Money Rehab with Nicole Lapin - Franchising 101 with Nigel Travis

Episode Date: September 14, 2022

Nigel Travis (former CEO of Dunkin' Brands, current business expert) gives a masterclass on franchising: how to become a franchisee, the path to a profitable franchise, and why becoming a franchisee is the ultimate business kickstarter. 

One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that

I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN. That's Chime.com slash MNN. Chime. Feels like progress. Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A. Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Booths are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details.

Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player game stop and should i have a 401k because you don't do it no i know you think the whole world revolves around you and your money well it doesn't charge for wasting our time i will take a check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. I am so stoked about this episode that I'm going to cut right to the chase. Today, I'm joined by Nigel Travis, CEO extraordinaire who has been at the helm of Papa John's,

Nigel Travis, CEO extraordinaire who has been at the helm of Papa John's, Blockbuster, Burger King, Dunkin' Brands, and more. We're going to dig into the fascinating and often misunderstood world of franchising and why, if you have enjoyed some oat milk in your cold brew at Dunkin' lately, you have me to thank for. Well, kind of. Nigel, I am so, so, so excited to say welcome to Money Rehab. I'm delighted to be here. This is not our first rodeo, of course. I had you on CNBC 12 years ago, was it? When

Duncan Brands went public the morning of. Is that right? You did. And you had me before we went public and then talked to me many times and even came to Dunkin', didn't you? I did. And I even had a special flavor made for me. It was the vegan test flavor that was delicious. I hope that one day it reaches more people than just me. And you were so kind and put soy milk back in the day before any of the brands had alternative milks in my local duncan by my house in new york it was so nice so you go down as an influencer for soy milk okay that's that goes to your uh i can take some credit for that yeah you can really tell me more well i mean i think you're right you started a trend and uh you you

used to barrage me with these emails and saying i'm not going to drink the coffee unless it has soy milk so i was the soy milk muse so all the all the lactose intolerant or vegan people can credit me for their soy milk and their Dunkin' Coffee. That goes along with all your other achievements. Well, this is the biggest one by far. So, wow. Thank you. I cannot think of a better person to have on the show to talk about franchises.

So thank you for being here to do that. I'm delighted to be here. And I think it's a great subject. And ask me anything you want. Let's do it. Let's dive in. I think franchising is one of those terms that we hear so often that we forget to do a gut check to see if we really understand the concept. So let's just start at the beginning. Can you define what a franchise is? Yeah, that's a good question. So franchising at one stage didn't have a very good reputation. Franchising at one stage didn't have a very good reputation.

It actually goes back into like the 20s and 30s, but really became big in the 50s and 60s with the foundation of big chains like Burger King, McDonald's. Dunkin' actually started in the early 50s. And various laws were brought in to regulate it over time. So over time, it became better respected. Franchising today, and I'm reading from some 2020 numbers, there are 750,000 franchise establishments in the U.S. with an output of $670 billion U.S. dollars

and employing 7. a half million people. And that is just the US. That's ignoring every other country in the world. And having been with all those brands and a few others, franchising has helped great brands move around the world. But to answer directly your question, it is a concept. But to answer directly your question, it is a concept. It's a concept that people like and usually have been proved successful in what's called corporate stores, stores that the brand owns.

And then they decide to set up a franchising business and they then franchise usually in a small region. Then it grows across the country and finally across the world. Then it grows across the country and finally across the world. And you then have companies like Yum! Subway having tens of thousands of stores. Yum! Brands has a bunch of things under it, right?

That's like Taco Bell. And what else do they have? KFC and Pizza Hut and The Habit. There's two sides of this equation, right? There's the franchisor and the franchisee. So I'd love to dig into both of those sides and how these deals come together. So let's start with the franchisor. Let's say I had a business.

It was booming, of course. And I wanted to scale it by franchising. How would I start? Well, I think you'd start by effectively writing up the concept. So, I mean, you are a very successful author and we've actually competed and you won by a mile. So let's say the business is book writing. You'd write up how you write books. You would then make sure that it's clear, simple and replicable. And then you would probably go and get some lawyers because, as I said earlier,

there's all kinds of requirements that have been brought in over the years. And one of them is the franchise disclosure document. Before anyone buys a franchise, they should look at the franchise disclosure document that has a whole list of things that has to be in it. And the document, if you can see it, is about two or three inches thick. It's a lot of information. And then you would hire some people who would go out and try and find franchisees. And franchisees typically pay a royalty for access to the brand. And the key word is the brand.

That would be Nicole's book writing brand. Store or whatever. And you would pay a royalty, typically something like 4% to 6%. And then because you want to grow the brand, there would also be a marketing fee. the brand, there would also be a marketing fee. And depending on what kind of franchise, there's often other fees like for information technology, things like POS, if it was a restaurant or a retail outlet, and development fees for opening stores or having territories. So you pay that to the franchisee, franchisor, and you get for that the brand, you get training, you get support.

But at the same time, the franchisor has to make sure you're maintaining the standards that the brand started with. So you said 4% to 6% of what? Of usually gross sales. It sometimes varies, but gross sales. So give you an example from Dunkin'. A typical Dunkin' Donuts, and as we sold the company at the back end of 2020, I can't give you the actual numbers now, but let's say you do 1.4 million a year, you'd pay, actually in

Dunkin's case, 5.9% royalty. So the company would take 5.9% of that 1.4 million. And similarly, there's a 5% spend on marketing. And that goes into a pot. The marketing goes into a big pot called the advertising fund. And franchisees work with the company to spend that effectively. And in Duncan's case, that's hundreds of millions. McDonald's is over a billion. And they work with advertising agencies, marketing people in the company, and groups of franchisees organized around the country to decide how to spend the marketing dollars effectively. It may be TV advertising, it may be radio, it may be obviously digital. TV advertising, it may be radio, it may be obviously digital.

It may be in some cases, and Duncan did a lot of this, working with various sports organizations around the country. So let's double click on that. Let's say I wanted to start a franchise, a Duncan location. How would I even begin? Well, you would go probably on a website, look at all the information, collect all the insight. And most franchisors have good websites with basic information. You then fill in some details, you then send it off, and then they would interview you, give you more information. But most franchisors are pretty brutal.

And by the way, I think they should be in who they let into their brand. Because if we go back again to your brand, you wouldn't want anyone just coming in and ruin the brand. It's all about the brand reputation. So you recruit people and ideally you bring people in for some kind of orientation, see if they're going to fit, got the right personality. But essentially you find out the information online and I would always advise anyone, and I know a lot of your listeners are looking at franchising,

I would advise them to get some financial experts to go into detail and probably also a lawyer to check all the franchise legal agreements. How much roughly do I need to have in order to even start thinking about opening up a franchise? Well, it's all over the place. But basically, to open a franchise in a simple business, not a Dunkin' or a McDonald's or Servpro, you could probably find something for $30,000, $40,000. What would a simple business example be? Probably some kind of cleaning business. I mean, I don't know their terms and never looked at it,

but Molly Maid might be a good example. Gotcha. And then bigger franchises. I mean, to build fast food stores or other forms of restaurant, you can be spending in the high five to a million dollars just to put the store in place. So a company like Dunkin', when I left, we only really brought people in who were going to build at least five sites. I think a lot of franchise ores are in that case. There are franchises out there that bring people in

to do one or two stores. Traditionally, Subway has done that. But I think the key thing, Nicole, I want to spell out, whether you're on the franchise ore side or on the franchisee side, it's all about the relationship. And I spoke in Las Vegas last week to a fairly new chain. I won't say what it is. They're growing very quickly. Just between us girls, Nigel. No, no, no, no. So many secrets. The key thing is you want a franchisor who thinks about the franchisees and makes sure they're focused on franchisees making money.

And one of the things I think was a major reason for our success at Dunkin' and at Papa John's is there are profits for the franchisor, there's profit for the franchisees, and you have to think that sometimes they're going to clash. If you realize there's going to be a clash, the job of the franchisor is to bridge that with the franchisees. And in larger organizations, there are franchise representative councils who represent the franchisees, and you have debates.

And one of the things I'm most proud of in my life, I've always had great relationships with the franchisees and you have debates. And one of the things I'm most proud of in my life, I've always had great relationships with those franchisees. And I think that's really important because if you work on it together, recognizing that there's sometimes a conflict with the interests of both parties, I think you'd get success. So let's say I want to open a Subway location in Los Angeles. How much money would I need to start that up? I need to find the location. I need to pay for what exactly up front? Well, you'd probably, I don't know exactly for Subway,

but you'd probably pay some kind of fee to open the store. You'd obviously have to probably spend money on training when you've got no revenue coming in you then have to find a location and if it's in los angeles uh one of the problems as a result of the pandemic is you know there's been a a big backlog of of buildings requiring permitting by local authorities and local planning departments. So that's slowed it up. So sometimes you have to wait longer to get any revenue

because you have to set up the store, build it, train the staff. So I don't know how much a subway is to build, but let's say it's 300,000. I think you'd struggle to get away with less than 400,000, but obviously it depends on your cost of living. Hold on to your wallets, boys and girls. Money Rehab will be right back. One of the most stressful periods of my life was when I was in credit card debt. I got to a point where I just knew that I had to get it under control for my financial future and also for my mental health. We've all hit a point where we've realized it was time to

make some serious money moves. So take control of your finances by using a Chime checking account with features like no maintenance fees, fee-free overdraft up to $200, or getting paid up to two days early with direct deposit. Learn more at Chime.com slash MNN. When you check out Chime, you'll see that you can overdraft up to $200 with no fees. If you're an OG listener, you know about my infamous $35 overdraft fee that I got from buying a $7 latte and how I am still very fired up about it. If I had Chime back then, that wouldn't even be a story. Make your fall finances a little greener by working toward your financial goals with Chime. Open your account in just two minutes at Chime.com slash MNN.

That's Chime.com slash MNN. Chime. Feels like progress. Banking services and debit card provided by the Bancorp Bank N.A. or Stride Bank N.A. Members FDIC. SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe eligibility requirements and overdraft limits apply. Boosts are available to eligible Chime members enrolled in SpotMe and are subject to monthly limits. Terms and conditions apply. Go to Chime.com slash disclosures for details. Now for some more money rehab.

So I have to find the actual location. Okay, good question. That doesn't always happen. Some franchisors find it for you and will say, hey, Nicole, this is the perfect site for what you need. But in most other, and I'll say this is the majority, majority of franchise businesses, it tends to be a collaboration. Now, a lot of franchisors, and Dunkin' was one, outside of the historical territories like Boston and Dunkin' was one, outside of the historical territories like Boston and Dunkin' and Boston and New York, the rest of the country, we gave people areas where they could build like 10, 15 stores, and they'd find sites, we would then approve them. And sites, it isn't

just like finding any site. I mean, Dunkin', you have to take into account things like, is it on people's way to work? Because it's basically a breakfast concept. Is the access to the store effective? Can you just drive in? Can you go into the drive-thru? And to give you an example, I always remember one day in Florida, I saw a store that was doing 17,000 a week in a strip mall. It then moved 200 yards, was a drive-through on a corner, and zoomed up above 2 million. So what's that? I've gone from about 850 to2 million just by moving 200 yards.

So they always say an old phrase is location, location, location. That's so true in most restaurant or retail concepts. So are franchisors, big ones, really real estate companies? No, no, because they will, in most cases, lease from another individual. But in some cases, franchisees say, I want to stay here for a long time. They then buy the real estate. So it's a mixture. And if you go into McDonald's, McDonald's owns, I think it's the majority of the real estate and the franchisee actually leases it from McDonald's. McDonald's owns, I think it's the majority of the real estate and the franchisee actually leases it from McDonald's. So I was thinking of McDonald's because I think there's some business school saying, asking the students what kind of business McDonald's was in. And they

would say hamburgers and they would and then the professor would say, no, it's real estate. Yeah, real estate is very important in any retail, and I include fast food and other restaurants. Real estate is very important. And who owns the real estate is also important. And I think I'd just say, if any of your listeners are outside the country, there's a tendency for Americans to think that real estate works the same elsewhere as it does here. In this country, people tend to have five, 10 year leases. In the UK, for example, it's about 20 years. Oh, wow.

That's no joke. So let's say I want to start, I have to start five Duncans because that's the minimum you said, and it would be like 500 to a million bucks a location. So I need to have cash two and a half million to five million bucks on hand just to get going, you would say. And I'd need to have that in cash or can I finance it? Oh, no, you can finance it. And one of the things I think was probably different from the way I ran Dunkin'. I mean, we recognized that in the franchise economics, their financing was very important.

So what we did is every year we had a meeting with all the financiers who supported the franchisees because it was important for them to know us. It was important for them to understand how the brand saw the franchisees. It was important for them to know what's up to date. And franchisees regularly told me that was one of the best things we did, because the partnership with the people, the local bank or whoever it is, is absolutely critical. So most of them will

borrow money. I think it's a really accessible way for a lot of people to grow wealth. I, as you know, grew up in an immigrant family, and I think that's a much more tangible way to grow wealth or generational wealth than putting money in the stock market. Yeah, well, no, no, I agree. And it builds a business. And I was having this debate with my wife, who, you know, that I think there is a real she's right that she's the brighter one i didn't hear the the topic but she i i vote for her yeah no no you should do um so i think what is absolutely critical is that people realize that they're building a business and you mentioned immigrants in duncan we had a lot of people who came from Portugal, Brazil, and India in particular, other countries.

They built businesses. They pass it down to their kids. So you're building not just individual wealth. You're building family wealth. Yeah, generational wealth. Yeah, but they've worked really hard. And I think one thing that your listeners should know, like most businesses, you don't get anywhere without hard work. I mean, back in the early days of Dunkin', people were up at 3 o'clock in the morning making donuts at the back of the store.

That's changed. But you really have to work hard at making this business a success. And you have to get to know your customers. You have to be involved in the community. And it's not a case of just going to the store, opening the store, and then closing at the end of the day. It's a lot more than that.

So let's say, you know, in our example, you need about 5 million bucks to open five Dunkin's in LA. And maybe more costs for the marketing and other fees, right? How much can you expect to make and when? There's thousands of franchise concepts, so I can't give you an average. But what I will tell you, a good standard is if you can get cash on cash returns, that means getting your cash back in a certain time over three years, or sometimes they do it as percent, 30% return on your equity per year. And obviously,

you look at cash, a lot of people get confused between the P&L and cash. Cash is kind of king, and you take into account accounting concepts like depreciation so i would say 30 is a good standard but probably 20 for a lot of people is fine i mean it depends how aggressive you are how ambitious you are but i think you you should see in the fdd and this is a key point the franchise disclosure document that i talked about earlier they should put in the FDD, and this is a key point, the franchise disclosure document that I talked about earlier, they should put in their historical returns. So if you're going brand new into a concept, you can look at how that concept has behaved and performed in the past. So 20 to 30 percent of what? Of the cash you've invested.

Would it be your profit or your revenue? No, it's the cash you produce, not the profit, the cash. And what would the profit be? Well, again, it depends on the concept, but I'd say at store level, something between 12% and 20% is fairly normal in a restaurant concept. Of profit from? The revenue of the store. A year.

So if you did a million dollars sales and you made $150,000 a year, and then you go into another debate, is your salary in there or not? So you may work the store. A lot of concepts people buy it was called buying a job and and they i mean they're saying some of the smaller concepts people who are on a salary of say 40 000 a year say i'm going to go into franchising i'm going to work the store and they will be part of the labor costs. So if they take money on top of that, it's their salary plus the money they've gained from the profit of the store.

And when do you typically turn a profit? Does it take a few years or can you expect it right away? I've said this like 10 times. Depends on the concept. A lot of stores build over time. A lot of stores go into newer areas. If you're a mature concept like Dunkin' or McDonald's or Burger King, you may say, hey, we're going into this area.

This area is going to develop over several years. So it may build over time. But I would say most stores, if you do a great grand opening where you bring in a personality like, I know someone most stores, if you do a great grand opening where you bring in a personality like I know someone in L.A., I think her name's Nicole, to make it an exciting launch, it often starts very high. like California, some of the stores kicked off at the highest level they ever had because people were so excited that Dunkin' was finally coming to their territory. Yeah. The left coast was so happy when the Dunkin' migration started to happen westbound. Sue, thank you for even repeating yourself that it depends. I, as you know, love to follow the money trail. So I want answers to how people can make money. So tell me about the

franchisor perspective. Let's say you're crushing it and you want to franchise your business. Does opening yourself up as a franchisor make you more and more vulnerable to the misuse of your branding, intellectual property, or scams? Or what should you look out for? What are the challenges of the model? Have you become a franchisor? I think you have to have a number of replicable outlets to demonstrate the success of the brand. I think you need great lawyers because there's a lot of laws out there. It's easy to infringe on other people's trademarks, so you need to check on that.

And at the same time, you need to protect your own trademarks. So I think that that's the first piece of advice. There are franchisors who are very small companies, and they have unique concepts. But I really think if you develop it, and it's interesting that the majority of restaurant companies, particularly in fast food, are now franchised, because the benefit of franchising is you can grow quicker,

you get more money into the ad fund. One benefit, by the way, that some people never mention. In most companies, when time gets tough and the economy gets tough, they cut back on marketing. You can't do that in the franchise business because it's not your money. If you're my franchisee, you put money into the ad fund i can't cut you we can't cut back on marketing because it's your money so so i think it's about fast growth it's making sure the franchisees are controlled a lot of franchisees have built a lot of stores that effectively haven't worked because they've gone too quickly is so the franchisor

needs checks and balances to make sure the right things are being done and sometimes that needs pretty strong discussions to make sure everyone's on track and you keep mentioning lawyers uh is it expensive is an expensive process to set up i think there's a lot of franchise lawyers out there i mean it's just a case that there are laws to protect people which is i think we all agree is a good thing right i mean yes we're very bullish on laws in this episode in general do not break the law people so so i think this is a concept there's a lot of legal stuff out there uh the relationship with franchisees can go haywire. So again, the lawyers come in. I was very proud of the fact that at Dunkin', when I got there,

we had something like 600 lawsuits with franchisees. I managed to get it down to like hardly any by the time we left. And it all comes down to the culture and the environment you create as a franchisor. What kind of lawsuits would those be? Well, that would be things that, you know, the franchisee hasn't reported all their revenue, which is quite a common one. In other words, they've cheated on reporting because they haven't shown the honesty of reporting what revenue comes through their stores. It could be cold labor.

It could be that they've broken some local planning, all kinds of stuff. Do you think running a franchise is a masterclass in entrepreneurship? In other words, if someone wanted to start their own company, would starting off as a franchisee be a useful way to learn the business ropes? I think 100% because it really tells you how big companies, well, biggish companies are run, how smaller companies are run, how to create the, how to, and this is the most important thing to me, how to employ people, how to make sure you don't have

turnover how your finances run you'll learn so many disciplines i think to use your phrase it's the perfect masterclass yeah and it's almost like a business in a box you don't have to think through a lot of the things that the parent company already has. The most important question is, what's your favorite donut flavor? I don't think I know this. I always said the same thing on TV. Glazed. Boring. Yeah. But you're not boring, so it balances out. For today's tip, you can take straight to the bank. If this conversation got you stoked on franchising too, and you have a particular brand that you'd want to work with, check out what that brand requires in a franchise application. It may be an endeavor that takes you a few years to work toward, if a brand requires a certain net worth in order to start a franchise or a large amount of liquid cash available from the jump. In short, you might not be able to start a franchise today, but you can put yourself on track today, so long as you make a plan.

Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.