Buying a Franchise – Separating the Strong from the Weak!

A key factor to success is to first isolate strong franchise systems from weak ones, and then only focus your search on partnering with a strong franchisor. So let’s look at typical traits of both “strong” and “weak” franchises:

Characteristics of Weaker Franchise Systems:

  • either the franchisor has not sufficiently proven their business model, or has never proven the business model; instead, they are franchising their business too soon and then using the franchisees as guinea pigs to test their ideas and processes
  • the franchisor does not have sufficient franchising experience – they might know how to run their individual business very well, but when that have to teach and coach others to run the business, they don’t hire the right leadership talent (with sufficient franchise industry experience) to help them manage and grow the franchise system
  • the franchisor does not have sufficient support staff on hand to assist the new franchisees in the effective launching and growing of their business; instead, they fail to understand the amount of time and financial commitment that is required to get each new franchisee to a state of self-sufficiency
  • Often, weak franchisors use the “heartbeat and chequebook” method of recruiting franchisees – if you can fog a mirror and have a fat wallet or purse, then come on in! We’ll figure out the rest once you’re on board! These franchisors often try to convince people to buy their concept by getting them to look at all of the upside aspects of what life will be like when the business is successful (in other words, selling on emotion, not logic), instead of helping you understand what the full scope of owning their business would require – in time, effort, money, focus, activities, marketing/selling, etc.
  • Lower initial franchise fees – often, young franchisors set their initial franchise fee too low – either because they aren’t able to justify a higher value for their concept, or because they want to attract a lot of franchisees who can only afford a lower investment to start a business, or worse, a combination of both! If people can only afford a low franchise fee, then what kind of resources are they going to be able to bring to bear to grow their businesses? I’d argue not very much! Would you want to be part of a system that takes only a little bit of money to start (less than $20k initial franchise fee), but where most of the owners do not have the resources (and often the skills) to grow the business into a substantial enterprise? These types of franchises are one of the reasons people perceive that buying a franchise is just buying yourself a low-paying job with long hours! While this doesn’t apply to some low-investment franchise concepts. It does apply to many!
  • The franchisor is often insufficiently capitalized; the only thing that funds their growth is the revenue created by the sale of each new franchise
  • Franchise systems where a high percentage of franchisees are selling their businesses after only a year or two of opening them – while this is not always indicative of a weak franchise, it is something to watch out for

Characteristics of Stronger Franchise Systems:

  • The business system has been proven to be viable –  where the Franchise system has been operating for a sufficient number of years and where the business model has been duplicated by enough franchisees in different markets, and enough of those franchisees are achieving reasonable to strong success by following the prescribed business model that the franchisor has created
  • The franchisor is well-versed on what’s required to run their business model successfully, day-to-day – either they built and ran the model for several years to “prove it out” and they understand what it takes to support their new franchisees in launching their franchise; also, in what it takes to help their existing franchisees to continue to succeed and grow their business. There are some very good franchisors on the market that may lack sufficient understanding of growing a franchise system, but instead of trying to figure out everything by themselves, they hire experienced franchise executives who are experts at building and supporting a franchise system
  • The franchisor has sufficient support staff, infrastructure and business tools to ensure that the franchisees have a high likelihood of success (initial and ongoing training, reporting/accounting & POS systems, website, marketing materials, etc.). It is also part of their plan to continually add to their internal support resources as they add franchisees.
  • The franchisor has strong financial resources – they recognize that the revenue created from the sale of a new franchise is completely invested back into that franchisee over the first several months in their business. The franchisor has strong enough financial resources to be able to pay for all of the operating and infrastructure costs, without having to rely on revenue from new franchise sales for its existence
  • The franchisor is selective in who they bring on as franchisees – in other words, they don’t “sell” you a franchise, instead they have a clear understanding of what it takes to become a successful franchisee in their system, thus they “award” a franchise to only those candidates who have demonstrated (through a strong mutual evaluation process) that they have what it takes (skills, abilities, interest, motivation, desire, passion connection to the roles that drive the business, etc.) to become a successful franchisee

When you align with a strong franchise system, you are paying more for the initial franchise fee (usually between $25k and 75K) but you should be getting so much more in value. When compared to starting the same business from scratch in (non-franchised), when done right, as a franchisee you should experience a smoother launch, a shorter time to positive cashflow, and higher revenues once you’re ramped up than the same independent business in the same market.

Jun 7, 2014