Signing Your First Franchisee
We have, on more than one occasion in this column, referenced the need to exercise caution when awarding franchises. New franchisors, fresh from spending $100,000 or more to develop a franchise program, will soon find themselves put to the test when a less-than-ideal candidate comes calling.
But the success of your initial franchisees, perhaps more than any other factor, will have a huge impact on the success of your franchise program.
The Nature of the Beast
Let's start with a key assumption: No business is foolproof. Fools are simply too ingenious; they can find ways to destroy even the simplest business.
Put another way, no business system is so strong that it can survive franchisees that are stupid, undercapitalized and lazy. So if you sell franchises to these prospects, they will fail. Period.
Once they fail--and, in fact, while they're on the way down--they'll be listed in your Uniform Franchise Offering Circular, along with their address and phone number, and your next prospective franchisee will call them. Every book on buying a franchise and every expert in franchise sales will counsel them to call. And rightly so.
And what do you think the failing/failed franchisees will say?
"Mr. Franchisor was a great teacher, and the system is flawless. In fact, the only reason I failed is because I am stupid, undercapitalized and lazy..."
Of course not.
They'll say the business is much more difficult than it appears. Franchisees will talk about the long hours and how the franchisors (you) don't care. And by the time they get around to telling the prospect about how they lost their house, their wife and their 401(k), and how they now live in a cardboard box underneath the train station, one thing will certainly be true: You will never sell that franchise prospect.
Ironically, these marginal candidates will not only say the worst things about you, but will require the most work from you, will pay you the least amount of royalties and will be the franchisees named "most likely to sue you" in your annual yearbook.
If a marginal franchisee is your 25th franchisee, you probably can weather the storm. But if this franchisee is among your first 10, you have problems. And if this franchisee is your first, you may be so distracted that you never get your franchise program in line again. Moreover, your first franchisee will often set the tone for your entire franchise program.
The First Step: Screening for "Stupid"
So what criteria should you use? We generally recommend you start with the big three, and that you add needed skill sets (sales ability, restaurant background, etc.) and personality fit from there.
The big three?
- Work Ethic
Obviously, it's imperative that you, as a franchisor, take the "award" part of franchising seriously. Franchise sales is not a hunt for the next check; it's a true screening process. But some criteria, like capitalization, are much more easily quantified than others.
When it comes to capitalization, the franchisee's needs will vary depending on a variety of factors (such as amount of leverage typical in the investment, speed at which the business typically achieves cash flow, other sources of income for the franchisee, etc.), but ultimately, most franchisors can readily identify a number at which their franchisees will have sufficient capital to open a unit and get to profitability.
TransUnion, Experian and Equifax are the three primary players in the credit reporting industry. Options for creating a subscriber account are provided on each of their websites. All three companies offer the opportunity to acquire credit and related reports online.
For those businesses that require more vigorous screening, there are two more names worth knowing. SentryLink is an excellent resource for conducting background checks including criminal history, property ownership and driving records. Credit checks can be run nationally, or by state. Intelius focuses on criminal checks, bankruptcies, small-claims activity, tax liens, address history and court judgments.
The more difficult part of the screening process involves looking for intelligence and work ethic. Unfortunately, like other screening processes, the "screenee" knows how to play the game, too.
These candidates often come to you because they want to buy your franchise, and they'll answer your questions with the answers you want to hear. Obvious questions will, unless you're interviewing Forrest Gump, meet with the obvious answers.
So it's imperative that we ask our prospects questions that provide meaningful information relative to these criteria. For example, in addressing the question of work ethic, envision the following conversation:
A: I like to work around the house and golf.
Q: Really? I'm a golfer, too. What's your handicap?
A: I'm a six. How about you?
You now know two things: This prospect is spending way too much time on the links to be actively involved in many businesses and, of course, don't ever golf with him for money.
Likewise, if you ask about someone's typical day, and your answer comes back that after a brutal eight hours, your prospect feels a need to go home and unwind before a brisk evening of television, perhaps this prospect doesn't have the energy level needed for your particular business.
Screening for "Fit"
Perhaps just as important as the Big Three is in the area of "fit." Start by looking for particular skill sets that'll help the franchisee succeed. Are sales skills important? Does your franchisee need a background in a particular industry? Professional certifications or licenses? Will franchisees with a certain type of personality be more likely to prosper?
When it comes to personality, one thing you certainly want to avoid is a prospect that's too entrepreneurial. While this may sound counterintuitive, the last thing you want is an entrepreneur for your first franchisee. True entrepreneurs want to do nothing more than to try to change the system, and there's no worse time to award a franchise to an entrepreneur than your first franchise, as this franchisee will set the tone for each subsequent franchisee that joins the system.
While there's no sure test for entrepreneurship, look for prospects who have started numerous businesses. In addition to the obvious, look for other characteristics of the "rule breaker"--the entrepreneur's defining characteristic--such as changing jobs frequently, a spotty driving record and a less-than-stellar record of academic achievement.
When it comes to fit, some franchisors also swear by personality testing. They'll identify top-performing franchisees (if they have them) or top-performing managers and ask them to take a standard personality test. With those results in hand, they'll then ask franchise prospects to take that same test and see how the results compare. Of course, when it's your first franchisee, you need to make some assumptions about these characteristics.
Perhaps one of the most important--and overlooked--"fit characteristics" is how well you and your prospect will get along. Do you share the same philosophies? Is your relationship contentious from the start?
The franchise relationship is a long-term one. If you're going to be successful as a franchisor, you should start with the attitude that every franchisee will be someone who you'll have to live with for years to come. And nowhere is this philosophy more important than when awarding your first franchise.