Franchises

Answering the Million-Dollar Franchise Question

Several weeks ago, I was drawn into a conversation regarding the relationship between franchises and the word “proven.” One side felt most franchises were “proven” and the other side felt most franchises were not “proven.”  Honestly, it was a silly and circular conversation, but it did get me thinking as many of the aspiring business owners I help as a franchise coach ask derivatives of the following questions:

  • When does a franchise become “proven?”
  • What makes one franchise “proven” and another not? 
  • Can “proven” even be measured and should this be our objective?

At the heart of the word “proven” is the concept of risk reduction and/or avoidance. As I suggest in my book, The Educated Franchisee, people chose to join franchise systems with the intention to reduce business risk. The more certainty a person has, the more “proven” the franchise system becomes.

Related: To Franchisees, McDonald's Arches Aren't Looking So Gold

Obviously, the perfect franchise system would be a system with 100 percent certainty. Unfortunately, even franchise systems with 1,000 successful locations cannot deliver certainty. Just as a million white swans cannot negate the potential for a black swan. Even 1,000 successful franchise locations cannot disprove the potential for a negative outcome. 

Certainty is an impossible measure. As Peter Bernstein stated in his exceptional book, Against the Gods, "when our world was created, nobody remembered to include certainty. We are never certain; we are always ignorant to some degree." Therefore, even though certainty may be the goal, it can never be the expectation.

With this being said, the next logical step would be to determine how much uncertainty we are comfortable accepting.  In statistics, this is called our "margin of error." Is there a specific margin of error or deviation that everyone can agree on? How tight does the margin of error or deviation need to be in order to be able to state that the franchise is certain or “proven?”

Unfortunately, or maybe fortunately, each person values risk differently. Bernoulli’s contribution to the mathematics of risk includes the basic premise that each person, based on their personal situation, experience and phobias, will measure risk differently. Therefore, no margin of error is equally appropriate for all people. When translated to franchising, this tells us that what is proven to one potential franchisee may not be proven to another potential franchisee. This is an important premise because if everyone the same appetite for risk, new franchise systems would never be able to attract their first group of franchisees.

Related: McDonald's Slashes Menu in Bid to Turn Around Sales

In some ways, we have an adaptation of Rogers Adoption/Innovation Curve. This curve shows that “proven” is in the eye of the beholder.  An “Early Adopter” is likely to consider a franchise system to be proven long before the “Late Majority” will feel comfortable.

innovation adoption lifecycle

This begs the question, is it even possible to answer the “Is it proven” question?

Perhaps the entire objective of “proven” is misguided. Maybe our objective should be something different. The foundation of risk management revolves around controlling what you can and minimizing your exposure to those things you cannot control. As Peter Bernstein states, “under conditions of uncertainty, both rationality and measurement are essential to (successful) decision making. Rational people process information objectively: whatever errors they make … are random errors rather than the result of a stubborn bias toward either optimism or pessimism.”

As a person evaluates a franchise, the primary objective should be to discover, in a factual and unbiased way, whether the franchise system works and to what degree. You can do this by sampling the franchise system and the franchisees. You collect all the information that is available and conduct a rational and unbiased due diligence. Once you complete your due diligence process, then you measure what you have discovered against your own, very personal, comfort with risk.

So, again, back to the question. Is the concept “proven” enough for you? Well, when it comes down to it, this is a personal question that only you can answer.

Related: Why Do Franchisors Fail?