How Franchising Grew Up: Joe Bourdow on the Transaction From Legitimacy → Education → Capital

Hello and welcome to this Harmonyze webinar. Today's guest is a good friend, Joe Bourdow, someone who has seen franchising from almost every angle. Joe started as a multi-unit franchisee, went on to lead Valpak as president for more than 16 years, and later served on the IFA board, on the executive committee.

Joe, I think for the last 15 years you've been advising franchisors, suppliers and private equity groups, helping shape the way modern franchise systems grow and operate. Is that right?

Yes, I think that's accurate and I had no plans to do it, but I've done it anyway.

Okay. I know you said the multi, the supplier, you've kind of seen every side, anything I didn't say in that two sentence intro?

Any other interesting side quests in your career?

Well, somewhere in there, I broadcast 180 minor league baseball games on the radio. Been involved heavily in the nonprofit sector here locally, in St. Petersburg and Tampa Bay in the last 12 years. And sat on numerous boards.

Yeah. And you've blended the two, the radio and the nonprofit, right?

Exactly. I founded a local public radio station in St. Petersburg, Sunshine 96.7 FM. We are an all volunteer, nonprofit radio station and internet platform and it's really gotten traction in the last two or three years finally. So very active with that as well.

I love that, it's so cool. Alright Joe, the question I really wanted to ask you, and I think the launch point for the entire conversation is the fact that you've really seen franchising over a longer period of time and from many different angles and ways that most of us haven't, even those that have been in the industry for quite a while.

In the spirit of talking about pivot points and how things changed, I wanted to ask, are there two to three real inflection points, where you felt that franchising either matured or fundamentally changed in some direction? And then I'd like to spend a little bit of time on either of them, but first just kind of, what are those two to three pivot points?

I think, some viewers here might not be aware of the history, but franchising, product franchising, and even business format franchising got going a long, long time ago. But it wasn't at all, I would say serious until, about 1960 and a guy named Bill Rosenberg, who was the founder of Dunkin' Donuts

and a bunch of his, cronies at the time, Ray Kroc of McDonald's and several others became concerned. Just distributor networks and people calling themselves franchisors were running all around. There was no regulation whatsoever, there was a lot of, crookedness and bad press and bad behavior going on.

And finally, Bill called Ray and they called each other and they said, let's meet in Chicago to talk about this. And, they then, as the story goes, slapped hundred-dollar bills down on the table and formed the International Franchise Association. Initially the IFA, was formed to sit down with the Federal Trade Commission and see if there was a way to come up with reasonable regulation of franchising and of the franchise model.

Normally you hear business people complain about government regulation and want less of it. But in this case, these major founders of the franchising industry realized that unless there was some uniformity and standardization, nationwide regulation,

it all gets shut down eventually because there were too many bad players out there. Well that was a success. They sat down and some years later created in cooperation with the Federal Trade Commission, what was known as the franchise rule and certain aspects of franchising that we still have today- a franchise disclosure document, a way to make quote earnings claims in the document so that franchise development people just can't make up stuff about how much money you're gonna make. So there's a regulated way to do that. Now what happened here was this created a barrier of entry because, there were some legal fees involved in coming up with disclosure documents and getting prepared to do this legally and it made it harder for crooks to be crooked.

And so as a result, the industry flourished and grew through the seventies, through the eighties. Probably the next pivot point, I think in looking back the history would be, enough people joined the IFA and it got enough, scale that, they realized that really the next step in addition to regulation education was really needed, not only of franchisors themselves, but also their management teams.

And so in 1989, the IFA started the Certified Franchise Executive Program, which has graduated thousands and thousands of folks. I've had the ability to teach in that program for about 17 years and finally just finally retired from that. That has made a huge difference.

In the nineties, that becomes another pivot point, and that is when, the franchise association, which had grown to thousands of members at this point, realized it was important to not only bring in franchisors, but also to involve franchisees themselves, and the suppliers to the industry. So that all happened and evolved as we moved into the 1980s and 1990s.

Third pivot point was private equity beginning to enter. Now you had this industry that had all developed from a few guys throwing hundred-dollar bills on a table, to a huge industry with a formalized education program, certification program, and some real success stories in terms of franchise brands.

But private equity didn't really, begin investing on any kind of scale until the mid 1990s, and it has accelerated since. To the extent that of all franchise brands that we know about, according to FRANdata, about 15% of those now have private equity investment in it.

And so that has resulted in money flowing into franchisors to grow faster, the creation of multi-brand platforms and a higher level of sophistication than had been around before. And to a certain extent, some culture changes in terms of how it all works. So, those are kind of the broad strokes of the last 60 years.

I kind of joined somewhere in the middle of that and I did have the opportunity to meet Mr. Rosenberg. But the rest of those guys were long gone by the time I arrived on the scene.

I love that it's that, you know, in hearing you speak, it sounds like it's 30 years apart, three different pivot points.

The first is something of a form of, legitimacy or making sure that the snake oil salesmen weren't using the name in any way. And then the second was really this idea of, okay, now that there is legitimacy and it's validated, how do we create cohesion across the entire piece

and this education piece? And then this third phase that you're talking about with private equity, and I know it's just a small but growing part of franchising. It's now how does franchising, now that it's validated and cohesive, how is it interfacing with outside investment in other industries and starting to become this form that's integrating with other forms of the broader economy? Which I think is really smart.

Yeah I think that that's accurate. I will say that the 12 and 15%, according to Forbes at least, and FRANdata. May be a little bit of a misnomer because we can eliminate all the really small brands. Brands that have registered but haven't gotten off the ground yet, or those that have no EBITDA or very little. So of the viable franchise brands that have significant scale, the percentage would be higher today.

Got it. Yeah, that makes sense. I know you said that you entered somewhere in the middle. I'm assuming that you weren't around for those hundreds of, dollars being slapped on to form the IFA. So, you know, let's maybe pick it up in that second, inflection point, which was this idea of starting to create a cohesion amongst the franchise industry.

I'd love to hear. In seeing that process, in seeing the CFE program, and seeing the IFA start to broaden its reach to suppliers and franchisees. Right, and like transparently, that's how you and I met, right? We met through the IFA and through educational programs within it. Curious, what did that look like?

If we're talking about, the nineties - how over that decade, can you walk us through the before and after, once these educational programs got stood up?

It was kind of interesting. I ended up at the national headquarters of Valpak because the founder didn't wanna do it, so I created a business out of training and identifying within the Valpak system what were best practices, and then trying to train to those best practices. And flew around the country and went to countless hotel conference rooms and did seminars for, the Valpak franchisees and also their sales representatives.

But it was all about, let's figure out what works, identify the best practices and then teach them and monitor them and measure them and all those kind of things. I think to a certain extent, a CFE program is a lot broader than just that now, but when I got into it well, first of all, I was surprised. First time I went to a convention in the very early 2000s, I was surprised that there were best practices that cut across all types of franchises. That was a real enlightening thing to me. Here I was a major printer of printed coupons across the country.

And it was hard for me to see what I might have in common with a McDonald's or a hair salon, a brand. And that's why I had never really gotten very active in the association. But once I went and talked to a few people and went to a couple of sessions, I realized, well, these were all the same issues that I was facing as a franchisor, even though I had nothing to do with their kind of business.

And that was a major thing to me. So then, for 17 years in there, when I was involved in the CFE training, our full day program was called, Fundamentals of Franchise Management. And it was a roughly 30 key issues, something like that, 25 or 30 key issues that almost every franchisor, if they don't know better were mistakes they make.

In that particular class, I played the role of a founder, a franchise founder, who made all of those mistakes and then, eventually went bankrupt and thrown out of the class itself. But again, there were clear issues along the way in the evolution of a franchise brand that founders and CEOs would have a choice to go one way or the other.

And if they went the wrong way, it had ramifications down the road. So we were able to identify with the help of a great law firm, DLA Piper, a lot of what the legal aspects, as well as the business ramifications were of these decisions. But it was all about franchising best practices.

Today, if I work with a new client, a new franchisor client, one of the first things I'm asking myself is, where in the evolution are they along the timeline? What decisions have they already made that might be right or wrong, and how do we get them on a path forward where they realize they don't have to reinvent the wheel?

Usually I'll join the IFA and take some of these classes. But, there are definitely established best practices and that was where I kind of entered it and it made sense to me because I had just done it with Valpak. I said, wow there's a lot here to learn. And if I'm making mistakes, which I did, I was able to go talk to people who could help me unwind the mistakes. It was very helpful.

I imagine that's around the same time that we started seeing this idea of the franchise executive or the franchise professional where somebody can start to, you know, I'm not sure home services was fully set up back then, but the idea that somebody was transitioning from home services back to QSR, over to wellness.

There was this idea of the franchising executive as a through line rather than any single industry. And that I do see that in the best practices, the documentation, everything that you're talking about that, I'll take your word on it that the nineties was when that really came about.

So, I'm curious, right. You know, this is a pivot point in the sense that you really started to have its own name as a cohesive, industry. What were the outcomes about, right? If I were to compare the IFA as a proxy, but more so the franchise industry in the year 1990 versus 2005.

I guess if we were able to hold those two right next to each other, what do you think would be the major things we would see as a difference between those 15 years?

Well, just a lot more educated folks. In a lot of people it became a kind of, not only a professional thing, but kind of a social thing that you wanted to have the CFE thing on your name tag.

And so we, you know, tons of people went through the program on all levels. I can remember, I won't mention his name, but he was one of the early major private equity investors in franchising. And you'd know the private equity firm, you'd know the brand, and you may know his name. One of the first classes I went to, he was in the class.

They had just invested hundreds of millions of dollars in this brand and he's taking the initial franchising class. And that showed me something, and that helped to get me, serious as well. So I think it was largely a matter of the programs getting better, and more people taking them, and the creation as you say, of this, professional kind of status that allows you to go across brands. And, you know, quite frankly, in the last 12 years that I've been working with various franchise brands, never thinking I would ever do it, it's all based on that. Except maybe I was an expert on direct mail and digital advertising.

All I know about a, McDonald's is there's hamburger and fries and a bunch of other stuff. But, when you sit down and work with a franchise brand, as an advisor or consultant or as a board member, it's largely around best practices, and you see things going wrong and you let them know that, maybe they're not doing it the normal way, and maybe that's creating, some issues. I recently had a client last year that was having franchise relations issues, you know, unhappy franchisees and they were private-equity owned. And I realized that private equity firm really didn't have any significant franchise experience or holdings.

The franchisor, home office team didn't have franchising experience, and none of the franchisees had ever been franchisees before. It was pretty easy to identify and talking to all these parties that, well, we need to like sit down and go here, 1, 2, 3, 4, 5, and take these things one at a time and see if we can fix the problem. So, without any huge business education, just with, you know, four decades of experience and my CFE, designation can be pretty dangerous at an old age.

That's cool. It's interesting what you say around the checklist, right? Because it's a blueprint for, or it sounds like it, it was the beginnings of a blueprint for somebody that's in one industry versus another, but both operating in the franchise model to finally have a framework, to have that conversation and a framework to draw the through lines. And then once those through lines have been written down and the education was set up, sounds like that was the first time that:

A, you had people that were external to it, right? That might say, I want to educate myself, I want to step into it. And there was a path to, getting interwoven into this, rather than what you're saying is, you just need decades of experience that happened to be franchising and that was the way before.

And now there's a, gives some, almost some course material there.

Just to make that clear, if you're recruiting a vice president of operations. The person may have worked at one or two or three companies previously, but if they got the CFE, they've got some broad based, and they should pay me for this reference as the CFE.

I still pay them. In other words, you say, okay, well this person's serious about the franchise model. They've had some broad exposure to various issues in franchising, even if it's not in the operations department. Same thing with a franchise development, franchise sales person, if you will.

They've had some broad experience and legal issues, operations issues, things that play into franchise development that are not directly related to franchise sales.

Awesome. I guess this is a nice way to segue into that third pivot point, which you talked about, which is private equity.

And you just alluded to it too, with the starts of some initial investors looking at the model, getting educated in it around the early 2000s. I've heard now, folks talk about, it just makes so much sense, right? You don't hold the liabilities, it's kinda just there's like this, massive network,

it's all upside, right? Like in many ways franchising is the hot thing in investment right now. When did you really start seeing private equity having significant presence rather than the odd one or two investors, but when did you start seeing it more of an industry trend, if you will?

It started out with the Dunkin's, the Burger Kings, Bain Capital, all that. It started on a big scale, somewhere in the nineties, and then somewhere in the 2000's, and I could research this, but you had entry into it with Focus Brands, which became Roark Capital.

Which now is perhaps one of the biggest investors. They own Subway and a bunch of other things. But, I remember they entered and I believe, if I remember correctly, Schlotzsky's Deli is where they began their journey. Learning a lot, they bought one of my competitors at the time. And you then started to see smaller brands earlier in their evolution, but still significant scale brands being invested in by private equity. And it continued that way for a long period of time, in the last 10 years. And it used to be that most private equity firms, because of the nature, they really were not set up to buy or invest in smaller brands.

So they might be looking for, over $10 million in EBITDA and probably a lot more. I had one private equity firm say, if we're not striking a check for $150 million, we can't participate. And I told 'em well, strike away, you're not gonna find a lot, if that's what you're looking for.

In recent years, so much money was available. So much money was on the sidelines. There was pressure to get money invested in these private equity firms, so there was downward pressure that began looking at smaller brands, earlier in their development. Then you had within private equity, you had big, middle and little and boutique.

So there was an evolution as they tried to invest. Probably the biggest thing to understand is, platforms began to be developed. So you might have one lead brand that was, significantly profitable with scale and then, they would acquire an investment.

Or perhaps buy out the main brand, and then begin looking for, other brands that were complementary to it, and where they might be able to get synergy and a lot of other advantages. A lot of that has happened. So you have probably 15 different or more different, smaller franchise brands. Now, the good news is that the smaller brands get expertise, they get some money to help them grow. You know, if they've been struggling in franchise development, maybe they'll get a much higher level person to lead the effort. Same with operations or get a real CFO, any of those things.

That's all good. And, so they get money and expertise. On the rough side, not so positive side. Unless the private equity firm has a lot of experience in franchising, a lot of 'em make the same mistakes that franchisors can make because they wanna do things fast.

But one of my early mentors says in franchising, you can't fool Mother Nature. Certain things across franchise systems take time, because a franchise system is made up by CEOs. They don't work for you. And it takes time for them to adopt a new idea.

You can't just say, our marketing research indicates that we have this great new idea and, we're gonna implement it, beginning January 1st. You stand up at your convention in November and say that, and they're throwing stuff at you, no we're not gonna adopt it. If you say, our franchise agreement allows us to adopt it and we're gonna adopt it, then those guys are going, no, you're not.

We're gonna form a franchise association. We're gonna bring legal action and you, and off we go. So it requires, management, time and, where we're seeing some lawsuits in litigation, it's a lot of times where, they're trying to push smaller, less developed brands faster than Mother Nature will allow, and it creates noise in the system.

It creates friction, worst case litigation, but, it's a different business. One story I can tell, it really explained that better. Our company was owned at the time by, Cox Enterprises, which was, they're now an automotive and healthcare bunch of things, but they're a big media company, TV, Cox Cable.

Great company, and they were a great owner of Valpak for many years. When I would go to the senior leadership meeting at Cox, there would be 4 or 500 people in those days all reading their Wall Street Journals in the morning. And the chairman of Cox would come out to the microphone immediately

everybody quiet and he'd say, good morning. Okay, go to any franchise conference in America, particularly the larger ones, and there'll be a big countdown clock up there for the start of the session. And the reason for that is hopefully the CEO doesn't have to walk up and beat on the microphone, and say everybody sit down and shut up.

When we would bring in people to my company, of course I'm going to the microphone saying, alright, sit now, shut up we got a big program, gotta go. Their first indication was, but they don't seem to respect you. I know, they don't need to respect me, they're CEOs too.

So that's, it's a whole different culture and it's a wonderful culture. It's a great model, but you gotta understand it. You're more of a leader than a boss if you own one of these companies for that reason.

That's interesting, because you need to convince, you can't command is what you're saying, right? And if that's the model, then naturally the time horizons on all these things are a bit longer. But the PE groups have their own time horizons and they have investors, and they have commitments they're in.

Right. So that's a possible misalignment, for that reason. Exactly.

So how did that, my natural thought is, what changed in the last few decades where it made more sense and you can achieve those time horizons? Why is there more transaction frequency now than before?

And more money being made now than before. Clearly there has been an acceleration in the industry that allows for these private equity groups to make good on their promises. What is the underlying thing there?

I think they're just getting smarter and getting more experienced, and they realize these issues.

And a lot of the mistakes are being made by folks with less experience, who are investing. There's a way to do this right, and there's a way to do this wrong. If you do it wrong, it's not gonna work. But, those that recognize that there are differences and that, you know, there is a fundamental understanding that there's a system view, and there's an individual franchisee view of the world. So if you own a unit of a franchise system, or five or six or a hundred, you may have different priorities for your company than the franchisor brand does. And a different timeline, different goals, and to the extent they're in alignment with the franchisor, that's great. But the franchisor can't come out with a new program.

I was involved with a restaurant company that tried to roll out a new menu that they had fully researched, fully, had the thing nailed. No question about it. But you had a significant portion of that company's franchisees who were very satisfied with the status quo, thought it was risky to make this change.

They were not gonna be early adopters. They were pushing back and that caused friction in the network. The priorities of the franchisor brand, even if they're completely researched and ready to go, may not be on at least on the same timeline.

I had a very good friend, a franchisee who was actually my brother, when I was a multi-unit franchisee in FASTSIGNS and in Valpak. When I became the franchisor, he was one of my toughest critics. It wasn't because he had bad ideas. He had ideas I could not implement because the timing was wrong.

He would say something, I would say, well, I think I can do that five years from now. Sure enough I did 'em and I had an opportunity last year to, he's in his low eighties now, and I was able to say, we did all those things just not fast enough for you.

And I think that illustrates the difference between the system view and the individual view. He might not have recognized that half our system wasn't ready to implement his ideas. My job was to have a system view and to try to find the right mix so that we could raise the whole level, of all the boats in the harbor.

And to the extent that I could explain that. And get it right, then we would be successful. And when I came out with an idea that I thought was gonna add a couple of those that they were so absolutely the right thing to do. You're crazy if you don't think so. And people would just say, well, no, you're crazy and we're not gonna, right?

To answer your question, I think there are very sophisticated private equity firms now with a lot of experience. Hesitate to name names, but, you know who I'm talking about. These are folks who have acquired, grown, led and perhaps exited, brands, with a very nice return on investment and they've made the brands better along the way, so it is being done very well.

But there's still, more and more people, coming into franchising in the private equity space that have to learn these lessons and eventually they will, or they'll go someplace else.

Maybe that'll be the last thing I ask you about and then I think we'll wrap up. This idea of how the people have changed, right?

And maybe through the lens of private equity is an interesting way to do that. So you talked about this influx of capital that was going after brands and then, whether it's parallel or maybe slightly at a different timeline, you saw them really start focusing private equity in acquisition on the franchisee level.

And I think, there's two things there, right? Which is that at both the brand level and the franchisee level, there's a viable exit path that everybody's aware of, which maybe didn't exist before. One of the interesting things that I've seen is, I was at one of our brands, annual convention, and there's this open talk around what value do you want your franchise brand to be as a franchisee when you exit and this open talk about the valuation, with the understanding that it will be private equity that consolidates that or buys that up, right.

And so, naturally when you have exit plans and people now understand that this is maybe not the lifetime, but they can work hard for 5, 10, 15 years and have an exit path and build generational wealth and all of these things, and maybe not hang onto the business. Now, that this is a viable thing for both the brand and the franchisee, how do you think the people in franchising changed and developed new thinking? Or newcomers coming into the industry because now there's this opportunity to work hard, make money and then exit. How do you think that's changed in, call it, the last 15 years?

I think there's a generally higher level of sophistication all around.

The brand I was talking about that had no experience, they also had the most sophisticated group of franchisees I've ever run into, ever. These guys were sophisticated investors, they had experience running businesses, and those guys were attracted because the private equity firm was respected that owned the company, the franchisor brand.

So they all came together in this family, realizing they still had to learn how to get married and go to marriage counseling and do all the rest of this stuff that they were having trouble with. So I think it, you're absolutely correct. I think that, more and more franchisees, well, the whole growth, we haven't talked about multiunit franchisees.

That's a whole big deal. Particularly in the restaurant space where you have companies that own hundreds of units or thousands of units in 2, 3, 4, or 5 different brands. And they're often private equity owned groups. It's like everything, it's evolution, it goes, it just gradually goes.

But I think we've moved to a new level of sophistication. I know back at Valpak, I had come out of the radio business and I knew the value of a radio antenna, which the way it used to be, not anymore. My whole focus with our franchisees was to try to create programs that would increase their passive income.

And these were national sales programs where we would, we were trying to, I would say, make money while you sleep. Passive income from a national or regional advertising program, that was what the business we were in. Now, when we put that out there, it was total violation of our franchise agreement.

It couldn't be done. But we put the vision out there because if we could increase the passive level, a large account business with these franchisees, the value of their entities would go way up. Not only would they make more money, but the equity value would go up exponentially over just their day to day local sales.

Again, we laid out a vision. It took probably close to five years in order to get all the negotiating done, everybody had to give up rights. We had to completely redraw with the airplane in the air, we had to completely redo the deal. And, you know, ultimately it worked out very well for a whole lot of people.

And there's still some old timers around who may see this, who have accounts that spend, you know, what my total revenues for my Valpak franchise were in 1990. That's one account. So it's all completely different. And, now in that case, private equity has bought back most, the majority of the Valpak franchises.

And so they're operating, the current owner operates it mostly as a company sales operation today.

Fascinating. Crazy how that happens. Full circle.

Alright, Joe, I think we're wrapping up on time, but I can't thank you enough. Super insightful, I think, insightful for me, just knowing that, I thought we were gonna talk about pivot points recently, and we started at the beginning of time for franchising. But this is super insightful. I appreciate you sharing this with our listeners.

Yeah, hopefully it's helpful. And again, I think it's like any other thing. It's a good thing that's taken time to evolve and all the way along there were problems.

And so I think a lot of people say, well, now we have all these issues with private equity. But you know, they're gonna work themselves out just like, Ray Kroc and Bill Rosenberg were able to cure the wild, wild west.

Yeah, that is nature, right? We see the problems and we remember the solutions.

Exactly. Alright Joe, thank you so much. I appreciate you taking the time and we can't thank you enough.

Trip down memory lane. Thanks.