Q: The franchise I'm interested in buying seems like a really great idea. But I'm a little leery as to their ability as a franchisor. Will the great business outweigh their ability as a franchisor?
A: Companies frequently contact us looking to become franchisors. They may only have developed a loyal customer base in their local market, or they may be a Fortune 500 company with a household name. Regardless of their size and reputation, we believe it's essential to first examine the company's underlying business before we help them become a franchisor. During a feasibility examination, we measure the client's company against criteria we use in determining franchiseability.
We sometimes find that the client's business will never work as a franchise, due to economics or complexity or possibly even a lack of qualified franchisees necessary to meet expansion goals. Other times, missing elements must be developed before the company invests the significant resources necessary to become a franchisor. In some of these cases, the gaps are so significant that the development of the franchise programs may be delayed for a long time.
Unfortunately, not every franchise system is developed after a feasibility examination. And, while most franchise systems have the tools and management skills to succeed as a franchisor, many aren't even viable. How can that be possible if franchising is one of the most regulated businesses in the United States? It's really quite simple.
The legal requirements to become a franchisor in the United States are very low. All a company needs is a disclosure document it can present to a prospective franchisee at the appropriate time. No regulator ever reviews those documents in most of the United States. Even where they do, the role of the regulator is to ensure that the franchisor is in compliance with the law, not to determine whether the franchisor's underlying business is franchiseable or even viable. The ease of entrance means not every franchise concept being marketed today is worthy of your investment.
Your dilemma as a prospective franchisee is that a well-packaged franchise opportunity may appear to be a great business. How do you really know whether the franchisor understands the business of franchising? How do you know that they have the necessary tools and systems to support you as a franchisee and to grow the business? Managing a franchise system requires an entirely different set of skills than those used in operating the business itself. The time to find out whether your franchisor understands the business of franchising is before you invest in the franchise. You need to conduct a feasibility examination of your own on the franchisor you're interested in.
Put Them to the Test
To be successful, franchise systems must have the right people on board. In smaller franchise systems, the resources available for management and staff may be slim, and your support may come from only a handful of people. Often, that's perfectly acceptable, since there are few franchises to support, and the franchisor often overcompensates by providing hands-on and personal services that future franchisees can't expect to receive. In larger systems, franchisors often have a staff person or a whole team available for every support service they provide to you. Regardless of the size of the staff, you must be certain they have the human and financial resources to exceed their legal obligations to you.
Experience counts though, and so does a person's track record. One of the benefits of the disclosure rules is that the franchisor needs to provide you with information on the management of the franchise system--their employment, litigation and bankruptcy history. You need to examine closely who the management personnel are and what they've accomplished during their careers.
When you invest in a franchise, you rely upon the franchisor to meet their obligations under the franchise agreement they sign with you. Does their background assure you they're honest and likely to do the right thing when required? Have they been convicted of any crimes, including anything to do with violations of the securities laws? Do they have a history of bankruptcies or a record of meeting obligations? Have they been involved in lawsuits from franchisees or former business partners? The past can tell you a lot about the future.
Examine the franchisor's employment history closely. Look at the performance of their former companies during their tenure--the information may be as easy to find as going to the Web and doing an archives search of business publications. If they came from another franchise, call some of the franchisees in that system and ask for their insights on these people. Talk to the current and former franchisees in the system you're examining. Ask about their experience with the franchisor's management team. Look at news articles about the system; if it's a public company, see whether any of the analysts have followed the management personnel closely. Honest and ethical conduct is essential in a franchisor. A track record of growing and managing businesses is equally important.
As in most industries, insiders often know who the true professionals are. Franchising is a relatively small industry, and that type of information is readily available if you know the right people to ask or to ask for you. An experienced, competent franchise lawyer or consultant, active in the industry, can help you source the information you need about the franchisor's management through their business network. Make sure the advisors you choose have the right credential and aren't brokers or agents of the franchisor. Your professional advisors should also be active members in the Supplier Forum of the International Franchise Association (IFA) and/or the Franchise Forum of the American Bar Association (ABA). These are two of the most influential and active organizations for professional in franchising, and working with a member of either group can be beneficial in finding out the facts about a franchisor's management style and capabilities.
Full disclosure: Michael is a member of the IFA's board and past chair of its supplier forum, and Kay is an active member of the board of the supplier forum. But, biases aside, it absolutely makes sense to look for franchisors that are active members of the IFA (contact them at www.franchise.orgto determine whether your franchisor is a member). One reason: The IFA is considered the premier educational provider in franchising. It's a good sign if your franchisor management and staff regularly attend the seminars and other education programs on franchising conducted by the IFA; it indicates they're current on management trends in franchising. Better yet, see if they're often asked to make presentation at IFA programs--this is a strong indication that your franchisor has earned the respect of their peers.
Remember, you always need to complete your due diligence on any franchise opportunity. But knowing the people behind the franchise are honest and ethical, and have the skills and a proven track record in franchising, is key to reducing your investment risk.
Michael H. Seid is managing director of Michael H. Seid & Associates, a West Hartford, Connecticut- and Troy, Michigan-based management consulting firm specializing in the franchise industry. Seid co-wrote Franchising for Dummies (IDG Books) with Dave Thomas, the late founder of Wendy's, and serves on the International Franchise Association's Board of Directors.
Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.