The Ins and Outs of Franchising

>> Dr. Cheryl Noll: At this time I would like to
introduce Dr. Marko Grunhagen, who is the
Lumpkin distinguished professor of entrepreneurship.
He is responsible for coordinating the events of
this week in support of Global Entrepreneurship Week.
Dr. Grunhagen will introduce this evening's panel presenters.
[applause]
>> Dr. Marko Grunhagen: Thank you, Dr. Noll.
Good evening everybody.
As I was just introduced, my name is Dr. Marko Grunhagen.
I'm the Lumpkin Distinguished Professor of entrepreneurship
here in the School of Business at EIU,
and your host for the evening.
Tonight's event is held during Global Entrepreneurship Week,
a globally designated week of celebration of the
entrepreneurial spirit and we're very proud to host two Hallmark
events for the second year here in the School of Business during
this special week.
It allows us to showcase the expertise
and the contributions that the study of business in general
and of entrepreneurial ventures in particular contributes
to the local, the national and even the global economy.
This is the second year that we're operating our minor
in entrepreneurship--a campus-wide minor housed in
the school of business--and we're very encouraged by over
40 students from across the EIU campus who have already
chosen entrepreneurship as their minor concentration.
The first of this year's events was held last night in the same
auditorium and focused on green jobs in rural Illinois.
Tonight's event is about franchising which has become
one of the preeminent engines of growth not only for the global
economy, but it has become a Hallmark of the US economy and
it remains one of the mainstays of local rural economy.
With the ubiquitous presence of franchise fast food restaurants,
hotels, car repair garages and more recently of
franchise laundromats and even funeral homes.
In short, franchising is with us for the long haul and it is
becoming increasingly a part of economies across the globe.
And I wanted to show you a slide from a recent article in the
journal of retailing that shows a comparison of the impact of
franchising across different countries around the globe and
the first line here is the United States were franchising
accounts for over 40 percent of the retailing sector for $2.1
trillion of our GDP, employs 18 million people and accounts for
almost a million outlets through about 3000 franchise systems.
We also have with us tonight the president or the chair
of the local school chapter in SCORE.
He is involved in providing free and confidential counseling for
business, for local businesses and there are handouts that
we're going to place somewhere at the exits
for attendees to grab.
Academic research on franchising goes back for over four decades
and increasingly the entrepreneurial components of
franchising have received attention both in academia
and in industry.
It's no secret that the founding franchiser such as Ray Kroc or
Dave Thomas were entrepreneurs through and through.
Similarly, many franchisees show entrepreneurial traits as they
grow their businesses, come up with innovative new ideas such
as Subway's $5 footlong, which was the creation of
a Florida franchisee's despite the safety net provided by the
franchise system behind them.
And finally, many franchise systems' franchisees fid areas
that remain completely unregulated by the system such
as HR incentive systems and advancement opportunities
despite of the many regulations inherent of franchise systems.
We have here with us tonight a panel of five experts
who are going to offer their perspectives
of franchising from a variety of vantage points.
The idea of the panel is to provide insights into
franchising from the perspective of the franchiser, the company
behind the system if you will, the franchisee,
the owner of individual units and players that become part
of the equation throughout the life of a franchise.
These are in the form of a regulatory agency, or in the
form of legal representation when such a party is needed.
Hence, we have with us tonight to represent these angles
Mr. William Guzik, the executive vice president
and CFO of Midas International.
We have Mrs. Cassandra Karimi, the assistant attorney general
for the franchise bureau of the state of Illinois;
Mr. Kevin Traub, franchisee with Dairy Queen International from
Jerseyville, Illinois; Mrs. Doris Carter, franchise attorney
with Carter & Tani Attorneys at Law from Wheaton, Illinois;
and Mr. John Inyart, our esteemed mayor of Charleston,
and also a franchisee of Midas International.
We also brought in the moderator, one of my valued
franchise colleagues, Dr. Steve Michael from
the University of Illinois.
Steve and I are part of the same tight-knit circle of franchise
scholars and our friendship goes back a number of years.
Interestingly, every time we hang out we seem to end up in
some bar in some city somewhere around the globe
from Steve's favorite Indian restaurants to a pub in London
to most recently a club behind Boston's Fenway Park.
Steve is one of the most recognized academics in the
field of franchising research.
He received his PhD in Business Economics from Harvard, is
professor of management at the University of Illinois,
an associate editor of the journal of management
and I'm excited to have him here with us tonight
as our moderator for this panel--Steve.
>> Dr. Steven Michael: Thank you very much.
Good evening.
Let's try that again-- Good evening.
[audience responds].
Good to hear you, glad you're out there.
We were wondering for a minute up here.
Glad you came, happy entrepreneurship week to
each and every one of you.
Thank you Miss Provost, Madame Chair.
Thank you very much to the Lumpkin family
and the hospitality of Eastern Illinois.
I'm glad to be here.
Most of all I want to thank in advance--and we'll thank them
also later for their time and talent of our amazing all-star
panel here to my left.
Let's thank them in advance, shall we?
[applause].
A couple of ground rules for conversation and then we'll get
to the meat of things or, as they say, we'll get to the beef.
We'd like to encourage you to ask questions,
we'd like to encourage you to ask questions, however,
with legible handwriting on index cards
and those will come forward.
By the way, I assume that when someone takes your index card
you'll be offered another one should you be the typical
inquisitive student who has multiple questions.
We do ask that you give, as we will ask ask a number of
questions we want each of our respondents to have their turn
with the question, and if for some reason you have to excuse
yourself, as students sometimes do, please be sure to let all of
our [unclear dialogue] before you leave--in between questions
is what I'm saying, and not in between speakers.
That's a nice courtesy if you can do so,
if your schedule permits.
A couple of remarks just about franchising.
Well generally franchising is without a doubt one of the
fastest growing industrial organizational forms present in
the global economy today--there are over
a million franchisees worldwide at a minimum.
Franchising is an organizational form.
That is to say it's a way of doing business.
Some might use the term business model as a way it
can be adapted across multiple and distinct industry sectors.
I dare say that every one of you in this room, if you're students
like my students in Champaign that narrate a week
has gone by without some visit to a franchise operation,
perhaps a restaurant-- perhaps you had a Blizzard.
If you're visiting an auto repair shop on a weekly basis,
it isn't a Midas...
That's the one joke I have.
[audience laughter].
But it might be one of its competitors.
Franchising is also usefully thought of as offering from the
developer of a person with a good idea in the service sector,
offering two things.
Offering a brand name and a production technology.
Now since you're students, you've heard the term production
technology before because you've all studied economics,
but I point out to you that's a fancy way perhaps of saying
a blueprint, a design, an operating manual,
a way to get the work done.
Dairy Queen was an innovator.
When ice cream was first developed it was served
typically at about five degrees fahrenheit,
and it was hard ice cream.
However, the founders of Dairy Queen thought that
it was tastier to serve as it came straight out of the
mixing machine, i.e. about 20 degrees fahrenheit.
They had to develop some technology to do that.
Now there's a technology in the sense of science there,
but there's also a science to learning to operate a
restaurant at the volumes that it has to operate at to be
a successful franchise, say a McDonald's or Dairy Queen.
There's a technology to running a repair shop for fixing cars,
so behind that is a technology of how to do business and in
front of that of course is this familiar trademark that we all
know so well that we from the highways
that we see in the downtowns.
That's a good way, I find, to think about franchising,
the way I like to introduce it to people.
We have with us today a distinguished panel,
and rather than standing and adding any further remarks,
let me just ask them perhaps the most important question.
Each of you as students are seeking to find your place
in the world--I'd like to ask each of our panelists
how they found their place in the franchising world.
How did you get to the place you are now?
How did you become a business owner, a franchisee,
a counselor to franchisees, an attorney?
Perhaps we can start from left to right,
so if I could start with Kevin...sorry.
>> Mr. Kevin Traub: Well, I got started in 1987,
bought the Dairy Queen from a gentleman that had bought it
from my dad in 1982 and actually I never really aspired
to be a Dairy Queen operator.
I grew up in the Dairy Queen business and felt as if there
was other things out there besides the family business
and I went to Lake Land College in Mattoon, took broadcasting
classes and was working at the radio station in Jerseyville,
Illinois and the past owner of the Dairy Queen came in
and asked if I wanted to get into the Dairy Queen business,
or back into the Dairy Queen business and after
some careful consideration and some discussions
with my dad who was still in the business at the time
but in another community, we decided to get into the
Dairy Queen business for two reasons.
One, I had a past background in Dairy Queen having grown up in
the business and two, it was a financial opportunity to
provide for my family in a better fashion.
I knew the business, I knew the community because
I was working there, live there, went to high school there.
So that's how I ended up, it was kind of a, actually it was my
backup plan of being in the Dairy Queen business.
Franchising with the Dairy Queen system has changed
drastically over the years.
It's not anything like it was when I got into the business in
that I went to the bank and had nothing more than a promise
and a handshake that I promised that I could do the job,
pay the bills and did it all on a handshake
and my dad's co-signature on the loan.
Today, you've got to have nearly 3/4 of a million in net assets
and $400,000 in liquid assets just to be considered to get
into the Dairy Queen business, so I don't think I could
get into the Dairy Queen business today the same way
that I did before.
It was kind of a--I don't want to call it a backdoor approach
to the franchise business, but something I didn't expect to
end up being involved with but nonetheless did and been
doing it for 24 years now so I guess we've been
doing something right for the duration,
so that's how I got there.
>> Mr. John Inyart: There's a common theme here
because my dad was involved a little bit
on my project as well.
In about 1980 when I graduated from high school,
I took off for Lake Land College and their automotive program
and felt that I wanted to be a technician,
an automotive technician.
I found that working on cars was a lot of work and getting dirty
was okay, but I also realized that I wanted to own my own
business but I felt like I wanted to stay in the field
that I knew.
I spent about seven years working in a couple of other
shops before I had the opportunity to buy the
franchise here in Charleston.
Backing up a little bit, I had grown up in a family
business--my dad was in the retail shoe business downtown
here in Charleston in a store that his dad had started in
1921, so there was business in our family for a long time
and I knew that, watched my dad work hard
and call his own shots for the most part and I knew
that business was probably somewhere in my master plan.
But in 1989 the franchise, the Midas franchise here in
Charleston had been open for about a year and a half,
and it was for sale and I convinced my dad to
loan me a little money so that I could make it look like I had
more money and went to the bank and borrowed a lot more money.
Nothing like the numbers that they talk about today, obviously
but I found myself self-employed with one employee
and still doing much of the automotive work myself.
Found that business grew and I added an employee each year for
about the next four years and 1996, on April Fools' Day
no less, I bought my second shop in Mattoon, so between the two
stores now what was once a two-man operation
is 22 full-time employees and a pretty large operation where we
probably see between the two stores close to 80 to 100
customers a day, so it's really been a good ride.
But as Traub indicated, it's a different business
than I got into as well.
When I was getting into the Midas business we were muffler
and brake, Midas Muffler and Brake, formerly Midas Muffler.
We were actually one of the first franchises in
the automotive business, in 1956 I believe we were founded,
and offering just a lifetime muffler.
So now we're a full-time automotive repair shop--
we do quick oil change service, we sell tires,
do diagnostic work, so it's a totally different business
very much like what's happened with your business.
It involves a lot more equipment, a lot more capital,
a lot more technical training and it's a challenge every day.
>> Mrs. Doris Carter: When I went to law school,
there were no courses on franchise law and I don't think
I ever heard the word franchise law in law school.
In fact, when I was a business student at U of I, I never heard
the word franchise either, back when I was there,
but I kind of fell into franchising after doing
something else for the first five years of my law practice.
I decided I wanted to go work for a corporation--
with my business background that was my interest,
and I just happened to get a job with a franchise company.
At that time I didn't really know what a franchisor was,
but the first few days, sitting down with the FTC rule
on franchising and trying to read it, but I was there for
five years, it was a great way to learn franchising.
Being in-house in the franchise company,
you're working with franchisees,
it was just a great learning ground.
That particular company was bought out five years later
and moved to California and one of the other attorneys on staff
and I started our practice in 1991 and decided to be a
franchise law firm, and we just celebrated our 20th anniversary.
I think it's a fascinating area of the law, and it's been
interesting and a great ride, and sometimes you just
kind of fall into things.
You don't necessarily learn them in school but you can
learn them on the job.
>> Mr. William Guzik: I grew up in a blue collar
family in urban Chicago--my father was an auto mechanic,
my mother was a home maker and I spent a lot of time
with my dad in the garage working on cars, at his
facilities working on cars, and coming to Midas actually
was coming full circle for me, back into automotive
which was something that I've always loved.
I graduated from DePaul University in 1982
and was fortunate enough to get a job with Coopers and Lybrand,
who's now part of PricewaterhouseCoopers,
as an auditor and I did that for 11 years, worked mostly
with retail clients, so when I decided to go into industry,
it was with a retailer at the time.
I became the CFO of a public retail chain, did that for a few
years and then decided to do a startup--me and a couple of
friends started a specialty grocery business in Chicago.
We ended up building I think 18 stores
over the course of 5 years.
Business did about a $100 million,
and that came completely out of the ground.
That was hiring the first employees, finding office space,
literally doing everything, so I have a lot of appreciation
having done that for what these guys do on a regular basis down
in a smaller business, but that business ultimately failed
and this was 1999, the internet was alive and going.
and just about anybody who had an idea could get financing
and having just gone through a failed startup I decided,
I got offers from companies that were in the internet business
and from Midas and because of my love for cars and my background
with cars, I was able to walk in and talk to the people
intelligently about their business, given my childhood.
I accepted the job with Midas and it's been
a wonderful experience.
It's my first franchise business,
but franchisees are customers, they pay our
salaries, and they're also very innovative.
They have the freedom to experiment.
You mentioned Dairy Queen--I know that in the case of
McDonald's, our CEO is the former president of McDonald's
and he has all kinds of stories about how most of the sandwiches
that are sold today were invented by franchisees.
And in our business, we take all the great ideas that franchisees
come up with, package them up and repeat them back out to our
franchisees, so it's really a very good way to do business.
>> Mrs. Cassandra Karimi: Well I too fell into franchising
sort of by accident, it wasn't really my plan
at all but here I am.
I graduated from law school, I went to work for a law firm for
several years and I enjoyed that, but I had a friend who
worked in the consumer fraud bureau of the attorney general's
office and she used to talk about all her cases and,
you know, she just made it sound so interesting
to get to talk to consumers on the phone and to help them
with any problems that they were having with the business
and all sorts of new issues every day.
She never knew what she was going to come in to deal with.
So I ended up applying for a job there and I worked in the
consumer fraud bureau for several years and then there was
an opening in our franchise bureau, and I hadn't really
given a lot of thought to the franchise bureau or what it
did--it was upstairs, I had no idea--but my boss came
and talked to me about it and she said it's very similar
to consumer fraud, where, you know, helping
folks make investment decisions beforehand and you're dealing
with problems that they encounter after the fact.
So I gave it a try and I have been splitting my time ever
since, both in the consumer fraud bureau
and in the franchise bureau and just really
enjoy what I get to do.
Still every day I have no idea what I'm going to come in to
face in my voicemail, in my emails--
it's an adventure every day.
I've enjoyed it a lot.
>> Dr. Michael: Thank you very much.
Let me ask a question, we'll start with the franchisees
and franchisors--the counselors of course are free to weigh in
as they see fit.
Franchising is a situation where you're operating under a shared
trademark--Dairy Queen operated under the big kiss, the golden
arches of McDonald's, at one time the giant sign at the
Holiday Inn, the big sign.
They're operating under a shared trademark, so I'm curious to
what--the Midas yellow and black sign as well--I'm curious to
what extent you feel dependent upon your fellow franchisees.
To what extent do you see yourself as part of a team, or
do you see them as competitors?
And in the same way, how do you manage,
how do you interact with your colleagues to try to make sure
that that brand name stays as valuable today,
or grows in value as businesses move forward together?
>> Mr. Inyart: Want me to start?
>> Dr. Traub: Yes.
[laughter]
>> Mr. Inyart: There were several questions
in there.
>> Dr. Michael: I'm trying to give you an
opportunity to pick your favorite and go for it.
>> Mr. Inyart: Very dependent upon the
trademark, very dependent upon the fellow franchisee.
I guess you could say we're probably as strong as our
weakest link in the chain, as in the business that we are in is
subject to scrutiny, it's subject to trust
from the consumer.
When that trust is violated, there are repercussions across
an entire system--Sears has found that, Midas has found that
over the years--and so you are absolutely at the mercy of
hoping that your fellow franchisees are doing as good
a job as you are, that they're honest with people,
that they're fair with people and you do have some protection
in that the company can help enforce that,
but still we're independent.
I mean we are independently owned, we're independently
managed, and unfortunately all aspects of involvement--some
people are passively involved, others are at the counter
every day and are, you know, writing the work orders
and seeing the customer and involved in that way.
So I would say that probably--
I'm partial to smaller towns and smaller operators,
but the one and two shop operators probably,
in most cases, are closer to what happens
in their shops every day.
But we have some very good large franchisees that manage
their systems well.
As far as communication amongst our franchisees,
we have a fairly solid franchise association.
I happen to be serving this year as the president of the
International Midas Dealers Association
and we just had a conference last week in Miami,
so we get together once a year,
we have seminars and discussions and we can socialize
and we can trade stories and we can share.
I don't ever see them as a competitor because traditionally
we are geographically separated, so I don't know that
that's really an issue.
I would sooner ask a fellow franchisee 500 miles away than
I would maybe lean on somebody in the SCORE chapter locally
because of the involvement that we have,
and I could probably find somebody with almost the
same problem that I have. you know, a few hundred miles away
that I can bounce that off of.
I have days when I think I'm having a bad day
and I'll call one of my friends in the big city
and let him tell me a couple of his stories
and suddenly I'm having a pretty good day, you know.
It is nice because our association allows for
a lot of interaction.
Midas is good about having events, advertising meetings
and things to get people together.
We have, franchisor has a newspaper they put out
and help publicize that from successes
from other franchisees, so there'e a lot to
learn from fellow franchisees, I would say.
Way more of an asset than a burden.
>> Mr. Traub: Fellow franchisees,
oh absolutely.
You know, I'm on an advertising committee in St. Louis
for the St. Louis DMA, a member of the Mid-state Store
Owners Association, which represents stores mainly in
central downstate Illinois but has associate members in
Missouri and Indiana as well, and the advertising committee
in St. Louis meets monthly and I live for those meetings.
I mean to tell you to be able to go to meetings
and talk to fellow franchisees is, to me, vital.
I mean, you've got to stay in contact with these guys because
I guarantee you that as much as it might seem like a love fest
between the franchisee and the franchisor,
it's not always that way I guarantee you.
As a matter of fact, Dairy Queen has a--I wouldn't call it a
rival association but in a sense it is.
It's a new organization that we're also a member of--it's
called DQOA, Dairy Queen Operators Association--
which fights for your rights as Dairy Queen operators.
There are issues that come up on a regular basis that involve the
corporate level and the store operators and they don't always
quite see them eye to eye, so there's a lot to being involved
with your fellow franchisees and making sure that you're
up to date and you know what's going on.
It's vitally important and no, they aren't competition,
other Dairy Queen operators.
You know, like you said the stores are protected by their
contract from allowing other Dairy Queens to open up right
across the street or in the same community.
There's territorial rights that are involved with your contract.
As far as the recognition of the logo, from what I understand the
Dairy Queen logo, next to the golden arches,
is the most recognizable symbol in marketing today.
In other words, if you saw the Dairy Queen logo, the lips,
without the word DQ or Dairy Queen on it,
you would instantly know what it means,
you would know that it's the Dairy Queen logo.
Same with McDonald's--if you see the golden arches,
you know it's a McDonald's.
So that signage, that protection, that security of
being under a franchise is vitally important and again,
you're right, we're only as good as our weakest link because
I'm sure everybody's been to a Dairy Queen or McDonald's
or some restaurant that wasn't operated very well
and you have a tendency to avoid that franchise or
that store at other communities, so it does carry over.
There's good and bad in that, but for the most part if the
franchisor is doing their part, they keep most of the stores
from bringing the rest of the system down.
So, yeah it's important to have that recognition,
that instant name recognition and the ability to,
the buying power that also comes along with
your franchise as well.
>> Mrs. Carter: I'd like to make one
comment on the legal side, talking about the
reliance on the brand.
If anybody, if any of you have looked at a franchise agreement,
they're pretty onerous and they're pretty one-sided
in favor of the franchisor.
There's certainly some room for fairness to the franchisee,
but as I tell when I'm representing prospective
franchisees I tell them you want, in a certain sense,
you want that agreement to be one-sided and to be
forceful because it's there to protect the brand.
You want the agreement to,
the franchisor to have the ability to protect the quality
of services that are provided, the quality of the products,
because that brand reflects on every franchisee in the system.
>> Mr. Guzik: I'd say that as the steward
of a brand, as the franchisor responsible for maintaining the
brand's equity and worth, having franchisees
who've invested their personal, in some cases,
entire life savings in their store ends up
making it easier for us to make sure that customers get
good experiences, are well taken care of and aren't cheated.
There are plenty of retailers out there who've been in the
news--somebody mentioned Sears earlier--that have done things
to consumers, at stores, and that reflects on the entire
organization and those were company operated because
the person who's running that store for Sears doesn't have a
personal investment in it, but I'm sure that John
will do everything he can to take care of his customers.
So we've got a collection of people that have their entire
net worth tied up in a business.
We're likely to get a better consumer experience
as a result of it.
Now for the franchisee, it's sort of a good and bad because
I've got [unclear dialogue] which is going to drive traffic,
otherwise wouldn't be there, but I am subject to
what the guy down the street or across the country is doing.
We had a case in California a couple of years ago where the
franchisees shops were mystery shopped by the Bureau of
Automotive Repair--California regulates everything
and they regulate automotive repair very tightly--
and they sold some services that weren't needed and
the Attorney General splashed his name all over the papers.
He was running for governor at the time and made a big deal out
of it, and ultimately business in that--he had 21 stores--
declined by 50 percent and other stores in that
California area also saw significant decline,
so one guy's innocent acts hurt the whole California market
and we ended up having to buy those stores because the
Attorney General wanted a fine that was just unbelievable
and couldn't be managed.
And we've been investing and losing money in those 21 stores
now for 2 years trying to rebuild the customer trust
and the customer base that was there, so it can work really
well when you get the brand, but when something bad happens
it hurts everybody.
>> Dr. Michael: It might seem unusual
to students who see a panel of business practitioners
to see attorneys at the table, and the reason--
one reason that's prominent in the franchising world,
as a number of our panelists have alluded to--
the franchise agreement is grounded in a contract,
a relationship between two independent parties,
legally independent but economically
interdependent parties-- the franchisee and the franchisor.
Of course that differs as Bill remarked between that and say
the manager at the local Sears and Sears, Incorporated.
So given that the franchise agreement is grounded in a legal
contract, what types of disputes have you seen?
How've you seen successfully disputes being resolved
underneath that contract or outside of that contract and
what role does the law play or the contract play as a final
arbiter, if you will, of the relationship of a franchisee
and franchisor.
I'm going to ask our attorneys to comment first
and then allow our practitioners to continue.
>> Mrs. Carter: I will say I'm not a
litigator so I don't handle dispute resolution
but obviously see it in my practice and
try to help clients resolve it before it goes to litigation.
Ultimately, that's best for everybody.
I mean there's a whole host of things that can happen,
and I'm sure you can comment on that sort of thing too,
but it can be financial failures where they're not,
if they weren't sufficiently capitalized.
For some reason if the business is not taking off
and not doing well financially where there's,
then the franchisees stop paying the franchisor.
It can be more operational issues where they're not up to
the quality that they should be, so there could be a whole host
of things, or there could be franchisees that are
intentionally deciding that they know a better way to do it
and not following the system that they bought into
and using unapproved products or adding on services
or products that were not approved.
Those are just some examples of things that can happen where
there can be some variance from the contract
and then it has to be addressed by the franchisor.
>> Mrs. Karimi: I see in my job a lot of
situations where a company has developed a popular
business model, a restaurant for example, that's really taken
off and they go to expand that by franchising
and they're really good on the business end of it,
they haven't maybe gotten some legal advice on the other end of
it, and they've sold a few locations down the road,
they haven't completely complied with the franchise laws
and requirements and they maybe haven't thought
through how this system is going to work for somebody
new coming into the system.
It's working really well for them, they knew what they were
getting into, they knew the recipes and they haven't quite
given the thought as to how they're going to train new folks
and help them get up and running, so I get a lot of calls
from folks who've bought into these systems,
saying "I'm not making any money, I want out now'
and then I'm looking back at the beginning of the situation
and what happened in the beginning and, you know.
They maybe have a contract, they maybe don't, they maybe called
it something completely different and thought they
were going to avoid all of the franchise protections,
things like that--so that's how I spend a lot of
my time dealing with situations like that.
>> Dr. Michael: So what actions is the state
capable of remedying and what situations are you
less able to bring the state's resources [unclear dialogue]?
>> Mrs. Karimi: Sure, sure.
In my job I enforce the Franchise Disclosure Act.
I don't represent any franchisees, I represent the
people of the state of Illinois, so I can't bring an action
specifically on behalf of one franchisee, but when somebody
gives me a call I start looking at their documents and, you
know, how the system was formed and a lot of times the company
didn't, the franchisor didn't properly register with us to
begin with--as they're required to by law--they didn't
put together this disclosure packet in the proper way.
Probably a lot of the same things Doris will do up front if
somebody's come to them before they buy, but a lot of times
I see if after somebody's bought and basically
I have a couple of options.
One involves a lawsuit, which is the most common thing I do at
that point, or a settlement document where I can get
rescission for the franchisee, I can get the contract basically
unwound, get them out of the business and get them some money
back--never usually their full investment, but some money
back--and, you know, a penalty for the state,
some relief that way.
>> Mrs. Carter: I think it may be helpful
to have a little background information.
There are, there's a lot of regulation in franchising
and there's a federal franchise law that covers every franchise
transaction anywhere in the country with a few exceptions if
you might have an exemption, so there's, and that requires that
franchisors provide you with a franchise disclosure document
and that you would have that at least 14 days before
you would sign a franchise agreement or pay money
toward a franchise fee.
And then there are 14 states that have registration and
disclosure laws that, on top of that, will require some kind of
registration and oversight and review in some cases,
and get approval before a franchisor could offer
to sell franchises in that state.
So there is a lot of, and those laws are there really to protect
the prospective investors, to protect the franchisees,
so you really need to take advantage of that
and make sure that you are getting that franchise
disclosure document that you are entitled to under the law,
that you're getting it in the right time frame,
that you have the right time frame, you're getting
the most current information and then use that as part of your
tool in your due diligence in deciding whether or not to
purchase a franchise and whether this is the right
system to become part of.
>> Dr. Michael: And that you are hiring
an attorney.
>> Mrs. Karimi: Before you sign the document,
not after.
>> Mr. Inyart: One of the things that comes
to mind that we see in the association
and I've seen it in years past, you mentioned, Kevin,
that you have a protected area, and with Midas,
we really don't.
We don't have a geographic area that's protected.
There's always been a very good cooperation with the company as
far as determining whether or not there's the ability to have
and support another location, but it was explained to me early
on and it's still true today--if Midas felt like I was either not
representing the brand well enough, not serving the
customers well enough or that the customer base would support
one, they could put one across the street from me.
So I always took that as more of an asset than a liability
because I felt like it was some protection for me in that it was
motivating for me to continue to be up to par
and run my business the correct way.
But we have seen issues over the years where someone felt
slighted or someone felt, you know, imposed upon or that a new
shop was being located too close to them and although our
association doesn't get involved necessarily with individual
issues, we do try and help clarify some of the policies.
That's one of the things that we do in our association.
Our association has a full-time attorney and that person is our
executive director as well and so he has a pretty good rapport
with Bill and Bill's sidekick who's our attorney, Midas'
attorney, and they talk quite often I think and most of the
time people can work things out without having to spend a lot
more money on additional attorneys or having to go to
court, but typically there's a reason why Midas feels there's a
good place here for a Midas shop, or in this case of our new
co-brand initiative with our speedy oil change service,
a conversion or a co-brand conversion and so when you
start coming into areas where somebody's been there for 30
years, well there's going to be one just 3 miles up the road.
Yeah, there may be, and Midas has done some work to try
and make that case before they ever--they didn't just drive by
and say 'hey, there's an empty building,
we should put another Midas there'.
It was a lot more involved than that.
>> Mrs. Carter: That's one of the key things
is getting involved with the right franchisor because you're
talking about companies like Midas and Dairy Queen that have
been around for decades and obviously they're doing it
right, but there are other new concepts coming out that either
they're not fully developed or they're not really understanding
franchising, they haven't done enough to learn
about franchising, and there's people out there
that are to defraud investors.
So you really have to make sure that you are with the right
system that isn't going to take advantage of somebody and sell
one franchise and then sell another one a few blocks down
the street a year later that's going to encroach on the sales
of the first one.
>> Mr. Inyart: One of the things that
I've learned early on is that Midas doesn't make money
turning franchises, but there are companies that really do,
so you really want to look at that,
at that turnover rate and the cost involved
in turning the franchise.
Ours is very very reasonable to sell or transfer a franchise,
but in many cases some of those larger companies,
some of those companies that seem to be in high demand,
they're very high dollar and when you get ready
to sell it the next guy has to pay that too
and in some cases a franchise transfer fee as well.
>> Dr. Michael: I commend you, you have
lots of questions, so let me make sure that I get to them.
One of them was about what I would describe as the issue of
exclusive territories or putting units too close to another,
so I'll leave that question as addressed.
> Mr. Inyart: Probably franchise agreement
specific--I mean it would be, ours is not
and I think Kevin's is.
>> Mr. Traub: Yeah, five miles.
>> Dr. Michael: One of the students is asking
our franchisees and our counselors--I guess I'll ask
the question to the counselors first
and the franchisees second.
Counselors are asked are there are laws that prevent a former
franchisee from owning a different company in the same
industry, and then the question will be about the franchisees
starting a business in the same or a similar industry.
So counselors, are there laws or other prohibitions that prevent
people from owning another company in the same industry?
>> Mrs. Carter: In probably 100 percent
of the franchise agreements you will see non-competition
provisions, and that is in there so that the franchisor
can protect that proprietary information that they're going
to teach you to teach you how to operate that business,
but those non-competition provisions are going to say
that once your franchise is terminated or at the end of
the expiration--if there was a 5 year term, a 10 year term--
at the end of the term if you don't renew,
either way you're not going to be able to compete
with anyone in their system for a certain period of time
within a certain geographic radius, and that can,
that period of time and the geographic radius can vary from
system to system and there's a lot of variation in state laws
but the majority of the states will enforce non-competition
provisions because, you know, you have that knowledge in your
head and if you terminate your agreement and you stay in
business, you're obviously going to be using still
that proprietary information that you learned.
So there would be some restriction after termination
or expiration.
>> Dr. Michael: Let's make the assumption
that the franchisee is not in violation of one of those
non-compete types of agreements, so the franchisee says
your experience as a franchisee gives you the courage
and the skill and other necessary qualities to create a
startup in some line of business that might be, that would not
again jeopardize the mainline of business that you're in now.
So maybe the question's what have you learned about business
or generally.
>> Mr. Inyart: So, could I start another
business in another industry or in another field--
yeah, absolutely.
Running the business is about the people, it's about having a
good banker or two and it'a about having the process
and a product that people want to buy and a margin
that will afford you the ability to stay current.
One of the things that people sometimes fail to understand,
especially as a consumer but sometimes even as a business
owner is you have to make money on a transaction.
You have to make money in business to stay in business.
Just not enough to feed your family, but you have to be able
to buy new equipment, you have to be able to pay for things
when they break, you have to be able to pay for things
when they go wrong.
And so, without that profit you can't do all of those things,
but if you have a business I think I could take
what I have learned and probably run any service based business
that would be successful.
>> Mr. Guzik: We have many franchisees in
our system who own multiple franchise brands.
So they'll own the Midas shop, they'll own a Subway franchise,
I think we even have a McDonald's franchiseee
in the system.
What we won't allow is someone who has a Midas shop to own
an AAMCO Transmission or a Meineke repair facility.
We will not allow that.
>> Mr. Traub: I guess I could have
another franchise, but I don't want to.
[laughter].
I don't have enough time as it is.
>> Dr. Michael: This is directed to Mr. Guzik.
What made you want to be a franchisor in comparison to the
alternative ways you could be in business as, let's say,
a fully integrated service provider or simply
a manufacturer and distributor whole seller
of mufflers or some other arrangement.
What do you see as your key advantages as a franchisor
rather than one of those other traditional forms.
>> Mr. Guzik: Well, we actually were in the
manufacturing and distribution business.
Midas got started with a muffler manufacturing plant and a guy
who wanted to find places to sell mufflers and exhaust
systems, and so he created Midas, which actually is an
acronym for muffler installation dealers associated services,
and brought people together, didn't charge royalties
but sold product and made money selling product.
And that worked real well when we were in exhaust and very well
when we were in brakes, but when we started getting these other
categories, our ability to manufacture and distribute all
of these other products which franchises were no longer buying
and putting in stock, but wanted to buy on a just-in-time basis,
became completely impractical.
We tried to meet the demand and it almost ended the company,
so we got out of the distribution business.
We source all of our products now from people that have big
distribution systems, big organizations that can sell to
us at very good prices.
The question is why we're franchise
versus company operated.
It's simply just the business model.
There's a company out east called Monro Muffler and Brake,
they own about 600 stores, it's all company operated.
They make a lot of money doing it that way, but they have huge
capital investments and the return on their investment
is not nearly as good as ours.
We have, in a franchise, virtually no investment,
so when our franchisees need new equipment,
they have to make it, If they need to repair their building,
they have to make that expenditure.
We have costs associated with people who help them run their
business, but we have no hard dollars invested in equipment
or assets, so our return on the royalties
they pay is infinitesimal.
So it's just a different philosophy, and I would tell you
that we do operate some company shops ourselves,
but we're just not as good as our franchisees are.
Franchisees run better shops, probably across all industries,
than a company operation does...
>> Mr. Inyart: I'll need a copy of this tape.
[laughter].
>> Mrs. Carter: Well one thing I would add too,
is that I think the franchising, a franchise company
you have a whole lot of different experiences
you can have inside the franchise company.
It's a company that has to do marketing to develop the brand,
it's a company that has to have customer service to the
customers as well as to the franchisees--it may be in
product distribution, you've got the legal aspect, so it's really
very interesting type of company to be involved in.
>> Dr. Michael: One of our students asks
'when someone wants to own a business,
why do they think to purchase a franchise'?
And I guess this is getting to your question, getting a
response [unclear dialogue] 'is there an obvious disadvantage to
franchising rather than starting an independent business'?
>> Mr. Guzik: You know, let's say that
you wanted to get into the automotive repair business,
you'd wonder okay well what size building should I get,
how many days, what sort of lifts should I buy,
what kind of equipment do I need, how much should I pay
in rent, how should I price my products,
what should I have in inventory.
Those are questions that if you don't have a franchisee that has
a business format, that you have to figure out on your own.
It's a lot easier to come to someone who has experience
and we'll tell you the size of the building,
the specifications, what colors to paint it,
how big the letters on the sign should be,
everything from that down to the forms you'll need to have,
and so it's a way to get into business--
we like to say that franchisees are into business
for themselves, but not by themselves.
So they've got the safety net of the franchisor who's looking out
into the long-term trying to develop the long-term view of
the company and has the resources to maintain a current
business format, so you pay for that in terms of paying
royalties, but you get the benefit of a brand that people
recognize--in our case, a national brand--
and you automatically get customers as result of it.
If I opened up Bill's Auto tomorrow, I wouldn't see nearly
the traffic that I would see if I opened up a Midas shop.
So the yin and the yang is you pay royalties
but you get all this knowledge.
>> Mrs. Carter: And one of the--looking at it
from the flip side, you really have to look at
what is right for you.
I've heard a number of franchisor clients say that they
would not want to accept a true entrepreneur as a franchisee.
They're the ones that want to do it their own way, you know,
they're going to come up with some creative ways to change
what you're doing and go off on their own, and that's going to
be a problem, so you have to be prepared to be under that
oversight from the franchisor, to commit to the time
commitment--you're committing to a term of 5, 10, 15 years--
so that's some of the flip side against the
great advantages that there are in franchising.
>> Mr. Inyart: I looked also at the ability
to sell my business someday, to transition out of it.
Many times when you build a business, especially a
family-owned business, you've either got to have another,
you know, Dairy Queen owner in the mix
or somebody in the family that wants to take that over.
Many times you would end up financing your own retirement,
you know, by loaning the money to your children or whoever.
I really felt like , and still feel like a national name would
be easier for me to move when the time came for me to either
step aside or transition away from running it,
whereas I have a lot of friends who have built
very, very successful businesses but they are centered around
what they do and probably tomorrow they would be hard
for us to find someone that would actually buy them
for what they're really worth or what
they create in income for that person,
whereas I think that when I want to sell mine, Midas will
have people that will help that, and they'll make sure that
not only are my employees taken care of but that my customers
are continued to be taken care of.
>> Mr. Traub: I would think that the back
end value of your investment over the years is much safer
with a brand name.
Dairy Queen--you know the blue sky that goes along
with Dairy Queen, what does that mean?
Well it's, everybody knows what Dairy Queen is and what it has
to offer and the product line so the value of your business
with a franchise name attached to it is, you know.
Dairy Queen's much more valuable at the end of the day
than Tom's Curly Q.
It retains it's value, I think.
>> Dr. Michael: One of our students has
asked a very specific question about this moment,
this exit moment [unclear dialogue],
selling the business-- 'if you have a successful
franchise, do you have the right to sell if for
what the market will bear or'.
and I quote, 'are you dictated to by the franchisor'?
>> Mr. Traub: Market value, whatever...
>> Dr. Michael: Whatever a willing buyer
can agree [unclear dialogue].
>> Mr. Traub: Yeah, your franchisor has no
involvement in that part of it,
at least at Dairy Queen they don't.
>> Mr. Inyart: The only involvement the
franchisor would have would be if your buyer
doesn't qualify as a buyer, and that is obviously
for the protection of the brand.
The last thing they want to do is have somebody come in there
and fail because they're undercapitalized
or not properly positioned.
Maybe they're not the kind of person that can run a business,
so there's some protection there for the brand, but no, I think
we can negotiate our own deal and sell the business
for what it's worth.
> Mr. Traub: Now the franchisor can,
if the contract dictates, enforce modernization clauses.
In other words, if your facility doesn't meet their modern,
new building design, before you sell it and transfer the
franchise you're going to have to reinvest in that business
and bring it up to their codes and standards,
and in some cases-- in our case at Jerseyville,
we're not planning on selling the store
but we're going to go ahead with that in mind,
that in some point in time we're eventually going to sell it,
that we need to have the newest, latest building design
and I'm going to go as far in depth next spring as I was the
day I bought the business, and that prospect is a bit scary.
But you know that they can control that part of it
and have a bearing on what the business is worth,
not what you're going to sell it for.
>> Mrs. Carter: The typical franchise agreement
has a list of conditions that have to be met
in order for you to be able to transfer your franchise
and to get approval from the franchisor.
You're right, the franchisor is typically not involved in the
value of the business, but for one you would typically
have to be in compliance with your agreement.
If you haven't paid your royalties or if there's
may be some unsatisfactory operational issues,
you're going to have to cure those.
You will have to get approval of the buyer,
that buyer will have to conduct training.
As was said oftentimes there might be a requirement to
remodel, and there's typically a transfer fee as well, so each
particular franchise agreement will have specified conditions
you have to meet in order to get final approval for that sale
to go through.
>> Mr. Guzik: I'm not sure I should say
this with an assistant attorney general here but we do
help buyers and sellers get to prices that make sense.
There are a lot of times that buyers are willing to pay way
more than market value and it'll be financed by the seller
and we'll say let's look at your business plan here, you can't
cash flow with this kind of a number, you're going to be
out of business within six months or a year,
and so we work with the buyer.
Sometimes he produces the price, sometimes he extends the
financing terms, so we do look out for buyers and sellers and
just to make sure that whoever's going in is going to be
successful or has a better chance of success.
>> Dr. Michael: One of our finance students
has asked us, I'm going to actually quote it because
I know there's a, I'm going to quote the question
because I know the answer is sophisticated.
"Do you have any projections for what I can make in a franchise?
"What is my expected break-even and at what point in time should
I expect to achieve this?"
>> Mr. Inyart: I guess we need to know
how hard they want to work.
>> Dr. Michael: So the first answer, as always,
hard work is a prerequisite for success in anything.
The minimum is going to require hard work.
Beyond that how would you add to what the
upside might be or the downside might be to
a franchise opportunity of operation?
>> Mr. Inyart: Again, I think it depends on
the market, it depends on the line of product
that would be involved.
There are some franchises out there, and I'm guessing there's
probably somebody at the other end of the table that can speak
to this, but there's some franchises out there that really
at the end of the day the person that owns it isn't making much
more than minimum wage for all the hours that they're putting
in, and then there's some that are very lucrative
and there's a lot of them that are here in between.
If you work hard and have a good banker and keep him happy
and he lets you grow as you need to grow, you can do well,
but it's not, there's no guarantees and I don't think
the franchisor's going to guarantee any amount of return.
I don't think they're going to represent that and I wouldn't
expect them to because I think that it would be really up to
you to look at the market, because we have Midas shops that
are in small markets and only do a few hundred thousand dollars a
year and we have Midas shops in large markets
that do two or three millions dollars a year.
So, I mean, there's a huge difference in the profit
structure of those two stores,
so there are a lot of variables there.
>> Mr. Guzik: We avoid earnings claims
like the plague.
Because someone's looking to buy a Midas franchise
and we say 'oh, you should do about $700,000 in sales
and make about $100,000' and they don't, well guess what,
they're going to be suing us, so we're very deliberate
in not making any sorts of earning claims
other than to say what the sales value,
if it's an existing store, has been historically.
Now if John's selling his store to a third party,
whatever he says is not regulated by the FDD.
He can, as a willing seller, work with the buyer and they can
say whatever they want but we have to stay out of that.
>> Mrs. Carter: Under the franchise laws
the franchisor has the option of providing information
to prospective franchisees about, you know,
what the franchisees are doing historically--
sales, net profits, whatever--but they do not
have to provide that information.
Last I saw, and maybe you'd know the percentages about--
I think it's increasing--the number of franchisors
that are actually putting that information in their
franchise disclosure document.
Either that or they rely on prospective franchisees going
and talking to the franchisees directly to get a sense of what
people are making.
>> Mrs. Karimi: We did some research a couple
years ago and looked through all of the files that are
all the franchisors that are registered with us and it was
about 40 percent were making some type of earnings claim,
and I was really surprised that it was that high.
>> Dr. Michael: I did that in the state of
Maryland about 20 years ago and the number
was about 20 percent.
This is a specific part of the document that actually
gives you an income statement, a profit and loss statement.
I went further, actually analyzed those, broke them down
and made them into a common financial and reporting
structure and with some assumptions
was able to construct a common income statement
across 73 distinct franchise chains.
I was then able to compare those to both the wages of employees
or store managers in the same industry--so it would've been
auto repair or restaurants--and also within other independent
businesses, that is independent businesses [unclear dialogue].
In both cases, franchise chains did better.
That is to say that the franchisee was making more money
than he would have as a manager of a store or unit in a similar
industry and by the same token, the business--
[unclear dialogue]-- was worth more than
an independent business.
This was again from proudly established chains,
such as Dairy Queen or Midas--and they were not
actually part of my study--but it did suggest the power of
the brand name, the power of the technology did translate
into dollars and cents into people's pockets.
Dollars and cents are not the only reason to choose your
livelihood over your lifetime, but it is worth keeping in mind.
>> Mr. Inyart: I might add to that that is,
the one big variable in that equation is your
level of involvement in the actual business.
You're going to be the hands on manager and owner of the Midas
shop or the Dairy Queen or whatever it is,
you're going to be, you're going to make a lot more money
than if you pay someone else to run it for you,
so you're going to be taking-- if you're going to pay
a manager--you're going to be taking that right out of
the bottom line and you're going to be giving that to
someone else and hope they run it the way you want to run it.
So it is a big variable there.
>> Mr. Traub: It's certainly not a
get rich quick scheme.
I mean, first five years we didn't make money.
We were lucky to stay in business.
Next five years, we started to break even.
After the fifteenth year, we started showing a profit.
And even today, still a dog fight day in and day out--
it's a penny at a time in the restaurant business.
If you're planning on making money hand over fist quickly,
probably not going to happen.
>>Dr. Michael: If it says it's a
get rich quick scheme, it's not.
>> Mrs. Karimi: That's a red flag.
[laughter].
>> Dr. Michael: One of our students has
asked a question, I'm going to rephrase it a little bit.
We live in an era where there are lots of changes going
on--internationalizat tion, globalization,
technology changes and so forth.
I'm curious about whether there is, in your own experience as a
franchisor or franchisee, if there's been a threat,
an underlying threat to the business, whether it has risen
from technical changes, regulatory changes,
changes in consumer preferences, consumer taste.
In your experience, how did your company--how did Midas,
how did Dairy Queen, how did someone with whom you provided
counsel--how did they deal with this change as a system
and were they successful?
>> Mr. Inyart: Midas went through
something several years ago where we transitioned
from a muffler and brake company, mainly mufflers.
When technology on the automobile changed and the
manufacturers of the original equipment [unclear dialogue]
started making exhaust systems out or stainless steel, we went
from an 18 month to 30 month replacement of a muffler to 9 or
10 years, and many of these cars go to the salvage yard after
15 years with the original muffler still on the car.
Midas had to diversify, we had to go into these other areas,
we had to make changes in our product offering
because the exhaust business which was once all of
our business is now less than 10 percent of my business.
>> Mr. Guzik: One advantage we have
that we like to tell prospective franchises is that we are not
a business that can be made obsolete by the Internet.
Most anything can be sold over the Internet, but service
businesses can't so we think that automotive repair,
which is $153 billion business in the U.S.,
it's here to stay for a long time.
>> Dr. Michael: What research would you
recommend would be done before you choose to purchase a
franchise and other particular sources or websites that
you would recommend for reference [unclear dialogue].
>> Mr. Traub: I would suggest actually
working in that field or working at a Dairy Queen, in our case.
I mean that practical experience can't be, is invaluable.
That's the research that I would do.
I mean how do you know if you even like it or not
unless you've actually participated in it.
>> Dr. Michael: There's a famous McDonald's
phrase "you should have ketchup in your veins".
Do you think that you should be interested in...
How important is it to be interested in the business
or the service that you're providing,
opposed to the business of it shall we say?
>> Mr. Traub: Well, you have to want to
succeed and do a good job, absolutely.
>> Mr. Inyart: You'd better like people.
>> Mrs. Carter: That's what I tell most of my
prospective franchisee clients--it's not about the
ice cream or the muffler, it's about marketing and selling,
and you've got to be comfortable with that
or else you shouldn't get into a franchise.
A couple of sources of information, there's a lot of
online directories that list franchising and will have kind
of a little synopsis about different franchises.
You know, if you don't know what store to go work in for a while,
you can kind of get an idea of what's out there,
those are good sources.
There's also franchise broker networks that actually work with
candidates to assess their skills and see what would be
a good match for them for franchising,
so there's different resources, and then once you hone in on a
couple of franchise systems and meet with them,
you request their franchise disclosure document,
and that's the legal document that gives all
the required legal disclosures.
It'll give you a lot of background about the company
and the officers, litigation history, bankruptcy
and what it's going to cost to open the business,
what your obligations are going to be
and what the franchisor has to do for you,
so that's a lot of information that you really need to look at
once you get real serious about a particular franchise.
>> Dr. Michael: I want to turn the tables
just a moment, one of the students has asked
not about being a franchisee but about being a franchisor.
"I have a great idea to begin a franchise in the fashion
or retail market" and let's, just abstract from that
whatever this great idea is in
"but I don't have enough money to begin.
"What do I do, how do I help to become a franchisor,
how do I build up my business and my idea, where do I start?
"My business plan is done, where do I go next?"
>> Mrs. Carter: I represent a number of startup
franchisors and also work with franchise consultants that
provide some of the business counsel for companies
looking to franchise.
Typically, I know that franchise consultants recommend that you
establish your business and operate it for a good year or
two and find out if it's viable, is it financially viable,
and then you have to look at it on top of what money you can
make operating that business, but if you're sharing some of
that revenue with a franchisor and paying royalties,
is it continuing to be viable,
as well as can it be systematized?
Can you train somebody to do the same thing
that you're going to do?
So really the groundwork is starting the business itself,
operating it and knowing that you're looking to go into
franchising, my suggestion would be to start working on
that manual from day one.
You know, when you're training your employees
or you're setting up your systems, put it in writing.
You can later refine it if you do want to get into franchising.
>> Mr. Traub: I think having the demand
is the most important part.
You've got to create a demand for that clothing
that you want us franchising.
If that demand is there and you're not able to keep up with
that demand, that's when you'll probably start thinking about
franchising, where there's demand outside of your area or
more demand than you can handle and you need help
with that product, getting it out.
That's the key, you've got to have--it's like the Pinkberry,
the yogurt store in California that started, I don't know,
5, 6, 7, 8 years ago in West Hollywood, California.
A little two-window walk-up, a different type of yogurt--
it's a soft-serve product.
There's a couple in Chicago now, I don't know if anybody's tried
that, but it's a tart, tangy type of product that just caught
on like wildfire and there are now hundreds of Pinkberry stores
throughout the country.
It's a franchise success story, based on demand.
>> Dr. Michael: John and Bill,
I want to say one of the students wants to help
you out because they have a question.
Do you think that Midas should begin a towing service?
Have you ever though about starting that
and what's your response?
>> Mr. Inyart: We have franchisees that
offer towing.
>> Dr. Michael: [unclear dialogue]
regard it as successful?
>> Mr. Inyart: I think it's a sideline
to their business, I don't know that
it's a profit-generating part of their business.
>> Dr. Michael: They're not prohibited
from doing so either.
>> Mr. Inyart: No, but the amount of towing
that I would require, I'm better off, in my case,
just to sub it out or contract it out on an as needed basis.
Fifteen or 20 tows a month wouldn't really justify me
having a person and a vehicle and all that liability
driving around out there on the streets.
I'm not sure for most dealers if it would be advantageous,
but there are some that have made it work.
>> Dr. Michael: One of our students has asked
a specific question as well, which is the franchisor
has told the franchisee, the respective franchisee,
they don't have enough startup capital,
but the franchisee has investors ready.
The franchisor still declines them,
what should the franchisee do?
So there's sort of two questions there--one is the specific
question and the other is how do you deal successfully with the
franchise application process and how can you make that a
success to actually come out at the end as a successful
franchisee of a Midas, Dairy Queen or another system.
>> Mr: Guzik: Well if somebody doesn't
have the startup capital but has investors willing to make
the investment, then they'd have to be parties
to the franchise agreement.
In our system, the people who sign the franchise agreement
have to sign personal guarantees that they will pay whatever
money that has come due, one way or another and if there's a
third party that's going to help finance this, whether it's an
investor or a bank, we'd have to see that money was in the
business and it was available to spend on the business, so it
would just be the organization between the investor
and how that money gets invested in the business.
So if you had a parent who wanted to give you the money,
that's fine, have your parent write us a letter that they're
going to give you the money and show us the liquidity in a bank
statement that says you have the money to do it and we will only
close if they come through with their investment.
>> Mr. Inyart: And we actually see some
of that when people are in the position where they're trying
to transition out of the business.
Where they, you know, the former franchisee may end up helping
the finance part of the deal or signing that guarantee for a
certain period of time to get the deal to work because it
does, you know, they're trying to protect the brand and the
last thing we want is a dealer to get in there and not be able
to make it because now you've got an empty storefront in a
town where there was once a thriving Midas shop,
and you have a lot of customers with that warranty
in their hand that can't get service .
>> Dr. Michael: I'd like to ask a
public policy question at a broader level.
Job creation is really, I think, the highest challenge facing
America these days, and I'm curious whether our panelists
think that franchising can help with job creation.
Not just as franchisees but as employers, what challenges they
see as employers in creating new employees
and creating employees with a future of their own.
Are these good jobs with a future that they can create
through franchising--is franchising part of the
challenge of job creation in America, part of the solution?
>> Mr. Inyart: Well I would say it's
part of the puzzle.
Obviously, you can't create a franchise or open a business
where there isn't demand for that particular service or good,
so it's kind of a chicken and egg thing, I think.
To a certain extent, people don't have the money to fix
their car and they're deferring maintenance and putting off
things that need to be done but they don't have to do--
the demand is not going to be as strong.
When the economy gets bad, people put off their
sweet treats.
>> Mr. Traub: It's easy to do, yeah.
>> Mr. Guzik: In my opinion,
small business is a growth engine for the economy.
It isn't as though General Motors and IBM are going to
go on hiring sprees and add a lot of jobs.
Job creation will mostly come from small businesses, and
frankly franchise businesses have a higher rate of success
[unclear dialogue].
There's a statistic out there that's somewhat dated now--I
think that 50 percent of businesses fail within their
first 2 years, of new businesses.
Well in most franchise businesses, it's nowhere near
50 percent because you've got a proven business model,
so I think franchising could be a great creator of jobs.
>> Dr. Michael: I have one last question
and it comes from you, the students.
I want to give each of our panelists a chance to respond.
What's the best advice that you have or that you've learned that
you can share with us to help an aspiring individual get his
foot in the door of the franchising world?
What's the best advice you can offer?
Let's work our way back down the table.
Give everyone a final word, shall we say,
about the best advice you can imagine.
>> Mr. Traub: Well, I don't know about advice,
but I do know that if you're going to get into business
for yourself and have a staff and provide a service
or a product, understand that as the boss,
your number one problem, day in and day out,
is going to be your employees--bar none.
Piece of equipment breaks down, you can beat it with a hammer if
you want to but when it's little Susie or Tory not able to make
it to work on a Friday night, guess who's going to have
to take care of the problem, and you can't hammer a kid.
You've got to figure out a way to deal with those
issues and problems.
Employees are people and they have feelings and you have to,
that part of the business for me was the biggest learning curve,
and still is today.
Kids today are different than they were 20 years ago, so
learning to deal with employees and their problems and the
things associated with that, if you're a good people person
from the get go, it will be of great benefit to you.
That's my bit of advice.
Be aware that employees can be problematic,
but you need them, you've got to have them.
>> Mr. Inyart: Well, I would have to
say that I agree with Kevin on that.
You better like people--I said it earlier--you better like
people if you're going to be in a business that is
facing customers, facing employees.
You better have the ability to have some compassion for the
situations, but at the same time be firm because people will walk
all over you if you don't and--I would have to say that
that would probably be the key to it.
If you don't want to be reliant upon other people, then you
might want to find some other sector to make a living in,
because you will absolutely be at the mercy of your employees
and your customers really.
You have to care about both.
We kind of joke that it would be a great business
if it weren't for the people.
Fixing the car is the easy part.
>> Mrs. Carter: I guess my advice would
be in getting into franchising is just how I did it,
you get a job with a franchisor, get a job with a franchisee
and have your ears to the ground and understand and start to
learn franchising as a business model and look at it from
the different perspectives and see if it's something for you.
>> Mr. Guzik: I'd say some of our best
franchisees worked for us as the franchisor and then decided
to buy stores because they understand the organization,
where to get help, what the people who failed did,
what the people who are succeeding are doing,
so there's a lot of knowledge that way to be learned as well.
>> Mrs. Karimi: I agree with that.
The biggest problem I see are people that have gotten into
something without doing their homework and I think that's a
great way--you know, work in the business, get some experience
that way, talk to other folks that are involved in the
business, just make sure you know what you're getting into
before you get into it.
>> Dr. Michael: I wanted to thank
our panelists for their expertise and for the
education they've afforded me and they've afforded you.
I've learned a lot, I'm going to just hit a couple summary points
that you've just heard, but first of all, success in any
business--franchising is no exception--
is going to be based on your hard work.
But also you have to be willing to build a team,
work hard, work with other people.
You also have to like people enough to enjoy being
a service business and being in front of people.
One of the things I liked, and you saw a nice live example
today, was that one of our panelists when they were asked
whether towing was a good business, he started to work
the numbers in his head, said I don't see the margin there.
That's a good lesson.
There's lots of attractive things in the world, lots of
things that need to be done, but you can't necessarily make money
out of--that's a great lesson, so be sure to be able to work
with the numbers and do the numbers as well as wondering
whether it's just a good idea.
Finally, do your homework.
Your homework is doing those numbers but also getting good
counsel and good advice before any serious business decision
or, for that matter, any serious decision in general.
For these and so many other lessons,
I'm grateful for our panel.
Can we show them our appreciation, please?
[applause].
[no dialogue].