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. 

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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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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!

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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.  

Veteran Franchisee Explains 3 Challenges Franchisees Face Today

Virginia Barbeque franchisee Ed Totanes recently helped me introduce franchising to a group of veterans in Washington, DC. Ed is a veteran who took advantage of the VetFran program, which helps veterans of the U.S. armed services buy franchises at a discount.

Challenges franchisees face

Ed said every franchisee (regardless of the type of business) is facing 3 primary challenges today:

1. Labor. Finding the right people is a challenge, in spite of high unemployment. Ed’s suggestion: Hire a veteran! If they’ve been through boot camp they’ve been trained and they know how to say, ‘Yes, Sir!’”
2. Money. Finding it, managing it and keeping it! “Cash is king,” Ed told the vets.
3. Marketing. Businesses don’t just develop, they have to be cultivated. You need a good marketing campaign. “That’s one of the reasons why I prefer a franchise,” he commented.

Advantage over civilians

Ed told the veterans that if they become franchisees they have an advantage over civilians. “The military teaches us to work hard and work as a team. Civilians don’t understand that,” he concluded.

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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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Three Reasons Why You’re Buying A Franchise

Say what you want, but these three reasons are behind your desire to buy a franchise:

1. You want to belong to something that’s larger than you, i.e. a network of successful franchisees. It’s admirable.
2. You want to be led by someone larger than you, i.e. a franchise coach, and other successful franchisees. It’s different.
3. You seek relationships with like-minded successful people, i.e. you want to operate a franchise just like they do. It’s admirable and different.

Emotion drives buying decisions

I’m not making up these reasons to have something for my blog. I’ve studied the process for more than 30 years. As I’ve researched articles and books, I’ve asked countless franchisees, “Why did you decide to buy that franchise?” As the former CEO of a major franchise company, I listened carefully to franchisees who told me what triggered their buying decisions. The reasons almost always were based on observations that fed into their emotions.

“When I saw the Bible on your desk, I knew this was the right franchise for me,” more than one franchisee told me. Fortunately, I don’t keep a Bible on my desk for show. I read it. But that’s no reason for anyone to buy a franchise.

Experts agree with these reasons

Recently, I reached out to an expert on this topic to get his thoughts about the reasons why people buy franchises. Fred Berni is the founder of Dynamic Performance Systems, a Canadian-based company that helps franchisors select the best franchise candidates using personality profiling. He told me, “I agree (people buy franchises because) they want to belong to something larger than them, and they want to be led.” As for seeking relationships, he continued, “It would be a big factor in their decision, but not the primary motivator. They want to perceive themselves as entrepreneurs, but are uncomfortable with actually being one. They ‘need’ the support that a franchise gives. There’s a good reason for the expression, ‘in business for yourself, but not by yourself.’”

People buy emotionally first, logically second

Even that expression taps into emotional drivers. It works because people buy emotionally first — logically second. And that’s what gets so many franchisees into trouble!

Emotions lead people to buy the “hot franchise” — a term frequently used by people searching for franchise opportunities. But when it’s time to actually operate the franchise successfully — profitably — they realize they can’t, or they don’t want to, or they can’t afford to, or that the product or service really isn’t something they’d like to sell. And that’s when it all falls apart. If only they had paid attention to the logic before they signed the franchise agreement. But that’s not human nature.

Fooling yourself as to why you’re buying won’t work

If you’re buying a franchise, don’t try to fool yourself. It’ll catch up with you and you’ll end up on the wrong side of the business. You can’t deny your emotions. You’re going to buy what appeals to you — regardless of the reason.

Maybe it’s because, as Fred Berni says, you want to see yourself as an entrepreneur. It’s a prideful thing to be an entrepreneur! America, we’re told, was built by entrepreneurs and thrives because of entrepreneurs. The richest people in the country are entrepreneurs. (It’s just a hunch, but if we take a second look, we might discover the poorest people include many who were also entrepreneurs).

People buy to be admired; to be different

You want to be an entrepreneur because you, too, want to be admired (like the guy who drives a Rolls Royce), or you want to be different (like the guy who drives the Hummer), but if you fall short of performing successfully as an entrepreneur, you’ve got a serious problem.

So go ahead, buy the “hot franchise,” but do yourself a favor. Justify it first. Figure out what it will take to be “admired” and “different” before you buy the franchise. ‘Cause as much as he may want to, and as good as he may be at leading you, the guy with the Bible on the desk in the CEO’s office isn’t showing up on site and operating your franchise for you!

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Why Are You Buying A Franchise? . . . Really?

“You don’t need to invest all that money to get into the pizza business,” the advisor told his client/friend. “You make the greatest pizza I’ve ever tasted. Far better than anything those franchises offer. You don’t need to pay them all that money upfront, and then — my God — you’ve got to pay them nearly ten percent of your revenue for the rest of your life. Don’t buy a franchise!”

Expect to hear that advice

I invented the above scenario, but it’s real nonetheless. Franchise prospects almost always hear something similar to it. If it’s not about pizza it’s about cookies or chicken or services of all kinds. These passionate commentaries are often shared by accountants, lawyers, family members, or friends — people who mean well, but don’t always understand the real story.

If you’re thinking about buying a franchise, chances are you have met, or you will meet, one of these “advisors.” And when you do, make sure they understand the real story behind why you are buying a franchise. Even better, make sure you understand why you’re really buying a franchise. It doesn’t matter much what the “advisors” think, although I can understand why you’d like them to be on your side — you may need their help, financially and otherwise.

Understanding why people buy franchises

So what is the real story? Why do people buy franchises?

Because, look, there’s some truth to that fictionalized scenario I posed earlier. Some people can indeed make or provide better products and services than some franchises serve up. So who needs a franchise? If you can bake, fry, grill, make something — anything — better than what the marketplace offers today — if you can provide a better service — why do you need to buy a franchise?

Several good reasons, and here’s the first

In a word, I’ll tell you why: marketing.

One of my favorite cousins in Ohio made the greatest pizza ever. You got a whiff of her pizza baking and you thought you were in Italy. One bite and it was over. Never again would you buy pizza from anyone else.

So why did her business fail?

Miss this and your business fails

Because she didn’t know how to market her pizza. It was the world’s greatest pizza, no doubt about it, but she didn’t know how to sell it. She didn’t have a brand. No presence. No home delivery. No knowledge of how many slices of pepperoni to put on a large pie and make a profit upon selling it. Didn’t know where to advertise. Or how. . . . There were countless other issues all related to the operations of the business. Ingredients, recipes, how to mix it, fix it, bake it, serve it — no problems there. She just couldn’t market it!

How much better off she would have been had she just bought a franchise!

Know what you know

So when your “advisor” tells you that you make the greatest whatever, or you provide a better service, you can accept the compliment for what it’s worth. And even though it’s true, if you know that you don’t know how to market your product or service, then that’s why you’re buying a franchise. It’s what you know that matters.

Your accountant, your lawyer, your family members, your best friend — they do not know! You do. Tell your accountant to give you financial advice, not business advice. Tell your lawyer to give you legal advice, not business advice. And tell your family and friends — nicely, of course — to keep their advice (unless they are successful business owners).    

It’s a good reason, but not all franchises provide it

Marketing know-how is a very good reason to buy a franchise. . . . providing, of course, that you buy into a franchise that knows how to market and how to teach its franchisees to market! (Sadly, many do not).

Marketing isn’t the only reason for buying a franchise. More reasons are coming in future blogs!

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Like It Or Not: Franchising Comes With No Guarantees. Accept It Before You Buy!

One thing you need to understand before you buy a franchise: It never, ever comes with guarantees.

Do you know of any business methodology that does?

Systems make franchises work

Franchising isn’t a business. It’s a method of distributing products and services. The method is defined and supported by a system. How well the franchise will perform depends first and foremost on the quality of the system.

Franchisees make systems work

The next most importance factor is the franchisee’s desire, ability and willingness to follow the system. A quality system in the hands of a dedicated franchisee usually spells success.

But there are no guarantees

However, there are other issues that must be considered when you buy a franchise–issues that you cannot control:

1. The economy. Had we only known in 2006 what we’d face in 2008 and 2009 — most of us–franchisors and franchisees–would have made different decisions about our franchises.
2. The market. Interests and demands change. Suddenly, there’s no market for your product or service.
3. Changes at the corporate office. The new management team isn’t nearly as good as the old management team–they manage, but they don’t lead. The new ownership isn’t nearly as vested in the franchisees as was the founder–they make promises and don’t deliver. When changes occur at the corporate office, they may negatively impact your business, or at least your relationship with the franchisor.

Any one or a combination of these issues can turn a thriving, satisfying, profit-producing franchise (or business) into a disaster.

Can you accept this risk?

That’s a risk you must be prepared to accept before you buy a franchise.

If you can’t or don’t want to, here’s my best advice–and I suggest you take it: Keep your job! . . . Or get one. A job may not be satisfying and it may not pay enough money — but if you’ve got one, or can get one, it’s safer than buying and operating a franchise.

Most of you who are reading this blog won’t be sidelined by this advice. You’re not going to keep your job or get another one. You’ve done that and it didn’t work. You’re going to buy a franchise–but now you know that risk is inherent in the methodology.

Accept it!

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Franchisees: Just Churning Businesses Or Are They Turning Out Profits?

Franchisors in the United States are required by federal law to tell prospective franchisees how many franchises they sold and retained from year to year. That’s good information for anyone who wants to buy a franchise. But it’s not enough information to help you determine if the franchisees are operating profitably. And that’s what you really want to know.

You might assume that because the franchise company shows more franchises in its network this year than it had last year that the franchisees are making money, and you could assume they’re profitable. But you could be mistaken. And if so, the franchisor doesn’t have to tell you otherwise. It’s only after you invest your money, open your business, and operate it for several months that you find out no one is making any money!

Are you thinking: That no good franchisor? Well, not so fast.

Franchisors don’t always know

Crazy as it sounds, franchisors don’t always know if their franchisees are operating profitably. Yes, they should know, but they’re not required by law to know. And, while they won’t admit it, some may not want to know, especially if it’s a new concept that has yet to catch on, or if the upfront costs are so expensive that it takes a year or longer just to break-even. The franchisor may be content so long as the franchises continue to sell, which they will if it’s the “hottest,” “trendiest,” “sexiest,” or some other useless “est” that catches the eye and the checkbook of people who buy franchise opportunities.

Franchisees don’t always know

Crazy as it sounds, franchisees don’t always know if they’re operating profitably, either. They’re busy! They’ve got a business to run, customers to tend to, employees to train, vendors to talk to, a franchisor to satisfy . . . they’ll wait for their CPA to tell them if they made money. Meanwhile, they’re getting by, paying the bills, paying the landlord, paying the employees, and paying themselves what they can, but never enough to feel that it’s worthwhile.

Now, those franchisees who know they are profitable, well, some may not want their franchisor to know for fear the franchisor will increase royalties, or impose additional fees. Or worse: Tell the IRS!

And those who know they’re not profitable, some of them don’t want the franchisor to know for fear of losing their franchise license. If they can keep their license, they figure they’ll eventually turn a profit; otherwise they may at least be able to sell the business at a loss.

Franchisees don’t always tell all

For all these reasons and others, franchisees don’t always tell the franchisor everything!

Besides, franchisee profit or loss is ultimately the business of the franchisees, not the franchisor. Granted, good franchisors understand that if franchisees aren’t profitable the franchisor won’t be profitable–for long. But not every franchisor is a good franchisor.

That’s why it’s the business of the prospective franchisee to find out if franchises are just churning, or actually turning out profits.

Some franchisors volunteer profit information

Recent U.S. franchise laws have made it easier for a prospective franchisee to learn about the financial performance of a franchise company. Franchisors can voluntarily release this information in their Franchise Disclosure Document (FDD), which they must give at no cost to prospective franchisees. However, the majority of franchisors choose not to voluntarily release this information, and for many reasons, some of them, in fact, good reasons (which I’ll discuss at another time).

So what do you do if the franchisor won’t provide you with the information you need to determine if the franchises are just churning, or if they’re actually turning out profits? 

Good relationships lead to better information

How about: Don’t buy the franchise!

That’s probably not what you wanted to hear. So how about: Develop a relationship with at least one franchisee who will help you get the information. Two to three franchisees are even better!

Chances are pretty good that if you don’t know me and I call you by phone and ask, “How much money are you making?” you probably won’t tell me. Even if I tell you I’m hoping to buy a franchise, like the one you own, you probably won’t reveal too much information by phone. You might spend some time talking to me, answering questions in generalities, but when I get down to profit and loss issues, and I want details, you’re probably going to politely stall that conversation–“Gee, I don’t know, my accountant takes care of all that”–and get off the phone as soon as possible.

But if I make an appointment to visit you, or I offer to buy you breakfast, you’re likely to be more receptive. Once we meet and you see that I’m a serious prospect and that I’m asking good questions, you may be open to a second meeting at which you, and/or your accountant, will share profit and loss information with me.

And that’s how you get the information you need.

Be careful: you may need more info

Even then, it may not be enough information. It could be the franchisee you met with got lucky and made a profit in spite of himself. Or he invested more money than you can invest. Or he had more help. Or a better location. Or the franchisor gave her a once-in-a-lifetime deal.

So when you meet with franchisees, make sure you are comparing apples to apples. “If I open in this kind of a location, and I invest this much money, and given that I have this particular background, and I’m willing to follow the operating system, as you have done . . . do you see any reason, Ms. Franchisee, why I can’t succeed like you?”

Remember: One franchisee’s experience still may not be enough for you to make a good decision. You may need to repeat this scenario a couple of times until you’re confident that this particular franchise is the right one for you and your money. 

I know it’s time consuming. But there are no other good choices. You must be willing to invest the time. And if you’re going to invest thousands of dollars, possibly your life savings, isn’t it worth the time? 

One last point: There are many franchisees who are just churning, without even knowing it, putting in time until they have to sell at a loss or close their business. And they’re in nearly every franchise network–even the good, brand-name networks. At the same time, profit-generating franchisees abound. I can’t tell you they are in every franchise network, or that they are in the network you’d like to join, but you will find them if you ask. 

Photo image by: Borman818