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The Dangers of Do-It-Yourself Franchising

If you want your program to succeed, you'll need some outside help.
November 30, 2009
URL: http://www.entrepreneur.com/article/204188

About 15 years ago, an entrepreneur came to me proudly displaying the franchise legal documents that he had prepared, and asked me to critique them. While I'm not an attorney, I said I would be happy to weigh in on the business issues that these documents contained.

Half an hour later, I told him that the documents had a number of major flaws, and that they would need a complete overhaul if his franchise program was to succeed.

"That shows how much you know," was his indignant reply. "We copied these documents almost word for word from the legal documents of the industry leader--and they are doing just fine without your advice. I guess we didn't need a consultant after all."

I didn't end up working with that company. Almost three years later, the industry leader he had copied from declared bankruptcy, and in another 18 months, my one-time prospect followed suit.

For all the change that has occurred in the world in the last 15 years, when it comes to human nature, things are very much the same. Not a month goes by that I don't meet a prospective franchisor who believes that using outside help is a waste of money.

Entrepreneurs are, by their very nature, both resourceful and self-confident. Moreover, in younger companies, these entrepreneurs are accustomed to substituting hard work and ingenuity for growth capital. Chances are they started their businesses without outside help. So why shouldn't they do the same when they franchise those businesses?

When these prospective clients ask me why they can't develop their franchise programs without outside help, they're often surprised to hear the answer: Of course they can.

The problem is that they're asking the wrong question. The question should not be whether they can develop their own programs, but whether they should.


Time is Money
The development of a franchise program takes time and a substantial amount of effort. A well-conceived and executed program for aggressive growth will require a significant amount of competitive research, a well-conceived strategic plan, sophisticated financial analysis, operations manuals, training programs, training videos, e-learning systems, marketing plans, brochures, an optimized website for franchising, promotional videos, and a properly designed and executed sales strategy.

The problem with doing all of this in-house is that most successful entrepreneurs are already putting in work that would make the average masochist blush. So where do they find the time?

Even if these diverse skill sets were available internally, either the entrepreneurs would have to devote a huge amount of their personal time to this endeavor, or borrow time from already busy staff, or both. And, in the process, something has got to give--usually the core business. Even in the best of cases, these entrepreneurs will only be able to devote part-time efforts to their franchise programs, thus delaying their market entry. And as the months while away, the window of opportunity may be closing.

Of course, entrepreneurs could also hire additional staff to do this in-house, but chances are that they'll never find a single individual with all the diverse skill sets needed: research, writing, financial analysis, legal documentation, operations and training, brochure design, website design and optimization, video production, and sales. And, even if they could find several people with this combination of talent, many of these skills are only required for the startup phase.

By contrast, many of these tasks can be outsourced to consulting firms and law firms. For these firms, providing such assistance is their full-time job--not something that they do after-hours or as time allows. And because they have been down this road many times and have highly specialized resources, they can complete these diverse tasks much more quickly.

So while you focus on running your business, the consultant does the heavy lifting, and gets you to the market faster in the process.


Expertise Is Money, Too
Aside from the element of time, the decisions you make as a new franchisor will have a profound impact on the success of your franchise.

As an easily quantifiable example, consider your royalty. Many new franchisors (like the one I dealt with 15 years ago) will spend little time choosing this all-important number--perhaps taking a cursory look at their competitors and then choosing a value that approximates it.

But "me too" is not a strategy--it's a copout. Every franchise program is--or at least, should be--unique. Some will offer more support to their franchisees. They will have different products, different vendors and different costs. Average unit volumes will differ. Salaries will differ. Growth plans and franchise structures will differ. So why would franchisors believe that their structure should be identical to a competitor's. Even if everything else was equal, who's to say that their competitors did their analysis properly?

More important, there can be a huge cost to a "small" mistake. If, for example, a franchise company underprices its royalty by only one percent, it could mean the difference between success and failure. Remember, in franchising, everything is compounded by growth and time. For each franchisee who achieves average revenues of $500,000, this "small" 1 percent error will reduce the franchisor's bottom line by $5,000. So if the franchisor sells 100 franchises with a 20-year term under this structure, that $5,000 becomes $500,000--every year. And $500,000 per year for the next 20 years is $10 million right off the bottom line.

A poorly defined territory may have a similar detrimental effect. Overestimating territory size by 10 percent means little to the new franchisor. But if the U.S. market is saturated five years later with 500 franchises, the 50 franchises that can never be sold will amount to $1.5 million in royalty revenue lost each and every year.

To paraphrase the late Sen. Everett Dirksen, "Ten million here, ten million there, and pretty soon you are talking real money." And these are just two of the hundreds of business issues contained in a typical franchise contract.

Entrepreneurs, whose "ready-fire-aim" personalities and lightning fast decision-making are legendary, may not want to hear that the analysis that goes into these decisions should take weeks. But when they realize the impact of those decisions in the long run, the importance of a more systematic approach becomes readily apparent.

And this experience is important throughout the process of becoming a franchisor.

Operations manuals and training programs can seem to have little immediate relevance to long-term success. But they are vital for brand maintenance and liability protection. One well-known franchisor lost millions in a food-borne illness lawsuit because its operations manual did not contain the appropriate language. Another franchisor lost a lawsuit because it was overly prescriptive when discussing the type of drop safe that the franchisee was required to use. And on the flip side, a third franchisor saved itself from protracted litigation in a sexual harassment suit brought against a franchisee when it demonstrated that it had thoroughly documented and trained that franchisee on the bounds of acceptable behavior.

The fact of the matter is that while many entrepreneurs can write, few have the requisite experience necessary to draft a manual that adequately protects them from liability. Being a good writer is not good enough. Often, it is not how you say it, but instead knowing what you should say--and what you should not.

Marketing provides many more relevant examples. With more than 100 internet advertising portals that target franchise prospects, companies new to franchising will have little idea of what will or will not be effective. An expert who has implemented dozens of successful franchise marketing programs will know what works and what doesn't. The neophyte's alternative is to learn by trial and costly error.

And while a well-designed brochure will never sell a franchise, a poorly designed brochure can certainly lose sales. Marketing to prospective franchisees is unlike the marketing of other services. Years ago, I saw a franchise brochure for a hair salon, with three happy barbers standing behind their chairs in a pristine shop on the front cover. As a consumer, the photo was very inviting--a beautiful and clean shop, no waiting in line, and happy barbers waiting to serve. As a franchisee, however, the photo represented my worst nightmare. "What if I invest my life's savings and nobody shows up? I am paying those hair stylists, and all they are doing is standing around!"

And this does not even account for the liability that can accrue from a poorly worded or poorly documented brochure. Nor does it account for the fact that what you say in a brochure is subject to review in seven states. A brochure that is not approved in a state cannot be used in that state, forcing some unwary franchisors to reprint their brochures at considerable expense.

What is it worth to the fledgling franchisor to avoid one lawsuit because they have a well-written operations manual? What is it worth to avoid selling a franchise to a prospect that will lower brand standards or a franchisee that will be a constant thorn in the franchisor's side? And of course, what is it worth to sell just one more franchise to a strong franchisee?

The problem is that many of these issues aren't apparent in the first year of franchising, and may not even become apparent in the first 10 years. A franchisee will never complain that a franchisor's royalty is too low, and often, inertia will carry franchisors for years, until one day they run into the proverbial brick wall. A faulty operations manual doesn't have a red flashing light that warns the franchisor of impending doom. It simply ticks like a time bomb. A poorly designed marketing plan does not advertise itself-it gets hidden behind the salesman's lament that there simply are not enough good leads.

The reason you go to experts is the hope that their experience will allow you to avoid a mistake, side-step a pitfall or grow faster and more profitably. It doesn't mean abdicating your authority. Ultimately, good advisors will make sure that you understand the advantages and disadvantages of various strategic alternatives, and will always leave it up to you to make all of the final decisions.

Vernon Sanders once postulated that "Experience is a hard teacher because she gives the test first, the lesson afterward." For those willing to pay for the experience of others, those lessons can have a much lower cost than they might otherwise.