April 05, 2019
Are people telling you not to buy a franchise?
If you were not aware, franchising has been in the media for all sorts of undesirable reasons...
It’s quite clear that the last 12-18 months have been a very disappointing period for franchising. It’s been that challenging that if you’re mentioning to people that you are looking to buy a franchise, many might recoil in concern for you.
If you were not aware, franchising has been in the media for all sorts of undesirable reasons. The conduct of primarily a handful of mostly the largest franchisors has come under severe scrutiny, but so too has the entire business model of franchising.
All of this culminated in a Parliamentary Joint Committee into the franchise sector with a report of recommendations/changes supposed to be due before the end of 2018. Delivery of this report was been delayed a number of times, with it only recently being released in mid-March, and there is much to come from that report.
There is all manner of analysis and commentary going on around the report, and the recommended actions and what a changed franchise sector will look like. What I wanted to do here, was just try to be a bit more practical with insights to help by focus you in on some of the more obvious things that could be a red flag in a franchise you may be considering.
It’s not meant to be the only criteria of things to consider, and every franchise business is different, but paying attention to them may save you from an expensive mistake.
Is the franchisor your primary supplier?
We’ve heard a lot of evidence and submissions given to the committee around the quality of supply of product by some franchisors to their franchisees. In theory, where the franchisor controls the supply of the bulk of product their franchisees sell, this approach should potentially be of benefit with a tighter control of costs, quality, exclusivity and performance.
However, it also means as a franchisee, you are exposed almost entirely to the competence, attention and efforts of your franchisor. And in the instance where profitability is key, you could end up paying the price for an incompetent franchisor spread too thin, who is also trying to be your supplier.
I am a big believer in the notion of core competence. As in, we need to focus our efforts in areas of our competence, otherwise our lack of competence in other areas can leave us exposed by not performing as well as a specialist in that space.
Franchisors who also own large parts of the supply chain (especially including production) to their franchisees, are in danger of losing sight of where their true value delivery is. There are exceptions of course, but you’d want to really understand the entire business model and especially where the franchisor is making their money.
Are a significant number of current owners unhappy?
It is absolutely essential that you speak to as many current owners as you can. Previous owners that have recently exited are also important and should be at the top of your list. A franchisor who actively facilitates this is a good sign.
Keep these things in mind though when talking to current and previous owners;
- No business is perfect. So, if you are looking for perfection, you’ll never buy a business as you’ll never be satisfied,
- Some people are negative regardless of context or success,
- Some people could be too positive. Yes, sounds weird, but for example, the franchisee re-selling their store will likely be telling you all positives with no balance.
I always look for context in anything I’m told or observe, particularly if I’m looking to make a judgement with that information. Even if someone has negative things to say about a business, putting that back to the franchisor to ask some questions about why that person would be negative will immediately get you cutting to the chase in your research. It may well be that there is a logical back story which gives context to why the negativity exists. You may even end up determining that the negativity was un-balanced about the business / franchise.
A great example of this is just by taking a look at TripAdvisor or Booking. com or any of the main accommodation sites with reviews. One person’s adoration for a hotel is next to another person’s disdain! And even worse, some peoples disdain is driven by the most ridiculous of things – like the housekeeping tucking the sheets in too tight or something!
The lesson here, seek and determine context for all your feedback from others.
Is it growing in unit or location numbers?
This can be good and, or bad, or even mean nothing.
Just because other people are buying, or have bought a franchise does not mean that brand is necessarily a proven thing. You must judge every location and opportunity to invest on its individual merits. A seriously fast growing franchise could be a great thing, showing the brand has momentum, higher brand awareness and a growing customer base for all. But, it could also indicate that the brand is a ‘fad’ concept, and or the franchisor selling the franchises could be seriously over stretched handling a rapidly growing business. As far as impacting on you, rapid growth can cause as many problems, if not more, as no growth.
It’s a hard one as I see and have worked with brands that are really good businesses, with franchisors that I personally know care deeply about the success of their franchisees. But, for a variety of reasons, they have just not been able to get the momentum required to grow as fast as other brands in the market.
Who knows, maybe they refused to take short cuts? But what I do know, is that just because someone has many more franchise locations, does not necessarily make them a better brand to be part of compared to others with less. Again, judge each location / opportunity on its individual merits and assume nothing.
How to make sense of it all
I think the best way to approach the research of a franchise is to compile all you uncover into key areas of the business. For example, you could bundle things like;
- Sales driving activities / marketing support,
- Entry / establishment costs,
- Ongoing costs,
- Specific scenario clarifications (ie of examples presented to you by existing / past franchisees),
- Business mentoring / coaching support.
As you do your research and have all conversations with stake holders involved, you could categorise your information under these headings, into things you uncover that you’d like to know more about. It’s just a quick way to organize your thoughts in some way, so you don’t end up with random questions, statements and facts as you dig deeper into the franchise system. If you don’t get them organized, you may miss asking the right questions! Remember, you are the buyer, and your doubts need to be satisfied in the areas of your concern in order to move forward. Any professional person in franchise sales should welcome being presented the exact things you’d like clarified no matter how delicate or uncomfortable some conversations could be.
