This post was copied from a website I used to maintain called How I Built My Business. It’s now here for posterity.
Company: Franchise Foundry
Years Active: 2005–2007 (sold)
Location: Provo, Utah
Business Builder: Corey Spencer
HIBMB: First off, can you fill us in on what franchise development is?
Corey: Franchise development is helping a business owner (called the franchisor) franchise their business. Franchising is where the franchisor sells certain rights related to their branding and business model to a third party called the franchisee. The franchisee typically uses those rights to build a new store that mimics the franchisor’s store.
HIBMB: How did you get into something like that?
Corey: I was working at Omniture and a friend of mine had a house painting business called Five Star Painting. I suggesting they start advertising franchises online. They were skeptical but I ran a PPC campaign for them and they started getting leads up the wazoo. I left Omniture to help them with their franchise system and then it became obvious that I would just be their employee forever and it was a company with more risk and no benefits.
Through connections, others heard that I knew how to tap the franchise market and I blindly went into a partnership. I had never worked with these guys before but they knew they needed a marketing guy.
HIBMB: So how did the business work? What’s the business model behind franchise development?
Corey: Some of us had worked in franchising before building franchise systems and we found that there was a gap between somebody creating a successful business vs then franchising that business. Several things contributed to that gap:
- Capital. Taking it from a sandwich shop to a franchise business is quite capital intensive.
- Legal. The franchising industry is highly regulated. A lot of the capital ends up going to lawyers to create all the documentation that protects all the parties involved not to mention the fact that most franchisors end up in a legal battle with franchisees within the first few years.
- Marketing. You might be really good at selling a five dollar sandwich but are you good at selling a $45,000 investment? How do you reach that market?
- Sales. A franchise sale can take as short as 30 days and can take up to 6 or 9 months depending on finding a location, talking your uncle into giving you the money to do it, and everything else. Having processes around franchise sales while you’re trying to run your sandwich business is virtually impossible.
HIBMB: As a franchise developer, your customers were the business owners that wanted to franchise then, correct?
In our case, we paired up with a venture capitalist firm based out of Canada. We would look for these places that were ready to franchise. We would start a new company. So if you’re Bob’s Sandwich Shop we would start up Bob’s Sandwich Shop Franchising and we would typically own the majority share of this new franchising company. We would try to own anywhere between 49 and 51 percent of the franchising company depending on the strength of the brand and how much we would need to do.
What was really unique is that we didn’t say, “Here’s a million dollars. Go franchise.” Instead we would say, “Here’s a million dollars and you don’t get to touch it. It’s going to the franchising of your business. Here’s how we’re going to use the money.”
What happens all the time when a venture capitalist gives a business owner money is the owner will say, “Guys, we can finally get new chairs and the computers we wanted.” A quarter of the investment is gone before any of it has been used to franchise the business.
One of our partners was a lawyer who specialized in franchise law. Because he was a part-equity owner, we didn’t have to hire a separate law firm. He was able to do all the legal stuff for all the franchise systems from sales to franchise disclosure documents. He was on our payroll. That saved franchisors tons of money.
HIBMB: How did you find this lawyer?
Corey: Good question. We lucked out. It’s a very small industry‚ very incestuous. We knew somebody who knew somebody who knew him. He happened to want to move to Utah from Oregon. He happened to be the most ethical, nice, pleasant human being I’ve ever met in my life. This unicorn came in and was like, “I’ll do all your legal!” It was fantastic.
Out of the gate that saves the franchise business anywhere from $100–150k.
I handled all the marketing. There are economies of scale that come with having an SEO team and a PPC team and a web team and a content development team to go after franchises across different businesses. You can go after sandwich franchises and the next day go after handyman franchises with great success. We already had our processes on knowing exactly what to do: what directories we had to get into and what social media things we needed to do so that within a month or two we were ranking at the top of the search engines . This is where we got our cheapest leads.
We had a developer who knew Corda really well so we had a visual process that we mapped out. We created marketing dashboards so we could see where our money was going based on close rate. We tracked everyone on Salesforce. The average emerging franchise can’t afford any of that on their own.
Then we had a sales team that would close the deals.
The cool thing was that because we were partnered with the venture capital firm we did all of that at cost. We weren’t trying to make a profit as a services business. We were really transparent in showing franchisors exactly how much money was going to their marketing campaigns and such and that we weren’t upselling anything. We weren’t trying to make a 20% margin on our consulting because it benefitted us for that franchise system to grow. We wanted every dollar to go into building the franchise system and not into trying to capitalize off of it too early. Does that make sense?
HIBMB: So you were wanting your earnings to come from your equity in the franchise company and not from charging for your services?
Corey: Yeah, the goal would be to build up 15 franchise systems that get big enough that a few of them would get acquired. That’s our payday. In the franchise world, that’s usually how it happens. Once you get to a certain penetration rate in the market some bigger franchise system comes and says, “We’ve been looking for one of those. We need a fried chicken or a frozen yogurt or a handyman franchise.” The other option we have is to sell it back to the franchisor. We say, “Okay, now you’ve got fifty units and it was worth a million dollars when we came in and now it’s worth five million dollars. We’ll sell our equity back to you for X amount.”
Technically, we were incredibly successful at what we did but we ran into some problems. We opened our doors the week that Lehman Brothers shut theirs. We were so excited to build our business just as the entire credit crash started. The franchise industry is very credit intensive. If you decide to open a frozen yogurt shop, the first thing you have to do is get a hold of $50–100k. During the late 1990s and early 2000s all you had to do is blink and somebody would give you money to open up a franchise. They didn’t care if it was a new franchise system or already had 500 units. During the credit crunch, it was virtually impossible for the average person to get a loan big enough to open a franchise.
Despite that, we still figured out how to grow and in some cases we even grew too fast. There were some franchise systems where I think our rapid growth really hurt them because they couldn’t keep up with the opportunity. When you sell 25 franchises in a year, it’s considered really rapid growth and the franchisor is now having to keep up. They’re getting paid but that first year or two of growth can be really hard on the franchisors.
HIBMB: It’s hard for them to deal with the stress or the financial burden?
Corey: The stress.
HIBMB: Why was it stressful for them? What work would they end up doing?
Corey: Let’s say a franchisee wants to open up a Bob’s Sandwich Shop. The franchisor has to get them all the plans, the architecture, make sure it opens correctly, help them with initial launch marketing, make sure the initial managers and employees are trained, come back and give them monthly and quarterly marketing calendars with all the new products going to be released.
The franchisee pays 7–10% of their top-line royalty plus a marketing royalty and a few other things. It usually ends up being around 15% total. The franchisor is never really flush with cash. They’re trying to handle all their responsibilities with 15% of what the franchisee is making. They’re always pretty lean so having good processes and systems is critical. If you’re a franchisor that opens up two or three other units a year for the first five years, then you can grow into that. If we partner with you and you have to open up twenty in a year, you’re having to learn really fast and grow really quickly.
Most of our franchisors did really well. We ended up selling Franchise Foundry to a franchise consulting business. Most of us just wanted to get out of the franchising business. Most of all, the venture capital side of it was also hurt by the credit crunch and wasn’t able to continue investing. We ended up selling a lot of the equity in our franchise systems back to the franchisors to try to keep the business afloat while waiting for money to flow from the venture capitalists. All of those systems that we sold back were better off for the work that we did, but we weren’t able to grow the way we wanted because the business structure was so oriented toward venture capital.
HIBMB: Why did you want to get out of franchising?
Corey: The main reason is that my heart is in tech. A lot of what we did at Franchise Foundry was bring tech to franchising. Going in there and using Salesforce, marketing dashboards, pay-per-click, and mobile apps wasn’t being done in the industry. In fact, we often joked that we looked like the punk rock kids at a bankers conference every time we went to a franchise conference. Everyone was in their late fifties in suits and we were in our t-shirts and jeans and in our mid-thirties. We did it for three years and put everything into it and realized that there was someone else who could benefit from taking it. I looked at tech and it was just something that got me more excited. I wanted to be in building software instead of just using it.
Franchising is really beneficial for the right companies and they can grow really quickly, but my passion has not really been about doing business but doing cool stuff instead. Moving to Adobe scratched that itch way better than building franchise systems.
HIBMB: Do you feel like Franchise Foundry was successful?
Corey: It was wildly successful for a while. We had a great team but we weren’t agile enough on our business model.
HIBMB: Do share.
Corey: All I’ll say is that, in our case, having the right venture capital partner was critical. The wrong partner really sunk the ship. Who you go into business with is more important than what you do.
HIBMB: Any other sage advice for someone trying to build this type of business?
Corey: Having seen a lot of franchise systems and a lot of businesses, I would say there’s no such thing as artificial growth. There’s a thin line between fooling yourself and being optimistic. If you can get in and let your growth and opportunity come organically you have a better chance at being successful. It will take way more patience and way more discipline.
What usually happens is that once a company, like ours, sees a little bit of success, they hire two or three times more people than they should. It’s all with the eye of saying, “Guys, we have to have all this stuff so we can grow at scale.” Two years later they’re firing all those people because they took on too much overhead. If you’re comfortable with two to five years of being in pain and everyone feeling like they’re overworked and never feeling like you’ve got enough resources but knowing you’ve got enough money in the bank, then eventually things open up.
Some people will totally disagree with me. They’ll say you’ve got to put the pedal to the metal when you’ve got the opportunity and maybe there’s an argument for that if you’re trying to get acquired in the next two years, but far fewer companies get acquired than those that do. If you have a successful business, you have a greater chance of being acquired. If you’re trying to artificially create that growth or that perception but really you’re wondering how you’re going to make payroll this month, then it’s only a matter of time before you go under. Nine times out of ten you’re already running on empty.
HIBMB: Do you mind giving a brief summary of some of the companies you helped franchise?
- Spoon Me: Frozen yogurt shop.
- Fairway Divorce: Divorce mediation. The most successful franchise system we helped build.
- iPreserve: They’ll come to your home and digitize your analog media (pictures, videos, etc.)
- Cell Again: Kiosks that buy and sell used phones.
- Symbii: Home health and hospice.
- Hassle Free Homes: They visit your home each month and perform maintenance and repair.
- Sauca: Food truck with international cuisine.