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.

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

Got 3 minutes? View my new video about evaluating franchisee interviews.

As you do your homework to determine which franchise to buy (or if you should buy one at all), you’ll likely hear a variety of opinions and comments shared by existing franchisees. Your challenge now: Who to listen to?

Making sense of what franchisees say

Whose opinions count the most when you’re interviewing franchisees?

Here are 5 guidelines to help you interview franchisees and make sense of what they say:

1. All franchisees are not created equal. Some are better than others. A few are better than most. Interview the best!
2. Interview franchisees at all levels of the network so that you get the total story. But spend most of your time with the top performers and money makers. Ask the franchisor, other franchisees, and members of the Franchise Advisory Council for the names of these franchisees.
3. Get most of your information from franchisees who you admire. Even at the top, not all franchisees are created equal. It’s important to learn about their beliefs and lifestyles. The guy who makes the most money may not be the type of person you want to be!
4. Every franchise network has a bottom 25 percent — this is where franchisees end up when they don’t work the system, or they make other blunders that may be related to the franchisor’s inability to help them succeed. But probably not. Avoid spending too much time at the bottom — and while you do, expect to hear negative comments and whining.
5. Interview award winners, but keep in mind that they may not be franchisees you’d admire. And just because they won an award doesn’t mean they made a profit. Be sure to ask! Award winners are usually franchisees who implement the system — and that’s how you turn an opportunity into a business.

Who are you talking to?

When I served as CEO of HomeVestors, prospects would occasionally tell me they weren’t buying one of our franchises because of what they had heard from the existing franchisees. I would ask the prospect, “Which franchisees did you interview?” And most of the time, the franchisees were in the bottom 25 percent of our franchise network.

“What do you care what franchisees in the bottom 25 percent say about this business?” I’d ask the prospect. 

You can usually ignore the bottom performers 

Quite often, the prospect didn’t know who they were talking to! They were surprised to find out that they had interviewed the worst performers. Again, I’m not suggesting you ignore all the negative comments you hear from franchisees. But, unless you hear the negatives over and over again, I think you can ignore most comments from bottom performers.

If the best performers share the same negatives as the bottom performers, that’s worth exploring. Maybe there’s a deficiency that the franchisor needs to correct. 

Work your way to the top of the network

Unless you plan to end up in the bottom 25 percent of a franchise network, stay away from it! Listen to the franchisees at the top!

And by the way, that advice also works for existing franchisees. Watch who you’re talking to! Bottom performers aren’t going to help you rise to the top.

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Is Franchising Indentured Servitude?

Crazy Isabel called.

Normally, Isabel isn’t crazy, but this morning — whew! 

She wants to buy a franchise. Has a pretty good idea which type of franchise she wants to buy, and she has the money — at least most of the money that she’ll need for a start up in this particular industry.

She’s done some homework, with a little help from me, and she’s collected information from targeted franchise companies. 

Plans derailed?

But today, she’s crazy (I mean that in a nice way, of course) because she read something that will derail her plans to buy a franchise. “If this is true,” she shouted, “I’d rather take my chances and start a business on my own.” 

She was screaming at me today!

She read on some Web site that franchising is little more than “indentured servitude.” While talking to me — screaming at me, really — she said I should have told her that she’d be nothing more than a “slave” as a franchisee.

“Why didn’t you tell me that?” she demanded to know. 

Uh . . . because I don’t believe it’s true.

Good enough?

I didn’t think so.

Here’s my take on the issue

Here’s what I told Isabel and what I will tell you if you ask the same question:

Don’t insult the slaves. They had no choice. In addition, don’t confuse slavery with indentured servitude. They mean different things. And you, my dear Isabel, you have a choice that neither slaves nor servants were afforded. No one is forcing you to buy a franchise. And if you do buy a franchise, no one is forcing you to buy this one or that one. You — and only you — get to choose. 

Want to hang up?

So if you’re going to continue talking crazy, it’s time we end our relationship!

She didn’t hang up, so I continued:

Furthermore, if you have even an inkling that it’s indentured servitude, then why would you bother buying a franchise? Forget it. Keep your job. I’m sure you have lots more freedom working for your employer! (Yes, that was sarcastic).

Franchising has limitations

And let me add this. I’ve owned several franchises. I enjoyed each experience, though some were more profitable than others (and some of the franchisors were better than others). Never once did I think of myself as a servant, but rather, I was in control of my destiny and in control of my operations to the extent the franchise agreement permitted me to be.

And since I knew, and agreed to, the boundaries of the franchise agreement, I had no issues with the franchisor’s controls. If you think those controls will be a problem for you, Isabel, then move along, stay away from franchising, it’s not for you. Don’t try to make it something that it’s not! (Watch this video now.)

Be careful of who you talk to!

Finally, Isabel, pay attention to who you’re talking to — or in this case, what you’re reading and who wrote it. Of all the successful franchisees I know — multi-millionaires included — I don’t know of one that would compare their franchise to indentured servitude. On the other hand, I understand why a failed franchisee would make that comparison. They gotta blame their failure on someone or something, and it’s surely not going to be the person they see when they look in a mirror.

Beware of some franchisors: the bad ones

Okay, I apologize for that last statement, because, in fact, there are bad franchisors who take advantage of their franchisees. They lie to them. They mislead them. They control them. They even try turning them into indentured servants.

But Isabel, all you’ve got to do is your homework and you’ll uncover the bad franchises before you ever make your commitment.

. . . When we finished talking she had settled down and had returned to the lovely, sensible Isabel that I’ve known now for several months. She’s off this week looking for earnings claims. I’ll let you know when she checks in with me again! 

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. . . Register immediately for my free franchise tele-seminar: How To Buy A “Hot” Franchise And Not Get Burned!  I’m giving subscribers to my blog the first opportunity to sign up for the tele-seminar and get an unbelievable package of information about franchising — all free. Later this week I’ll begin promoting the tele-seminar to thousands of prospective franchisees and once the available slots are filled the tele-seminar will be closed. So this is your early notice — sign up now and take advantage of this opportunity. 

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