Franchise Series: Focus on the Skills that Make You Successful

Speaker A: Welcome to the CEO Project podcast where Jim Schlixer, author of the best selling book Great CEOs Are Lazy, and the founder of the CEO Project, provides ideas and tools to help CEOs of mid to large sized companies grow and optimize their businesses. Now let's get started with the show. Welcome everybody to the CEO Project podcast. I'm Jim Schlexer and I am your host. Well, you know, passive income or income while I'm still in a job or transition to something completely different from your crazy boss are questions I think people ask all the time and they go like, what does that even look like? And how do I do it without risk and how do I find the right thing for me? And I think these are all really excellent questions and we're going to try to get deeper on this topic. Our last session, uh, on franchises, got uh, into it. We're going to go even deeper on franchises today and what might be right for you and how to pick and how do you generate that passive income that you want or maybe multiple streams of income if you want. You live that Instagram life. So our guest today is, uh, strategic franchise advisor Jeff Shafritz. If you're wondering whether franchising could be a smart way to diversify income or thoughtfully transition out of corporate life, today's guest brings clarity to a space often clouded by hype. Um, with over 30 years of experience across multiple sides of, uh, franchising, including owning and exiting his own franchise fitness, uh, franchise Jeff has advised hundreds of executives, executives, investors, career changers on making clear, confident franchise decisions without all the hype. And he's a Maryland grad. So welcome, Jim.

Speaker B: Thank you. Yeah, it's always great to speak with a fellow tarp. And Jim, thank you, uh, so much for having me on the show. I appreciate it.

Speaker A: Thanks. And my kids, I've sent a couple of truckloads of money to Maryland over time, so that's fantastic.

Speaker B: I couldn't get mine, unfortunately to go that direction. Yeah, well, there wasn't a lack of

Speaker A: effort though, so, uh, it's not that easy to get into anymore.

Speaker B: No, it is.

Speaker A: Um, so you know what, you started out as a franchise operator or in franchise sales where just spend first?

Speaker B: Yeah, I started out in franchise development and okay, I got into that out of college by accident. I wanted to be in sports management and I thought that somehow, um, uh, being a franchise development person for the athlete's foot would have me in the sports talking to athletes.

Speaker A: So I'm going to meet Michael Jordan. This is Gonna be great.

Speaker B: Exactly, exactly.

Speaker A: So.

Speaker B: But turned out much better. I, I learned franchising, so it was fantastic.

Speaker A: That's fun. So I didn't realize athlete's foot is a franchise operation.

Speaker B: Yeah, the athlete's foot is a franchise operation.

Speaker A: So I thought they were corporate stores. Huh.

Speaker B: So basically, uh, now I think it's all franchise and I haven't been there for quite a, quite a bit. At the time it was half franchise and half company owned.

Speaker A: Got it.

Speaker B: So they probably had 500 units or it's probably 200. 250. Corporate. 200. 250. Franchise, basically.

Speaker A: So I always wondered, you know, when you're talking to a franchise advisor, particularly with the franchise, um, if you buy a franchise or an area to develop, you know, they get pretty healthy commission on that. Right. Like part of that upfront fee goes

Speaker B: to the commission of the franchise advisor, the consultant.

Speaker A: Uh, well, either one. Well, we, I'm not, I wasn't getting yours. But as somebody working for the franchise, as opposed to a franchise advisor like you, I know you get paid by the franchise. Does a franchise advisor like when you're working for the foot? Would you?

Speaker B: Yeah. So as a, in franchise development there was um, a salary and then, uh, uh, commission, uh, a piece of the franchise fee went to the franchise development person for sure.

Speaker A: Okay. Do you think that influenced your ability to truly advise people? And I'm going to contrast that to what you're doing today where you're a little bit more neutral, I think.

Speaker B: Um, that's a great question. Actually. I love what I do today because of that. I work with hundreds of different opportunities. Uh, it definitely influenced me, uh, because that's all I had to offer. So it's impossible for it not to. On the flip side, uh, you knew that if you're working with somebody who was absolutely the wrong fit that it wasn't going to make any sense and they're just going to end up struggling and not doing well and it hurts the system. So there are a lot of really good people in franchising and there's a lot of people just like any industry that would sell anything to anybody. And I tried to weed out the people that didn't make sense.

Speaker A: Good. So, um, after the uh, foot, where did you go to? Is that when you went on to your own franchise or did you go somewhere else?

Speaker B: No. So after the uh, athlete's foot, actually I got recruited away. I was there for, for nine years. Um, and my old boss had started, uh, or started a franchise division for a publicly Traded company. He asked me to come on board and start up the franchise development division. Uh, I was there for about nine months. We were getting it going. My son was born Aug. 29, Sept. 11 happened. He downsized the franchise division. And so that's how I got into, uh, uh, consulting. And initially I was doing some just basic franchise consulting. I've been doing what I do now for 20 plus years, helping people find the right franchise.

Speaker A: I thought I read that you read you ran your own franchise for a while.

Speaker B: I did while I was doing this. So, uh, there are certain businesses that are designed to be manager run or can be manage or run from the start, and certain ones where you got to go all in and be full time. Um, I found a business that was a great fit that allowed me to spend 90% of my time doing this and got it. Grow that business. Yep.

Speaker A: Okay, well, we'll get into that more because there's probably some people going, I'd love to have another stream of income, you know, take some of my assets and turn them into an income stream in that way. So we'll get into that in a minute. So, um, why did you move to. Well, obviously there was a moment of need, like I got to find a job, I got to do something, and this was obviously a skill set of yours. Uh, how do you help people find that perfect franchise?

Speaker B: Yeah, uh, that's a great question. Well, first, most CEOs come to me and they're thinking, how do I take my capital and my leadership experience and grow something, but not from scratch, because they don't have time to do something where they start from scratch. Uh, and I sit down with the CEOs and get an understanding of what their goals are with this particular concept, what their skill sets are, where their strengths are, and, and then any criteria that's important. So understanding the time commitment that they can put into the business, some have more than others. And we build a model based on all the criteria that's important for them in finding the right opportunity. And then I take it and ah, I go find franchises that fit and have territory available where they live. So you go through a pretty extensive,

Speaker A: uh, process and you're a broker, like an insurance broker, you could any franchise, I don't care what the franchise is, as long as it's the right one for you. You're not aligned with any particular group or type of franchise.

Speaker B: So we don't, you know, transparently, we don't work with every single franchise that's out there. Not every franchise wants to Use consultants. And there are franchises that we wouldn't want to, you know, work with.

Speaker A: Yeah, well, I would hope you do some screening on, you know, who's at the party.

Speaker B: Right, exactly. So. But literally, uh, you can't think of an industry, every industry, all different investment levels, all different stages of maturity. Um, and we work with hundreds of different opportunities.

Speaker A: Got it. Um, so let's go down the passive income side, because that's, I think, interesting. And then I want to go into, like, you want to get your son or daughter into something and set them up maybe as a second stream, let's say. I like the idea of franchising. I want to be pretty passive, like a couple hours a week. Is there a model that looks like that, or do they all require more time than that?

Speaker B: So, you know, I'm very cautious when I'm working with somebody because I think you don't want to get into something and not realize what you're getting into. It's an operating business, so. And it's your business. So ultimately, uh, if things aren't going well, you have to put some time into the business. Uh, there are definitely opportunities that are designed to be manager, run from the start, and your role is managing the manager, building the culture, you know, et cetera. I wouldn't say two hours a week to start, because I think that's not fair. But there's definitely opportunities where you could focus the majority of your effort, like I did, on your current business that you're operating and still put some time over and above that into building the business. And then once you start growing that after the first location opens and it's going well and you've got a manager and you understand the business and what have you, it's much easier to scale, and it's almost like you're scaling larger and putting less time in at the. At the same time.

Speaker A: Oh, nice. Okay. So the second, third, fourth, fifth is easier than number one.

Speaker B: Yeah. I mean, number one, you're learning the business. You're. You're going to have to put some time into it, for sure. Um, but again, not. Not all day, Monday through Friday, 8 to 5. So. Yeah.

Speaker A: Good. Well, and, yeah, that's interesting. And that schedule flexibility may be very compelling to a lot of people. Like, I don't have to be there 8 to 5. I can pick my hours a little bit and how I spend it.

Speaker B: Yeah, because ultimately what you're doing is, is. Is finding someone to run the business, which you have the leadership experience as a CEO of, of you're not, you're not making every decision, you know, and doing everything. Um, and then what, what you want to make sure is that the person you put in charge to run the business is doing a good job. So you have to be able to put the time in, um, to make sure that they're, they're running the business the right way and, and you don't want it to go too long and not realize you've had the wrong manager and then the business is in a big hole. Yeah.

Speaker A: Amen. So when you've got somebody who comes with a big set of business chops, maybe has some sales capability, where do you orient them for businesses? It's probably not pure retail, but. So what would be more of a B2B oriented franchise operation that somebody out of a business environment by find compelling?

Speaker B: So first I might add that I really enjoy um, B2B opportunities but I don't like them as much typically nothing's black and white but uh, in general I don't like them as much typically for a manager run situation or semi passive. Because the most important part in a B2B business is going out and getting the business. And when you're starting a franchise, unless you're just super well capitalized, start hard to go out and find a, you know, $200,000 a year salesperson uh, to go get your business. So what I typically do in a B2B is that the person who is running the business is the one who is building the business to start with on the franc on the sales side and, and that doesn't go as well. So the businesses that I really like for more of a manager run are service based businesses inside of a storefront. And then there's some service based businesses outside of a storefront as well. But inside of a storefront you don't have to worry about inventory walking out the door. Food, uh, is very difficult because of the employee challenges, but things like health and wellness, uh, there's some medical franchises, women's beauty services, fitness, um, there's pet related franchises that, that fit the bill. Um, those are opportunities that I really like for manager run. Um, you get people who are passionate about uh, the business or they've got schooling and they're making it a career. It's not a minimum wage job basically.

Speaker A: Yeah, got it. I've always heard like UPS stores are pretty solid ones in that regard. It's a business service in an environment

Speaker B: right in a storefront that UPS makes a little more sense just because people are still coming to you so you don't have to be out there pounding the pavement, basically. Uh, uh, which again, I want to stress that there are fantastic B2B opportunities. So if somebody wanted to make a transition and get into business for themselves, then there's plenty of both white and blue collar B2B opportunities that are great.

Speaker A: But it sounds like shoe leather and some sweat equity to build your position until you get to putting a manager in place and running it that way.

Speaker B: Exactly.

Speaker A: So what, what kinds? And I don't have to name names, although we'd love you to do it. Um, do you not like, like, I, uh, would not do xyz. These three areas would just be no go zones, in your expert opinion.

Speaker B: So, uh, the, the one industry I don't like is food. Just because I think the work life balance is terrible. Um, you can make a lot of money if you build a large chain. The problem is a lot of people don't get to the point where they build a large chain and they're buying themselves a really bad job where they're making way less than they were accustomed to and they're working a lot harder and they don't get to the fruits of the labor because it's such a difficult business. Um, interestingly enough, to me, the most important thing is that you have the right business for the reasons you're getting into the business and the fit. So I, I don't know that there's any industries. There's definitely franchises I won't name that. I, I would never recommend.

Speaker A: Oh, come on, M. Let's do it. It's just you and me.

Speaker B: Yeah, exactly. Nobody's listening. I, you won't tell anybody. I appreciate that. Uh, but, but the important thing is that you, you find the right fit because there are so many brands where you could put the same person in the same brand in the same area and have completely different results. And so, uh, to me that's the most important thing. Not so much as the industry, uh, is as what's good or what's bad,

Speaker A: basically meaning I've got to have some passion. I got to love on whatever my pick is. I mean, you're kind of getting to pick your job, right? Like you pick. As long as they have availability, you pick what you want to do, you better like it.

Speaker B: Exactly. And it's got to fit. Like, you know, we were just talking about B2B businesses. If you were a. Is a perfect example. If you were an engineer and you wanted to do an engineering franchise, uh, and you. And I was talking to, to you and said, hey, do you like business development? No, I'm not. I don't like that at all. How about building teams and leading teams? No, but I love working on projects. Yeah, well, the franchisor doesn't want that. They want somebody who's strong in business development and strong in leadership skills to, to manage the team. So sometimes what you do and what you like to do isn't a good fit for the business. So that I focus on the characteristics of what would make you successful in a particular type of business. Got it.

Speaker A: And that's the evaluation process you run before you recommend anything is like, if they say, ew, people, you're like, okay, that's probably not a good answer for you. Right?

Speaker B: Yeah, exactly, exactly. And there's people who shouldn't buy a franchise too. So. At all.

Speaker A: Who, who looks like that?

Speaker B: Yeah, I'll tell you, uh, you buy a franchise because there's a system for doing business that's already been built, and you like that system and you want to follow that system, and it's going to give you a better chance to succeed. But if you're the type of person that absolutely wants to come in and change everything and build everything, I understand that. Uh, but you're not the right fit because everything what you're paying for is the system. That's the most important part of what you're paying for. So if you're not comfortable, um, you know, uh, being, being kind of part of the team and following the system, uh, and you want to, and you want to go off on your own and create everything, you're better off just starting from scratch.

Speaker A: Interesting. You know, I looked at Dunkin Donuts years ago, and when I was talking to the development guy, he goes, you. He hands me the contract, he goes, you will not change one period, one sentence, one word, one comma on this entire contract. You can sign it or not sign it. That's it. And that was kind of their way. Like, we got a model. You plug into the model. And my reflection to your point is, that's not my gift to an organization. It's in creativity. It's in other areas. I'm like, they wouldn't like me very much if I joined them, and I probably wouldn't like them very much either. So I, uh, totally hear you. Right.

Speaker B: Yeah. And frankly, though, if you're running another business and you want to execute on a business, it's a great idea to buy a proven system that you follow. But you have to know yourself, you know, and whether you'd be comfortable doing that.

Speaker A: Interesting. So why do people do franchising? Why do franchiso? Because you got invited in to help build a franchise business. Like why would they make that strategic choice like you, you got to pick partners who may or may not be good. You've got the risk of their business skills, you've got, you know, you're not in control of the thing and you only take uh, a franchise fee, not the full profitability of the location. So why do people decide to do franchising in the first place?

Speaker B: Well, I think it's a, it's a growth strategy that they choose that helps them scale much quicker than they otherwise could scale, uh, if they tried to do it themselves. Um, and so if you've got a good concept and you've got a system for doing business and you don't think that you can scale it across the country for a long period of time, franchising is a way to do it. You go find people uh, who have the skill sets and have them open uh, the businesses in those markets. So I think that's the main reason. Um, but also quite frankly if you put a company owned unit like we talked about the athletes, but if you put a company owned unit and a franchise unit in the same exact spot, the franchise should do better because it's their money, their, they're you know, overseeing, it's their livelihood. It's not just a manager that's uh, running the day to day operation or uh, you're, you're involved in the community etc. So I think there's a lot of, a lot of opportunity, a lot of reason for, for companies to go into franchising. Last thing I'm going to say on that, you collect the royalty based on the system that you give. So you're overhead can be significantly smaller as well.

Speaker A: Right. Although ah, you have to support the system and support the franchisees and I mean there's stuff inside there. It's not for free but it is a pretty, a relatively smaller number I think compared to potential profitability of a business.

Speaker B: So 100, I mean if you look at 100 million dollar revenue company as a whole and they charge 6% royalty, that's a 6 million dollar revenue company.

Speaker A: I looked at a company in the wild bird space like bird feeding and like they had like a couple of 3% royalty. I'm like this is a horrible business. I mean it was a lot of work for very, very little money unfortunately. So um, it can happen. You got to set the right number. What about, um. Now, just a question. When you're dealing with supply chain like that one did, is it normal for the franchise or to provide the supply chain of, in that case, bird feed and bird houses and bird. Whatever else bird books do, they also put a margin on that. So they have an opportunity to make profit on the supply chain or do they just provide that at cost normally?

Speaker B: So every franchise is different. Um, and, uh, and it just depends on the situation. I think where you want to feel comfortable and confident as a franchisee, uh, uh, is that if the franchisor is putting a markup on there, you're still getting that product at a significant discount than if you went out and got it on your own. And I think that's where sometimes things become problematic. And that's why it's so important to choose the right franchise and do your homework. Because it's extraordinarily frustrating if you purchased a franchise and you start buying product and realize that you as a single operator can go out and buy it, you know, 20% cheaper that they're forcing you to buy it. So.

Speaker A: Right, yeah. That's borders on abuse, I think.

Speaker B: Right, it does. But listen, there's every industry, there's good apples and there's bad apples and um, you want to find the good apple that fits. So.

Speaker A: And is that one of the things you'll help somebody do? Like I'm thinking about the due diligence process of like, I think I've got one or two that I'm interested in. Do you help people through that due diligence process of figuring out if it's a fit? And what else do you do in the due diligence process to help somebody with that process?

Speaker B: Yeah. So there's a, uh, fine line in our industry because it's heavily regulated by the FTC of what I can say and can. But I can teach people how to do exactly what they need to do to make an educated decision. And that. That's my process. First half I'm a matchmaker. Second half I'm a guide. I've got a system for how to investigate a franchise to make an educated decision. And I show you what to do and where to go to get the information you need.

Speaker A: Uh, Got it. And what kind of return on capital can people expect in these models?

Speaker B: That's precisely the thing that I can't answer, unfortunately. And, uh, every model is different if you think about it. Franchising's a method of doing business that the company uses as its growth strategy, we said. But every industry and every type of business could be a franchise. So you could have a retail business where the margins are really low. You could have a service business where the margins are really high. Um, what I tell people is this. If the return and you're doing this as a manager run business isn't significantly better than you think you could get in the market or in a real estate play that's completely passive, you should not do the deal. I can't tell you it's going to be. I can teach you how to do the homework, but if you think it's not going to be significantly better, it makes no sense for you to do the deal.

Speaker A: Right. But they're required to disclose financials in the fdd. They've got to tell you about what average looks like and about what top 25% looks like. So you can, you could do your math on what it should model as 100%.

Speaker B: And that's part of how I, you know, work with people. So there's, there's two real, uh, ways to understand that. There's what they call an earnings claim. Um, uh, in the fdd, the franchisor can put whatever information they want in there though, and they can only discuss what they put in there. So if they just give you revenues, they can't say, between you and I, you should drop 18% to the bottom or whatever. Um, but when I first started enfranchising, very few franchisors put any information in the fdd. Most of the companies that I work with have a significant amount of information in the fdd. And quite frankly, if they don't have revenues, that to me raises a red flag because they know what those are from the royalties. Um, then there is a list of all the franchise owners and their phone numbers. So you're able to validate everything that you're hearing and seeing. And there's a process you have to go through to, to get the information, but you're going through it, you're doing it. And you, you feel confident when you get to the end that this is going to be the right fit or not. So.

Speaker A: Got it.

Speaker B: Yep.

Speaker A: Um, well, and you can call anybody you want, right? I mean, on that list of current franchise operators, don't they also talk about how many went out of business in the last year or two or how many. Don't they have data on, uh, how well they perform basically over time?

Speaker B: Yeah, absolutely. That's a good point too. So the FDD and, and I don't know if everyone knows that it's a franchise Disclosure document.

Speaker A: Thank you.

Speaker B: Every franchisor needs to send that out at least two weeks prior to agreement being signed. Um, and ultimately there's just a ton of information in there. Part of what you said is, is very accurate, actually. All of what you said is just accurate about that. They have to give you a list of all the franchise opportunities that left the system in the last year and their last known phone number which may or may not still be active. And then there's a three year chart of how many they started with, how many they sold and how many they started with the next year. So if you had easy math, 100 uh, locations and you sold 25 and the next year you only have 101 locations, that means you're selling, you know, closing them as fast as you're selling them basically.

Speaker A: Yeah, yeah, that, that's called yikes.

Speaker B: Yeah, that's called yikes.

Speaker A: Run, run, don't walk.

Speaker B: Exactly. That's the type of thing I point out too. So.

Speaker A: Got it. But it's normal to have a, I mean I was going to go to success probability. Like what, like they talk about the five year success of average business being like 20, make it five years, 80, go out of business. What's the success probability in franchising? So you know, God help me, I hope it's better.

Speaker B: Yeah, yeah, yeah, I, I, it should be better. And there's numbers that float around but I don't know that they're accurate. So I don't feel comfortable. I will say this. Look, any business, any venture is a risk. But if you find a business that fits what you're looking for and it's proven, it should give you a much better chance to succeed than a uh, startup from scratch. And I think the percentages and the numbers uh, would, would show that. But I don't, I'm not comfortable necessarily saying 60 of this and, and 20 of that. But I, I do think there's a much higher probability if uh, you, if you buy the right uh, or find the right fit for what you're looking to do.

Speaker A: Boy, if I was the marketing guy for a franchise that'd be the number I'd use. I'm like, look, you can start your own business and you have a 20 chance of being here in five years. You come with us, it's 60 or 80 or whatever the number is. Like it's not a guarantee. But that's the math, that's the data and like that's pretty compelling for somebody who's risk averse.

Speaker B: By the way. I think that's really, uh, smart for a franchisor. The problem is trying to. Trying to take that across, you know, thousands and, uh, uh, opportunities. It makes it a challenge. But, yeah, I. I agree with you. It's a very smart play. And you can see it at least for three years in the. In the fda.

Speaker A: There you go. Um, is there a book or a website so you would point somebody to if they wanted to get a little smarter? Not your own for the second somebody else's or some other book that you find really illuminates this industry or a place that could go to get smarter if they were thinking about it?

Speaker B: Yeah, I would actually. Um, there's a book called the Educated Franchisee, and there's also a playbook that goes along with it. Um, the book was written by someone I've known for a long time, Rick Bizio. And, um, he does the same thing I do, and he's. He's fantastic. Uh, and the workbook was done by him and another lady that I've known for a long time that does what I do named Britt Schroeder. And it's a great workbook.

Speaker A: Nice. Okay, good. Great tip. Thank you. M. And now you get your chance. If somebody wanted to reach out to you, Jeff, uh, because you're obviously super knowledgeable and understand the space and got a nice way about you, if they wanted to talk to you about this, um, I imagine you'd be open to it. What's the best way to get ahold of you?

Speaker B: Yeah, let me. Let me give a couple, uh, options. And I would just say if you've ever thought about opening a business or you just have questions about franchising because you're not sure if it's right for you or what have you, I'm happy to have a conversation with you. Um, I've got a website just for this podcast. Um, look at that. Which is podcast. Franchiseguidance. Um.combackslash TCP. And so that's podcast franchise guidance. Uh, com TCP. And then.

Speaker A: Boy, that rolls off the tongue, by the way.

Speaker B: You know, the. The funny thing is, as I'm getting older, I need glasses, uh, for a small screen, but a large screen. I can't see very well. And I'm. I was looking at the web on the larger screen. My personal website or my business website is Franchise guidance dot com. Um, there's a ton of information on franchiseguidance dot com. Uh, there's an ebook. There's, uh, you know, all kinds of things. And you can book an appointment with me on either of those those ways.

Speaker A: Beautiful. Well, thank you so much for taking your time with us today. I appreciate it. You were super direct and insightful and informative. I appreciate it.

Speaker B: Jim, thanks, uh, so much for having me on. I love the opportunity to speak with your audience. And, uh, I really appreciate it.

Speaker A: Awesome. And for those of you joined us, thanks for coming along. We'll see you next time on the CEO Project podcast. Thanks for listening to the CEO Project Podcast. We'll see you next time. Be sure to subscribe to get all the future episodes and check out our website, www.theceoproject uh.com.