Mark Vandegrift
Welcome back to another episode of the Brand Shorthand Podcast. I'm your host, Mark Vandegrift, and with me today is a very special guest, Steve Vandegrift. Yes, if the last name sounds familiar, this guest is my brother. Steve is president of FranSource International, a leading franchise development specialist firm with over 30 years of experience in the franchise development industry. We welcome him on the Brand Shorthand podcast today because Innis Maggiore and FranSource in exciting news have recently entered into an agreement to provide a one-stop shop for franchise development. FranSource has always focused on the legal, the operations, the training and sales aspects of setting up a franchise system. And of course, Innis Maggiore is all about the marketing and tactical sales experience in the same space. So we thought we'd invite Steve on just to talk a little bit about franchising. And that will be our topic today. Lorraine will be back with us next week. So never fear Brand Shorthand fans. She will be here again. This is just a quick guest appearance by Steve Vandegrift. Steve, why don't you tell us first a little bit about yourself and what prompted you to get into the franchise development space.

Steve Vandegrift
Well, like most situations with a lot of folks, things happen in your life that lead you to a certain path. And that's certainly true for me. Out of college at Miami of Ohio, I had a friend that actually owned, back then it was called Acro Mattress and Waterbed here in the Northeast Ohio area. It was a franchise. And he was looking to open a second location. I went with him to look at locations and he found a location and he said, hey, if you'd like to invest, I'd love to have you as a partner. You can manage the store. Ultimately went and talked with five banks and the fifth bank said yes. And suddenly I was a business owner at the ripe old age of 22. So I was a franchisee initially. And then flash forward about two and a half, three years, we had recognized the franchisor was having some difficulties due to some personal issues in their life. And we had heard that he wanted to take ver all the franchises. So we made the quick decision to call and say we'll be first. Ten days later we were bought out of our franchise and that led me to start looking at what would be the next venture. Ultimately I started a company called Scorecard Plus and it was a company that we produced yardage books for, for public, semi-private, private, and even resorts. Arizona built more out in Arizona, the wigwam, etc. We ultimately franchised that in 1993, so I became a franchisor. And through that process, I actually engaged a company out of Pittsburgh. There was only a few companies at that time. It cost me $84,000 to do so, and I started getting these documents. First was the franchise disclosure document. The second was our franchise operations and policy manual. And I literally looked at these documents and said what many franchisors come to us after working with another company, they'll say, I don't even recognize my business in these documents. Ultimately, that was my case. And so I basically had to learn what franchising was all about. We ended up working with a local franchise attorney to redo our franchise disclosure document. We ended up drafting our operations manual in-house, preparing our advertising and marketing plan, all the sales materials, the forms, et cetera. And through that process, the franchise attorney that I hired, Outsource Legal Counsel, asked me to start consulting with some of his clients. He said, Steve, I've franchised them. They have this beautiful franchise disclosure document. They'll call me six months later and say, we're still not sure how to spell franchise, let alone sell one. We understand we need marketing materials. We need an operations and policy manual. And the list went on. And so I consulted with a number of his clients over the next couple of years. And during which time he started to ask me to consider maybe forming FranSource, what became FranSource. It took another year or two but ultimately I made the decision that I felt that that would be a great move for me and so in November of 1997 we officially opened the doors to FranSource and so I've been both a franchisee and a franchisor. I have good perspective on both sides of that and I think our clients find it very valuable that I come to the table not just with book smarts or book education but actually real world experience. And so ultimately that's led us to where we're at today.

Mark Vandegrift
Very good. Well, there's a lot of deep concepts in there for people that aren't familiar with franchising like FDD and operations manuals, but let's start out with something real basic. And that is in our chat today. I want to communicate to our listeners why franchising is an ideal way to grow a business. Many probably don't understand franchising, other than that they may know they walk into one frequently. If you eat at McDonald's or you eat at Subway or you order a pizza from Donato's, you're actually ordering from a franchisee. Give us a little background. Why is franchising an attractive way to grow a business versus other traditional ways? We think of opening a corporate location or establishing a dealer network or we have a lot of clients that have distributorships. Give us a sense why is franchising an attractive way to grow a business?

Steve Vandegrift
Well, the first that comes to mind is it really is the closest thing to corporate expansion that you can get. In terms of control, franchising is regulated by the FTC under the FTC franchise rule. And so ultimately, it does allow a franchise company to exert a great deal of control over the individual operation. And so from the standpoint of it's the closest thing to corporate expansion, that's from that perspective. In other words the control that they still have ultimately the reason that many companies elect to franchise and we hear this from our clients. So I have five ten locations and I'll say, okay, you've been doing this for 10 years. Why now? And they'll say, honestly, if we have to manage one more location ourselves, I'm going to go crazy. And so what our clients like is the fact that they're putting a motivated owner, whether that owner is an owner operator, whether they're just an investor that hires a general manager. Ultimately, the franchisee is responsible for the day to day operation of the business, obviously following the franchise company system. Another big reason is that corporate expansion can get very costly the hierarchy you have to develop obviously the franchise or the company is taking all on all the liabilities they're leasing additional locations etc. Franchising greatly reduces that and it actually is using quite truthfully other people's money franchise fees etc to expand their business because that individual is looking for a roadmap we like to say franchising in its simplest form is the franchiser provides the vehicle, they provide the roadmap, and ultimately the franchisee is responsible for bringing their passion, their work ethic, and all of those things to the equation. And married together, it makes for a wonderful opportunity for both the franchisee and the franchisor.

Mark Vandegrift
Yeah, and from the standpoint of the consumer, the consumer benefits because of the controlled setup, the controlled system. If I walk into one McDonald's, I should expect it to be the same service as a McDonald's I already walked into or a Subway or Donato's. In other words, I experienced the brand consistently no matter where I am or who I buy it from or who the franchisee is. That's kind of the benefit that we see as marketers and also we feel as consumers. Is that? Yeah. Yeah.

Steve Vandegrift
That is so true. That is so true because ultimately that's the goal of every franchisor they want everyone to sing off the same song sheet they want them to have consistency in their products etc you mentioned from a marketing standpoint enjoying that perspective well franchising even banks they love franchises because they understand their systems there's procedures everything is dialed in it's systemized and so they feel much more comfortable if i'm an individual that walks in for a loan for start an independent business. The first question they're going to ask is what's your experience? They're probably if I get an SBA loan they may require me to hire a manager who has previous experience etc and so ultimately when they're approached with a franchise they feel much better about that. There was a statistic a number of years ago that ultimately four out of five independent businesses fail in the first five years whereas only one out of five franchises fail in the first five years. Now I don't know the current statistic but that was statistics that's been around a long time and from our experience with our clients we see that. We've had very very few clients over the last 30 years lose even a few franchises. Usually if they lose one it's due to the operational deficiencies within that individual and it was something they could just not correct. So that is another tremendous advantage of franchising and that access to capital.

Mark Vandegrift
Good. Let's go back to what you do with, with franchising. So I have a business concept. Let's call it, you know, restaurant ABC, and I have something that's unique about franchise ABC that I think other people in other areas would like to benefit from that system that I provide, whether it's the way I make my food or if I'm in a non-restaurant situation, let's say it's a special technology and I need feet on the ground. Give us a sense for what your part is. When someone says a franchise development specialist, are you selling franchises? Are you marketing franchises? Like, help us at a very basic level for those listeners on here who don't understand maybe what a franchise development specialist does.

Steve Vandegrift
Sure. About 80 percent of the work that we do every year are what we term full developments now as you heard I originally co-founded this uh FranSource with a franchise attorney A couple years later. He actually got headhunted by the largest law firm in our area to head up their new legal department. At that point he had to divest himself of any interest. We continued to work together for a while. But at the end of the day, we always build ourselves as the only company that really combined both the operational, the training, the sales, the marketing and the legal all under one roof. Now granted our clients do engage directly with our franchise attorneys so that they fully represent the client not FranceSource which is very important because they need that assistance but we even get involved in the franchise disclosure document process. We work with attorneys all over the country that love to learn that we will actually assist their clients in determining what are franchise fees, royalty fees, how do we define territories, etc. But franchise development is more than just having a franchise disclosure document. Yes, that's the legal basis for granting and offering franchises. However, there's many more components, especially nowadays with the internet for the last 30 years, people can research these companies. And so every company needs a robust franchise operations and policy manual. It outlines the business from A to Z. It's prescribed procedures for every employee, human resources component, et cetera. That's a big portion of the project. And in fact, that takes about typically three to four months with a client, whereas the franchise disclosure document, we can get through our proprietary questionnaire with them within the first two or three weeks of commencing the development and that attorneys can begin drafting those documents. We move on to the operations manual. We also actually put together our clients entire franchise sales process. We develop a franchise sales manual. It outlines everything from point of contact to actually signing the franchise agreement. Advertising and marketing. We work with obviously Innis Maggiore to assist our clients. First of all, with franchise marketing. Second of all, many of our clients also elect to work with Innis on behalf of their franchisees. In other words, they recognize most individuals are not marketing experts and they want them to be able to support their franchisees and for a startup franchisor that can be somewhat overwhelming as new franchises are coming aboard and so Innis can provide not only the franchise marketing to draw in qualified prospects, but actually then to support those franchisees on their local advertising and marketing, whether it's social media, Google ads, paid ads in social media, et cetera. And so there's all these nuances and various services that go into creating our clients entire franchise operation. What are the support and communication programs we're going to develop for franchisees? And the list goes on and on. And in fact, if any listener is interested in reviewing all of our services they can go to fransource.com and there's a nice comprehensive list with the description of the typical services that we provide under our full development program and then about 20 % of the work that we do every year is actually existing franchisors. They've worked with another company. They train a couple franchisees. They realize their 82 page operations manual is extremely deficient, or they don't even have a franchise sales system. Just in the last six months, we worked with a company that supposedly was going to have this elaborate franchise sales system. Not only did they not have a system, they did not even receive a franchise application to allow prospective franchisees to formally apply for a franchise. And so that's the other 20 % of the work that we do. We call them one-off projects.

Mark Vandegrift
Very good. So it sounds like a franchisor a prospective franchisor is going to engage FranSource and walk away with maybe five primary elements that is the foundation for their franchise system. Right? Right. Good.

Steve Vandegrift
Yes. Five legs in the stool so to speak. That's exactly right. So you're looking at the legal the operations the training the marketing the sales. There's other things that fall under each of those legs But that is how we typically identify with a prospective client what's involved in the franchise development process.

Mark Vandegrift
Very good. On your website, you have a 15 question quiz about franchise readiness. In other words, is your business ready to franchise? And while our listeners look that up on Fransource.com, can you share with us a little insight on why you created that quiz and what it intends to accomplish for wannabe franchisors?

Steve Vandegrift
I sure can actually we developed this quiz and it's been tweaked over the years as well but what we recognize is just about every client not all but just about every prospective client that comes to us is still trying to figure out should they franchise. Are they the right company ? Is it the right concept? Is it the right time? do they have the right management team? And so we wanted to provide franchise perspective franchisors the opportunity to take a quiz that's initial indicator of franchise ability in other words a high score means franchising could be a wonderful application for them an expansion method. For lower scores we're able to provide some advisement where they answer a question a certain way. Let's say they're a restaurant they have no national suppliers they don't have any they're not working with Cisco US foods, Gordon Food Service, any of those companies. They need to establish those relationships to maintain that consistency across the entire franchise network. So that 15 key questions is really key questions you know are they operating more than one unit is the business profitable enough that they can collect a royalty from franchisees and the franchisees will still get a good return on investment and a good profit at the end of the year. And so that's how we use that quiz is really to give a snapshot of where they're at, help us identify maybe a couple of issues initially so that when we do discuss their business with them, we can ask some qualifying questions and kind of lead them down the path of either A., yeah, looks like it right now that you're in a good position to franchise, or let's take care of a couple of these things and then come back to us. And believe it or not, we have had clients come back to us a year, two years, three years later and say, we've done this, we've done this, we just won a governor's award for our business, we're ready to franchise and that's what we love to hear. So our initial process, it's all about education. We like to say we take a prospective client through to where they have an associate's degree in franchising. When they get into the franchise development process, they're going to end up with a BS in franchising and coming out the other side, they're going to have that masters. So that's the way we look at our process.

Mark Vandegrift
Very good. Well, you touched on the four legs of a chair. And I think the way we look at it is legal, operations, sales and marketing, right? So let's ask some questions specific to each one of those. From a legal aspect, franchising is heavily regulated versus other business expansion methods. Like we talked about before, dealers or distributors or corporate locations.

Mark Vandegrift
Why is that? What makes it so heavily regulated?

Steve Vandegrift
And many people do feel that way, that it's very legalistic. In fact, there's well-meaning business attorneys who recommended to their client that they do a license instead of a franchise. And then they come to us because either a state has contacted them and asked why they're selling illegal franchises in the state, et cetera. Because in franchising, the FTC franchise rule spells out three key elements. And if you meet all three key elements, you can put in your agreement 500 times that this agreement is not construed to be a franchise. But if the relationship says it's a franchise as we like to say the FTC says if it looks taste and smells like a duck, it's a duck. And so there's the required, the trademark element, which is i'm going to license you the right to use the name McDonald's, you're going to have a separate LLC or corporation, but you DBA doing business as McDonald's. A second is significant control or assistance. If you're going to mandate certain menu items, in the case of a restaurant, suppliers that they have to purchase from, if you're going to provide training which is considered assistance, that too meets one of the elements. And the final is the required payment element. If a licensee/franchisee is going to pay a fee of $500 or more either prior to opening or during the first six months of operation that meets a required payment element and so ultimately franchising believe it or not is a much safer expansion method than a dealership distributorship license program because those programs can fall under various states business opportunity laws. There are 28 states in the country that have business opportunity laws and if you're considered to be a business opportunity there's filing requirements. Some states require you post a bond, a letter of credit, and so ultimately you almost have to engage your attorney if you're going to expand nationwide to investigate every one of those states business opportunity laws and you very well could end up with 28 different agreements. Franchising is regulated first of all by the Federal Trade Commission under the FTC franchise rule. If not for that rule, franchising would be considered a security and subject to the SEC. So the FTC did a wonderful thing when they carved out this rule and it basically mandates that every franchisor prepare an FTC compliant franchise disclosure document. They have to address certain items in the 23 item disclosure. There's just certain requirements that every franchisor must follow and once you follow that rule, work with a qualified franchise attorney, you're immediately able to begin offering and granting franchises in anywhere from 31 to 35 states. It varies based on the status of your if your trademark. Has it been federally protected, is it registered in a single state, so there are some nuances to that. But ultimately it almost provides immediate accessibility to most of the United States without any additional steps. Now there's 14 states in the country, we call them franchise registration states. There's an additional step that every franchisor has to take which is to formally apply to offer and grant franchises in their state. They have some nuances above and beyond. Every state follows the FTC franchise rule. It might be related to your right to terminate a franchise if they go bankrupt as an example. So our attorneys actually draft addenda for each of those states to the FDD, the 23rd Addend Disclosure, and the franchise agreement so that when they apply, we've already addressed any question that a state has. And so there's never been a client that failed to get registered, but there is that additional step. At that point, you're theoretically ready to go in all 50 states. So it by and large is truly a safer from a legal perspective method of expansion than trying to kind of shape your offering into that dealer model, which there are some wonderful dealer models out there that they are totally by the book, totally legal, distributorships, et cetera. There's even licenses, but licensing works best just to share this with your audience for a product. You just simply want to license others to sell it. So I always use Toro mowers. You have authorized Toro dealers, and those are truly dealerships. The company itself cannot control their daily operation. They can only provide advice, assistance, support with whatever that product is. So they could train technicians how to operate that product as an example. So those work great in some situations. But if you're a business and you are franchising your entire system of operation or you want to license that, majority of time, it's going to be a franchise.

Mark Vandegrift
Good. Well, from an operations standpoint, then you work with a lot of businesses that have never operationalized or systematized their operations. Do you find this is the most typical challenge for organizations that you engage? Or is it just the most voluminous? In other words, maybe it's not necessarily difficult, but it's a bit tedious. What, what, does the operations play out in that framework?

Steve Vandegrift
Yes and it's so important when a company begins the development process we have to have a very good sense and understanding that they do have their system dialed in. What's typically lacking is the documentation because they've been expanding orally and they can handle it that way, but when you franchise this is why clients love the fact that we actually draft their franchise operations and policy manual using information that we obviously request from them. We have a questionnaire that we go through for each section of the manual etc. But at the end of the day they're the first to admit we don't know how to write a manual. We're not sure what's supposed to be included. Oftentimes when we have already existing franchisees ask us to redo their operations manual, we'll always ask them to send us their FDD and they're always happy to but their question is but why do you need to review the FDD and we explain that franchise attorneys will cross-reference the operations manual 65 times in the documents so that the agreement's only 60 pages, not 600 pages. And then we'll go to their manual. And typically, 64 out of 65 and sometimes 65 out of 65 mentions, there's absolutely nothing in the manual. So our involvement and understanding of what's actually supposed to be there makes our clients feel very comfortable. They're obviously reviewing, editing, commenting on everything that we produce. But we take the heavy lift because we believe our clients, they're experts in their industry. They just need the support of people that are experts in franchising. Tying those two together, we create wonderful franchise operations and opportunities.

Mark Vandegrift
Good. Well, I'll give you a break here for a second and I'll talk about the marketing stool of the chair. And it's funny because most franchise concepts have not actually ever thought of marketing as a system. But when you really look at it, when a business is put into a marketplace, you have a lot of questions to ask around marketing. Number one, does anybody know the brand? We just have happened to have this happen recently. A town just slightly north of here has a concept and they've been around, I think, 60 years. Is that right, Steve?

Steve Vandegrift
It's very close, yes.

Mark Vandegrift
Yeah. And just down here south in Canton, Ohio, ask, hey, has anyone ever heard of this particular business? And they were all, nope, never heard of it. And yet we're only, you know, 20 minutes, maybe in some cases, half hour south here and no one knew the brand. And we said, well, what if you take this concept and put it in Oklahoma city or you put it in Orlando, Florida, who's going to know about the brand? And when talking to them about their marketing system, they said, well, we've never had to market because we've been here for so long. Well, that's great for those locations, but it doesn't do so well when you're going into a new market, because now you're introducing a new brand that people have never heard of. They don't know what your difference is, ala positioning, and they have no clue why they would buy you as a concept versus any of the other competition. So that's where we start with the marketing to help them understand you're developing a brand now that you want to probably expand nationwide, if not globally someday. And it's so critical to get the brand established, develop brand assets and then develop a marketing system so that when the franchisee opens a location, they can answer the question, how am I going to create a customer? And when that system's already in place, they have all the confidence in the world and that makes your franchise company more attractive. So there's marketing there and then there's a second side to marketing and that is how are you even going to attract prospective franchisees? So we have a marketing program that also understands this is how we go out and we reach people that are interested in opening a franchise. And that attraction then we call lead generation. And we hand that off to either the company's sales team that is handling franchising, or in some cases, Steve, you've outsourced that part for some franchise companies.

Steve Vandegrift
Number of our client.

Mark Vandegrift
And you have a whole team available that can handle doing handling or vetting franchise leads, franchise prospects, walking them through the process and ultimately handing them on a silver platter over to the franchisor to say, here you go. They're ready to buy, do your thing and you help them get through that last leg of the process.

Steve Vandegrift
That's right.

Mark Vandegrift
So what we call local store marketing or marketing to the consumer. And then we also have then the franchise marketing. Steve, I mentioned sales there. That's our fourth leg to the chair. Why don't you go ahead and talk about this sales system and what does that look like for a franchisor when they're considering setting up a franchise company?

Steve Vandegrift
That's kind of interesting. Our first couple years in consulting, we're producing beautiful FDDs, operations manual, marketing materials, et cetera, and doing just a little bit on the sales front, giving them application, a franchise application, et cetera. And we quickly realized that our clients needed a little bit more. They might have a team that are great salespeople, but they never sold a franchise. So we quickly added an additional service way back when which is developing their entire franchise sales system. And again, everything's a system in franchising and it should be in any business, whether it's a franchise or not, so critical to being able to duplicate what works. But ultimately, we will put together, ultimately they'll end up, I should start with a very comprehensive franchise sales development manual. It's going to outline from point of contact by prospective franchisee, clear to signing the franchise agreement. It includes scripting, frequently asked questions. We actually develop their franchise sales action plan. So what steps, 26 steps that we're gonna walk a prospective franchisee through. We draft campaign emails for their CRM system. We can even help them set up a franchise CRM system. There's a lot of great providers. I can remember when we started FranSource, there were a couple clients that spent upwards of $150,000 to develop their own CRM system. Today, you can get that off the shelf, white labeled for your business for a couple thousand dollars and a few hundred dollars a month. And in our minds, it takes the place of a full-time administrative assistant. So that franchise sales piece, we also do all the marketing materials. So the e-brochures, the franchise section on our clients website that promotes the franchise, the FDD request forms and preliminary consideration forms and franchise applications. So we really get very extensively involved in their franchise sales process because we understand what it takes to successfully walk a prospective franchisee through the process and come out the other end with a highly qualified franchise. In fact, we preach to our clients throughout this process, the most important aspect of successful franchise sales, there's really three qualify, qualify, and qualify. If you do that you're going to have a wonderful franchise network and that's the other great aspect of franchising. You certainly can't discriminate against anyone when it comes to franchising but you have a right to accept or deny any franchisee. You might have three people looking at the same territory and clients will ask do I have to sell it to Bill who came in first but Mary she's number three she's going to be a wow. Awesome franchisee. They have the right to determine which of those individuals they'd like to bring into their franchise network. So that franchise sales piece we love when clients call us a month after they've launched. We're following the entire process. It's working out extremely well. We're getting responses. We're getting qualified leads in. That's what we love to hear.

Mark Vandegrift
Fantastic. Well, this was a lot of information and we have some exciting news. If you want to hear more from Steve, then get ready because FranSource and Innis Maggiore will be starting a new podcast focused on franchising. So don't worry, brand shorthand's not going anywhere. You'll still get Lorraine every week, but we'll be adding Steve to the mix in a separate podcast yet to be named and yet to be published, but we'll get there. So as we wrap today's episode, thank you, Steve, for joining us as our guest. And thank you to our listeners, as always, for joining the Brand Shorthand podcast. And if you haven't liked, shared, subscribed, subscribed, and subscribed, please do. And until next time, have an amazing day.