The Gap and the human inside the franchise

Buying a franchise and running one are two different things, and the gap between them is exactly what due diligence exists to close. In this episode, Belinda and Julie get honest about what the prospectus shows you, what it leaves out, and why the first six months belong to you and nobody else.

What we cover: what the prospectus actually sells you · the five pillars of the Franchise Fit Matrix™ and the two buyers most often get wrong about themselves · the franchisee who completed every week of training and never opened his doors · what a franchise agreement actually grants you (and the woman who discovered she'd bought a way of thinking, not a business) · how to close the gap yourself before you sign — including the one problem with talking to franchisees.

 A line worth keeping: artificial intelligence gathers the due diligence data. Discernment, knowing what it actually means, takes lived experience. That's what we bring.

 Nothing in this episode is legal or financial advice, it's education and commercial guidance from lived experience. 

Before you sign a franchise agreement, have it reviewed by a franchise-specialist solicitor.

Hosted by Belinda Bradley (thirty-five-plus years in franchising, from South Africa to Spain and most places in between) and Julie Taylor (twenty-six-plus years helping people buy, run and build franchises in the United Kingdom). 

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Transcript

SPEAKER_01 0:00

He couldn't open the door. He froze. He just stood there and he could not open that door. Can the prospectus actually tell you what actually happens on a rainy Tuesday morning in Lincoln? You you just don't know. Franchises are awarded, not sold, but there's a human being in the middle of it. Do you know there's one thing that all new franchisees experience, and almost almost none of them admit it? About a month after opening, they wake up in the middle of the night and think, oh God, what have I done?

SPEAKER_02 0:47

Welcome to the Human in Franchising. I'm Belinda Bradley, 35 plus years in franchising from South Africa to Spain and most places in between.

SPEAKER_01 0:58

And I'm Julie Taylor, 26 plus years helping people in the UK to run, buy, build franchises.

SPEAKER_02 1:08

The franchise industry sells a system. We talk about the human being who has to run it.

SPEAKER_01 1:14

And today we're asking one question. When you buy a franchise, what does the prospectus actually show? And what does it leave out?

SPEAKER_02 1:24

We've spent two episodes on why the human in franchising matters more than the model. Today, the gap nobody shows you. The prospectus is the document, the glossy sales document that shows you exactly what the system looks like. Lovely photographs, the model. It may tell you a little bit about the numbers and what it costs to set up the support that you receive. All of it's real, all of it's documented. But what it can't show you is that first six months in real life, what that's actually going to be like. The mornings, the decisions nobody makes for you, and whose job is it to close that gap? Well, actually, it's yours. And that's specifically why we're having this conversation today. Before signing, not after, you need to have worked out exactly what is going to be required of you and whether you're prepared to do it. But don't you think that's just how selling works? Yeah, I agree. It is. It absolutely is. Um, it is meant to be a persuasive document. That's what sales documents are there for, the glossy magazine, so to speak. But franchise buyers need to be a little bit more discerning, they need to be a little bit more educated and take in the subtle nuances of what really running a franchise is all about. And that's what we're hoping to convey today. We're going to chat about all those little bits and pieces that they need to consider.

SPEAKER_01 2:56

That's why we've developed a method to help you to walk through the whole process. We've called it the franchise fit matrix. Let me walk you through the pillars. So we start with financial readiness. And it's not just have you got enough money, it's where are you in this process of getting the funds together to start this business? You need to have enough money to buy it, to buy the franchise. You need to have enough money for the setup, for some um ongoing working capital, but you also need some fallback money. You need to make sure that your life doesn't stop if the business, for whatever reason, takes a while to get off the ground or doesn't work. So we look at that with you. Operational capabilities. Now, this is about you and the operation. What have you what have you got to do on a daily basis? And we're going to talk a little bit more about that as we go along because this is all about doing your due diligence and making sure that you understand what the model asks of you. But don't just think it's about doing the job. Think about lifestyle compatibility as well. What is it that you've got to do to change in your life for this new business, this new role that you've got to fit into that life? So think about, you know, where is it you're going to be based? Are you going to be in a shop? Is it is it a territory franchise? Most franchisors want you to live in the territory. And the reason being, lifestyle can get in the way very, very quickly. You can end up, you know, you've you've not quite finished work, you've you've got some other bits to do, but the kids need picking up some from school and they're 15 miles away. Not very good if you if you're trying to run both jobs. So think about how it's going to affect your life. Think about relationship readiness and the fact that you've got so many different relationships tied up in this. So you've got your relationship with franchise, you've got your relationship with the other franchisees around you, you've got your relationship with your customers, relationships with your suppliers, and your family relationships as well. Back to the lifestyle bit, but you know, you've got to think about have you got the back-in of your family? And to be honest, a lot of franchise will ask you that. Have you got the back-in of your family? Because it's no good if you're saying, oh, I'm going to do this regardless of what you say, because that's going to bite you in the bum if you're not careful. So just think about how that works. The other thing to think about is long-term commitment. You are going to be signing an agreement. Now, there's a couple of things tied up in this. There are the the general sort of can I commit to this? It's is it five years, ten years, three years, however long the franchise agreement is. Understand that that franchise agreement is a legal document that you're going to sign, and you need to be sure that you understand what's in it. We're going to talk a little bit about that as well. But it's also about, you know, the franchise also has to understand where you're coming from. And if you are setting up a business, so let me give you a bit of an example. If you're setting up a business in the UK, that's fine. You can do that. But if you're setting up a franchise and you're going to sign for five years, you better be in the UK for the next five years. And we've got a lot of people coming in on visas and things like that, which is fantastic because it's bringing all the skill sets into the into the UK. But make sure you can stay here for the length of time, and the franchise will want that as well. So there's lots of things that you've got to think about. What I'd like to do is just go back to the capability bit for a second. You can pass every test that you need to take to get this franchise. And you need to be able to understand how it works and you need to believe that you can do it. Let me explain what I mean. Let me give you a story. I had a franchisee that passed every week of training. The launch day came, he he was happy. Prior to that, he'd he'd done all that he needed to do. His financials were right. We knew that he'd got the um the operational capability because he'd done the training. We knew that um he'd got the lifestyle worked out, and his wife was actually going to be supporting him. So that was that was all in there. Um his family were all excited because he was starting this business. The franchise was happy, they've got a new store opening, everything's going to be fantastic. They'd done the marketing, so people were going to come. It wasn't the kind of business where they were going to be queuing at the door, thank goodness, but they were coming, you know, it was it was there. He then realized that everything's there. He's got the brand above the door, he's got everything in place. He couldn't open the door. He froze. He just stood there and he could not open that door. That was it. So he had the skills. So what was actually missing, Julie? His own self-belief. Because what we didn't pick up on was that he ha he didn't believe that he could do this. And it and the language must have been there. It's a long time ago. The language must have been there, and and we weren't picking up on it. We weren't understanding it. And he just did not believe that he could do it. It never did open the door. It never opened the door. But what I would say is, you know, in the in the franchise sector, there's lots of, oh, I'm going to buy a franchise, we're selling franchises. Franchises are not sold, franchises are awarded. And that means that there's an expectation on both sides as to what's going to happen. That one of the things that I say all the time is this business is nothing to do with the actual business itself. It's if it could be food, it can be estate agency, it can be a retail shop, it can be anything. Buying a business or starting a business is not about the actual business. It's about managing the expectations of each party. So the franchisee has expectations, the franchise or has expectations, and if those expectations are not met on either side, then you've got a problem. In my case, in my story I've just told you, the franchise or had an expectation that the franchisee would pass the training, he did. He had an expectation that he would open the doors. He didn't. The franchisee had an expectation that he would be trained. The franchisee had an expectation that he would be helped with the business. But that did not stop his self-belief. That wasn't there. So franchises are awarded, not sold, but there's a human being in the middle of it.

SPEAKER_02 10:52

That's an interesting um take on the on the expectations, Julie, because franchise agreements inherently record obligations, don't they, on both sides? And I guess the real question isn't is the agreement fair? It's have my expectations been tested against what that agreement actually says? And just going into what an agreement typically grants and what buyers quietly assume that it grants, but typically agreements grant rights, rights of access to intellectual property. And that intellectual property is made up of various things. It could be the business model itself and how it runs, it could be marketing uh plans and marketing strategies that you have access to. It could certainly be product if there is product involved. It could be methodologies, it could be operations manuals, it could be all training, training programs and training materials. All of that is a body of work known as intellectual property. And when a franchise is awarded, what you're actually getting is access to that entire body of information or that blueprint, so to speak, the recipe for success, if you if you will. And understanding what it is you're getting access to and what you're obligated to do in order to fulfill the agreements uh in terms of that access is hugely, hugely important. Let me tell you a little story about um a lady who came in to us a little while ago. She had been involved with the franchise for a long time, uh, had a very, very good relationship with the franchise, believed in the product, and actually believed in herself really well. So, you know, in this case, franchise all believed in her too. Um, she had been operating a franchise under a verbal agreement in a different country. So she'd moved from her home country into a different country, and she had been operating this franchise on this verbal agreement. She'd been trained, she'd paid money for that training. So there had been a transaction involved. What had happened was sadly the franchise passed away. And the rights to all that intellectual property, all those trademarks had been passed on to the heirs. Uh, and so the heirs then took it over and realized there was no agreement in place with this lady and decided they needed to formalize the arrangement and put an agreement in place. And so they sent her the franchise agreement. And you can imagine sitting across the table, she's got the agreement in hand, and she realized she hasn't bought a business. She's only bought access to a methodology.

SPEAKER_01 13:42

So what should she do now? But she's got no franchise agreement.

SPEAKER_02 13:47

She didn't have a franchise agreement, and the new franchise knew that. So I'll say the obvious out loud. Obviously, before you sign any franchise agreement, you do need to have a franchise specialist solicitor read it. This is not a general solicitor, this is a specialist franchise solicitor who is trained in franchising and understands the ethics involved in franchising. You know, that'll be the cheapest money you'll ever spend. But what she needs to do now is come to a decision because her whole access to what she's built up now in the new country hinges on her using and accessing this methodology. The franchise agreement does not promise that they are going to set up a business for her or teach her how to run the business of using this methodology. It simply grants her access to a methodology. So she's got a couple of decisions to make. She either refuses to sign the franchise agreement because it doesn't meet with her expectations of training support, business support and materials, etc., and loses access to the methodology, which comes with a brand name, by the way, which she's been using. Or she makes peace with the fact that all she's got is access to a methodology, seeks those other requirements that she's really hoping is going to be included in this agreement, which are not, and she seeks those from outside specialists to support her in terms of support, business support, marketing support, etc. And that's only a decision she can make. But it brings me back to the point that expectations. She had an expectation of what should be included in this franchise and what was actually recorded in that agreement was simply access to a methodology. A bit sad that it took her 10 years to figure that out or to find that out. But yeah, a tough one to have to deal with.

SPEAKER_01 15:46

So how how does a buyer close that gap then? So there's a gap between the sort of you know the expectation and very often when you when you come into this, or or almost always when you come into this, you don't know what you don't know. So the due diligence aspect of it is massive in terms of what you what you need to do. And the and as we said earlier, the practicalities of you know, this is what it says in the prospectus, but this is what real life is. And you know, can the prospectus actually tell you what actually happens on a rainy Tuesday morning in Lincoln? You you just don't know. So it's not gonna give you that sort of stuff. So there are some things that you can do. I I would suggest that there are questions you need to ask the franchise, of course. Um, and ask them precisely what makes the model work? What is it about this model that makes it work? And they will know. They will they will all know what that is. So you've you've got to understand what it's difficult to give an exact, isn't it? Because you you we don't know what the business models are that people out there have got. But what what's actually going to make that model turn into a business in your area? But there are things that you can do fairly simply. You know, one of the things is very simple, visit franchisees, go to real units or go to real people if you're in a territory franchise situation and talk to the franchisees. Ask them things like, what does a day look like? What does a real day look like? How do you carry out local marketing? Because when you're buying a franchise, of course, the the local marketing is done by the franchisee, not the franchise. So, what do these franchisees that you're talking to, what do they do to drive business into their door? So, you know, pick up the phone or open the shop door or whatever it is they do, how do they get the business? One caveat I would put there, just be aware. When you talk to franchisees, you find what you're looking for. So by that I mean if you're looking for the top performer who loves the brand, the franchise was brilliant, everything's great, the training was really good, absolutely fully embroiled in the whole thing. You will also find, if you look for it, somebody who will tell you the exact opposite, that they're not enjoying it, they're not making any money, the franchise never talks to them. Um, a simple question there that as I've gone through through this 26 years of learning is when somebody says to you, oh, the franchise never rings me, well, did you expect him to? We're back to expectations. What did you expect? Do you call him? Do you ring and ask for help? We keep saying him, there could be some hers here, but you know, do you do you do you ask for help? There's lots of things that you can you can find out, you know, how does this work? How does that work? A good franchiseur is not going to let you spend a day with a franchisee, by the way, always. You know, that you're giving away sort of things about the business that you don't want to give away until such time as you've signed a franchise agreement, and that's absolutely understandable. But when you're talking to the different people around, you can start to build a picture. Look for patterns that are emerging. It's harder when you've got a franchise that's only um maybe got two or three franchisees if it's a very new emerging franchise. If it's a much bigger franchise, then talk to a few more franchisees. It's up to you, really, as the person looking for the business. What do you want to know? But you will find exactly what you're looking for in every franchise brand. The thing is, whose truth do you listen to?

SPEAKER_02 20:09

And the truth is, very listening to very, very um good advice there, Julie. Um uh I've seen that before as well. You know, you will definitely find what you're looking for. I think just one point I just wanted to add in here at this stage is that often when people are doing their due diligence, they will be asking questions for information from the franchise. And sometimes we get the question, I'd like I'd like to see financials from existing franchisees, please. I'd like to see how they're performing. Um, and just one caveat there is that GDPR laws in the UK prevent that kind of information from being shared. So privacy, um, right to privacy, et cetera, is um is real. Franchis laws may not, in terms of the law, supply anybody's financials to you, even with their consent. The best you can do is get financial models from the franchise that include averages across the brand, across the board, uh for the various models. And sometimes if it's a very well-established franchise, you'll get averages across different regions, you know, whether they're rural locations or whether they're city locations. So if it's a very established franchise, you could you could find that. But if not, certainly per model, because some franchises have different models, but you can get averages from the franchise about those different models. And if they're running company-owned operations, those averages will certainly have come from the franchise company-owned stores. So just one point to remember there that you don't have the right to access other people's financial information, and the law prevents the franchiser from providing you with that information.

SPEAKER_01 21:46

That's very true. The one thing that I would say when you're talking to franchisees is is this what you expected it to be?

SPEAKER_02 21:57

I think that's the one question that always gets an Honest answer, isn't it? Uh is what were their expectations and what did they get? And I suppose you've got to compare that with what's actually being offered. You know, again, go back. What's actually being offered is recorded in franchise agreements, etc. So that's always your fallback. Is what is actually being offered and what was the expectation? And is there a gap between the two?

SPEAKER_01 22:23

Interestingly, I had somebody who um had been looking at a franchise and they went to one of the franchisees, one of the early franchisees in the brand, and said, you know, is this what you thought it was going to be like? And, you know, what's the franchise like to work with and all of that? And the the the lady who was running the franchise said, honestly, I expected a lot more help and a lot more support from the franchise or, but he'd only just started franchising when I when I took this on. My understanding now is that the training's better, is talking to people better, he's got a team in place. So just bear in mind that these things can evolve as well, can't they? Absolutely, they can make such a difference. Absolutely.

SPEAKER_02 23:16

And I think the pros and cons of buying into a very new franchise, you know, in that you have obviously got the benefit of a lot of good areas, good sites still available for you to take. But the cons are that you're probably dealing with a franchise who's got quite a lean team. So they don't have somebody in charge for everything. They're dealing with people who aren't specialists, people who are multitasking in those early days, and they're learning just as much as you are in terms of what the best way is to develop sites, you know, project manage sites, uh, what the best form of training is and how long that training should be. So that is all still evolving, as you said, Julie, you know, in those early days, versus going with one of the brands that are very much more established. You generally don't always have a choice in terms of territory and you know, you've got to take what's left basically. Um, and very often those franchise who've evolved um have evolved to the point where they are not looking for single unit operators anymore. Very often at that stage, they want you to come in with a deal to do five or even ten sometimes, you know, new units um or to take over 10 existing units. So there are pros and cons, and there's no right or wrong answer to it. You know, it's what you're comfortable with, but go in with your eyes open. Go in knowing uh what is coming, and then you should not be disappointed.

SPEAKER_01 24:39

One of the things I would I would add to that as well is the there will always be with a franchise a franchise fee. Yeah. So in the early days, the franchise fee is less than it would be when when it goes bigger. So you that comes back to financial readiness. If you have the money to buy into one of the bigger brands and that's what you want to do, that's fine. But if you don't have that kind of money, then you may have to think, rethink your financial readiness, if you like, and think about where you are in terms of what you can actually afford and what that looks like. So you're back to financial readiness, you're back to operational capability because can you afford a team that's going to do everything for you? Does the business need a team that's going to do everything for you? So you've you've got to look at that side of it. You're back again then to lifestyle, because if you've got to buy into an area that's a little bit further away from home than you than you'd hoped, think very carefully about how that's going to work. You're your thinking in terms of relationship readiness might be different because you know what kind of relationship have you got with a franchiseur who's very new and can give you a little bit more time compared to a franchisor who's got hundreds of franchisees. Will you still get that one-on-one? What's the team like that's behind it? And how does that relationship work with the development team and things like that? And then you're back to long-term commitment. If you're gonna sign something that's a lot of money, then your franchise agreement tends to run along with how much you need to borrow. So if you're gonna borrow £500,000 and you've got to pay that back in five years, that's a lot of money. You might want your franchise agreement to be a little bit longer. If you've got to borrow £12,000, it might only be for three years, and that's okay. You know, so you you've got to think about how that's gonna work. So your long-term commitment, your relationship readiness, your lifestyle compatibility, your operational compatibility, and your financial readiness all come into this, and you need to do your due diligence on all of that for that to work.

SPEAKER_02 27:19

You've touched on a couple of very important points there, Julie. Um, one of the questions I wanted to pose to you was in terms of franchise fees and what they're actually for, so you know, the initial fee that gets paid to the franchise. I've often heard it uh from naive buyers who don't really understand franchising and don't understand what these fees are for. You know, why should I pay the franchise? He's new, why should I pay him a fee to build his brand? What are your thoughts on that?

SPEAKER_01 27:49

Okay, so think about if you were going to set up a business similar to this on your own. You can't call it what it's called because that name is protected. So you've got to come up with a different name. You've then got to do all of the things that the franchise or did in the first place to set up their pilot operation. So you've got to get the brand together, you've got to get all of the uh methodology, the whole thing, the whole business model working. And I cannot think of one single person in probably in the world who can honestly say, I set up a business and I had no problems whatsoever. So when you think about it, you you set up a business and you start and you you have a nice sort of track and you drop down a little bit and you drop and then you go up, and you and and eventually you get to a point where you're not treading through mud. You've you've got it, you've got the model, it's working, it's making a profit. Then the business starts to take off. If you're gonna buy a franchise, you're buying at the point that that business is about to take off because they've done all that for you. They're also giving you access to the brand, access to a website, access to in these days, social media. I say these days, like on a grandma, but there you go. These days you you've got to think about every sort of aspect of marketing. All of that you get, you get the training, how to do it, what you need to do, why you should do it this way and not that way. You've got a group of people with you, other franchisees, sometimes only a small group, but it will grow, that are are saying, Oh, don't do that, I tried that, it didn't work, or you know, oh, do it this way. This is really good. It worked well for me, and you're you've got a similar area. So lots and lots of things. You know, when when you start your own business, when you're either putting your makeup on or having a shave, that person that you're talking to in the mirror thinks exactly like you. Whereas other people are thinking a little bit differently sometimes, and you get a better feel for what you can do. So there's a big reason why you should pay that sum. What I get asked sometimes, Belinda, and I'm sure you do too, is if you if you bull if you're buying, let's say you're buying um something that needs premises, and the whole thing is going to cost you, I don't know, 200,000 pounds. The question I get is why should I pay the franchise all £200,000? And and the answer, of course, is well, you're not. You're paying them the franchise fee, which is substantially less than that, but the rest of it is working capital. We're back to financial readiness. Make sure you've got enough money to pay the franchise fee, pay the bills, and pay everything until the business starts to turn a profit. So you need to make sure that you're financially ready. So that was a long answer to a good question.

SPEAKER_02 31:02

And and a large portion of that setup fee is obviously the set the setup cost for the actual setup of that business, you know, in terms of getting the premises ready to trade. So that would be a requirement, whether you're using the franchise or specifications or whether you've developed your own. So uh so yeah, a large, large portion of the setup cost is actually the setup of the business. And each franchiser was a little bit different in terms of whether they require you to use their contractors or not, or whether you can use your own, whether you work according to a specification, or whether they provide the whole the whole turnkey operation for you. And again, there's no right or wrong there, is there? It's it's just the preference you know that the franchiser has in terms of the setup. It leads me to a really good analogy that I heard some time ago where franchising was likened or compared to um taking the toll road. So when you are faced with the option of do I go on the on the old road or do I take the new toll road, the shiny new path, you have a decision to make. You don't have to take the toll road, you can take the alternative route. And both are likely to get you to a destination, a similar destination. But the toll road will come with some help along the way. You know, it'll come with a smoother surface, um, a few things that have been anticipated uh along the way for you. And that's a little bit like a franchise. You know, you you can, of course, always open your own business and trade and take all your own decisions, develop your own methodologies, do exactly as you please. Or you can take the tried and tested route, which has been tried and tested in every aspect of the franchise blueprint. And certainly that's you know part of your due diligence is to check that every aspect has been tried and tested, um, and then to decide I'm going to pay the franchise fee for that, because I have a smoother ride to get to my destination. So the destination is the is the same. One's going to be a shorter, smoother ride, more than likely a shorter, smoother ride, versus doing it your own way, bumping your head, twists and turns, making all the mistakes along the way.

SPEAKER_01 33:08

Yeah, that is a good analogy. Is and it's just it really is about doing your due diligence, isn't it? Absolutely. You you've got to do that because if you don't, either one of the the people that we've talked about today could could potentially be you if you're if you're starting a new business. Um and you just uh you just need to know what you're spending your money on, but also whether you can do it, whether you've got the belief that you can do it, because that's just as important. And you know, there's such a lot that that you can be helped with when you're buying a franchise, but but you cannot be helped necessarily just to do your due diligence. However, we have a mask, don't we?

SPEAKER_02 34:00

We do, we do. So if today's conversation is where you are right now, then there's a room built exactly for this. The franchise collective is a private community for people doing franchising honestly. So franchisers, franchisees, and potential franchisers and potential franchisees and the people around them. Your first months for free, so you can have a look around before you decide anything. And inside there, right now, is our due diligence masterclass, which is running this month on Wednesday the 22nd at 7 o'clock UK time in the evening, and it's free for every member of the collective. We also have a library of recorded expert interviews that members can access, and we have our Eyes Open franchise buyers program, which opens on the 29th. It's a training program, eight modules. Uh, members get a third off the price of that. There's a link in the description below. Uh, next time we're going to talk about territories, the research that almost every buyer thinks they've done but hasn't. Uh, and uh before we sign off, this has been the Human Enfranchising. See you next time.