So You Want to Own a Franchise?

October 25, 2013
Do your due diligence

We have recently learned a great deal about the world of franchising.  Our mobile site review application Action Card will launch early next year and is in a productive beta test currently.  I have several years of experience recruiting, setting up and managing franchises and it has been fun working with our beta testers and networking with others who work in the franchise industry.  In business, communication is fundamental to running a successful operation and it was nice to see the International Franchise Association launch a historic initiative to facilitate relationships between franchisees and corporate franchises.

The IFA Board of Directors recently adopted recommendations by the IFA Franchise Relations Best Practices Task Force to increase meaningful communication and franchise relations.  I am encouraged by this effort and hope that over time it results in fewer frustrated business owners and greater cohesion in the IFA so that they can effectively lobby and advocate on behalf of franchises.  In my experience it was always surprising to see how many owners were not clear on the franchise agreements they signed.  Unnecessarily adversarial relationships between us and our franchise owners was not uncommon in the infancy of our model.  As we talk to many in the franchise industry today, much of that still exists.  I think a big part of the reason for this disconnect between two parties who should have more in common has to do with a lack of due diligence on both sides.  I recently asked several franchises how they recruited and screened owners for locations that wanted to sell or open in new territories.  Many have good processes in place to ensure that, like hiring a new employee, they are well screened and consensus among the executive staff is obtained when making the decision to pass or approve an owner.

Mature franchises know how costly it can be when you get the wrong owner in a store or territory.  Not only do you lose market share, inevitably you spend a lot of time putting out fires and spending resources trying to prop up underperforming owners.  It benefits everyone when prospective franchise owners are crystal clear on what they are signing up for, how the model works and what the rules are.  Disclosure and transparency in the selling process are critical to the relationship and success of the franchise owner moving forward.

Franchising can be extremely rewarding.  I personally worked with many owners from the time they first looked into investing in a business through their first year or two as an owner.  I developed personal relationships with these people, their spouses and often their kids as well who inevitably contributed or worked in the business. It was rewarding to watch somebody transition from lifelong employee to owner.  When you find a person who wants to run their own business and you match them up with a business that plays well to their personal strengths, you have a recipe for success.  Franchises have an obligation and an economic interest in having the discipline to walk from prospective owners with red flags.  People shopping for a franchise need to do their due diligence.  Talking to other owners, and I don’t mean two or three, studying their local market, hiring an attorney to review the franchise agreement, understanding the economics of the model and having enough working capital are all critical prerequisite activities when researching franchise models.  Any prospect who can’t speak to these issues intelligently in front of a franchise committee should not be considered for ownership.

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