Today's Guest

Matthew Haller is the CEO and President of the International Franchise Association. The IFA’s mission is to protect, enhance, and promote franchising. Matthew’s team supports the franchise industry by lobbying for policies to support and promote franchise owners on the federal, state, and local levels. Matthew works to provide education on new policies, professional development opportunities, and to promote franchising to the general public. Are you interested in owning a franchise? Tune in for today’s episode to learn why franchising may just be the path you’re looking for – and what you need to watch out for.

Resources Shared

• International Franchise Association (IFA)
• Matthew Haller | LinkedIn
• Thryv
  

Episode Transcript

(Please excuse grammatical errors due to transcription)

Gordon Henry:                 Hey. Hey. This is Gordon Henry at Whiting on Main Street, and this week for all of you who have ever thought of running a franchise, we have the leader of the International Franchise Association, Mr. Matt Haller, the president and CEO of the IFA. Welcome, Matt.

Matthew Haller:              Hey, it's great to be here, Gordon. Thanks for having me.

Gordon Henry:                 Great to have you. Quick background on Matt. Matt has been a key member of the IFA team for 10 years, building extensive relationships with all three segments of the IFA membership, franchisors, franchisees, and suppliers. He became president and CEO of the organization in June '21, so just over two years ago. During his tenure, Matt has expanded the association's lobbying, coalition building, grassroots research communications capabilities, and took on some of the more difficult challenges, including defending the business model against the joint employer threat, we'll get into that and significant legislative and regulatory issues at the federal, state, and local levels. During the pandemic, he led the team's focus on helping the franchise business model survive, ensuring the paycheck protection program and other relief efforts included eligibility for franchise businesses while working with the internal team to innovate how to provide IFA members real value for their membership.

                                               What should listeners get out of this episode? Are you interested in owning a franchise? Let Matt tell you why it's a good idea, but also what you need to watch out for. Matt, welcome to the show. Quick background. How did you get into the world of franchising?

Matthew Haller:              Like a lot of people, there was no intentionality behind it. It just sort of found me at a point in my career where I was actually running, or not running, but working in another industry association, in the pharmaceutical industry. And really I hadn't thought about franchising as a sector of the economy and there was an opening with the association staff to run communications. And so that's what brought me into franchising at the association level. Learned on the fly about the industry and what it does and how diverse it is in terms of types of businesses that are available and the great supplier community that's out there. Yeah, like I say, it's often franchising sort of finds people at a moment where they're looking to make a change in how they're generating wealth for their family, and so my story is not that dissimilar from many others.

Gordon Henry:                 Tell us about the IFA. What does the organization do and how does it help each of the constituents, the franchisors, franchisees and suppliers?

Matthew Haller:              Our mission is to protect, enhance, and promote franchising. We call it PEP. And what we do, we've been around for 67 years now. We protect franchising through government relations and advocacy. We can talk about some of those issues that we're focused on right now. We enhance franchising through convening the industry through events, through professional development opportunities and education, both formal education. We have a certification program as well as informal education through our conferences, events, webinars, things like that. And we promote franchising to the general public through our website, through our publications with different research that we put out through our foundation. We have two foundation programs that are quite robust. Our diversity institute that helps underrepresented people learn about franchising, gives them tools and resources as well as our Vet Fran program focused on getting veterans into the franchise model.

Gordon Henry:                 And you do a certain amount of, I guess what we call lobbying, right? What would your lobbying be about? What would it be for?

Matthew Haller:              Either for or against policies that either could potentially make it harder for a franchise owner to be successful and generate revenue, things like that. But also things that are business model issues that could impact labor or brand protection, things like that. So it's the federal level, it's the state level, it's the local level. A lot of work is with regulatory agencies. We get involved in a lot of first party litigation, challenging laws or regulations that are put forward by governments. We want to make sure that while franchising does need some amount of regulation to protect brands and to protect consumers, that the heavy hand of government can sometimes go too far. And our job is to be in there educating them about the impact of policies that are being considered and hopefully the outcomes. And we've been fairly successful at ensuring the outcomes enable franchising to continue to thrive.

Gordon Henry:                 Got it. Let's turn to why people become franchisees. Much of what we discuss on winning on Main Street is about independent entrepreneurs, startups, particularly in the services space. Why do people become franchisees as opposed to becoming independent entrepreneurs who might open their own plumbing business or restaurant or what have you? Why the franchise route?

Matthew Haller:              Yeah, I think the biggest thing that we hear here of prospective franchisee that ultimately follows through is people don't know where to start when they're thinking about becoming a business owner. Whether they're thinking about starting an independent plumbing business or going into a franchise, and if nothing else franchising, it accelerates that decision-making process and eliminates some of the, I don't know where to start to even do this. Beyond that, you don't need to be a plumbing expert in order to be a successful franchisee in the plumbing business, you're in all likelihood not even engaging in the service. You're involved in building a team, you're involved in evaluating your P&L, you're involved in the community. And so those are some of the things when people think about I want to be a business owner. Well, are there trade-offs in entering franchise? Absolutely. Control is probably the biggest aspect, but for a certain type of entrepreneur, franchise model, there's a lot of advantages. But as we always say, it comes with some trade-offs.

Gordon Henry:                 Right. I'd like to get into the math, if you will, of being a franchisee. Maybe just walk us through, if I'm thinking for the first time about buying a franchise, what should I be thinking about in terms of cost? What is it going to cost me to get involved and then what is likely going to be the income stream I would enjoy in the future?

Matthew Haller:              The cost varies significantly depending on the industry you're contemplating. Franchising is used by over 300 different industries. There's really not a franchising industry. It's a business model that's used by hundreds of industries. We talked about plumbing, that could be one industry where there is a plethora of brands that have a plumbing franchise. At the low end in terms of initial franchise fees, it could be a $10,000 franchise fee all the way up to a hundred thousand dollars or more for something in the restaurant space or a hotel. Most franchisors today are looking for multi-unit franchisees, or at least the desire to become a multiunit franchisee. That's where you'd really get into more economy of scale on the franchisee side.

                                               And most franchisors, not all, but most would prefer to work with, prefer to have fewer overall franchisees within their system. Now, I don't want to paint... It's hard to paint franchising with one brush, but generally speaking, where there's a desire to have franchisees that have the means and the ability to scale. But the initial franchise fee is only one element of a startup cost. Depending on, again, the industry that you're focused on, you could have real estate costs that you need to factor in, or even if it's a mobile franchise, you could have other costs like buying equipment or trucks or vans if it's a mobile service business, home services like a landscaping business or a plumbing business. And then there's going to be initial marketing fees and other aspects to it. Generally speaking, when you look at franchise opportunities that are out there, and franchise.org is a great website, that's our website to look at the IFA membership, there's 1,200 brands that you could look at.

                                               We list initial franchise fee, kind of total investment required upfront, and then a lot of franchisors will have a sort of net worth requirements that they would evaluate as you get into that potential and investment opportunity. In terms of what, if you're a franchisee, you're obviously going into business to make money. One of the things that we encourage franchisees, prospective franchisees to look at when they're looking at the franchise disclosure document, which is the legal requirements, the document required that a brand makes available to franchisees, is an item 19 disclosure.

                                               There are 23 items in the franchise disclosure document. Item 19 is what's known as the financial performance representation that a brand is not required to make. This is one of the optional disclosures. A little over 60% of brands make an item 19 disclosure. Within an item 19 disclosure, some will break down their item 19 all the way down to EBITDA. And that's a really, I would say, a really healthy and robust disclosure. Others will cherry pick data and just say, our highest performing franchisee does X and our lowest performing franchisee does Y. Others will look at a top quartile, center quartile, that kind of thing. That's where having outside counsel that understands franchising and is looking at it from a perspective franchisees perspective is a really critical aspect if you become truly serious about getting into the business model.

Gordon Henry:                 Just to push down on this a little bit more, so there's the upfront fee, which you said there could be anywhere from 10 to a hundred, and I would imagine for a McDonald's in the middle of a big city, it might even be more. And then you start generating the revenue, and most franchisors require you to basically cut them a check off the top for a certain amount, which can be like 7/8%. That amount goes into your annual spend with the franchisor, which pays you for I guess all the systems and brand advertising and so forth, right?

Matthew Haller:              Yeah. You're talking about the royalty. I was focused on the upfront cost. There are ongoing costs that are required off your top line sales in most cases, and the royalty could be as little as 3% or some brands are well over 10% of the top line revenue is paid to the franchisor. There are often other fees. Some franchisors bake all their fees into the royalty. Others like to break out marketing fees separately or technology fees separately. Those are recurring fees. There can be special assessments that could be made, and these are disclosures that are also required in that franchise disclosure document. Understanding the economics of the business and understanding the fee structure is the most critical thing for a prospective franchisee to understand and come in eyes wide open. Also understand that the economy and consumer trends are going to change.

                                               We just went through a pandemic and a lot of franchisors relaxed royalties, but there was also investments that needed to be made in certain types of industries to better serve customers. And the flexibility has to exist on the franchise brand side to be able to continue to adapt the system to changing consumer demands. And there has to be the understanding on the franchisee side that we want our brand to continue to evolve and innovate because we have shared interests. At the end of the day, the robust franchise system is not making money solely by selling new territories or locations. They're making money because their franchisees are profitable and they're continuing to generate revenue into the franchisor off the growth of royalty revenue. We call it royalty self sufficiency.

Gordon Henry:                 Just one more question about sort of the economics, then we can move on. If I am buying into a... I have that upfront fee, I have that royalty payment we discussed, and then I am just trying to think about what do I get for that? Do I pay as the franchisee for all of the materials myself? Whether it's the trucks to go to your house, fix your plumbing or the burger meat and the potatoes to make the burger and fries, all that stuff is on me. What am I getting for my 8%, my upfront fee? Is it just maybe you can enumerate. I mean, the brand I know is one big one. It's a reputation, it's a goodwill, but there's a lot of systems I get. Can you talk to the systems?

Matthew Haller:              Yeah. The brand is certainly... If you're going to open Gordon's Burger joint in Long Island, nobody's ever heard of Gordon. And you might have a great burger, but you have no customer demand at the beginning, right? If you're going to open a McDonald's, you have a built-in customer base that already exists, but you also have a system that's been perfected. You have a POSs, a point of sale system. In terms of the products that you are required to buy to make your McDonald's, like every other McDonald's, an economy of scale in terms of meat and pickles and ketchup, and not just the product that you're serving, but also the look and feel of that restaurant or that retail establishment. There's going to be a relationship, it's called our supply chain, that the brand is leveraging on behalf of its franchisees for that economy of scale.

                                               Back to Gordon, if you're doing this yourself, you're going to have to go find somebody to do your flooring, your vinyl, your drive-through, all those elements of the system. The other piece is labor. The brand isn't hiring or setting wages, but in terms of employment, which is one of the biggest challenges in many of our member companies, employees desire to work in these types of businesses. And often pay and benefits, there's economy of scales there that we see in our research as well, but not every franchisor is created equal. And I think if you're a prospective franchisee, the time to be asking these questions, what do I get for my royalty and my other fees is on the front end. And shop around. Compare and contrast. And these things can be negotiated too, not with every brand. The less mature a franchisor is, you might have more ability to negotiate certain terms on the front end of the franchise agreement. But once you're into that relationship, the contract governs and typically it's a 10 or longer year contract that you're entering into.

Gordon Henry:                 Yeah, super helpful. Moving on from just the economics as we talk about these different types of franchising, if I'm a first timer thinking about buying a franchise, becoming a franchisee, what are some of the, for lack of a better term, hot industries these days that you would say people are moving into? You've got so many different types of industries. You mentioned restaurants, and there's gyms and workout facilities, there's beauty, there's almost any one. Almost anything that you could do, you could do with a franchise. What are some of the industries that are most popular right now? Is it something you can put your finger on it?

Matthew Haller:              Yeah, so we research this every year. I mean, quick service restaurants continue to be incredibly popular and despite a feeling that it's a saturated, there's too many restaurants to be chains, right? The innovation that's happening there, both in terms of brand and delivery, there's still a lot of demand both on the consumer side and a lot of innovation and different types of ethnic cuisine that's entering. Definitely the restaurant industry and particularly, quick service and fast casual that are doing business without, in many cases any in-store or physical retail footprint, like everything's happening through third party delivery and drive-through with changing consumer behaviors that were accelerated during COVID. Another category that is very hot right now is pets. If you look at the research trends of pet ownership in this country, a huge increase. And with that comes the need for pet care, and that is a growing category.

                                               Another area that is fairly robust right now is education. Both childcare as well as afterschool kind of specialty education. Those are three that are doing quite well, and there are a lot of options. The last I guess I'd mentioned, you touched on it is health and fitness and health and beauty. People are more focused on mental health as well as health and fitness than ever before. And while there are a lot of brands out there and just like every other category, not all created equal, there is a lot of development happening in those categories.

Gordon Henry:                 Yeah, terrific. Yeah, I'm glad you mentioned education. Just a couple of weeks ago, we had on the show the CEO of a franchise called Class 101, which provides consulting counseling to people to get them from high school into college, lots of services they provide, which is a growing franchise. And we've interviewed many on the show, things you never even thought about. One that I liked was a guy who runs a handyman franchise out of Canada, and they now have about 20 locations in Canada, and I think they're moving into the US. And if you've ever tried to hire a handyman near you, you're like, I could use that because it's hard to find somebody, especially somebody good, at a reasonable price.

                                               I could see that becoming a thing. Yeah, very, very interesting. With all those great opportunities for people to get into franchising, I'm curious about how many franchises fail. Because when you're in the independent, small business category, a statistic that's always thrown out is the number of small business failures, independent businesses fail at something like the rate of 50% in five years. I would think that franchises would fail a lot less because it is a system that's been worked out. There is a collective mindset. The franchisor has obviously thought this through. Is the success rate much better for the franchisees?

Matthew Haller:              Success is a hard thing to measure, especially in franchising, because when you look at the data, one way to look at it is renewals. Franchise terms are generally 10 or more years. Do franchisees renew at the end of their terms? And we see in the data that a firm that we work closely with called Fran Data looks at is around nine out of 10 franchisees renew their terms when they come up for expiration. So that's a positive indicator. The other really, I think, positive trend, and I touched on it earlier, is the growth in multi-brand ownership.

                                               People that succeed in franchising tend to continue to invest both in the same system as well as become diversified across multiple brands and multiple industries. Both of those trends continue to explode. Do franchisees fail? Yeah. All the time. But oftentimes if a franchisee, let's say a single unit person gets into the business for a couple years and isn't profitable, isn't happy with the franchisor, maybe they shouldn't have gotten into it. It's not like that location actually goes away. You might have a franchisee that owns a restaurant and they decide to exit the system. Typically they're going to sell that location either back to the franchisor, who's then going to find another franchisee to operate it. The company may operate it for a period of time and then find a new franchisee. With all these factors, it's a really hard thing to just say like independent, the restaurant statistic is nine out of 10 restaurants or whatever fail within the first year. It's virtually impossible to get a statistic like that for franchising.

Gordon Henry:                 Yeah, interesting. You raised an interesting point there. If I want to sell or get out or sell the franchise back to the franchisor, how does that work? Do I negotiate a price? Is there a preset fee? Is that in the original contract?

Matthew Haller:              There's not typically going to be a preset fee. It's going to be a negotiation depending on the brand and how well the units are performing. The franchisor could decide, yeah, we can generate a really nice multiple for us here. Or if it's underperforming, there may be a situation where you've entered into a 10 year agreement and you have an expectation that you're going to deliver a certain rate of performance in royalty revenue back to the franchisor over the rest of the term. I mean, the franchisor could require you to make that payment. Now, that's not exactly what's going to happen every single time, but I think this goes to clear expectations that each side goes into on the front end of the relationship, but it is a business contract, but there's a relationship element to it as well, and stuff happens in life. We can all get hit by a truck. All these things are laid out in the agreement and are fair questions to be asking at the front end of the relationships so that you go in clear eyed.

Gordon Henry:                 Got it. We just have a few minutes. We're going to take a quick break, be back with Matt Haller, and afterwards I want to hear a little bit more about the role of the IFA. Don't go anywhere.

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Gordon Henry:                 And we're back with Matt Haller, the CEO of the International Franchise Association, fascinated discussion about the role of franchising, how people can make money if you're interested in becoming a franchisee where you go for help. I want to talk a little bit more about your organization, the International Franchise Association. First of all, it has the word international in it. I guess international, is franchising as big internationally as it is in the United States.

Matthew Haller:              Yeah, it's in every developed and developing country. I think there are 70 plus countries that have a franchising community of some sort around the globe. We have international members, so non-US based franchisors who are members of the IFA. Around 70% of our members are doing business outside the United States. Obviously most are in Canada and Mexico, but significant presence in Europe and Southeast Asia, South America, and beyond Australia.

Gordon Henry:                 We've been spending all this time talking about independent entrepreneurs versus franchisees. I guess there's a misperception out there that franchisees or franchises are not really small businesses, that they're part of this giant sort of conglomerate, especially the big ones like McDonald's. Is it important to change that narrative? Is that part of what you talk to people in Washington about?

Matthew Haller:              Yeah, it's a constant battle. Franchising, it's not intuitive other than people like me that are paid to do this, don't wake up every day thinking, how am I going to change the perception of franchising? And we've perfected this sort of uniformity in franchising that gets delivered every day, whether you're going to a McDonald's or staying at a Hilton Garden Inn or whatever this product or service may be. But by virtue of that success of the growth of franchising, there's not a human face of local ownership oftentimes. When you go to, particularly in this era where, especially in restaurants, you've got delivery or through and there's less and less interaction even with humans. And so we've lost this local element. And franchisees have gotten bigger and scale, and many, as we talked about earlier, own multiple locations. But at its core, franchisees are still the business owners, not the brands.

                                               And that is what is unique and will never change about this business model. And when we look at performance of franchisee businesses versus independent businesses, they tend to be more profitable for franchisees, and franchisees also tend to be more diverse and more women, more minorities, more veterans. These are the stories that the IFA and by extension, we like to encourage our members to really be storytellers with one of your greatest assets. Gallup just did research that they do every year longitudinally and big companies are now some of the most distrusted institutions in America, along with politicians and government and media. But small business owners are the single most trusted voice in America, and we have all these great assets of these franchise owners, and so we need them to be engaged in telling the story of how they got in, what are the risks, what are the opportunities on our government relations and our advocacy.

                                               They need to be those people delivering those messages directly to policymakers and talking to the public about public policies that might impact this model. It is a constant battle. There will never be an end of promoting and educating about franchising. I guess it's good job security for people that work at the IFA. It's not like there's an exit strategy for a trade association that's going to sell to a private equity firm and have an exit event, but it's an important aspect of what we do at the IFA and I think important for anybody in franchising to understand that they can play a powerful role in changing that narrative.

Gordon Henry:                 Yeah. You bring up a really interesting point. If you said to me, who is the face of being a startup or an independent entrepreneur, I could think of a million. Mark Cuban is sort of associated, the Shark Tank guys, Kevin O'Leary, Elon Musk. Many, many entrepreneurs you can think of off the bat. If someone said, who's the face of franchising? I'd probably say Ray Crock, which is like the McDonald's from the fifties. The guy was in the movie. We really maybe need a face to franchising to sort of help give that voice, so that's an interesting point. We just haven't minute left. I'm just curious, what have been your biggest, personally, your biggest challenges since becoming the head of the IFA?

Matthew Haller:              I think the biggest challenge is probably that everyone's busier than ever, especially in the last two years, coming out of COVID. And encouraging people to find time to help us do our job, given what we know in terms of the research helps change outcomes most effectively. At the end of the day, people are head down focused on their business, but seeing themselves as part of something bigger and understanding what's at stake in terms of government policies that might be out there that could impact the way that they do business or their ability to monetize their investment. I think that's probably my biggest challenge over the last couple of years.

Gordon Henry:                 Yeah, terrific. Well, Matt, my last question to you is for people who want to find out more about franchising, who want to get involved, who may want to become a franchisee, who want to understand the economics. Is the best place to go to the IFA site? And give us that URL again.

Matthew Haller:              Yeah, franchise.org is our site. There's a ton of information that's there in terms of franchise opportunities, franchising education, and I definitely encourage that.

Gordon Henry:                 Terrific. Well, I want to thank you for coming on the show. This has been a great education for me, and I'm sure for our listeners, great to have you here and best of luck at the IFA.

Matthew Haller:              Thank you Gordon. Appreciate it.

Gordon Henry:                 And I want to thank our producer, Tim Alleman and our coordinators, Diette Barnett and Daniel Huddleston. And if you enjoyed this podcast, please tell your colleagues, friends and family to subscribe. And we'd love it if you'd leave us a five star review, we'd really appreciate it helps us in the rankings. Small business runs better on Thryv. Get a free demo at thryv.com/pod and check out our new product, the command center, which you will find for free download. Go to thryv.com for more information. Until next time, make it a great week.

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