Part V: Taking the Fear Out of Franchising

THIS BLOG ARTICLE IS ADAPTED FROM THE FORTHCOMING BOOK:

TAKING THE FEAR OUT OF FRANCHISING, BY DR. JOHN P. HAYES.

As you prepare to buy a franchise, you’ll complete the necessary “due diligence,” the process by which you “investigate” the franchise opportunity, or opportunities, that most interest you.

Unfortunately, many people fail Due Diligence 101. They either ignore it, or they don’t know how to collect the data, or they don’t know how to analyze the data to arrive at reasonable conclusions.

. . . Many experts will tell you that step one of your due diligence should be to investigate franchising as a concept, or as an industry, and I am telling you that’s a waste of your time.

In fact, you might be better off if you never knew a “franchise industry” existed because industry indicators, i.e. the growth of franchising, the satisfaction rate of franchisees, the success of franchising, etc., are not going to help you.

. . . Yes, of course, I believe we learn from history, and I believe that solid researchers can help us develop opinions and perspectives as well as identify trends, but telling us that most franchises succeed or fail is (almost) worthless information.

And here’s why.

It’s a squishy industry

No one knows for certain how many franchisor companies exist because franchisors are not required to register, or to declare themselves as franchisors. Yes, every franchisor in the United States must file a disclosure document before selling a franchise, but no one’s counting.

And you can be sure there are some businesses that sell franchises without filing a disclosure document, either on purpose, or for lack of knowledge. These businesses may say they’re selling “business opportunities,” not franchises, but what they’re actually doing is skirting onerous and costly franchise regulations, and most likely to the detriment of the people who buy from them.

But since no one keeps track of the number of franchisor companies, the best guestimates say there are some 3,000 to 4,000 franchisors in North America. The number expands annually by about 10 percent every year.

Are you getting the idea that franchising is a squishy industry? It’s a little bit like tracking a recent U.S. Secretary of State’s emails! . . .

Get the relevant facts

Franchising overall is best described as diverse. So how can anyone study the industry and report relevant data about success and failure to a prospective buyer? It’s very difficult, if not impossible to do. Even at their best, averages and national trends are interesting to read, but no one should use them to make a buying decision about franchising.

If I told you that “most” franchises survive, a true statement, does that help you? There would still be “some” franchises that do not survive. You might feel the odds are in your favor, and so while you’re still a bit uncertain, you go ahead and invest your life savings in a franchise opportunity.

And two years later you’re out of money and forced into bankruptcy. You can’t understand it because, after all, “most” franchises survive.  Yes, they do, but you selected one that didn’t. Assuming that you did everything right as a franchisee, it was just your “bad luck” that you selected the wrong franchise!

Or was it?

You can wrestle with the national data that the media report from time to time about franchising, or you can simply ignore it. Wise investors ignore it!

You must get this part right

But here’s what you must not ignore: The success and/or failure history of the specific franchise brand you intend to buy!

That’s a critical component of your due diligence. In fact, if you get this part right, you’ll know whether or not you should buy a franchise, and you’ll be confident about your decision.

Here’s the good news: While it’s unlikely that you can get specific data, or scientific evidence, you can still determine the success or failure history of specific franchise opportunities. More than anything else you do, uncovering this information about specific franchise opportunities will take away your fear of franchising.

Once you get a franchisor’s disclosure document, you can go to work to figure out the success vs. failure history of that brand, and that’s relevant data. It doesn’t matter how all franchises perform across the board or within their industries. What matters is the performance of the one franchise opportunity that you hope to buy!

You may have to dig deep into a half dozen opportunities before you discover the right one to buy, based on the success vs. failure history, but if you want to give yourself the best opportunity to succeed in franchising, there’s no substitute for the work that needs to be done.

Grab the disclosure document

The first step is to get a copy of the franchisor’s current disclosure document, which includes 23 items of information to help you decide if this is the right franchise opportunity for you to buy. . . .

A legitimate franchisor selling a franchise in the United States will not ask you to sign any binding documents, or pay any money, until you’ve had the disclosure document in your possession for a minimum of 14 days. You . . . should use the contents of the disclosure document to help you form opinions and conclusions relative to the franchise opportunity.

Get to the nitty gritty: success vs. failure

. . . I recommend that you first focus on the success vs. failure history of the franchise brand. Therefore, you should temporarily set aside all items in the disclosure document and focus on Items 19 (Financial Performance Representations), 20 (Outlets and Franchise Information) and 21 (Financial Statements).

I recommend that you prioritize your due diligence because until you know the success vs. failure history of a franchise brand, there’s no sense worrying about the balance of the information in the disclosure document. You may decide not to pursue the opportunity based on your investigation of the success vs. failure history.

Here’s the goldmine

The information in Items 19, 20 and 21 will not in itself always provide conclusive evidence about the franchise brand’s success vs. failure history, but there’s additional information in Item 20 that leads you to the next step of your investigation. . . . It’s the contact information for current and past franchisees! This is your goldmine. You’ve still got to work the goldmine, but that’s where you’ll get the answers you desire and need.

. . . The lists of current and former franchisees provide a neat database for you to continue exploring the success vs. failure history of the franchise brand. All you’ve got to do is contact the franchisees and ask the appropriate questions!

In my best-selling book, 101 Questions to Ask Before You Invest in a Franchise, I provide a comprehensive list of questions to ask franchisees, franchisors, franchise advisors and even vendors to franchise companies. Several of those questions pertain to the success vs. failure history of the franchise company.

Overall best source: franchisees

. . . Some of the most valuable information you can gather about a franchise opportunity, and in particular the success vs. failure history, will come from franchisees, current and past. That’s why savvy franchise prospects use the Item 20 database to complete their due diligence! . . .

Bottom line: Following the due diligence guidelines, you can uncover the success vs. failure history of any franchise opportunity. . . . You can forget the national polls, surveys, articles and books that address the success and failure of franchises – they’re meaningless – but if you carefully complete your franchise brand due diligence, you’ll know what to do next. You’ll either buy the franchise opportunity, or you will pass and look for another opportunity, making certain to complete your due diligence all over again.

And that’s how you take the fear out of franchising!

Categorised in: Franchise FAQ's

This post was written by Dr. John Hayes