Franchise Investing: Both Sides of the Table with Daniel Collins

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1:00 Regret is for the Prince of heart. In the end, it's all the same. Take what the wise I've got to in part. These are the principles of the game. The principles of the game. Oh, these are the principles of the game. Hey there, this is Karen Rand, your compassionate capitalist and we are back with a new guest to talk about franchising. Both sides of the table, right? We're going to cover this for you in the listening audience, for our potential investors that might be thinking about buying a franchise or what does it take to buy a franchise by a region be a master franchisor.

1:46 But also for entrepreneurs that are thinking that have a business concept that they believe that they can have the ability to grow it into a franchise, regional or national. And what do you need to consider as part of that? If you're somebody out there that doing neither one of those and you are trying to decide, so which way do I go? Is franchising as a concept right? Is it better to start a traditional business or better to start a business that's intended to be franchised? Is it as a potential investor, so not an acquirer, but an investor, Is it something that I want? And what's the difference of investing in a startup that is doing a business that you like? You know, we're going to be for the most part talking about sort of meat and potatoes operating types of businesses, you know, versus sort of an innovation that angels and venture capitalists get into.

2:39 But this is a big area of growth in the world, you know, in the US, it's a huge area. And and so it's important to understand because what we do with the Compassionate Capitalist show is really educate the investors and entrepreneurs on pathways to reach their objectives of creating wealth. And so as a potential Angel investor, let's say, or a private investor, you know, what are the differences of investing in a business that is a traditional type of operating business? OK. So it's not necessary. I mean, there are software that are that franchises that are powered by software. So there's innovation in there. There's innovation and processes and procedures and concepts and new ways of delivering services and solutions.

3:24 And those are all unique intellectual property that goes beyond just branding. But we're, you know, so or you know, a company that is, you know, some hybrid model where you want to be the financial backer of somebody for somebody that wants to purchase a franchise but doesn't have the wherewithal to purchase the franchise at this moment in time. And you don't want to be active in that business. And what does that look like? So my guest today is Dan Collins. If you're watching on YouTube or Spotify, then you can see him there waiting very patiently for me to introduce him. He is an award-winning franchise investment advisor with more than 30 years of experience across franchising and after building his career in operations training franchise development for high growth brands, some that you would totally recognize such as Arby's and Johnny Rockets.

4:17 It's right. So he's was a part of those. Now he focuses exclusively, exclusively on helping high performing professionals evaluate franchise opportunities with clarity and discipline. Is it the right fit for them? Because it is a match that needs to happen in order for the odds of success, the successful outcome that they are desiring to happen. They it's not. I've learned now in various different interviews and what I've known that you need to really take some time trying to make sure that you are equipped mentally, emotionally and financially to be an owner of a franchise. And whether that's individually or owning a region where you're going to have a multi location, which we're going to also talk about those things, right? He even he was at East Coast Wings and grill and after just two years, that brand was recognized as one of the top fastest growing franchises from the restaurant business magazine.

5:15 And so you know, that's I love it when I have somebody on the show that, you know, not only walks the walk, but talks talk. So, Dan, fill in the gaps like how did you, did you start out knowing you were going to be in franchise when you, you know, graduated college or, you know, did it just evolve because you were lucky enough to get a job in a franchise, then you learned how they operated and that, you know, sort of gave the direction of the of the course of your career. Well, First off, thanks for having me on. Yeah, I definitely knew I was going to be in franchising when I graduated college because I worked my way through school as a restaurant manager in franchises.

5:56 So I was very familiar. I went to, well, my first job I was a dishwasher in a franchised restaurant and I just, I loved it. I I had a great time when I got promoted to busboy and I got away from being soaking wet all day, you know, it was even better. But yeah, I worked my way through school as restaurant manager. I was in operations for probably a first third of my career and then transitioned over to business development when I was with Arby's and loved business development. It's basically helping to help franchise investors investigate the brand and make sure that it's a good fit. My job as I saw it was make sure it's a good fit and the person that I'm bringing in is going to be a great franchise once we get through the process.

6:38 So I really, really enjoyed that and that operations experience really helped me be a top performer every place I went. You mentioned the one place, I'll tell you the last place that I was AW2 employee a while ago, we went for. They had 100 locations when I started and three years later we opened another 208 and had, you know, 500 in development at that time, including those. So it was, you know, it was, it was acquired by private equity, but it was, it won just about every award in franchising at the time for growth and operations and franchise satisfaction, which is very important to me, franchise satisfaction. So it's about a year ago now, I split off on my own and now I advise people that are interested in inquiring about franchising and let them know what what it takes to be a good franchise and be a top performing franchise.

7:30 Because honestly, it's a lot more fun to be a top performer than just grind it out. Yeah. As an investor. Talk about that. Let's talk about that. So what is what is the biggest misconception people bring to you when they say I want to buy a franchise? There's a couple two different sides of this. Number one is people think, Oh my God, it's $1,000,000 to buy a McDonald's. Well, it's actually a lot more than that to buy a McDonald's. But everyone thinks I can't afford that. I, I don't have a million. Point 4. Even when I was a kid, I thought franchises were for rich people. That's why I worked for the company instead of becoming a franchisee, which now I wish I would have way back in the day become a franchisee from the beginning because I spent a lot of my youth making other people rich.

8:14 So what they need to understand is there's a lot of financing options out there, a lot of places, a lot of my franchise, the majority of my franchisees get SBA financing. Usually it's 20 or 30% down and SBA puts the rest up. And the other on the other side of it, people come in and you know, I had people come in and say I want to buy the entire state of California. That would be great. I would love to do that deal, however you need to now show me a business plan that's going to support that and show me the financing you're going to be able to execute that or people think it's a franchise. All I have to do is write that franchise fee check and then every once in a while I write checks for the equipment or whatever else, and then the checks start coming in and hitting my account.

8:57 Yeah, it's not automatic. Conception that it's really. Not automatic. Right. It's, it's really, you know, owning a franchise is like owning any business, you know, and you only get to be absentee on that and passive income when you've created a huge infrastructure that you know of people that you know, if the president, the CEO, that you know, all of those positions, right, the director of marketing, the director of business development, all those positions are filled and they're doing their job. And you know, you as the owner could be the chairman of the board or something like that, but you're not having to, you know, do be a part of the day-to-day that it becomes passive income.

9:40 Otherwise, you know, they're, they're and they're even at that end, there's 200 million, $200 million companies where the actual CEO is still involved in many of the day. To day. Decisions and things like that. So it is buying a business. It just has the differences is that has a it has systems, processes and standardization of things that in theory. And we were talking a little bit earlier about the guy that wrote the atomic, the atomic habits. And his thing about the habits is that it's not the habit has to change. It's the system that enables you to do the habit or not do or prohibit you from doing the habit you're trying to create. It's the systems that make it easier. You have to micro change your system so that you can accomplish the thing that you're trying to do. Right?

10:30 So sure. So what you were describing there, that was probably the infrastructure for either a franchisor, of course, or a very large franchise, someone that's got 50 locations or more. Typically the people that I work with are coming in buying anywhere from 5 to 2025 locations. And the way that works is they come in, we investigate the brands, I'll present the brands to them, see what they're interested in, see what's a fit for all of their goals. And of course, then you have to consider what's available in the areas that they want to go into as well. Then after that, then you're going to, if you get all the way down the line and you say, OK, this is what I'm going to do. You're going to commit to a certain number of locations, you're going to have a development schedule that goes along with that.

11:14 So and you're going to have your determined territory. So over the course of that development schedule, you're going to have to have a timeline for to get each one of these up and open. And as you go, the first one, of course, you're going to have, you know, you're going to have it staffed up with your general manager, who typically in a multi unit development agreement like that, you're going to have somebody that's very overqualified to be the general manager of that first place. Because especially if you're looking to be a little hands off, you're going to have someone that's going to have some skin in the game that's going to really manage these places as you get up and grow. So you're going to have that person's typically going to be your regional manager once you get the more than one location. And you're going to go through the all the training as well, because I always recommend that the owners know how the all the systems are supposed to operate. But then what happens is when you get to start looking at that second location, the manager at that first location is going to replace himself with somebody inside there. Then they're going to go launch off and do it all over again #2 and you're just going to cut and repeat every time you get up to typically 5 or 6 locations.

12:18 Now you have a regional manager. They're going to run all six of those, then you're going to have to hire another one for the next group. And it depends on the complexity of the concept, whatever you're looking at, how many that each person can run. OK. So well then that kind of leads into the next question. So if there if part of the formula for six if part if part of the formula for success for somebody to own a franchise is to be involved in it, working inside the actual functional, you know, operations of that seems like they would need prior experience to be able to do that and they can't just hire somebody and oversee them as a manager.

12:59 I think, you know, when we were talking earlier, it's not so much the you, you so to describe that because you know, if, if it's a restaurant, because somebody a lot of times you that know how to they have, you know, to me, restaurant is a unique set of, of skills that you know, how to, you know, man, you know, do staffing, you know, how to, you know, get the right cooks in there and the kitchen operating the right way. And that usually comes from years of experience. But you know, there's restaurant franchises being sold all the time and they all require the owner to go in and operate that franchise location before. No, actually, most of the people that I work with don't operate that.

13:43 They're not standing behind the counter. They're not handing out things to the client. I thought you said they need to be. An owner operator and then they replace themselves and do the next location. No, that would be that regional manager person that they hired for their first location. So typically my franchisees are never in the truck, you know, fixing air conditioning, they're not handing trays across the counter in the restaurant. They don't do that kind of thing. My franchisees typically make sure that first of all, there is a great culture, great people are hired, people are motivated, incentivized. They know what the KP is, are that they have to hit to make the business successful. And then once they hit those KP is for the month or the quarter or whatever it is, then they get paid on those KP is. So they incentivize the people, keep them pumped up and get them paid.

14:29 Their job is to make sure their, their culture is that everyone is killing the, the customers with kindness because that's the biggest, that's the biggest downfall I see in all the franchises that are out there. All the businesses that are out there is what sets people apart is the level of customer service. You know, when I call, I've called a plumber, $300.00 an hour for a plumber and the guy doesn't show up. I mean, all you have to do is show up, do a great job with a smile on your face. You're now their plumber. That's happening. And at 300 bucks an hour, I want to make sure that that person's only calling me and they're going to tell all their friends about me as well. So that's the one thing that I want you to do. Make sure you incentivize your people and make sure that their the culture is kill people with kindness. Doesn't matter if it's a restaurant or a service or whatever it is.

15:15 That's one of the biggest things. But then my franchisees are also responsible for making sure that the the marketing is executed. Marketing is critical to the success of a franchise location. We'll make sure come. Back to your, you brought up KPISI want to talk about them when we talk about like starting up a franchise. But So what are the red flags of what you look for that somebody doesn't have what it takes when it comes to owning a franchise or buying a A? Sure. So as a franchise, only 90% of the people I talked to never end up becoming franchisees. And, you know, a lot of them I only talked to for maybe 15 minutes, and that's because they wanted to be a franchise. They thought it was a great idea, but they're not financially qualified.

16:00 And, you know, basically what I'm doing is I'm just teaching them what it takes. And what I'm trying to do is I'm trying to let them down in the nicest way possible because I still want them to be enthusiastic about it. You know, I'll let them know. What you need to do is probably get a partner or probably, you know, talk to your family and see if anyone wants to go in together with you, that kind of thing. Get it, get an investment group going. But most of the people I talked to aren't qualified to be franchisees financially. Then out of the remainder, another factor it would be, I know this sounds a little wild, but somebody that's a little too entrepreneurial, somebody that is a great entrepreneur, has great ideas, wants to do a lot of things like that. They don't typically want to follow the systems of the franchise. They like whatever it is as an idea. But the reason you buy a franchise is to follow those systems because those systems have been successful and shown to be profitable.

16:49 That's what you want to do. You want to execute those systems, those people. I don't turn them away from being a franchise. But one of the red flags would be, you know how I'm going to do it at my place. I would hope that you would do it the way that it made everyone successful. That's what I want you to do. My goal is my job as an investment advisor is I want these people to be successful with their investment. So I want you to follow the systems. But that entrepreneurial Dr. is fantastic because what they do with that, they hire great people. You know, I had one guy, he had $150.00 roofing business and he became a franchise of another concept. And what he did is he said I'm going to have the friendliest people, I'm going to have the the cleanest places.

17:31 In the summertime, my place is cooler than their house. In the winter time, my place is warmer than their house. My people are going to go out, open the door and help the people get in the front. You know, all that kind of stuff sets my part. That's the entrepreneurial part that I want to see, you know, the marketing part. I want you to be out there shaking hands at the, at the BNI meetings. I want you to be out there at the, you know, at the local business market. I want you to go out to all those meetings, the Chamber of Commerce, and make sure that we're talking to those people. Wear the gear everywhere you go. Talk it up. Have your 45 second elevator speech. Make sure that every interaction you have with somebody you mentioned, oh, this is what I do. Oh, yeah. You saw my place down on the corner. Stop by anytime. It's fantastic. Those are the kind of people that are. Owner versus the operator.

18:16 Well, I would ideally both would do that, but the owner typically if you, if you came in as a new franchise owner, you're just automatically going to be excited about it. So you want to talk to everybody about it. What I directed to do is come up I guess. I was getting confused with, you know, an idea of a master concept. I'm going to build up and I'm, I'm a, I'm spending $10 million on a franchise, you know, with multiple locations. I'm not going to AB and I meeting, you know. Yeah, you're going to have your people do that at that point if at that level of investment, right, your people are going out and doing that kind of stuff. But then your job as the franchise make sure that they're out there and doing that right. You know, that's the stuff that that's all those systems in place is what makes you successful. Yeah, I have franchisees.

18:59 When I was when I was a senior vice president, I had franchisees that had 150 Arby's. I had some that had three hundred, 300 plus KFC, Taco Bell and Pizza Huts. You know, those are the kind of people that have all those other positions that you mentioned in place. So what they have to do is have the systems in place to back up excellent operations. So let's shift gears a little bit to this idea because we kind of brought it up. If somebody doesn't have the money, it, you know, when somebody doesn't have the money to buy outright because they don't have, they might be able to qualify for to acquire, but they don't have the capital to develop. And they say it's a single location that they're starting out with this idea of a of a investor and operating partner model. Somebody like that might be 1 where they want to be involved in running it, but they need the financing. So does that work for like flipping the switch on that where somebody that does want to sort of have passive, they know they've got somebody that's got relevant experience and owns it and then they are going to, you know, work there, earn their way out of it with that passive investor still owning a smaller? Percentage over time do does you know, I, I had seen that as a theory of a wave for this and I'm not sure how much that really ever happens.

20:24 It's to me it's a little bit like what you if somebody doesn't own they're going to go get investors to do it. But then to the investors other side of the equation when they're looking at this. So if you take a take a couple of minutes just to sort of say if that is the situation somebody doesn't have, you know, if somebody doesn't have the money to do what they need to do or they need to go raise capital, The investors make whether they're friends and family or other business owners in their community, they're in the chamber. They know that's not necessarily a friend or a family, but they see the way to you'd be able to participate in something that's got a proven model. How does that sort of work out? Do you see, how often do you see that, that then it's really relying a big part on the true systems and the person hunger of the person that is going to be the operator to earn out that they're going to be really diligent against on the processes.

21:23 They're going to follow it. Communication just like with any startup is important. But but I mean, I think that is a great solution, but I don't know how often it actually happened. Well, I've seen that in the past a lot. You know a lot of people. I'll tell you interest and enthusiasm is not enough. You know, they need to have the ability and the aptitude to execute at a high level if you're going to be an operating partner. Like I was the guy back in the day when I came out of college, I was so motivated to be successful, but I had literally nothing in my bank account. So I needed to do, you know, sweat equity. That's the only way I was going to be successful. So I would have been a perfect match. And I got it's funny, I got recruited by by a a bunch of franchisees and every concept that I worked for, they always wanted to hire me away. But I always said I'm going to be president of this company. Now I'm staying, you know, but that that would be a great match.

22:17 But you want, what you want to do is for you to have the ability to step back and look at this as an investment. You need to have that person that's locked in. I don't want to worry that so and so is not going to show up today and now I have to go down there and open the door. That's not the kind of investment that you want. So I love the model of the operating partner. I mean, Outback Steakhouse did that. That's exactly how they grew. Their operators at those Outbacks were an operating partner, so they had skin in the game. Same thing with Chick-fil-A. Everyone thinks Chick-fil-A is a franchise. It's not. The franchisees, quote UN quote, of Chick-fil-A are operating partners. That's why it's only $10,000 become a franchise at Chick-fil-A because you don't own a building, you don't own anything. What you own is the operation.

23:02 So you're responsible to work there six days a week, at least 40 hours a week. You get part of the profits of the business and it could be very lucrative. I know everybody that I know that has that situation is very successful, but you can't sell that at the end. You don't have no equity in that business. But while you're there, that's a fantastic paycheck and it's great. So if you can have somebody tied in those model. Excuse me, those owners operate in mind, don't have any equity in it. They're not owner operators, They're operators. Chick-fil-A is the owner. Chick-fil-A, you pay $10,000 to be the operating partner of that location. And sometimes they'll say, oh, I have a location available, but it's in Ohio and I live in Florida.

23:46 Well, if you want that one, you're going to have to go to, you're going to have to move. It could be worth it. A lot of people I know would, I mean, back in the day, I would have loved to have that if that was available for me. But what you want to do is use that model. So you have somebody that owns say 10% equity of your company. They can either put that money up, which is fantastic or what the way I like to suggest it is most of the people, they're super hungry. They might have great attributes and they might have the ability to execute exactly what you they need, but they have no capital. So what you want to do is give them ghost shares. Ghost shares would be you own 10% of this company in ghost shares. So whatever our profit is at the end of the first quarter, you get 10% of that profit. Then you could bank that to make it actual equity. So you tell me, do you want me to cut you a check for your ghost shares and then you get your, you know, $7000 or whatever it is, or do you want to put that in the bank until you own you're 10% and then you would be an equity partner. What you're doing there is you're locking them in so you don't have to worry about, oh, he's had a fight with his wife, he's not showing up or oh, you had a bad customer yesterday and he's had it and he's out here.

24:52 They're not going to do that. They're going to look at it as an owner. They want to make sure that the business is profitable. The KPIs that you set with them are the ones that make the business successful. So if they hit their bonus, that's because you made a lot more money and now you're paying them 10% of that. OK, so that see, I love it when I'm on a show, when I'm interviewing somebody and I learned something new. It's all that is the thing. So Chick-fil-A and used it was Outback the same way they the, the oh, they do an operating model where you pay to play to be the person that runs that Chick-fil-A location. But you and you can share the revenue, but you don't have any equity to sell that franchise.

25:40 The ownership of it remains with the franchise or the the corporate because it's not. Really correct, but the other thing is they paid for everything to build the building. The only out of pocket you have is that $10,000. So it's basically a $10,000 application fee if they approve you. Now with the Outback, they were all corporate locations, but the operating partner owned 10% of the profits. OK. And you and so like you had mentioned, I guess this is part of the idea of mistakes that they might make is that the the expectation that they don't have the ability to build equity in there unless they have this ghost share model where they don't take take income from it and instead get equity. Yeah, I've seen, I've seen those as well. Typically the the people that I see being the operating partners, typically they'll take that check at the end of the three months.

26:34 So they'll take those big bonus checks because what's going to happen is now you have the kid that was very motivated, he had a fiance. Now all of a sudden they have a baby coming. So now they need to build a nursery. So now he needs that $4000 check to start to do this. So it's basically you become part of their life and they're going to be there. Now he's got responsibilities, he has a little family. Now this person is going to be showing up, executing at a high level. You know, they want to grow that with the company. And if you show them that there's career investment opportunities, you got the right guy, you know, that's that's really a win win situation for the franchise and for that operating partner. OK. So let's let's look at franchising versus starting a business from scratch, because I talk about this when I talk about people becoming Angel investors or becoming crowdfund investors and that you know, and mostly because I'm looking at the cost like to start a business, you know, even a basic business, right?

27:31 But if you're not even going to like and in comparing it to buying real estate that the 100 grand, 200 grand that you would end up putting into real estate or starting a business that could be fundable by investors. If you don't have a clear how you going to get to market, how you going to generate the revenue, how you going to differentiate yourself, all those things that you've got to have a foundation for to be able to grow your business. Then don't just become an investor in businesses and take that fifty $100,000 and put it a wrap, put it in multiple businesses where those entrepreneurs are trying to become successful and sharing and grow and they're working harder. They're doing that fifty, 60-70 hours a week, you know, work week because they have a dream that they're fulfilling and they're, you know, they don't necessarily have that, you know, more than 100 grand to be able to start a business till they start raising capital. So that becomes a win.

28:26 So when you look at franchising, buying a franchise, you mentioned McDonald's and you know, you, you know, so buying a franchise is not just $1,000,000 for a McDonald's, it's all the other costs it takes to get it going right. So look, you know, the hat to me, it's you have to already be so established and wealthy to be able to buy a franchise. If you're operating particularly a big name brand franchise like that, you know, versus starting a a business from scratch that maybe you're going to create a restaurant chain or something else. So spend a couple of minutes talking about the considerations of somebody I had used to do this presentation of, you know, start, buy or grow, right?

29:16 Invest, start buy or invest. And what does that look like based on the amount of money and the amount of time it takes and the amount of effort and, you know, before you know, So within that kind of a context, you know what, what it, what have you seen or what do you when you're working with clients and they're trying to decide the difference of, you know, building a. Brand Why don't I just start it myself? Right. Yeah. Yep. So First off, you know franchises out there, you, their investment ranges from typically the ones that I, I work with 150,000 initial investment all the way up to multiple millions of dollars. If you're going to buy a territory and it depends on the concept and all that. The big benefit that you get starting with a franchise is what you want to buy is the systems are already in place. Whatever the end product is, it could be a food product, it could be a service, you know whatever you're doing, the systems are already in place to execute that. The other thing, as I said earlier, your marketing is so important and when you're starting your own company, you're either going to have to hire those experts and that honestly, hiring expensive experts is the cheapest way of starting your own business because otherwise you're going to make mistakes.

30:25 You're going to pay for it more than once if you don't hire the experts. If you have the franchise, hopefully they've already hired those experts and the people in those positions are already great at it. And that's part of the homework that we do. When they come to me and we start investing, investigating brands, I'll tell you there's this year, I believe it's over 4200 franchises available for sale. 90% of them are not worth investing in. OK, So I'm telling you that still leaves what, 420? So that out of 420 different concepts, that's plenty to pick from. But really there's only about 50 or 60 that I would ever present to my clients, what I look for and what you would need starting your own business. You have to have a solid concept to begin with. So that's got to be something that has legs. Like there's a lot of interesting, cool brands that you'll see on Instagram, Tiktok and all that, but you're signing a 10 year franchise agreement.

31:18 I need to make sure that that's going to be around for 10 years. If they stop posting about it on Tiktok and people stop coming in the door, you still have 9 1/2 years left of lease payments. You need to make sure you're busy the entire time. That's why I never recommend those flash in the pan concepts. OK. So, so when you're, when we're, so where does, where does franchising really reduce the risk and where does it still exist that people underestimated? And you, you started to talk about KPI's earlier. So maybe we've in what kind of KPI's that should be considered or evaluated as part of? That OK, So the way that you limit your kind of liability with whatever brand you're buying, some of the things I look for, number 1 is that brand that the concept has to be solid and has to have legs. Then I'm looking for experienced leadership. I want to see the CEO and the senior team have experience doing this before.

32:15 We're not going to buy a concept where the founder is now deciding he's going to franchise and now he's the salesperson and then he's going to help you with real estate and then he's going to help you with he's going to tell you who his marketing guy is, which is a third party that's not even working for him and he's now going to not work for you. I want to see that this senior team is experienced and they have done this successfully in the past. Then I want to see that they have great operational support and I want to see they have great marketing support. That's what I'm looking for. Those four things before I even consider a concept, but really what and then what you want to do after that. I've, I've filtered that out. That's why I have those 50 or 60 kind of in my back pocket that depending upon the next questions, that's what I would show you. The next questions are going to be all right, What's your financial capability?

33:02 What's available in your area? And then what are you interested in? I always put what you're interested in last because I know what the investors need. They might be interested in something that caught their eye again. It's only going to catch your eye for the next year. Next thing, someone's on to something else. And I don't want to mention any specific concepts because I have a lot of friends and franchising and an owner hurt their feelings. But there's a lot of concepts out there that I wouldn't sell because I don't think they'll be here in 10 years. And I know you're signing a 10 year agreement, but then we're looking at unit level economics. I want to make sure that those top line sales have a lot of fat bottom line after that.

33:43 So I, I don't care if you have $7,000,000 in top line sales and nothing drops to the bottom, what are we doing? We're working for. Something else? Yeah, yeah, yeah, yeah. Because I'll tell you, the franchisors get paid from the top line, they get 568 percent, whatever it is off those top line sales. Franchisees, of course, get paid from bottom line. They get paid the profit. What's left? Right off the top. Right, exactly. So no matter what, that's why right now, and I'll talk about these guys, Subway right now has a promotion, you buy 3 Subs, you get one for free and they have a special where I think the Subs are 699 or something like that. So that comes out to, you know that it's a very expensive, if you just do it off of their math, you know, you're giving away 25% of the sales.

34:30 That's most restaurants don't make 25%. So it's killing you. The franchisor is making their money off of the sale. Franchisees then have food cost, labor cost, rent, everything else coming out of that. There's nothing left. That's why franchisees hate value menus. Value menus get people in the door, but then franchisees have to upsell them to make it a profitable sale. You know those $5 footlongs franchisees hated those promotions. So I guess when does this is there? That brings up an interesting point, because when does a franchise get to opt out on a promo? Or do they ever get to opt out on a promo? You know, it does say usually on every TV commercial it has a little disclaimer, you know, that, you know, franchise franchisees opt into this. But in the brands that I'm with, typically you have to run that promo because what's happening is everyone else in the market is running that promo.

35:26 They're gonna come to your location and you're gonna have a dissatisfied customer at that point. So typically everyone buys in because it's best for the brand. But hopefully that senior team is gonna, you know, and the other thing is the senior team will understand what's the profit going to be on this promo. It's part of the it's part of when you propose A promotion like that, you have to say what would be the profit margin for the franchise. But then also franchisees typically either have a franchise Advisory Council or they're going to have, you know, a marketing person that they could go to and they could say, hey, this promotion doesn't make sense when they first catch wind of it, when it's first announced, say, hey, this, we're going to lose money at this. We can't do this. By the way, there's always going to be some franchisees that say, no, this is horrible.

36:08 Whatever, whatever you propose, there's always going to be that small group that hates everything. But you know, when you run the numbers and you have to say, all right, well, in order to make this as profitable as it would be without the sale, that means we had this sale has to bring in X plus number of people. So at that point then I know that this was a great return on my investment. So those are the kind of things you have to, you have to make sure of. What I always look for is franchisors who have a franchise first mentality. That's the name of my company, Franchise first advisors. That's because I want them to be successful. When I was younger, I was so naive. I thought all you have to do is make franchisees successful and then the company is wildly successful.

36:48 Well, that that is the best way to do this. However, not all franchisors have that attitude because again, they get paid off the top line. I'm worried about franchisees making more money because then they'll go and buy more of these and build more, right? And you get a good reputation and more people want to buy them. Of course you. And I this is a good moment in time to say, if you're, you know, we're getting the next thing we're going to get into is an entrepreneur deciding to franchise. I'm a franchise. Versus. Building their own business. But I want to tell the listening audience, if you want to connect up with Dan, you want to talk about any of the things that we've talked about like buying a franchise, starting franchise, any of that stuff, do go to franchisefirstadvisors.com. That is and it's it's franchisee. So it's just like the word franchisee. But then it had the 1st is a #1ST in case you're not looking at the show notes.

37:43 So it's franchisee first with A1ST advisors with an S dot com for Dan Collins. All right, so that's where you connect. Do you have like a an opt in box to schedule a meeting in there? Do you have any free guides on your website? I have all that stuff on my website. I got the, you know, I have for entrepreneurs that are, or for executives that are looking to transition out of executive corporate work. There's a guide on there of how to do that. And there's of course my calendar where you can just hop on my calendar. We could have a quick 15 minute meeting just to, you know, you ask me your burning questions and we'll see if it you think it'll be a good fit. And there's a bunch of other guides on there. I have all kinds of stuff, but you can follow me on at LinkedIn. Just look me up Daniel Collins on LinkedIn and you can't miss this head in my and.

38:32 He's the one that says franchise in his title. Yeah, and actually, right under my name, you'll know it. It says I love franchise success because that's why I do this. Yeah. OK. So for on to. OK, so for entrepreneurs who want to franchise their business, can they get started and have just a great system and strategy, like a business strategy? I'd heard one time somebody says that's all it takes. And it seems to me that you would need to have a proof of concept as a minimum, with one location being able to run without the owner, the originator being in there in the day-to-day you know to. The. You know, being a business owner in that sense that they can hire all the people that they need to run that business on a a daily day, you know, a daily basis in May. So so talk about what it takes for a friend, an entrepreneur, to actually franchise their business. Sure.

39:30 So I get a call probably once every two weeks from somebody in that position that has a great concept and they want to franchise it. Well, I got to tell you First off, it's two entirely different businesses. Operating a business is 1 is what you're doing now. Franchising is 100% support business. I told you I was with Arby's for five years. We had 3500 locations. Arby's didn't own one of those locations. We had 162 people in the office supporting all of our franchisees that ran those 3500 locations. So it's entirely separate business. Again, to your point, you always need a proof concept. I've had people come to me and say, hey, I have a great idea, go find me a franchise. It's going to cost $1,000,000 to be my first franchise and they had no existing location. I would never do that.

40:17 You have no proof that this is a great idea. If you think it's so great, use your $1,000,000 to show me. Once that happens, then I'll talk to some people. But what you need, you need a great concept. Again, I gave you those kind of four things that I'm looking for when we're looking at a franchisor. That's what you're going to need to be then. So you need to have your systems in place and as you said, you need to be able to step back out of it and have it operate without you. Once that's happening, now you observe it, you're and then legally what, what you need to do to be a franchisor, You need to have a franchise disclosure document created from a franchise specific attorney. Please reach out to me. I'll tell you who the best attorneys are in the industry or who the most competent attorneys are because you need a franchise specific attorney.

41:01 Any attorney is going to say, yes, I could do it. It's just a contract. It's not. It's specific to franchising and it's very important. Same if you're an investor looking at franchises and you want to have your attorney look at it, go to a franchise specific attorney because he's not going to redline the document until you get them to change this change. They're not going to change one word. I used to change not one word what I changed in my document. I put your name, your area, what the territory was, how many locations you wanted, and then what's your development timeline and that was it. So you're going to have to get that document done. You're going to have to have an operations manual created. Those are the two things you need. That's the absolute minimum to legally franchise your locations. Then there's 19 states across the country that are registration states. What you need to do is submit your franchise disclosure document, including the franchise agreement to those states, and then they have to check it out and come back to you.

41:53 They're always going to come back to you with some comments. It's rare that they just say, OK, this one's good, start selling. You can't sell until they come back and they're satisfied with your document. You might have to. Most of the times you have to put together a little addendum. So you need those items. After that, you're going to have to have basically what you want to do is you want to make sure that people are confident when they come in, when you start trying to sell it to them. You can't just come in and say, hey, we have the best tasting lemonade. We have 17 different flavors. This is our concept. All right, well now what's your system? Do you have distribution to my state where I live because I don't live in this state. We didn't think of that. All right, Well, how am I supposed to get the product? You want to make sure that they can execute the concept exactly the way you have it here, because that's the profitable one.

42:37 Wherever they are. You want to make sure it's duplicatable. Yeah. OK. So as we start to wrap up here, let's talk a little bit. Let's talk about market trends and opportunities. What are there are certain franchise sectors that are hot right now or that's driving demand as an industry? Sure. And you know, or and there are any sectors that are over saturated and risky despite their popularity. Yep, that's I'm laughing because that's the number one question I get when people get on a Zoom with me. What's the hot thing right now? I'm not going to tell you what the hot thing to me is Making money. That's all I'm interested in. Yeah.

43:19 So whatever the hot thing that you saw was, you know, like a while ago, it was, oh, this special swirly ice cream cone was the hot thing. And the franchises were selling out like crazy. And now I have franchisees calling me up saying this was the worst business decision I ever made. I never sold one of them, but they're telling me I just sold. I just got rid of these. Now I'm looking to get into something profitable and they see all my stuff on LinkedIn is all about making sure it's a profitable unit level economics and all that stuff work. So they they reach out to me and say I want something like you're talking about. Yeah, so I'll tell you, I don't. I spent a third of my life in franchised food locations. I rarely recommend food franchises.

44:00 Reason being, as soon as I got out of it, I got into the service industry and I said I've been working way too hard. I mean, the profit margins are super thin. I remember when I was with Arby's, they used to have a big board up on the wall and it showed, you know, here's a packet of sweet and low and it cost, you know, $0.05 or whatever it is. And they were trying to let the kids know, don't give out all this stuff because there's not much profit left at the end of the day. And if you do that, that eats into everything. Oh yeah, they totally grab a handful. I'm like throw when. I got 18 ketchup right? Two mustards or two? I don't want to have a drawer full of these at home. I know. And then what do you do? I got like I, you know, if you go camping, they're worthwhile because you know, you got an easy thing to carry on camping. But it's like sometimes, you know, and it'll just be like you'll get the bag and it'll be like 2 napkins, but 10 ketchups, you know, or 20 of something.

44:53 The math doesn't work on that exactly. So I want to make sure once I got out of that and got into the service business, I realized, all right, well, the profit margins are fatter. The initial investment was much lower because you don't have to build a restaurant. And then the employees, typically when I was at Arby's, it used to take 13 employees to run $1000 hour. And that was, I mean, now we're talking 25 years, 26 years ago. So it's been a long time, but still that number of employees to bust out $1000 hour to be profitable. And then they can only work there for an hour and a half. And then I had to cut labor. Otherwise I'm eating into all the profits from that $1000 hour. So, you know, once I got out and I realized, all right, we're dealing with say, you know, HVAC concept now.

45:37 All right, I have a technician, he makes more money. He, he costs me more, but there's only one of him in the truck. And now the ticket that I'm getting from the, from the client, you know, is he's only what, 10% labor to me now because of the ticket that I'm getting out of this service. So I said I'm, I'm working, I was working way too hard. So I never recommend what's hot right now unless somebody comes up to me with a blockbuster and I kind of have my finger on the pulse of the franchising. So I know what's coming. In fact, we have the franchise Expo S coming up next week in Miami or in Fort Lauderdale here. So I'm going down to that one to see if there's anything new, but really I'm just going to see all my friends in the industry. Sure, but. What I always recommend, I always recommend home services, pet pet concepts and kids concepts.

46:24 Reason being they're recession resistant. Doesn't matter what the economy is, If my air conditioning goes out down here in South Florida Friday night, it's triple time to get the guy. I'm paying it because it's going to be 90° in here. I'm not going to be able to sleep anyway. So, you know, your plumbing goes out, you're calling, you have to get your house painted. Doesn't matter what the economy is, you know, And then with pets and kids, people spend more money on that than they do on themselves. It doesn't matter. So you have a good solid concept with good unit level economics. That's what we look at. So those are the ones that I usually recommend to people. And, and I think, you know, sort of the, it's sort of a, an adage that's used if, when it comes somebody's setting up a traditional hair business or something like that location, location, location, right?

47:12 So I would think that deciding if I, this is what I know and I want to do and I want to go build this business that as like just what we would say a startup, you would go and see what your competition is. When you're dealing with a community type of a service or a business like that, it's like, what is the, you know, how many potential customers are in this geographic service area that you can, you can actually service do the franchisors look at that so that you don't get too many froyo shops in the same one or two mile radius. I mean, I know down here where I am in Peachtree City, outside of Atlanta, we're like, do we really need another pizza place?

47:55 Why do we in our 40,000 population have 8 pizza places? You know, it's like. Maybe. One that's an individual, they're all franchises. And so like like it did to me, it seems like there's does anybody the owner or whatever doesn't figure that out? Is the franchise orb? Do they limit like I know they do for their own stuff? You can only have one and so much, but do they look at their competition or do they say, oh, now that there's 4 fast food restaurants or a mini maid there, then we'll open up other one there because we know there's people that want to buy it or a massage thing or a chiropractor. One of the franchise chiropractors will open up a second one there.

48:40 Like, does that mathematics go into the idea like it would for somebody starting a business? I'll tell you, anybody that I would refer you to would absolutely have all the software it takes to know exactly how many households, what's the average household income. We do all the all the demographics, all the psychographics, all the competitive analysis. And then what I like to do is a market optimization map. So it shows me exactly who the competition is. Where are my customers for this concept? Because a good concept knows who their customers are. And now with cell phone information, you know you're going to get everything you need to be able to slice and dice that information and know exactly where my location should go.

49:21 So if you say I want a 55 unit territory, they're going to show you a map with usually six or seven areas that say, OK, these locations would go here. If you pull one of those off, the map will adjust and say, all right, if this is only a 5 or 6 unit territory, then this is where we say it would be optimal to have those locations. So they're they definitely have that. Competitors. Yeah, absolutely. Now when I was, when I was the development person, I was senior vice president of development, in charge of, you know, locations, real estate, sales, legal, all that stuff. I was, I would always say I'm very generous with territory because I want you to go out and hit a home run with every location, but I'm going to hold tight on that timeline. That's what you get for having all of that territory. You don't get to just gobble up a bunch of territory and then not develop.

50:12 I'm going to be knocking on your door saying, hey, you got 1 coming up in three months. It's time to sign that lease. You know, so those are the the kind of give and take that you have. And I can help share that with anybody that wants to talk to me of you know what, what can I negotiate with this person? You know, typically you have some wiggle room in a couple different things. OK, great. So any final comments that your thoughts that you wanted to share and of course, everybody, it's franchise first advisors to go to, you know, get more information Little golden nugget to leave the audience with Dan. One thing I would say is, number one, it doesn't cost anything to work with me or any franchise consultants that does this.

50:56 What I would say is definitely don't go and buy a franchise without talking to me or someone like me. You know, franchise consultants, I'll tell you, are a dime a dozen on LinkedIn. Make sure you Scroll down to see what their experience is, that they know what they're doing and they've done this before. Just because it's in the title doesn't mean they know what they're doing. So you want to be with somebody who knows what they're talking about, but definitely use my 40 plus years of experience to help you make a smart, informed decision. That sounds like a good closing line. I thank everybody for tuning in. Please. You know, it's really important to the growth of this podcast, if you like it, the compassionate capitalist show, if you tune in on a regular basis, give us some five stars, give us some love because the podcast players all and the review would be terrific. They all all care about that stuff. And that's how this show gets amplified. You know, we want to continue growing up the line on Apple. So good conversations like this with Dan can be found and you know, the entrepreneurs that are listening and other entrepreneurs and investors can be smarter about how they create wealth as a compassionate capitalist. And with that I will say onwards and upwards, have a great day. Thank you for listening to this podcast, The Compassionate Capitalist Show, brought to you by Cougar and Capital Holdings with Care Brands as host.

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