How To Buy an Investment Worthy Franchise

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For so many years the quality of most of what passes for franchise investment opportunities has been so abysmally low that their selling risk has had to be hedged with capital punishment clauses galore in the franchise agreements and in the FDD materials.

Part of this is that the quality of the concept being sold has been marginal and worse almost all the time. Whole business segments are now populated junk offerings.

Along these lines one might mention sandwiches, ice cream yogurt and gelato shops, pizza, printing, car repair and maintenance and dozens more. For various reasons - a long list - these are not real business investment opportunities and only fools buy them. Since the market does not provide protection for fools, I am not going to waste any more time talking about what they are and how they are sold. Rather, I would prefer to discuss how one should sell a real, investment worthy franchise opportunity.

In a real investment opportunity you have demonstrable revenue credibility.

The franchisor, before embarking upon a franchising program, had a real business that made decent profits and showed substantial growth and could be operated by trained and monitored managers in several replications of the franchise model. This kind of franchisor paid attention to what was happening in his market and made adjustments and improvements as soon as the opportunities presented themselves, keeping the operating manual current and paying attention to detail. It is a fine tuned, well managed business at the moment that the decision is made to franchise it.

In other words, it is a real business with an identifiable attainable breakeven point that will occur within a year in the right market.

The franchise's financial performance is sufficiently monitored both in company store mode and in the franchised mode, and differences in financial performance are accounted for in terms of what causes the differences. The franchisor knows his franchise and is not just some circus clown with a glib sales pitch chock a block with slogans and meaningless pseudo information.

A real franchise is not sold to every bozo with a temperature and a room temperature IQ who can write a check for the initial fee. A real franchise is not sold in any market where its anticipated performance is not responsibly projectable.

A real franchise skims the best markets first. In that manner the franchise itself, as a system, achieves early revenue credibility that enables the franchisor to begin writing a more aggressive FDD.

A real franchise is sold to carefully vetted franchisee prospects with more than enough money than will be needed and a proven business track record that includes actually having to make serious business risk decisions, not some marginal mid level "executive" who had to remortgage his house to meet the anticipated total initial investment.

Total initial investment, as presented in almost every FDD is an inadequate range of numbers intended to speak to the first 90 days after store opening and omits far too much to be remotely reasonable. In our real franchise, the Item 7 information will be a much higher number because the caliber of investor sought will not be scared off by it.

The number will also change frequently because its underlying information is being monitored carefully. The franchisor will have a good grasp on where breakeven can be expected to occur and how long it takes to get there. This enables more aggressive FDD information that is not misleading. This is the kind of information a real investor wants to know about. This is what sells franchises to intelligent investors.

If area development deals are sold, they are sold to people who have a track record demonstrating the capability to meet a development schedule. That schedule will describe the art of the possible in an area with defined top level geographic areas and good demographics specifically measured for this franchise.

With this approach the FDD can and will become more aggressively informative each year. There will be few surprises and those easily manageable. The franchisor will be willing to make adjustments for these surprises so that they do not result in serious economic disruption and the rise of disputes. The franchisor's willingness and ability to make adjustments and accommodations where appropriate, no matter what the franchise agreement may say, will mark that franchisor as the affiliation of choice for the best operators. Good reputations grow almost as fast as bad ones, and one does not become known as a chump for using good sense.

In this kind of franchise there is no danger in demanding compliance with the agreement terms, because the business is not financially impaired by the range of possible additional charges that could be made by the piggish franchisor. Good business partners know that everyone in the deal has to make money and that only a pig tries to squeeze every last nickel and dime out of it.

However, the extraneous revenue stream temptation will always be there, and an enlightened franchisor is all too often succeeded by more opportunistic types. For this reason it is critically important that franchisees establish an effective independent franchisee association long before abuses occur. It is far easier and less expensive to prevent abuse than it is to stop abuse.

Usually franchisees assume the best and leave themselves open to abuse until it is too late. That is a terrible mistake.

Franchisor established franchisee advisory boards are no substitute for the franchisees having their own independent organization. The franchisees of Quiznos and Marble Slab Creamery and many others learned this lesson the hard way. They are now dropping like flies.

For several years the franchise world has been populated mainly by mediocrities and worse, all sold to moron FranWads who were usually corporate middle management types - glorified clerks. They accumulated close to a million dollars in many instances through hard work and frugality, only to lose it all and end up in bankruptcy.

It is time for a higher level of investment quality. There are plenty of investors for those opportunities who are financially and experientially qualified. Following the plan suggested here and elsewhere on a solid and credible franchise investment environment can again be established. I will be very happy to help guide them through their early years into their growth phase to maturity.

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About this Entry

This page contains a single entry by Richard Solomon published on May 19, 2013 7:16 PM.

How Much Can I Make with Mooyah Burgers? was the previous entry in this blog.

Franchise Owner Continues to Litigate Against McDonalds, Even After Faking Evidence is the next entry in this blog.

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