103: Four Motivations to Choose a Franchise with Stacey Marmolejo

14
Apr

Stacey Marmolejo is the Principal Owner of the Franchise Prep Academy, where she focuses on teaching military veterans how to explore franchise ownership as a potential post-service career. We talk about the skills that define a great franchise owner, how to find the right franchise to invest in, and the biggest challenges to growing a franchise business.

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Four Motivations to Choose a Franchise with Stacey Marmolejo

Our guest is Stacey Marmolejo, the principal owner of the Franchise Prep Academy. And she focuses on teaching military veterans on how to explore franchise ownership as a potential post-service career. Stacey, welcome to the show.

Thank you so much for having me here.

Oh, it’s awesome to have you here on the show. And we always talk about the backstory of each of our listeners. And I’m very curious about yours. How does someone become a franchise coach and start an academy teaching about franchises?

Well, I have wanted to be an entrepreneur since I was in college, which is obviously a long time ago. But I didn’t have the courage, the guts, whatever you want to call it, the money, whatever. So, I took the more secure path of going through corporate America. I spent 25 years climbing the corporate ladder, and then I never lost that desire to be an entrepreneur. So, at the peak of my career, I resigned my position and I bought my first franchise, which I kept for 16 years. And I really think of franchise as a great first business for an entrepreneur, because you can learn so much while still having a safety net.

I really think of a franchise as a great first business for an entrepreneur because you can learn so much while still having a safety net. Click To Tweet

So I did that for 16 years. I sold it last year. And while I was owning the franchise, I sat on the franchisee advisory board. And so, I coached a lot of the new franchisees that came in on how to be successful. So, after I sold my franchise, I thought I was going to retire. I walked around for a couple of days bored out of my mind and decided that I needed to get back into business. And friends said, well, you’ve been coaching people on how to buy a franchise for so long and how to be successful. Why don’t you go into that field? That’s how I ended up as a franchise coach.

That’s wonderful. So, what did you like about being a franchisee and what did you don’t like about being a franchisee?

I think, and some of this I think is true for everybody that’s a franchisee. When you first get started, you love it because there’s so much support and so much help. You know, the idea of a franchise is they give you a proven business model, and your job is to execute. And you don’t have to worry so much about marketing and lead generation and accounting and all that bookkeeping on the back end, because most franchises have that support for you. It’s not that they won’t do your books for you, but they have it set up in almost a plug and play system so you can just put data into the system.

So, it’s a great first foray into owning your own business because then you can learn all those elements of owning a business that you may not have known going in. One of the challenges as people own franchises for longer, they start thinking, I could do it better, or this is what’s wrong with our model, and I want to do it differently in my location. And most franchisors do not give you that flexibility to deviate from the original plan. They welcome, most of them welcome if you’ve got some ideas on how to make it better to share those ideas and then they’ll evaluate them, but you can’t just go off on your own and do whatever you think would be better.

Yeah, no, I can totally relate to that. When I moved here 10 years ago, first I tried to build my own business here, my own investment banking business. And then I realized after a year that business is done so differently here in America from Europe. I didn’t have a clue how to communicate, how to get customers here. So, I became a franchisee of a peer group facilitation company called Vistage.

Oh, yes. I know Vistage well.

That was my exact intention that these guys are going to teach me how to get clients, how to market here, how to communicate, which they did. So it was very, very useful from that regard. So, what are the skills of an ideal franchisee who should want to become a franchisee in the first place?

So, I think first and foremost, it’s somebody who is open-minded to executing flawlessly somebody else’s plan. So that’s why I enjoy working with the military vets so much, is because the skills that they learn in the military are so strongly transferable to the franchise industry. It’s that take the blueprint that you’re given, execute to perfection, have each other’s backs, which the franchise owners are sort of like the squadron or the platoon, you know, they’re your colleagues that you can turn to to have your back.

And then just the mindset of doing what it takes to get it done, being very goal-oriented and setting yourself up for success and chasing that brass ring. It’s definitely not a career for people who want to leave work at work. That whole work-life balance, I never had it in corporate America, but I also didn’t have it in my franchise. It was like my world was built around my franchise, but I was okay with that because I owned a lifestyle franchise.

I owned a music school and my son took music lessons, right? So, he was a big musician. So, I didn’t want there to be a separation. But those who definitely want to be able to go to work for eight hours and then leave it at work and go do something else with no thought about work till the next day, a franchise is, actually, I would say any business ownership would not be for that mindset.

So, is it fair to say that franchising is for the non-visionary entrepreneur?

No, I think it’s, that’s a really, really good question. Because if you think about maybe a long-term plan as an example, I would say you could buy a franchise to learn all the skill sets that you don’t know going in. and then you have a choice of either selling, flipping that franchise, and starting something on your own. Obviously, you can’t do the same thing within the same territory, because you’ll have some non-competes, but you will learn how to run a business.

If you’re enjoying it, then you can add multiple locations, and then you’re going to go from perhaps owner-operator of managing one location to hiring two general managers, and now your job has just changed from that owner-operator to learning how to motivate a team of two or a team of three as you expand and expand. The other option is to take the profits that you’re earning on your franchise and buy a complementary franchise. I doubt you’d want to buy two in the same industry because then you’re competing with yourself.

But let’s say that you buy an oil change franchise and then you also buy a car wash franchise and you send them that side by side, somebody comes in to have their oil changed and you can give them a free car wash if they buy a certain package. So that’s why I say it doesn’t restrict visionary, it just reframes how you consider visionary.

That’s very helpful to look at this way. So how do I know if I’m coming out of corporate America and I turn to you, do you have a blueprint to help people figure out what kind of franchise would fit their personality and their needs?

Yes, so that’s where we start. A lot of people who think they want to buy a franchise like I did, because I didn’t do it the right way. I said, “Oh, my son wants to be in music performance and there’s not a franchise looking here,” here’s one and I’ll buy this. But that’s not necessarily the best way I got lucky. So, what we do a motivation assessment and a core competency assessment. And then we do a net worth statement. So that kind of gives us the ground to say, what kind of business might I enjoy running that I’d be successful running, and that I can afford to run. data, the how-to, the restrictions, the licenses, the franchise disclosure document, regulatory. There we go.

The regulatory documents. Because even though you can easily read a regulatory document, sometimes what it says and what it means can be two different things. And so, we go into how to consider those regulatory items. As an example, when you buy a franchise, there’s generally a predetermined amount of time. So, it might be five years, it might be 10 years, it might be 20 years. And on the surface, it’s like, I understand the difference between five and 10 years, but do you understand the ramifications of that choice?

So, for example, if you’ve never owned a franchise and you buy a franchise that has a 20-year commitment and three years in you hate it, well, now you’re going to have to figure out a way to sell it or suffer through it. On the other hand, if you’re saying, well, I’m just going to dip my toe in the water, so I’m going to look for a franchise that only has a five-year commitment, well, they can’t change anything in their contract with you for the length of your contract.

So, let’s say when you buy in, as I did when it was a brand new franchise, the royalty rate was very low at five percent. They couldn’t change that until the end of my agreement. But then at the end of my agreement, it went up three points. Everyone who bought between, like when I bought in at five points and until it was eight points, they came in at 6%, 7%, 8%. But I was grandfathered in. So, if you’re thinking of it that way, then whatever you buy into is going to be the rules you live by for the length of the agreement.

Okay, I got it. So, what I understand is that obviously the financial commitment I can make is important. The time commitment I’m willing to make is important. What else is important? You said that whatever you like, I mean, how do I know whether I like a certain industry? How do people decide that?

Great question. And that’s why we like to start with the motivator assessment. Let’s say that you like to work alone. Well, that’s going to discount any franchises where you’re going to have 30 employees, say. Let’s say that you hate to work alone. Then that’s going to discount those franchises that you buy a truck and you go to somebody’s house and fix their HVAC, right? So that’s one thing is what motivates you? How do you enjoy spending your day? Do you like to be hands-on? Do you have a skill of a carpentry or electrician or plumber, things like that, that’s going to narrow down.

But then do you want to do that as the, do you want your business to be that sole thing? Or would you like to come in and buy some sort of home handyman business that perhaps you partner with a friend who you’re a plumber and they’re an electrician. Now you’re going to look at a different type of franchise. So I think that’s why it’s so important to look at what your goals are. So we say there are four motivators for somebody to buy their business. One is money, one is freedom, one is flexibility. Money, freedom, flexibility, fulfillment.

So there are people who want to own a business because they want to make as much money as they can. That’s going to be a different selection process than somebody who wants flexibility and freedom in their timeline so that they can, with no problem, go to their child’s soccer game at three o’clock in the afternoon. Now, most people have some element of all four, but it’s really important to know which is your primary driver, and that will also help reduce. Very few times do I say you should pick an industry because you like something.

So just because you like pets doesn’t mean you should get into the pet industry. You may discover in a, you buy a pet food store and you’re going to have it where people can bring in their animals. You’re all excited to play with all these little different animals every day and you discover that what you do most of the day is stock shelves and keep books, you’re going to be very disappointed. So, the business that you’re buying may not be the business that it looks like on the front.

Okay, so you are a franchise coach but you also mentioned that it’s very distinct from being a franchise consultant. So, what is the difference between a consultant and a coach?

So, a good analogy would be the difference between a college professor and a headhunter. So, let’s say you decide you want to be in marketing as a career and you go to college to get a marketing degree. When you step onto that campus, you may know something about marketing, but you don’t really know what you don’t know. I, as a coach, teach you what you need to know, but I don’t sell franchises. So, you pay me for the knowledge that I impart on you. A franchise consultant is the headhunter. They help you find the match of the franchise that you want to buy and then they are paid a commission by the franchisor.

Which by the way, we’re throwing these terms around. Let me just clarify. A franchisor is the one, the original or existing business that licenses or sells somebody else the rights to use their name and business model. A franchisee is the one who buys the rights and is on the front line. And then we also hear the word franchise. And the franchise is actually the brand itself. So for people who are sitting here, like everybody should know that. And that’s not- Buy a franchise, buy a certain brand.

I buy a franchise from McDonald’s and I buy the right to run a McDonald’s restaurant. Got it. So, let’s talk about the franchisor for a moment. So, a lot of people are talking about, okay, one way to grow my business is to franchise it. Because a franchisor, let’s say I have an HVAC business, I turn myself into a franchisor because I don’t want to open all those branches myself. I want those to be run by people that I don’t have to babysit, who are entrepreneurial, and they’re going to take care of it so I don’t have to have the headache of managing so many people in remote locations. So how is the business going to transform if I franchise my HR business, is it still the same thing or it has metamorphosed into a different type of business?

Great question. It actually does metamorphose into a different type of business. Your first thing is you’re going to have to have a proof of concept. You’re going to want to open two or three locations, and that way you can prove that what you’ve done in one location is replicable. That’s going to be your first step. Then you’re going to have to consider how are you going to differentiate your HVAC business from the HVAC businesses that already exist. Because why would somebody want to buy an HVAC business from you and pay you royalties to use your brand and your system if you do the exact same thing as the guy down the street.

Your first thing is you're going to have to have a proof of concept. You're going to want to open two or three locations, and that way you can prove that what you've done in one location is replicable. Click To Tweet

So, you need some sort of differentiation to make it an interesting and appealing business proposition for a potential franchisee. Then the next thing is, how transferable is the knowledge that’s required to run the business? So I’m not saying that you have to only sell to people who know how to do HVAC, because you don’t. Somebody could actually hire experts or technicians that know how to do HVAC. But if you’re going to require your franchisees to train people or license people in becoming an HVAC technician, they aren’t going to come necessarily to the table with that expertise. So how are you going to empower them to share that knowledge?

Another one is, is your business adaptable to different markets? You know, what works in the Southern United States may not work in the Northern United States or the East to the West. I remember when I was younger, I lived in Houston and there was a restaurant I absolutely loved called the Black Eyed Pea. Well, it was all Southern cooking. And when I went to Minnesota, there was no Black Eyed Pea because nobody in the North, I shouldn’t say nobody, most people in the North are not interested in eating grits. So, it has to be adaptable to different regions. You have to document your systems.

Your business has to be adaptable to different markets. Click To Tweet

Now, obviously everybody documents systems, but we are talking document, document, document. You’re going to need to document processes, procedures, expectations, how to do the reporting, what reporting you’re expecting from your franchisees, how often, how is that delivered to you? Where do leads come from? How much do you do lead generation versus the expectation that the franchisee is going to find their own leads. All of that has to be documented and accessible to the franchisees. And of course, then it comes in for the money.

Is it affordable for somebody to buy? Because the more expensive your franchise is, the smaller perhaps your pool is going to be. Now, in some instances, it also means it’s easier to find and identify people. So, let’s say you’re going to do, there’s a chiropractic franchise, right? And you want to open that. Well, you’re probably going to approach existing chiropractors and explain to them why being a part of your franchise network would be more beneficial than them doing it on their own.

Or maybe you’re going to go to chiropractic colleges and get people right when they’re coming out before they start their own practice. So that, like I said, that might be a more expensive franchise, but it also is a more defined target. So, and they, I would think, I don’t really know for a fact, but I would think somebody who’s getting a degree in chiropractic might have a little more money to spend to buy a franchise than somebody who’s opening a different type of franchise, say, a pool cleaner or a dog pooper scooper thing.

And then there’s the question of what is the expected return on investment to the franchisee. So really, when you’re thinking about how you would price your offering, think about what it costs you to run your business, and your franchisees are going to want slash expect somewhere in the 10, 15, 20 percent profit margin. So that is going to mean that they’re going to pay you your royalties, they’re going to pay all of their expenses, and based on your model, they’re still going to make somewhere between 10 and 20 percent profit.

So that leads neatly into my next question, which I always had about franchises, which is this. So, when you have a franchise business, it’s basically a bootstrap business. Of course, you have to do your upfront investment. You buy the franchisee.

Are you talking as the franchisor or the franchisee?

I’m talking about the franchisee’s perspective. The franchisee, essentially, it’s not a business that’s going to be financed from the outside other than the initial amount, is my understanding. So, it’s a bootstrap business. So, a bootstrap business, the growth of it depends on the cash flow that that business generates. That’s the fuel for the growth. Now, I was always wondering whether, is there a limit to the growth of a franchisee because of the royalties?

A bootstrap business, the growth of it depends on the cash flow that that business generates. That's the fuel for the growth. Click To Tweet

Because it essentially dampens the profit that can be recycled into growth. And I always thought that some franchises are kind of condemned to eternal hard labor, because they’re never going to be able to break through to the point where they create the business, which they can really monetize and sell. And maybe that’s just a head trash. What is your thought about it?

I think that’s one of the myths of franchising, to be honest. Couple stories. So, when I bought my first franchise, I said, what I’m going to do is I’m going to fully finance the first location. I’m going to prove to my bank, and I banked with a national bank, I’m going to prove to my bank that I can do this. So, when I want to open my second location, they’ll be happy to give me a loan. That’s what I did.

Then I went to this national bank and I said, look how successful I’ve been in 18 months, we’re profitable and I’m generating more profit than I anticipated and I want to open the second location, but I need some more money and blah, blah, blah for a build out, yada, yada. And they’re like, oh no, we don’t see this as an expansion of your business, we see this as a second business.

So, you’re going to need to put more skin in the game. And I was like, but I’ve got all this over here. So, what I teach in my course is even if you have the money, don’t spend all your own money to open. Bring 30%, 40% to the table and finance the rest. Because then you’re going to have whatever that was you set aside, you can use that for working capital if, in fact, you don’t grow as quickly as your optimistic entrepreneurial plan would suggest, which happens a lot, because we’re all optimists if we’re entrepreneurs, right?

But doesn’t that also mean that you are not able to generate enough profit to make that down payment for the next location?

So, you’re growing slowly, right? And then another option though, is when you start, let’s say you’re going to invest $100,000 in a franchise, right? You have a few options. Most people go, what franchise can I afford for $100,000? And they go for the biggest one. Well, what if instead of thinking about that, you go, I’m going to buy 10 franchises at $10,000 each. And then I’m going to figure out over the course of five years which ones are making me a lot of money and which ones aren’t making much.

And then I’m going to flip those ones that aren’t making much so that I can grow the ones that are making a lot of money. So that’s one way. Another way is, and this happens often in franchising, is you’ll develop an investment group and you can invest in franchises that you’re not an owner operator in. So, you’re putting strong managers in each of those locations so that you can continue to grow. So, you know, there are some people who buy 25, 30 locations they’re not bootstrapping.

Yeah, got it. That’s fascinating. So, there are lots of ways to skin a franchise and lots of ways to skin a cat.

Yes

And if you’d like to figure out what is the right, I’m talking to the listeners now, the right kind of opportunity for you, you are looking to become an entrepreneur, but you want to have a proven system, you don’t want to figure it out on your own, on your own time, you want a fast-learning curve, then how can these listeners reach out to you? Where can they find you? And what, you know, what is there anything resource that you can put at their disposal?

I would love to. So, I am going to offer two free eBooks to your listeners so they can go to franchiseprepacademy.com/managementblueprint. So, it’s my business name and your business name. And I’ll have a free ebook for those who want to create a franchise out of their business to become a franchisor. And I’ll also have a free ebook for those who want to think about buying a franchise and don’t know where to get started.

That’s fantastic. So if someone wants to become a franchisor, can you also coach them? Can you help them with that?

I am not qualified to do that, but I can introduce you to people who are qualified to do that for sure.

That’s fantastic.

I just have enough knowledge there to be dangerous.

No, it’s great. I mean, you catalyzed some great thoughts and ideas and you picked my curiosity as well. So, I’m going to definitely download those books. So, Stacy Marmolejo, the principal owner of the Franchise Prep Academy. Thank you very much for coming on the show. You shared some fantastic information, the best I’ve heard of franchising. And for those of you listening to the show, if you enjoyed this, definitely do go and check out Stacy’s resources. They’re going to be in the show notes. So, if you didn’t write them down, you can find it there. And stay tuned next week, because I’ll have another exciting entrepreneur coming on the show. Thank you, Stacey.

Steve, thank you so much and also thank you for writing the Pinnacle book. I’m thoroughly enjoying it.

Thanks for the plug, Stacey. Have a great day.

You do the same. Thanks, Steve.

 

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