy, we really need to have this in Myrtle Beach. And what I tell them is we consider that to be consumer validation of the brand itself and I said let me explain. When they walk into your establishment and obviously I traveled to visit clients over all over the country and I'll stop in to some of these independent businesses and had I not done a little research online I would have done it afterwards because I would have assumed they were a franchise. Why? From the moment I walked into the door, the way I was greeted, I look around, the colors, the branding itself, the cool things on the wall or the graphics, the sign above the front door. This to me looks like a major brand or at least a regional brand. Might have if nothing else a corporate regional brand that has 20 locations and it turns out it's a single location or they have two or three. And so again that's such an important thing aspect of business is you have to have a strong brand. You have to know your customer base. You basically have to have positioned your business addressing every aspect of that business from how do I look to a consumer walking in or looking from afar. And if I really put the time and effort and work with some professionals like Innis Maggiore to help me establish what appears to be this national brand, even though I might only have one or two locations. So I can't understate the importance of that brand. And in fact, as you know, we've worked together over the years on a number of clients that recognized that maybe the brand was lacking in certain areas. It might just be they want to logo enhance or a logo enhance and they really want to enhance their website or they want advice concerning their brand colors and the way they're used in the operation of the business. All of those things go a long way because today it's so easy for individuals to look at various franchise concepts and if your brand from an image standpoint does not measure up that prospective franchisee is going to check you off the list he's going to move on to the others that he's been looking at. So again it's extremely important and something that goes hand in hand with developing a robust franchise model.

Mark Vandegrift 
That's great. Well, you've talked probably on these two episodes, as far as type of business, you've talked a lot about restaurants. And I think that's because we as consumers walk into so many restaurants, we can feel when a restaurant is special or not special. But let's talk about some other types of businesses. Are there certain types that you think are best suited for franchising beyond restaurants?

Steve Vandegrift
I like that question. I'm actually going to begin on the other side. What types of businesses don't? The types of businesses that are really difficult would be like a doctor's practice. Believe it or not, a bakery. Why a bakery? Well, ultimately, a baker likes to tweak the recipes, and so it's very difficult in many cases without controls in place. What are those controls? Well, there are bakery franchises, cafe and bakery, etc., where those baked products the franchisor will actually require the franchisee to buy the exact ingredients, follow the exact recipes according to spec. What's great about that is you don't have to be a world professional baker in that case to become a franchisee. That model has already figured out that we want consistency not to bring restaurants back up but we want to or McDonald's is an example. We want that consistency across the entire brand. And so there are certain, let's say, industries where it's not as conducive. It's tough to control each location to the extent that the consumer, the customer, the guest gets that same experience no matter which location they're at. So ultimately, we like to say that just about any business, industry-wise, could franchise potentially if they in fact have their system completely figured out. And basically we call that a business in a box. I don't have to think about anything. So we have franchised child development businesses. We've franchised obviously restaurants, retail stores. We have franchised a backup and residential generator business because they had everything figured out. So again, really is more about has that business really created a model that as I mentioned in a previous episode that the franchisor can train and instruct and teach them in such a way that their location is going to completely follow the franchisor prototype locations. It's critical. And so I would answer it that way because we get surprised after doing this for almost 30 years. I think we're just hitting 30 that in that I didn't mean my age but ultimately we're we're seeing that there are concepts that come to us and it's like I didn't even know that was a business and again we dig under the hood and we find out there's really something there and usually it's a business when we ask them that million dollar question has anyone ever asked about franchising 90 % of the time the answer is yes because other people other entrepreneurial minded people recognize that they really love what they're doing and they know there's probably no other franchise out there. So we have been first to market in terms of a franchise with many, many clients over the years.

Mark Vandegrift 
I think one of your first questions when you engage a prospective client is about their IP. When it comes to intellectual property, does the system need to be, let's say, patented or copyrighted or trademarked that it can't be duplicated? Or how far is, like, what's your barometer on the IP side of things?

Steve Vandegrift
Yeah, that's a great question because first of all, IP is intellectual property and intellectual property encompasses a number of different areas. First of all, it's your trade name and your trademark. That's intellectual property. Another is your system of operation. Now, a trademark, a trade name can be registered on a state level. Most of our clients have not done anything but that. Maybe at the initial, they've been operating in a single state. One of the steps in our process is to introduce them to our affiliated franchise or trade market attorneys so that they can help them first of all do a search make sure the name is available file etc. Why is that important? Because that trade name you want to expand nationwide and if you want to expand nationwide you want that federal protection. We've had clients unfortunately it's always worked out that went to that process with us they may have been in business for 15, 20, 25 years. They engage with our trademark attorney, they do a search and they find out there's a conflicting mark or marks so a conflicting trademark. And at that point in time, the attorney is going to say either a. it's within the same category that you're in, therefore, we believe the examiner is going to reject it outright. Or it's not in the same category, but because it's not a burger joint, it's a pizza restaurant, there's close proximity that it may be rejected. So ultimately we've probably had 10 or 12 clients over the last 30 years that literally had to rebrand to offer their franchise and know that their franchisees would be protected from anyone else in their market using that trademark. So that's one aspect of it. You mentioned... yes, please.

Mark Vandegrift 
What, yeah, what, when it, I'm sure most of our, listeners will understand the name side of this, because that's usually what we go and we trademark. What about the systems themselves though? Is there anything that they can do that would say, okay, I do this, my ingredients for this product are secret. It's my grandma's recipe. Do you then recommend that they go and get some kind of protection on that?

Steve Vandegrift
Well, and what you brought up was the intellectual property from an operational standpoint, right? So the recipes is an example. That's part of their intellectual property. Can you patent a recipe? Yes. The problem is most patent attorneys would probably say, but it gets published and now everybody knows exactly what your secret recipe is. So how do we protect that? Well, on a previous episode, I discussed the fact that franchisors actually can have a co-packer as an example, make their secret spice. We have a couple clients right now that are in process of engaging. We always like to provide some co-packers that we know can deal with their type of industry. And so what happens is the franchisees are buying that from typically the franchisor or the franchisor will ask one of the major food distribution company like Gordon Foods. We just happen to be a preferred supplier for their customers. Cisco is another name that people know. US Foods is another. Oftentimes, those companies are willing to pick up those products and basically distribute them to franchisees when they're delivering all their other paper and packaging, their ingredients, et cetera. We have another client that's in the pizza industry and they'll actually ship out their, they have made their frozen dough balls. Why? They want it to be consistent, but they also don't want to have to give the secret sauce to a franchisee whose employees may start sharing that with their friends and family. So that is certainly one way to protect yourself. Another example of intellectual property is the operational system. So however you operate your business, that's part of your IP. Can you trademark that? No. Ultimately what you can do is you can actually copyright. So copyright applies to things like books. So in our case, It applies to the franchise operations and policy manual and then today with technology There's ways to further protect it that you can't necessarily have someone download it only franchise owners and the managers can access through a secure system, etc And so that's ways to mitigate that of course. Nothing is foolproof And so the best approach to take is we're going to grow like crazy. We're going to do what we do. We're going to protect ourselves to the extent possible. So whether it's shipping them the secret sauce or it's trademarking their trade names. All of those things can be done to mitigate anybody else being able to rip you off. We like to tell clients there's a process in franchising. You host discovery days. People come in and sometimes they're a little nervous. And we always ask the question, let me ask you, when a customer comes in, do you ever think twice about them knowing your system? Well, no. I said, franchise prospects are no different than that because you're IP is not everything they see. It's what goes on in the back, in the kitchen. It's how you do your landscape process. Those things aren't evident to most people. And so again, it mitigates the risk that someone is going to, quote unquote, steal your concept.

Mark Vandegrift
OK, so one of the, I guess, indicators you could say of what makes a successful franchise is how many elements do I have that I would feel I would need to protect with some level of IP protection?

Steve Vandegrift
Sure, but it might just be the main one might just be yes, the trademark, but the operational system. We have clients in the food industry. They operate in a big industry where there's a lot of them. Their operational procedures are so unique that when people are truly looking for that type of business, they quickly realize you have something behind the back wall or behind the curtain that we're not going to know about fully until we come on board. And in that case, the franchisor might further protect it based on what I shared, just by requiring them to purchase that secret ingredient, not make it in-house.

Mark Vandegrift 
When you have something, you've had a couple concepts and we've worked on them together where there was a concern about reverse engineering. I can think of an ice cream machine. I can think of alternative dwelling unit. I can think of a kiosk, a robot. How do you counsel franchisees on that so that they don't feel like, if I start franchising, someone's going to rip it off and run with the idea. What's kind of your console on that?

Steve Vandegrift
Well, and what's interesting about that, Mark, about 20 years ago, I started seeing more more articles from patent and trademark attorneys that are writing about the risk a business owner takes on when they actually patent it. Because what happens is that's actually published. And obviously, other patent attorneys know how to pull that. And so I'll use the example well known. Many people have may have read this who are in the business world. But when that fire ladder that is lightweight, you can hang it from a second floor, get you down. Ultimately, this small company developed that and they were talking to large, large companies that manufactured those types of products and they were this close to a license deal and they ultimately had patented it. But what had happened was they went to a trade show, the very company that they were negotiating and they thought days away from signing a license deal with them had now rolled out their own product but not only so similar, but similar even with the packaging itself. Now, thankfully for that company, they had some deep pocketed investors and the trade, the patent attorney said, we can win this case, but it's going to cost you about $4 million. And the investors said yes. And sure enough, now granted it was about five years later, you know how the laws of justice turned slowly. That company was awarded somewhere between 30 and $40 million. I can't remember the article. So here's a company that thought they did everything right, but that other company was able to pull it. What they did was patent around it. Now in that case, that company lost. But usually what happens in those cases, you have some individual that made something, they did it in a workshop, they brought it to market, and ultimately patented it. And now that huge corporation has the capital to patent around it. And what happens is they'll go back to the individual who had the original idea and sue them for patent infringement. And here's Bill out in his workshop. He doesn't have $4 million to fight it. He's going to lose, right? So there are things that you can do, but you never can be assured. So you just have to move forward knowing we want to grow as rapidly as possible. We have had companies that are worried, so there's a control on their equipment. Their patent attorney told them, it's not worth patenting for the reasons I shared. So their biggest concern was, what happens if somebody goes out of business and now they want to sell our ice cream machine to whoever, China, and they're going to reverse engineer it? Well, ultimately, within the agreement itself, we made the recommendation, and this was an existing franchisor that was introduced to us and needed some help. They had worked with a different company. They needed help with operations manuals, sales development systems, and actually we pointed them to a very good franchise attorney. And the franchise attorney and I discussed this and I said, believe it or not, he hadn't yet received their franchise disclosure document. I can find nowhere in this agreement where the other attorney recommended that they have the first right to purchase that back. And it was literally that it could be valued at certain amount of money. And so there's another way that if you work with the qualified professionals, they're going to help protect your system so that that franchisee can turn around and say well you know I'm done I'm gonna let that Chinese buyer that came in from overseas he had said if I ever can get him a machine or pay me money I'm just gonna go ahead and sell it to them. Well that franchisee would be responsible for all your costs your expenses the damages if they don't there's some punitive damages if properly written if a franchisee would ever think about doing it they don't because that language is in their agreement. They don't want to lose their house, their cars, their assets, all because they wanted to make a quick buck after selling that piece of equipment to a third party.

Mark Vandegrift 
Well, it sounds like IP is one of the big initial watch outs when you start the process of franchising. What other challenges do franchisers face when they first go about developing the concept and then for the first few that they sell?

Steve Vandegrift
Well, ultimately it's getting your arms around the high levels of training and support that they require. And so ultimately it's very important, first of all, that we help them recognize what that is right up front. So going into it, they're not surprised that all of a sudden they are getting phone calls, et cetera. The other thing that we explain to them is the importance of the franchise operations manual. I think I mentioned in a previous episode, we get existing franchisors that contact us and they basically say, I have this operations manual even recognized my business in it. Well, the problem with that is not just you haven't given your franchisees the tools for success. It's guess who's going to get the phone call, the text, the email at two in the morning saying, I don't see this in here. I need help. So the first way to mitigate all that, I didn't expect all this is work with professionals that can advise you what being a franchisor is all about. And not only that, but will help you develop tools, systems, protocols so that you're not overwhelmed and you have a plug and play not just for your franchisee system but also for your corporate franchisor system. We explain to franchisors or would-be franchisors that you not just your business has to be systemized. Our job is to help you systemize your franchise support your franchise training so they don't get overwhelmed with that. I guess the other thing that will surprise most let's say entrepreneurial clients that have that entrepreneurial mindset is the amount of hand holding because again in some cases when they worked with another company and they said look we have three different friars they can buy is that all right apparently they said yes we actually say well let me ask you Mark, which one do you use well I use the x 2000 model. Well why do you use that one and the other two well it's wider it's faster it's easier to clean. So what do you think? Should we offer three? I said what I just did to you, they're gonna do to you. Meaning your franchisees. They're gonna call you up, I see there's three in here Mark. Yah, you can purchase any of them. Which one do you use? Why? And boom, it's the same answer. And our client goes, that makes a lot of sense. So those are the things that we do to try and help our clients understand. And that's why we feel we've never had an issue with a client saying, I didn't expect any of this. Now, the biggest thing they don't expect, even though we tell them, is the person you're selling a franchise to is, yes, an entrepreneur, someone who wants to put their money at risk. But they're not, they don't want to be what I call a pure entrepreneur. Figure everything out. What's our name? What's our website look like? What kind of design and trade dress do we need? How do I source my supplies? They want someone to give them that. They want that roadmap, as I like to say. And so ultimately that roadmap is going to provide them the path to success without them figuring it out. But it allows that franchisee to truly be the entrepreneur that they want to be and operate that business. They just happen to have a Bible with their business sitting right there in their operations manual.

Mark Vandegrift 
Good. Well, that's a good answer to the title of this episode, What Makes for a Successful Franchise. So we're going to wrap up today's episode of FranSimple. Thanks for joining us, Steve. And as always, thanks to our listeners. Please like, share and subscribe. And remember that FranSimple is here and designed to describe the concept of franchising in very simple terms. So until next episode, may your business expand through the power of franchising.