To Make a Smart Franchise Purchase, Ask These 3 Contrarian Questions Franchising is a powerful and highly successful entrepreneurial model. But it's not as turnkey or foolproof as some franchise salespeople would like you to believe.
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Franchising is a powerful and highly successful entrepreneurial model. But it's not as turnkey or foolproof as some franchise salespeople would like you to believe.
It helps to maintain a bit of emotional distance and even to be a bit contrarian to cut through the glossy sales pitch. Ask hard questions, and be on the lookout for red flags. It's easy for your enthusiasm to take over when you feel so close to achieving your entrepreneurial dreams. But your money, time, possibly your marriage and maybe even your retirement savings are all the line. There are many checklists and excellent franchise buying guides out there, including Entrepreneur's Franchise Resource Guide:
In addition, here are three contrarian questions to pressure-test your thinking and help you make a great franchise purchase decision:
1. What is the franchisor's reaction to my toughest questions?
Many people explore entrepreneurship because they are just D-O-N-E with their current career path and want to do something they are passionate about. Finding a franchise community of people who share your passion for tax preparation, hot yoga, math education, craft beer or axe-throwing can be exhilarating. You may find yourself sailing through the discovery process on a cloud of optimism. But don't replace one grind for another. If your passion overtakes your business sense, you could end up with an expensive hobby rather than a thriving business.
Observe how management handles tough questions. Does management give you straight answers? Do they imply your sharp questions mean you lack passion or aren't a fit for the business? One of my favorite franchise CEOs actually ends every discovery day presentation listing reasons why candidates should not move forward. This is a great thought-exercise.
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One technique to ferret out potential issues with the franchise model is to ask probing questions about the bottom of the unit performance bell curve. Are under-performers dismissed as recruiting mistakes or difficult personalities? They can't all be problem children, especially since the corporate team approved those franchisees and territories in the first place. If any franchisees are going rogue and not following the system, find out why. Where is the breakdown? Look also for evidence of healthy franchisee-franchisor relationships, open dialogue and a functional Franchisee Advisory Council with real influence over the company's direction.
Speaking of passion, is the management team passionate about improving franchisee profitability? Does that focus on unit level profitability guide every investment decision, marketing program, supply chain requirement, corporate hire and fees imposed? Find evidence, and confirm with franchisee feedback.
2. Does the franchise team brag more about selling units or opening units?
Speed of new franchise unit sales is often highlighted in franchise "best-of" lists and advertisements as a signal of franchise attractiveness. Hurry before your market sells out! This is a Sold-Not-Open theatre. Getting units open and then getting them profitable is far more important.
Strong franchises have the new site training and opening process down to a science. They open 100% of the licenses they sell. Those units ramp up fast and perform as expected. Weak concepts leave new franchisees marooned in startup purgatory. Franchisees struggle to open and ramp to adequate cash flow, leading to burnout. If multi-packs were sold, development agreements may be quietly canceled later as franchisees lose enthusiasm and fail to follow through.
Ask lots of questions about the franchisor's new site track record and support team. Interview as many recent franchisees as possible. What support did they receive? Was training adequate? Was corporate responsive? Were there any surprises? Were cost estimates accurate? How hard is it to achieve breakeven? How fast is the return on investment? How hard and expensive is it to find new customers? What do they wish they had known? What would they have done differently?
3. What are the underlying motives of influencers?
In your search for a strong franchise system with sustainable competitive advantage and healthy unit-level fundamentals, you will wade through a huge field of influencers. This is particularly true for first-time franchisees who may struggle to distill thousands of franchise brands into a manageable tranche of options.
Be a contrarian here too, and really dig. Ask anyone recommending a franchise to you how they are paid. Have they been a franchisee themselves? What training have they received? How do brands make it onto their recommendation list? Is it pay-to-play? Can you speak to franchisees they have worked with in the past? If you're using "best-of" lists to vet brands, make sure you understand selection criteria.
The best recommendations come from franchisees themselves. But even here, maintain healthy skepticism. There are non-monetary incentives for franchisees to participate in recruiting beyond protecting the brand. Franchise cheerleaders enjoy relationship benefits with the franchisor. In contrast, franchisees whose candor or downright unhappiness instead tend to kill new license deals may end up marginalized or may find themselves getting special attention from the corporate audit team. Every franchise sales team absolutely has a pulse on which franchisees are good validators and which ones will derail deals. Try to speak to a wide range of owners, and ask for their referrals to other franchisees who might have a different points of view. You absolutely want to talk to bottom-tier performers to find out what's going on there as well.
Gut-check franchisee satisfaction messages against the number of franchisees who are renewing their licenses or adding locations. It's a good sign when existing owners are expanding. Being on the inside, they know all the dirt but came back to re-invest anyway!
Be a determined sleuth. Don't allow your passion and building excitement to distract you from troubling signals or tempt you to take research shortcuts. Every tough-love, contrarian question you ask is an investment in your franchising success. And you're worth it.