🍟 5/22/2023 – The (Ugly) Truth About The Franchise Industry

DEEP DIVE 

The (Ugly) Truth About The Franchise Industry

I started The Wolf of Franchises in June of 2021. 

Since then I’ve been privileged to speak to some of the biggest success stories in franchising, including the CEO & co-founder of Crumbl Cookies, to the biggest franchise owner in the world, Greg Flynn.

I cite those examples because they embody the full power of franchising on the franchisor and the franchisee side.

  • Crumbl was founded in 2017, already has 700+ locations open, does over $1 billion in revenue, all as a 100% bootstrapped company 
  • Greg Flynn has gone from 1 Applebee’s location to 2,500+ restaurants and over $4 billion in annual revenue 

What other industry can you build a billion dollar brand in just 5 years (without raising venture capital), or become a billionaire, solely by following other people’s business ideas?

I can’t think of a single one besides franchising. The power of this business model is truly unmatched.

And yet, for all the potential, as a collective franchise industry, I believe we’re *massively* underperforming relative to where we should be. 

Why? It starts with transparency. 

Transparency, or lack thereof, is the biggest issue in franchising today.

It’s holding back the good franchisors.

It’s hurting franchise buyers and owners.

And it’s placing a low ceiling on the potential of franchising as a whole.

The Franchise Transparency Problem

It’s the reason I started this newsletter. 

I saw the potential of multi-unit franchise ownership, but there were no quality resources for individuals to research franchise brands. 

I’ve used this pie chart jokingly…but there’s truth to it:

Plain and simple: it’s hard to become a wealthy multi-unit owner if you pick a bad franchise.

And the regulatory reality is, franchises are hundred thousand to multi-million dollar investments, but the franchisor – the party providing said investment – isn’t required to bear the burden of proof if their investment has merit.

The burden of proof is placed entirely on the franchise buyer, and researching franchises today is shockingly difficult. 

Sure, you could dig through FDD’s (if you know where to find them & how to navigate through all the legal jargon), but as someone who’s dug into thousands over the last 2 years to write my newsletter, it is *far* from an efficient process.

Truly, it’d be crazy to think that in 2023, the best way for an individual to navigate the world of 3,000+ franchise brands is by reading one PDF document at a time. 

Not to mention, half the franchises out there don’t share financial performance data! 

The ugly truth is, much of the industry still operates like the auto industry did before the internet leveled the playing field for buyers.

Much like buying a car in those days, if you want any real data about a franchise today, you can’t get it unless you pick up the phone and speak to a sales rep. 

And it’s quite convenient that the sellers of a franchise in any given scenario will pocket a sizable chunk of the ~ $45k franchise fee you have to pay. 

Can you hear the commission breath yet?

So there you have it: an entire asset class with sky-high potential, stuck in the year 1995.

Don’t get me wrong, I know there are *many* honest and ethical franchisors out there who are being transparent, sharing financial data in the FDD, etc.

These are the ones I break down in my newsletter, get to write deep dives on, have on my podcast, etc. 

I also understand at a certain point, buyers and franchisors *need* to speak with another to see if a business relationship makes sense. 

But oftentimes, prospects don’t get to see objective data points on a given brand, (or speak to existing franchisees who can provide those stats), until multiple phone calls with a franchisor, an application, and then some.

Imagine applying for a job, and your potential employer requires you to jump through hoops just to know the salary range. This isn’t how it should work.

And the current system hurts franchisors as well, because there’s no good way for them to clearly stand out from the crowd.

But Wolf, can’t you get information from trusted 3rd parties?

Not exactly…

You effectively have two options:

1. Use a “Franchise Directory”

2. Use a Franchise Broker

Both options are “free” to you as a prospective buyer. 

But as the saying goes, “If you’re not paying for something, you aren’t the customer – YOU are the product being sold”.

And this saying applies for franchise brokers and directories.

Franchise Directories aka “Lead Portals” contain hundreds of franchise listings that give very surface level insights on brands. 

If you want to get the important details about any 1 franchise, you’re required to request information from them. This means you have to put in your contact information, which is then sold to franchisors for anywhere from roughly $20-$75 per lead.

It’s usually a miserable experience for the potential buyer, as their phone and email typically gets SPAM’d incessantly. 

And franchisors don’t love it either, as the lead quality is usually low – which makes sense given the prospect doesn’t know much about the brand they’re requesting info from, nor about the barrage of outreach they’re about to receive. 

Franchise Brokers are different though. 

They function like real estate agents do when you’re buying a house i.e. you get their services for free, as they’re paid commission from a franchise sale (the franchisor pays them via the franchise fee revenue). 

I firmly believe good brokers do an important service – some people need hands on-support in finding a franchise, and the ethical brokers do a great job matching people with the right brand.

However, bad brokers can lead buyers into brands that are paying the highest commission, with little regard for the candidates financial well being (and yes, this happens – I’ve heard the horror stories).

It’s hard to say if it’s a case of a few bad apples spoiling the reputation of the bunch, or if the problem goes deeper than that. I don’t know the answer, but my hunch is that some brokers aren’t truly the “franchise experts” they claim to be? 

Otherwise, there sure are a lot of experts out there! 

Wolf Time 💪

Regardless, it’s 2023, and it’s long overdue for someone to build something with the best interest of franchisees truly in mind.

After all, without new franchisees, everything else would stop: 

→ Franchisor royalty streams would plateau

→ Franchise broker commission would be $0

→ Banks wouldn’t have any more loans to underwrite

→ Private equity firms wouldn’t have new locations to acquire

Franchisees are the most important members of the ecosystem.

And it’s time they have a place they can trust and call home.

Tomorrow, I’m unveiling just that. 

See you at 8am EST. 


FRANCHISE HEADLINES

Taco Bell Wants to ‘Liberate’ Taco Tuesday

Since 1989, the term “Taco Tuesday” has been registered as a trademark, and Taco Bell wants to change that. The fast-food franchisor petitioned the U.S. Patent and Trademark Office to remove the trademark status of the familiar term, which currently belongs to the smaller Taco John’s franchise. Taco Bell, which is owned by the Yum! Brands umbrella franchise, doesn’t want to take over the trademark nor does it want damages. 

Jack in the Box Plows Ahead on Aggressive Growth Goals

Jack in the Box has 61 restaurants currently in the permitting, design, or construction phases. That’s the most CEO Darin Harris has seen in his tenure, and the most the company has seen in at least a decade. Highlights include bringing in the first new franchisee in over a decade, the addition of new markets including Florida and Arkansas, and incremental development agreements via Del Taco refranchising, including commitments to bring both brands into new territories.

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