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The Franchise Shell Game

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The economy for the past few years has certainly taken us all on a wild ride. First huge highs, then crashing lows, and now the possibility of a return to what passes for normalcy.

Unfortunately, this wild ride has brought back an old refrain I used to hear a lot in the early '90's - "If they have the cash and they fog a mirror, we'll accept them." This time though, franchisors are wording things a little differently. The current version of the old "Fog a mirror" saying is: "We're trying to find franchisees. Not weed them out."

I can certainly understand the need for generating short term cash flows. But.... it's a mistake, a possibly fatal one, to simply take any franchisee that comes along.

Haven't we learned yet that not weeding out bad franchisees can put the entire franchise system at risk? How many bad franchisees can you afford? If cash is tight now, how will these franchisors afford to pay all the legal fees to get rid of a bad franchisee? Or the legal fees fighting off all the lawsuits filed by disgruntled franchisees?

What's the price of the inevitable loss of focus on what your business is all about? How do you quantify the lost opportunity? Or the potentially good franchisees that are scared off.

Let's look at each of these in a bit more detail.

Disclosing failures
Keep in mind that in most jurisdictions, your disclosure documents will need to list these failed franchisees. I can guarantee you that future potential will contact them to hear what they have to say about your franchise.

What kind of conversation do you think they'll have? If the franchisee is failing, do you really think they'll tell the candidate what a great system it is? I shudder to think what would happen to the sales process then.

Suddenly, all the time, money and effort you've invested getting your candidate interested in your system is wasted. Now, you'll have to start all over again looking for more candidates.

Wasted support
Let's look at another expense that would be avoided by taking a few minutes and a little effort in choosing the right franchisee. You've accepted a candidate that's really not suited to run a franchise. Now, instead of simply offering a normal level of training to get the franchisee up and running, you're suddenly spending thousands of dollars on additional support.

Maybe you need to focus on building sales volumes. If you do, you'll have to cover the cost of your support staff out of lower royalties. If the franchisee doesn't have the sales, they don't pay you the royalties. All while you're covering the cost of support staff to try to help them build sales. How long do you think this would last before the entire system is in jeopardy?

The joys of litigation
If you haven't had any luck in turning the franchise around... and if the franchisee isn't suited to be one, the next step is likely going to be litigation. Have you talked to your lawyer lately about how much it would cost if one of your franchisees sued you?

Studies have shown that it costs an average of US$100,000 in legal fees alone for each unsuited franchisee. Even just one case a year can put a system in serious jeopardy.

Do unto others...
Last, but not least. Take a few minutes and put yourself in the candidate's shoes. Would you want to be accepted into a franchise where the franchisor was more concerned that you had the necessary funds? Of course not.

Franchise candidates are relying on you to help them make the right decision. After all, you're the expert. You've been selecting franchisees for years while they're just getting started. And they're likely putting their entire life's savings on the line.

So please, avoid the folly of "We're trying to find franchisees. Not weed them out." Take the time to make sure the candidate is right for your system. You owe it to yourself, your current franchisees and your future candidates to, at the absolute minimum, develop and use a structured interview system, and incorporate a selection rater into the process.

If you want to go further and help eliminate the static caused by personality and chemistry, add a validated profile designed specifically for franchisee selection.

Even if you use all of these methods and tools, you will still have some franchisees fail. No doubt about it. But at least you'll know you've done all you can to minimize the risk. And done so at very little or no additional cost.

Look at it as insurance. Let's say it costs you a couple of hundred extra dollars per candidate to put a structured interview, selection rater or franchisee specific selection profile in place. You'll save that very quickly in lower marketing costs alone. Never mind if you can eliminate even one lawsuit.

A critical decision
I know this issue may sound as if I'm preaching. It's simply that this is such an important issue for all concerned.

Bad decisions when selecting franchisees affects not only you, the franchisor, but also your franchise candidate and their families. Over the long haul, bringing the wrong people on board as franchisees will adversely affect the value of each of your current franchisees' business. So one bad decision directly or indirectly affects potentially hundreds of people.

In addition, lawsuits and bad press hurt our industry as a whole. When the press gets too bad, more onerous franchise legislation isn't far behind.

So please do yourself and the industry as a whole a favor, choose your franchisees wisely!

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This page is an archive of recent entries in the Due Diligence category.

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