If You Don’t Want Or Need A Safety Net, You Don’t Want Or Need To Buy A Franchise

“So, maybe you don’t really want a safety net, Isabel.”

She’s back! (The previous Isabel post will lead you to even earlier posts that chronicle her buying journey as a prospective franchisee). And once more, she’s not ecstatic. 

“Am I giving up my soul?”

“I don’t want to give up my soul,” she said. “I just want to own and operate my own successful business.”

Oh boy. Here we go again, I thought, back to the indentured servitude nonsense, when I first started chronicling Isabel’s adventures. 

“We’re not going there again,” I said. “I know you’re the client, but we’re not going there again.”

“No, no, I agree,” she assured me. “This isn’t about that. This is about my ability to make decisions relative to how I operate my business. Can we talk about that?”

Franchising always includes controls

“Certainly we can,” I said, “but don’t expect too much. You’re talking about buying a franchise, Isabel. By definition there will be controls. Controls mean limitations.”

“But there are some things that I just want to do my way, at least once in a while. I want to test my ideas! What if I come up with the next greatest product for the franchise, something they wouldn’t have thought of without me?”

Controls are limiting to franchisors, too

“That’s a risk the franchisor is willing to take,” I explained. “People think only franchisees take the risks in franchising. Franchisors do, too, but in different ways. Their controls sometimes limit their ability to expand and grow and develop new products and services, but that’s a risk they are willing to take. You’ve got to take that risk, too, or don’t buy a franchise.”

“But it shouldn’t be that way,” she protested. “I’m a reasonable person, in spite of my excited personality. I have ideas. If it’s a good idea, I don’t plan to keep it to myself. I’ll share it with the franchise. I just want to be able to test my ideas.”

Do it your way, test your ideas

“Then start your own business!”

“I can’t do that,” she said. “First, I don’t have the money, and you know that.”

Uh-oh.

Suddenly that excited personality was kicking into gear and I was going to take the brunt of it. Rather than tell her to “Go get the money!” which is what an entrepreneur would do, I bit my tongue. Plus, she’d need a lot more than just start-up money if she intended to “test” her ideas.

Testing ideas is a risk

It’s in the testing that businesses fail. It costs money to test ideas! That’s why franchisors don’t want franchisees to do it. Franchisees only have so much money, and they generally don’t like to raise more money. They need to invest their money wisely as they open and build their businesses. Investing it in tests isn’t always wise, and in fact, usually doesn’t work out.

That’s why there are controls!

But rather than explain all that now, I calmly said to Isabel, “This isn’t my fault. I’m not forcing you to buy a franchise or even to start a business. So before you get too excited, let’s stay grounded. Is there a second reason why you can’t start your own business?”

Franchising also comes with know-how

“Yes,” she said. “I don’t know how. I know I don’t have all the answers to the issues that I’ll face in starting up my own business. I don’t know enough about location, for example. I don’t know how to deal with landlords. I need some equipment and I don’t know what to buy without someone’s guidance. I don’t know enough about marketing, and I’ve never really liked to sell. That’s why I’m interested in a franchise. They’ll help me with all of that.”

It’s called a safety net

“Indeed, a good one will. That’s the safety net they throw out to their franchisees. They provide training, guidance, support, know-how, along with a brand name! But not everyone wants a safety net, Isabel, because it also comes with a price. Controls! Some people are bent on doing it themselves. If you’re one of them, please don’t buy a franchise. Get off this merry-go-round of shopping for a franchise. Save yourself the aggravation.”

“You mean save you from my excited personality, don’t you!”

I enjoy this fringe benefit

“I didn’t say that. I enjoy your excited personality. I consider it a fringe benefit to my fee!”

She laughed.

“Look, Isabel, don’t beat yourself up on this issue,” I continued. “Either you should or you shouldn’t buy a franchise. I don’t expect you to make that decision overnight, but eventually you have to. There’s nothing wrong with saying you want to do it on your own. It just creates a different set of issues for you. And, there won’t be a safety net. So think about that and . . .”

Do you want a safety net?

We’ll catch up again with Isabel in the near future. Meanwhile, a safety net may or may not be for you. If you don’t need one or want one, then you don’t need or want to buy a franchise.

Because a good franchisor always provides a safety net and insists on doing so!

You’ll Also Enjoy Reading:

Find A Franchise System That Helps You Capture & Keep The “Right” Customers. Nothing More Important Now! 

Figuring Out What You’ll Earn As A Franchisee Even When The Franchisor Doesn’t Tell You

Whose Opinion Counts When You Interview Franchisees? 5 Steps To Help You Decide!

Photo image by: divemasterking2000

The E-Myth Author, Michael Gerber: Who Buys Franchises, Why And What To Look For

Spent an enlightening Monday (yesterday) with Michael E. Gerber, author of The E-Myth, as well as numerous other best-selling business books, and we discussed franchising — why people buy them, why people sell them, why some work, why some don’t work, and (of special interest to me) what we might say and do collaboratively to help improve franchising for all parties. 

The E-Myth is our starting point

At 73, Gerber has more to offer than you or I can absorb in a day! If you’ve read The E-Myth then you know what I’m talking about. If you haven’t read The E-Myth I really don’t know what to say to you, other than, “Stupid, stupid, stupid!” (You’ll have to read it to get the chuckle that the rest of us just enjoyed).

If you haven’t read The E-Myth, just stop right now, go over to Amazon.com and buy it — let me check for you. Here you go: Click here. There are 369 used and new copies starting at $2.88! I assure you, once you read it, you’ll send me a check purely out of gratitude!

Stupid to buy a franchise without reading the book

The E-Myth is the most compelling, business-changing book you can ever possibly read. Don’t buy a franchise until you read it!

Back to my story. Driving to my hotel after lunch, Gerber says to me, “Do the people who buy franchises realize they are not entrepreneurs and that, in fact, they should not be entrepreneurs, and that, furthermore, no franchisor wants to sell a franchise to an entrepreneur.” It was really a statement, not a question. And, of course, I agreed with him.

Entrepreneurs don’t buy franchises

Entrepreneurs invent businesses, they don’t buy someone else’s idea, he continued to lecture me (and I’m attentive in his presence). That’s an important point. I know many franchisees who think they are entrepreneurs, and they’re not.

And thank God they’re not! It may make them feel better to think they are, but thank God they’re not!

‘Cause entrepreneurs screw up even more often than franchisees!

But that’s another story for another blog.

Here’s your mission when buying a franchise

Here’s my point today. It comes from Gerber through me.

Your Mission: As you’re in the hunt for a franchise to buy, look for one that has already solved the problems that an entrepreneur has to solve when starting up a business.

Avoid having to do the work of an entrepreneur

You don’t want to do the work of an entrepreneur! Not if you’re buying a franchise.

You want to find a business system that works. A series of systems, really. There should be a working operating system, a marketing system, a sales system, a system for hiring and firing people, a system for serving customers, a system for working with vendors, a system for inventory, a system for merchandising . . . . All kinds of systems.

Not all are created equal

Now here’s the thing: Many franchisors have yet to develop their systems. They may have one or two systems, but they won’t have all the systems you will need to succeed as a franchisee. Or they may have multiple systems, but the systems don’t work. Remember: All franchises are not created equal. Some are better than others!

McDonald’s — Gerber writes a lot about McDonald’s — works superbly because it is a series of systems. Look for a McDonald’s when you purchase a franchise.

And there’s more. (I told you, you can’t just spend a day with Gerber and absorb it all).

You must do it the franchisor’s way, thank God!

While you’re due-diligencing your way through franchise opportunities, look for the one that enforces compliance. You probably won’t like that — the more entrepreneurial you are, in fact, the less you will like that. But compliance is absolutely essential to the success of a franchise and to your success as a franchisee.

If only all franchisors enforced the rules!

There are franchisors who have systems, good systems, and the franchisees ignore the systems. That’s not entirely the franchisee’s fault. It’s mostly the franchisor’s fault. Sometimes the franchisor doesn’t understand that it’s a mistake not to insist that franchisees comply with the systems. Sometimes they don’t know any better. Sometimes they are too timid. Sometimes they are just gutless. Sometimes (quite often) they are managers and not leaders! It’s always, always, always a mistake to ignore compliance.

Enough for now. I’ll pick up with compliance at a later time and tell you why you should get on your knees and thank God that a franchisor insists that its franchisees comply with its systems.

For now, just find a franchise that has working, productive, satisfying, money-making systems. That’s the one to buy!

Gerber Is Seeking E-Myth Partners

. . . Know an entrepreneur who wants to dominate their industry the way Gerber has dominated small business development and coaching? He’s looking for E-Myth Partners! They will join him as co-authors on future E-Myth books. Soon there will be The E-Myth Attorney, The E-Myth Optometrist, and others to follow. Looking for The E-Myth Accountant, The E-Myth Bartender, The E-Myth Undertaker, The E-Myth Auto Dealer, The E-Myth Carpet Cleaner, The E-Myth Consultant, The E-Myth Broker, etc. Know someone who’s interested? Send them to me and I’ll make the introduction to Gerber. 

Read Another Blog About My Day With Gerber:
The F-Myth: Michael Gerber Explains Why Franchising Doesn’t Work For Entrepreneurs 

Photo image by: StevenGroves

Find A Franchise System That Helps You Capture & Keep The “Right” Customers. Nothing More Important Now!

Nowadays it’s important to buy a franchise that teaches you the importance of capturing and keeping the “right” customers.

Well, actually, that’s always been an important consideration, but you’ll have to work hard to find a franchise system that provides this critical consideration. Most franchisors do not do a good job of teaching franchisees how to capture and keep the “right” customers . . . nor do they support systems that will help achieve same.

Not all franchise systems are created equal

But remember, all franchisors are not created equal. Some are better than others. You’ve got to look for the world-class performers! Be confident: They’re out there.

Franchisors (and as a result, their franchisees) generally do not understand the value of a customer. (I’ve written about customer value at FranchiseMastermind.com and I urge you to review those articles. You should also view my videos on this topic).

Budgeting to retain customers

Business owners in general will spend a considerable sum of money annually to attract new customers, but they’ll spend very little — maybe nothing — to retain customers. Of course, whether they capture the “right” customers or the “wrong” customers is a whole ‘nother story that we’ll tackle at another time.

This is why you buy a franchise

As a franchisee, you’re not expected to know everything. You’re not expected to be an expert. And you’re probably not a customer acquisition and retention expert (though you will need to be). And that’s part of the reason why you buy a franchise.

You’re buying the franchisor’s system. That system better be a good one for identifying the right customer for your business, then capturing the right customer, and then (and this is so important, especially today) keeping the right customer. If you don’t keep ‘em you’ll go out of business, or spend your profit on finding new customers. Ouch!

Evaluate the franchisor’s customer retention system

As you evaluate a franchisor’s operating system, keep this information in mind. If the system can’t help you capture and keep the right customers, move on. Find another system! Because economically, nothing is more important than the right customers . . . get the wrong customers and you’re going to be a very dissatisfied franchisee.

And a franchisor that doesn’t know the difference can’t come to your rescue. Save yourself the agony: avoid that franchisor. 

Photo image by: roland

“Daddy’s Got Money!” . . . Bad For You. Worse For Franchisor. Ugly For Daddy. But Happy Graduation!

Watch my new video on evaluating franchise opportunities.

On several occasions while I was the CEO of HomeVestors, and on on many occasions in the last 30 years while advising people who buy franchises, someone was buying a franchise using “Daddy’s money.”

Most of the time it wasn’t a good idea. Lots of times these deals occurred right about the time of college graduation. 

He doesn’t want to teach after all

“My son,” a dad told me not long ago in my office at HomeVestors, “is about to graduate from college and he doesn’t really want to be a teacher after all. I think real estate investing makes a lot of sense . . . [at least it did at the time] . . . and so we’re here to buy him a franchise.”

Dad just wanted to help his kid

While Daddy talked, I watched Son, and in this particular meeting, Son demonstrated all the signs of fear and disinterest. Clearly, this was Daddy’s idea and not Son’s. Quite often it happens that way. Dad (or Mom) wants Son or Daughter to achieve success and they are willing to invest money to “help” them.  

It happens the other way, too. It’s Son or Daughter who’s eager to buy a franchise, and they need their parent’s money. 

A trip abroad might be a better gift

My advice: Proceed with caution! Investing in a business may seem like the ultimate graduation gift for your child, but it may turn into a financial and family disaster.

Can I tell you of any success stories where a parent put up money for a son or daughter to buy a franchise?

Many kids do succeed in franchising

Absolutely. Lots of them! Especially of parent and child working together. It’s very common in franchising, and many companies can brag about these stories.

But no one talks about the failures . . . and there are many of them, too. No one talks about them because the deal was bad for the kid who lost money and probably self-esteem; bad for the franchisor who had to work through the issues related to a failing and ultimately failed franchise; and ugly for Daddy because he thought he was doing a good thing and instead lost his money and possibly alienated his child and other family members, too. 

Here’s how franchising works best

Franchising works best when the buyer/operator uses his or her own money, or at least shares responsibility for the money. It also works best when the operator really wants to be the operator and understands what that means. The kid who graduates from college and realizes he doesn’t want to teach after all, isn’t necessarily ready to run a franchise. At least it should be his or her idea!

7 steps that could help you and your kid

If you’re considering putting up money to buy a franchise for your child, here are 7 steps to consider:

1. Ask your child to sell you on why he or she should own and operate the franchise. What’s the motivation? How deep runs the desire? How great the commitment? I know it’s your kid, but be objective! What’s the chance of success? You don’t want your kid to fail any more than your kid wants to fail. 
2. Require a business plan, which you will approve. If running a business is your expertise, it’s okay to help your child create the business plan. Seek other assistance. Local colleges offer courses on creating business plans. Get your accountant involved.
3. Require a payback plan. Charge interest for your money. The Bank of Mom & Dad expects to be paid back. Require to see how you’re going to recover your investment, profitably.
4. Tell your child to go to work for a franchisee. It may be for only a week or three, but getting experience in a franchise unit could prove helpful. Your child may decide, “I don’t really like retail,” or “I don’t think I want to be in the food business,” or, “I didn’t realize how tiring it is to be in a truck most of the day.” This experience may at least help them decide the type of business they want to own and operate.
5. Request an endorsement from a franchisee. Tell your child, “Convince one of the existing franchisees that you’re the type of person who will succeed at this business and ask them to write you a letter of recommendation.” Make sure the franchisee has achieved success in the business! A franchise operated by a parent/child combo would be ideal for this assignment. 
6. Attend Discovery Day. The franchisor most likely conducts free orientations where prospects learn more about the franchise. Go along and participate in this experience. You and your child will learn the details related to operating the business and you’ll be able to assess the likelihood of your child succeeding at this business. It may be difficult, but you need to be especially objective now.
7. If you agree to make the investment, look after the business. Take a seat on your son’s or daughter’s advisory board. Monitor decisions and progress. 

Sound too much like being a parent?

If these ideas seem too restrictive for you or your child, think twice about what you’re doing! Because there’s a pretty good chance that if you don’t take these restrictive measures, this “gift” isn’t going to work out!   

You’re taking a greater risk when you put up the money for someone else to own and operate a business. So protect your money. More importantly: Protect your kid!

Watch This Video!

Also Read:

Whose Opinion Counts When You Interview Franchisees?

Photo image by: CarbonNYC

“What Happened To That Thing They Called The ‘UFOC’?”

I hear this question quite a bit:

“What happened to the thing they called the UFOC, or Offering Circular? Why don’t they have that anymore?”

Well, they do!

UFOC is now FDD

But in July 2007, the U.S. Federal Trade Commission renamed the Uniform Franchise Offering Circular (UFOC) the Franchise Disclosure Document. The UFOC is now the FDD!

Since 1979, U.S. franchisors have been required by federal law to provide a disclosure document. It’s provided free and without obligation to qualified franchisee prospects. This is a good thing — and it’s one of the reasons for the success of franchising in America.

Important document to read, more than once!

The FDD provides much needed information to a prospective franchisee and it’s important to read it — perhaps several times — before you invest your money. It’s written, by law, in plain English, so if you can read at a 9th grade level, you’ll be able to understand (most of) what the document says. (Between you and me, when I buy a franchise, I still want my lawyer to review the FDD with me).

Along with the name change, the FTC included some other changes for the FDD:

First meeting between franchisor and prospect

Previously, the franchisor was required to provide a prospective franchisee with the disclosure document at their first “serious” meeting to discuss the purchase of a franchise. That was changed — good thing, because no one knew what “serious” really meant.

A prospect and a franchisor can now meet as many times as they choose, but the prospect cannot buy a franchise until he or she has had the FDD in hand for at least 14 calendar days. That’s a minimum number of days — so there’s plenty of time to review the document. (By the way, the number used to be 10 business days).

Franchise agreements issued 7 days in advance

An FDD will often include a franchise agreement, which is the document that the franchisor and franchisee sign. It’s the franchise license. Neither party signs the FDD, it’s just an explanatory document that precedes the franchise agreement, which, by the way, is written in legalese and requires an attorney to understand it!

Franchisors are required to provide a prospect with a final franchise agreement at least 7 calendar days before executing the document. (Used to be 5 business days).

Electronic delivery is now okay

Prospects can receive a FDD electronically, if the franchisor makes it available in a downloadable format. There’s no requirement to do so, but it’s much more efficient (and green!). Signatures are acceptable in a variety of ways including security codes, passwords, and electronic signatures.

Requires the franchisor to tell more

The FDD requires franchisors to provide data about sales, terminations and transfers of franchises — and that’s a good thing! It will help a prospect determine the longevity of franchisees in the network. If a high number of franchisees are exiting the network, the prospect will want to ask why.

But earnings claims are not required

Franchisors still do not have to make earnings claims, and critics say this is a major shortcoming in disclosure law. More franchisors are. in fact. completing Item 19 of the FDD, which provides financial performance data. However, even if the franchisor completes Item 19, make it your business to discuss your earnings potential with existing franchisees, and your advisors.

All and all, the FDD provides the key information that you need to evaluate a franchise investment. Take advantage of it!

Register now for free tele-seminar

. . . Register immediately for my free franchise tele-seminar: How To Buy A “Hot” Franchise And Not Get Burned!  Date is May 6, 2009, and you can subscribe while slots are still available . . . you’ll love the fantastic give-away. Read about it here.  

Photo image by: Dwonderwall

Figuring Out What You’ll Earn As A Franchisee Even When The Franchisor Doesn’t Tell You — Part II

Suddenly, Isabel wasn’t so ecstatic! (Don’t go any further until you read Part I of this story).

And how I hate to be the bearer of bad news, especially when I’m working with someone who’s paying me money. She thought she knew she could pay herself a tidy six-figure income after buying and operating a particular franchise, but she just didn’t have the right numbers.

Clever deduction, but it wasn’t reliable

So I let her down gently.

“Isabel, good work,” I said in reference to the handiwork she had performed on the franchisor’s revenue stream. Most franchise prospects don’t even think about backing out the numbers the way you did. They expect the franchisor to tell them what they can earn, and when the franchisor refuses, they’re mystified. But you took matters into your own hands and that says a lot about the kind of franchisee you’re going to be.”

Isabel’s enthusiasm abounds

“I’ll be a great franchisee,” she assured me. “I am a hard worker. If I’m in love with a product, I can sell it. I can sell this franchise, too!”

“Okay, okay, I understand,” cutting her off before she started selling me. She’s one of the most enthusiastic people I’ve worked with in a long time. “But Isabel, there are a few holes in your deduction.”

The holes in the deduction process

“I figured you’d say that,” she shot back. “My accountant wasn’t too happy about the process, either.”

“Do you understand why?”

“Yes, of course. I know I don’t have all the information I need because the franchisor won’t give it to me!”

Simple math leads to a simple number

“Exactly,” I continued, ignoring the latter part of what she said. “You divided the sum of royalties paid to the franchisor by the number of franchisees that were in the network. And that led you to determine how much money the average franchise generated and from that you figured you could pay yourself — eventually — more than $100,000 a year.”

“And I still believe that’s right,” she emphasized.

“It may be,” I said, “but you can’t count on it based on the numbers you used. First, not all of the franchisees were part of the network for all 12 months.”

What does average really mean?

“Better yet, doc” she said, reverting to her familiarity with me. “There were fewer franchisees generating that royalty revenue than the number I used. So the average revenue is actually higher!”

“You’re quick, Is!” I can be familiar, too. “But look, not all of the franchisees paid the same percentage of royalty. Most probably paid 6%, the number you used, but some may have paid as little as 4%. Others may not have paid any royalties! So you can’t get the number you’re after with the numbers you have to work with.”

You need to get as close as possible

“But I think I got pretty close!”

“You may have,” I said.

“Why won’t the franchisor just tell me that I’m pretty close? Or why won’t they just tell me what I’m going to earn and we could move on?”

“Come on. You know the answers. They’re not going to violate the law.”

Most will not make an earnings claim

“They don’t have to if they’ll file an earnings claim!”

“You’re right,” I calmed her down. “But most franchisors choose not to. It doesn’t mean it’s a bad deal. But it does mean you’ve got to work harder to get at the financial information. And you’re doing a good job of it, Isabel.”

“What do I do now, doc?”

Franchisees are likely to help

“Take your information to a franchisee,” I told her. “Show the franchisee your financial handiwork. Ask the franchisee to listen as you work through your logic and numbers.”

Franchisees will respect a prospect who has worked hard to figure out the projected financials. And, of course, franchisees are not prohibited from sharing financial information with prospects.

Talk to as many franchisees as you can

“You may want to talk to several franchisees, and that’s how you’re going to get a confirmation for your work,”I said. “If you’re off base, they’re going to tell you, and they’ll show you how. Ultimately, they’re likely to tell you how much money they earn and then you’ll know if this business makes sense for you — at least financially.”

“I’ll do it,” she said.

And with that our consulting session ended.

Register now for free tele-seminar

. . . Register immediately for my free franchise tele-seminar: How To Buy A “Hot” Franchise And Not Get Burned!  Date is May 6 and you can subscribe while slots are still available . . . you’ll love the fantastic give-away. Read about it here.  

Photo image by: liza31337

Figuring Out What You’ll Earn As A Franchisee Even When The Franchisor Doesn’t Tell You

Ecstatic Isabel called!

It’s been about ten days since I last heard from her (see Is Franchising Indentured Servitude?) and she couldn’t have been happier!

How much money?

“I know how much money I’ll be able to make as a franchisee even though the franchisor didn’t tell me — well the franchisor sorta told me,” she said into the phone without taking a breath.

“Wait a minute, Isabel. Either the franchisor told you or the franchisor didn’t tell you. Which is it?” I wanted to know, wondering if a franchise sales person had pulled the old back-of-a-napkin trick by jotting down a number that really doesn’t mean anything, but appears to be a nice annual income. “Does the franchisor’s disclosure document include a financial performance representation, or earnings claim? It would have been under Item 19 of the Franchise Disclosure Document (FDD).”

No to the legit financial info

“No. No earnings claim,” she snapped. “This stuffy franchisor doesn’t include any financial information under Item 19.”

“But you’re saying the franchisor ‘sorta’ told you how much money you can make if you buy the franchise,” I continued. “That could be a serious violation of the federal franchise laws. I just want you to realize what you’re . . . .”

It’s a different story in franchising

She cut me off, “Come on, doc. You know that’s not how it works. These franchisors put the information out there. You just have to be smart enough to get it. And I am!”

There’s no doubt that Isabel is smart, but I don’t agree with her generalization about how things work in franchising. At the same time, I’m not naive. Some franchisors disclose information that they should not disclose. Some franchisors break the laws. And as I’ve said many times: All franchisors are not created equal.

Backing out the numbers

I was running low on time and patience so I said, “Please don’t make me work so hard, Isabel! How did you find out how much money you can make as a franchisee?”

“My accountant helped me,” she explained. “The franchisor’s financial statement (which is included in the FDD) shows how much royalty revenue the franchisor collected last year. I divided the number of franchisees into that sum and got the average royalty paid per franchisee. Then it was easy! I divided the average royalty payment by the royalty percentage, which is 6%, and that gave me the average franchisee’s gross revenue. And that’s what I needed to know. With help from some franchisees and the franchisor, I figured out the monthly costs. And based on the numbers, I can pay myself a six-figure income. Not right away, but eventually. That’s where I want to be financially. So I’m thrilled!”

Not everything may be what it seems

I am, too! Thrilled to be coaching such a serious student of franchising. But there are a few problems with Isabel’s analysis!

Maybe you’re a serious student of franchising, too, and you already know what the problems are? If so, I’d like to hear from you. 

Meanwhile, look for Part II of this blog in a day or so. Until then, do not buy a franchise based on Isabel’s story!

Register now for free tele-seminar

. . . Register immediately for my free franchise tele-seminar: How To Buy A “Hot” Franchise And Not Get Burned!  Date is May 6 and you can subscribe while slots are still available . . . you’ll love the fantastic give-away. Read about it here.  

Photo image by:  jordigraells

How To Detect If A Franchisor Is Covering Up Failures. Seasoned Sales Pro Offers Guidance.

Jason Killough

All franchise networks lose franchisees, but prospective franchisees should investigate the how and why of these departures.

The normal exit patterns

Franchisees leave a franchisor’s network in one of 3 ways:

1. They transfer their license, or re-sell their business. They may sell to a new franchisee, an existing franchisee, or even the franchisor.
2. They willfully terminate their franchise license, or the franchisor terminates it. Many terminations are “mutual” agreements between franchisee and franchisor, and for various reasons. With a “mutual” termination the parties agree to go their separate ways without blaming each other!
3. They do not renew their franchise license after the current term,  or the franchisor decides not to renew it.

How many left the system?

“Before you buy a franchise,” advises Jason Killough, a consultant with  The Entrepreneur Authority (TEA), “it’s important that you know how many franchisees left the system, and why. It’s not always a bad thing that franchisees left the system, but it could be.”

U.S. franchisors are required to disclose the names of all franchisees who left the system whether they transferred, terminated, non-renewed or were bought by the franchisor.

How do you get at this information?

Look at Item 20 of the Franchise Disclosure Document, which the franchisor is required to give you, without obligation or fee.

Look out for net losses

“One number you want to know is how many new franchises did the franchisor sell?” continues Killough. “Hopefully you will see that the franchisor lists more new franchises vs. transfers, terminations and non-renewals. If the franchisor did not have positive net growth, that could be a red flag. It’s especially important in that case to understand why more franchisees left the system than joined.”

How do you get that information?

Three ways:

1. Ask the franchisor. That’s who knows! And the franchisor should be willing to share that information with you. Ask your franchise sales representative for details. If it’s difficult to get this information, or you can’t get it, that’s another red flag.
2. Ask franchisees. They know! They may not know the details, but they know. Ask them why more franchisees left than joined.
3. Ask the franchisees that left the system. Their names and contact information will be included in the FDD. It’s often difficult to get these folks to answer their phones — often times they want to forget a bad memory. Or it may be they agreed not to talk when they mutually terminated. Be persistent about contacting them. Ask other franchisees to help you find them.

Dig deep and find out the reasons

Killough says, “If you see a high number of transfers, be sure to dig deeper to find out why. A franchisee might get an offer he can’t refuse, and that’s a good reason to transfer. Or he may have sold for personal reasons, including a divorce or a death. On the other hand, the franchisee may have transferred because he wasn’t making money, or he was unhappy with the franchisor.”

Always push for explanations, and don’t buy if you don’t feel comfortable.

“Churning” may be the real story

Some franchisors may be “churning” franchises. They aggressively buy back franchises to save a termination, or they find willing buyers, sometimes at a loss to the original franchisee. “From a franchisor’s perspective, transfers (or re-sales) are always better than terminations,” explains Killough. “With a transfer, the franchisor is not decreasing their franchise count. Word of caution: Find out if a franchisor is hiding behind an actual failure by transferring or churning franchises.”

Buying a re-sale may be for you

Sometimes you can get a better deal buying a transfer instead of a new franchise. Plus, you don’t have to start the business from scratch — it already exists. On the other hand, if the previous owner ran down the business and gave it a bad reputation, you may have to spend an inordinate amount of money to revive it, and then still fail. Proceed cautiously.

“Go into your evaluation of a franchise with your eyes wide open,” advises Killough. “The more research you do, the better equipped you will be to make an informed business decision.”

Jason Killough is based in North Texas. Prior to TEA, he sold and supported franchises domestically and internationally for I Can’t Believe It’s Yogurt, Jani-King, ASI Sign Systems, Pizza Inn, 24seven Vending and HomeVestors.