Episode 27: Franchising 101 — What No One Tells You Before Buying a Franchise

Pam Currie (00:07.102)
Hey everyone, and welcome to the Franchise Sisters Franchise Business Radio Show. I’m your co-host, Pam Curry.

Shari Currie Skjoldager (00:13.61)
And I’m Sheri Curry Skaldaker. Thanks so much for tuning in today.

Pam Currie (00:18.41)
Yeah, on today’s episode, we’re diving into Franchising 101. This is a foundational conversation and honestly, one of our favorite topics because understanding the basics can help you avoid costly mistakes.

Shari Currie Skjoldager (00:34.412)
Yeah, absolutely Pam. Today we’ll be covering what a franchise actually is, what an FDD is and why it matters, why franchising is often considered a risk mitigation strategy to business ownership, and the advantages and disadvantages of owning a franchise.

Pam Currie (00:55.09)
Yeah, and Sherry, let’s be clear upfront, franchising isn’t for everyone, but it is an incredible path for many people when it aligns with their goals, their mindset, their lifestyle, their dreams.

Shari Currie Skjoldager (01:01.198)
Uh-uh.

Shari Currie Skjoldager (01:10.508)
Yes, okay, so let’s start with the basics. The International Franchise Association is the world’s largest and oldest organization representing the franchise community and defines franchising as a continuing relationship in which the franchisor provides a licensed privilege to do business plus assistance

and organizing, training, merchandising, and management in return for a consideration from the franchisee.

Pam Currie (01:47.732)
Wow, Sherry, that is a mouthful. But that definition is very important because it highlights what makes franchising unique. It’s not just a brand, it’s a relationship, a system, and an ongoing exchange of value. So let’s talk about the two main types of franchising. There are two primary types of franchises. And this is something many people don’t realize.

Shari Currie Skjoldager (01:50.979)
Hit it.

Shari Currie Skjoldager (02:15.882)
I agree, Pam. So we’ve got the first one. That is product or distributor franchising. This gives the franchisee the right to sell a manufacturer’s product, but not necessarily a full operating system.

Pam Currie (02:32.252)
Yeah and where you’ll see the most often when you think of product or distributor franchising is automobile dealerships gasoline stations beverage distributors.

Shari Currie Skjoldager (02:44.374)
Yeah, that’s right. But then there’s a second type, a type that really we primarily focus on, and that’s business format franchising.

Pam Currie (02:54.034)
Yeah, this is actually the fastest growing segment of franchising. Business format franchising includes three key factors, a shared brand identity, a clearly defined business system that must be followed. We like to refer that as the playbook, the business playbook, and a continuing financial relationship through royalties, paying that one time franchise fee.

So an ongoing financial arrangement.

Shari Currie Skjoldager (03:26.934)
Yeah, yeah. And that system also known, like you said, as the Playbook, is really the hallmark of business format franchising.

Pam Currie (03:36.124)
Yes, matter of fact, under state and federal law, a business is considered a franchise when those three factors exist. When these factors exist, the relationship gets regulated under the FTC rule, which requires franchisors to provide to prospective franchisees a legal document called the franchise disclosure document.

or what we know as the FDD. So what is an FDD?

Shari Currie Skjoldager (04:10.434)
Yeah, well the FTT is a legal disclosure document, just like you said Pam, designed to protect the franchisee, the prospective franchisee, or in other words, the buyer. It used to be called actually the UFOC, which stood for Uniformed Franchise Offering Circular.

Pam Currie (04:33.096)
That’s right, Sherry. I’m going to date myself. We used to refer to it as the UFOC. That’s what it was called. And the reason why it was called that is because it was a uniform layout. If you were to take a look at different FDDs across different brands and different industries, you would notice that the table of contents is the same. The table of contents is showing 23 items, plus it lists out the exhibits.

Shari Currie Skjoldager (04:35.374)
Thank

Pam Currie (05:02.078)
So the purpose of the FDD is to provide prospective franchisees with information on the franchisor, on the franchise system, and the agreements that they will need to sign if they become a franchisee. In addition to the disclosure portion of the FDD, there are exhibits. And one of the exhibits is the actual contractual franchise agreement.

Now we’re not going to into all of these details regarding all of the items in the FDD. That’s for another podcast. As a matter of fact, I would encourage you to tune into a podcast where we’re interviewing a franchise lawyer to learn more about the FDD.

Shari Currie Skjoldager (05:47.542)
Yeah, yeah, but let’s do talk a little bit more about the most common fees that you’re going to see in an FDD.

Pam Currie (05:56.596)
Great idea. Fees are always a big topic. Typically, there are three key fees that are focused in on. You have the one time initial franchise fee that is paid by the franchisee upon the signing of the franchise agreement. And then there’s an ongoing royalty fee. Very often that’s a percentage of gross sales or it might be a flat monthly fee or a combination of the two.

And then the third common fee is a marketing or advertising fee. And sometimes that might be on a national level or regional level. And of course you want it on a local level because you’re looking to build your business locally as a franchisee.

Shari Currie Skjoldager (06:40.098)
Yeah, and it’s also important to know that franchisors can structure fees as they choose, as long as everything is clearly and legally disclosed in the FDD.

Pam Currie (06:55.112)
Yeah, and by the way, franchising spans nearly across every industry imaginable. It’s all around you. Sometimes we’re just not aware of it. We always think of food and fitness, but it spans over to home services, senior care, business services, automotive, education, pet services, and so much more.

Shari Currie Skjoldager (07:17.454)
Which is why franchisee works for such a wide range of backgrounds, skillsets, and life stages.

Pam Currie (07:28.094)
Yeah, so I guess a question is why why franchising is considered a risk mitigation strategy? One of the biggest reasons franchising is attractive is because it’s built on something that has been recognized as the franchise prototype.

Shari Currie Skjoldager (07:33.422)
Yeah.

Shari Currie Skjoldager (07:46.06)
Yeah, that’s right. Michael Gerber explains this beautifully and the E-Myth revisited. The prototype is where ideas are tested, they’re refined and then proven before being replicated.

Pam Currie (08:02.346)
And I really like how Michael Gerber states in his book, The E-Myth Revisited, the system runs the business, the people run the system.

Shari Currie Skjoldager (08:14.958)
That’s powerful because you’re not starting from scratch or guessing what works. You’re executing a model that’s already been tested.

Pam Currie (08:25.354)
Yep, it’s those proven methods of operations. And that is, like you said, the hallmark of being a franchise. So let’s continue down this path and understand the advantages of franchising. There are some big advantages, including the proven system, right? The hallmark, the business playbook, brand recognition, the ability to co-op marketing and advertising support, the ability to receive training.

ongoing operational guidance back office infrastructure. Very often franchisors offer volume purchasing power, giving you economies of scale. If it’s a storefront, you may receive pre-opening support for site selection, grand opening programs. I also like to get people thinking about the end in mind. Franchising is a great opportunity to build something and then exit.

It’s a more attractive exit strategy when you’re ready to retire or move on. And in addition to that, if you are someone who is looking to build your own empire, scalability is very, very doable in a franchise system. And this often happens through acquisition.

Shari Currie Skjoldager (09:40.852)
Exactly. And that’s why we have a motto in franchising. With all of that that you get, you get to be in business for yourself, but you are definitely not in business by yourself. We often get questions about the trade-offs of owning an independent business versus a franchise. And we have a podcast discussing that topic as well. But let’s chat about the trade-offs and why some are somewhat disenchanted with the idea of franchising.

Pam Currie (10:11.176)
Yeah, disadvantages of franchising. I’m going to go ahead and state one of the obvious, the fees. So we had talked about those earlier. I know that that sometimes does not feel good. But overall, when you get in there and understand about the franchise opportunity, maybe those fees won’t turn you off so much. Another big reason why many are disenchanted with the idea of a franchise is you aren’t fully independent.

There are rules, there are standards and long-term agreements. So that is the reality of a franchise.

Shari Currie Skjoldager (10:48.268)
and there’s a lot of value underneath that too. Your success can be tied definitely to the strength and integrity of the franchisor, which can be good. That’s why vetting the brand though is very critical to make sure you’re tying yourself to the right wagon.

Pam Currie (11:04.97)
Absolutely. So Sherry, tell us, know, who is, I mean, how would we define the right person for a franchise? Is franchising right for who?

Shari Currie Skjoldager (11:19.502)
Well, we like to use the term fran-trap-ren-eur, so you’re kind of in the middle of that entre-pre-neur. You’re not a W-2, you’re not an entre-pre-neur, you’re kind of in the middle. You’re a fran-trap-ren-eur, a blend of being an entre-pre-neur and a franchise owner.

Pam Currie (11:34.89)
Yep, I would agree with that. It is sort of a hybrid. entrepreneur wants ownership, but also values, structure, systems, and learning from other successes and mistakes. And I’m going to just say this, don’t go looking up for entrepreneur in the Webster dictionary. I don’t think it exists.

Shari Currie Skjoldager (11:52.066)
Yeah. I think that’s the name we made up maybe. But yeah, but if you’re looking for that system structure and yet independence of owning a business, if that mindset kind of resonates with you, franchising may be worth exploring.

Pam Currie (11:56.905)
Mm-hmm.

Pam Currie (12:10.29)
Yeah, so what we’ve seen in the market right now, we’re seeing layoffs, seeing a lot of career dissatisfaction. And what’s really exciting, we’re also seeing a renewed entrepreneurial spirit across generations.

Shari Currie Skjoldager (12:24.236)
Yeah, definitely with the millennials and the G gen Xers, a lot of them are not interested in getting a W-2 and they’re looking to their.

family members to maybe support them because they haven’t actually earned the funds for it. But they really want to have that independence and opportunity to just grow something that’s theirs. But then you look at the flip side, you’ve got the baby boomers. They’re also looking at it because they’re retiring, but they’re not ready to stop working. They just want to work for themselves instead of somebody else. And the areas that I love, of course, is you’ve got women and minorities that are entering at record levels into business ownership as

very exciting. Really no one is left behind in this industry.

Pam Currie (13:09.13)
I agree with you and share. I’m so happy brought up the younger generation because we were also starting to see a lot of this by generational movement. Maybe the parents have the nest right? They have the money and the capital. However, they’re partnering with their children who have the drive, the energy, the entrepreneur entrepreneurial spirit, and it’s kind of cool to be witnessing and seeing that happen. So.

Shari Currie Skjoldager (13:22.049)
Okay.

Pam Currie (13:36.946)
Let’s kind of have a call to action here. The big question is, are you in the right place and is this the right time for you?

Shari Currie Skjoldager (13:46.252)
Yeah, and of course, if you’re unsure where to start, we would love to help you.

Pam Currie (13:50.792)
Yeah, absolutely. We offer a free ebook, Top 10 Questions to Consider Before Investing in a Franchise.

Shari Currie Skjoldager (13:58.486)
And we also invite you to schedule a free Franchise Discovery call with us. Simply visit our podcast at franchise-sisters.com and click on the contact tab.

Pam Currie (14:09.812)
Thanks so much for tuning in. This is the Franchise Sisters signing off. Fist bump.

Shari Currie Skjoldager (14:14.69)
this time.

Shari Currie Skjoldager (14:22.264)
Do we need to go over it again or are good?