Top Ten Mistakes Franchisees and Franchisors Make During the Vetting Process

Forward from the AAFD: Dave wrote this article for us many years ago, but the advice he offers still rings true today, which is why we’ve decided to give it a second run. Dave offers prospective franchisees and franchisors great tips on how to approach the franchise consideration and buying process. Ignore Dave’s advice at your peril!

Sadly, in many franchise systems, it seems as though the franchisor and its franchisees are from different planets. However, with the high-performing franchise systems, their stars always seem to be in a line with their franchisee partners. Why is that? I think the answers lay in the effectiveness of the up-front validation process…the mutual validation process.

I have compiled a list of the oft-made mistakes that both franchisors and potential franchisees make during the all-critical validation and expectations-setting process. Although no one can completely error-proof their decision, many of these mistakes can be easily mitigated a priori. And, if not, it can be the beginning of an unhappy, short-lived and financially underwhelming nuptial period.

The Prospective Franchisee Pitfalls:

1. Asking Only the Obvious and Relative Questions
Too many prospective franchisees basically ask only three questions during their due diligence process:

  • How much can I make?
  • Are you happy with your decision?
  • Would you do it again had you to do it over?

Not only are these questions inadequate, they are devoid of context. They can easily be answered with rhetorical questions right back to the interrogator: How much do you want to make? How fast can you walk? Not knowing anything about you, how would I begin to guess?
Point is, a prospective franchisee can make inaccurate inferences, good or bad, from these answers, potentially leading to a final decision based on relative answers.

Mitigating Actions:

  • Prevent misinformation or missed information by following a thorough checklist, such as the AAFD’s Road Map to Selecting a Franchise.
  • Don’t neglect some of the “fluffier”-sounding, non-quantitative considerations (e.g., your ability to mesh with the personality of franchisor’s management team and/or the other franchisees).
  • Get the assistance of an experienced consultant that can point out overlooked and potentially concerning items like trademark protection (or lack thereof) and weak financial statements, among others.
  • Never buy a business based on rankings or a magazine’s “stock picks”.

Mysteriously, the almighty advertising dollar can buy you rankings. Or, the weighting criteria is skewed towards who is selling the most new licenses which is not always the best predictor of the best franchise systems.

2. Not Understanding the 20-60-20 Rule
The bell curve is a reality of life. We have seen it all our lives: in academics, athletics, corporate America, the public sector…wherever you look, you can see this performance distribution across any organization.
I think far too often a prospective franchisee gets spooked by a low-performing or potentially disgruntled franchisee. I sometimes believe they were expecting that there is such a thing as 100% validation. If you talk to enough franchisees, you will come across some that have a “victim mentality” and it was through no fault of their own as to why they are not making the numbers they had expected. Rarely do they accept any of the blame.
You are also likely to encounter those franchisees that might perceive you as a potential competitor that would cannibalize their market share and they may disparage the franchisor’s system in hopes that you do not sign up.

Mitigating Actions:

  • Speak to as many franchisees as possible…new ones, veteran ones, ones near your market or in markets similar to yours, ones doing well, ones doing average, ones doing poorly, ones with professional backgrounds similar to yours, etc., etc.
  • Determine who seems to be the happiest and most successful and are these the ones with which you seem to identify most?
  • Make sure you ingratiate yourself to the franchisee before barraging them with questions, some of which may be very personal. The first words out of your mouth should not be, “So, how much are you making?”
  • Look for franchise systems where the top players are making significantly more than the average performer. The model should not be so constrained where you only get a slight “bump” by being above average.
  • Check to see if data providers carry franchisee reports on the franchises you are investigating. These can be objective, 3rd-party validation sources.

3. Not Narrowing the Search
With some 4000+ active franchises available, you can’t look at them all, although it is human nature to want to. [Note: That number is up to over 800,000 today!] We see prospective franchisees really dilute their effectiveness in the process by not pruning down to a short list. They learn only a little about a lot and do not learn enough about any. The risk is a buyer will make a decision without having all the right data points on the franchisor they ultimately select. Or, more likely the case, they burn too much time and eat into their purchasing power.

You can also get sideways with a franchisor if you don’t demonstrate that you are making some progress toward a decision in a reasonable timeframe. That is not to say that you should feel pressured or “bum-rushed” into making an irrational decision before you have all the facts.

Mitigating Actions:

  • Define your buyer values: what is your exit strategy, what are you (not) good at, what is important to you, what are you flexible on, what will you “dig your heels in” about, what types of employees/customers do you prefer, etc., etc.
  • As quickly and prudently as possible, pare back the list to a manageable number…say three or four. While this in no way precludes you from looking at others, it gives you a starting point from which to gain forward momentum.
  • Create a workplan that leads up to a go/no-go decision. Always anchor-back to this to keep yourself accountable to making progress.
  • Know when to call “audibles” and deviate from an original workplan.

4. Forgetting That It Is a Mutual Assessment
Gone are the days of the fog-the-mirror test and cursory credit checks. Franchisors now have a seasoned and savvy talent pool from which to draw. Unfortunately, some laid-off executives have an arrogant, almost entitlement-like mentality when approaching a franchisor.
You need also not forget that the way you treat them is viewed as the way you might treat a customer. Depending on your level of professionalism, that could be a good or a bad thing. Top franchise company executives do not subscribe to the notion that people have one behavior for one group and another for a different group. They believe that people live by a consistent modus operandi, treating every person with respect and courtesy, or they do not.

Mitigating Actions:

  • Pay homage to the franchisor. They took the first big (and expensive) risk in developing the franchise system.
  • Remember that they are interviewing you just as much as you are interviewing them. After all, it is their brand and they are looking for good stewards (note I did not say robots).
  • Treat everyone as you would treat a customer.

5. Being Either Too Analytical or Too Intuitive
Both are equally sinful and equally ineffective. There is no perfect model and it doesn’t take an Ivy League MBA to poke holes in a viable model. At the same time, the pure gut feel-based decisionmakers are a scary breed too.

Mitigating Actions:

  • Take a balanced approach to assessing what opportunity is right for you.
  • Accept the fact that every business generally has some sort of “wart” on it, or at minimum, some aggravating nuisances to it.
  • Be data-driven but don’t analyze things eight ways to Sunday. Ultimately, draw upon your empirical data, franchisee soundbites, professional advisors and your experiential base of knowledge to decide the right path forward.
  • Engage an attorney that specializes in Franchise and Distribution Law
  • Keep your professional advisory team playing in their own sandboxes (i.e., let the attorneys review legal considerations, let your consultant review business considerations, etc.).
  • Beware of input from investment advisors who may be fixated on you liquidating assets to fund your new business. Consider that their income will decrease if you take funds away from their management to use for opening your own business.

The Franchisor Pitfalls:

6. Not Distinguishing the P.U.R.E. Franchisees from the FranchipreneursTM
The best franchisors not only know what their end-customers look like and how to find them, but they also should have a tight profile of what makes the best franchisee candidates. They need to know how to set the traps early so they do not end up with previously undetected recruiting errors (P.U.R.E.).

Mitigating Actions:

  • Analyze your most successful franchisees in very granular detail. Get beyond the obvious. Ascertain the common themes, traits.
  • Tests like the Birkman can give predictive values on whether someone is too entrepreneurial or not entrepreneurial enough. What you really what to do is find those that are wired to be what we call franchipreneursTM, risk takers that have the discipline to follow a system.
  • Consider using select franchise consulting/broker networks that can lower your lead-to-close ratios and provide incremental closings, not simply put you in front of the same folks who would have found you anyway. Such arrangements should be set up a pay-for-performance and not retainer-based.

7. Not Discussing Exit Strategies Up-Front
People can be too linear in their thinking. They don’t, as Steven Covey would say, start with the end in mind and work backwards. This is probably the most neglected and overlooked aspect of one’s franchise search…the Exit Strategy. Yet, it probably is the most critical.
Hopefully, one’s decision to either buy or not buy a business is not based on the 1st-year revenue projections, but rather the longer-term trajectory of whether or not it will build substantial equity by the time they want to sell. Obviously, you are not making an earnings or future valuation claim, but you do want to get some sense of the long-term goals.

Mitigating Actions:

  • Tell your franchisee prospects to fast-forward the picture for you and articulate what they see five to 15 years out.
  • Understand what the short, intermediate and long-term goals of the prospective franchisee (e.g., multiple units, semi-retired in five years, diversified into another franchise, etc.)
  • Determine if your system is a conduit towards their goals.

8. Not Showing a Prospect a Day in the Life
You need to make sure your prospective franchisees are not harboring any illusions of the hard work, dedication, and commitment they must make to the launch of the business.
Obviously, you need to protect yourself from revealing trade secrets and proprietary methods to a prospective franchisee, but you do need to give them some insight into the normal routines and typical business rhythms.

Mitigating Actions:

  • Institute a “ride-along” or “shadow” program that allows a prospective franchisee to experience a day or week-in-the-life.
  • If the franchisee prospect has a spouse, you should engage him/him early and often in the process.

9. Not Preparing for the Inevitable Frustrations
The typical buyer curve is characterized by periods of frustration, excitement, remorse, hope, indecision, and elation. It’s a guaranteed roller coaster. The most common periods of frustration will be during (1) the business case development process, (2) the loan process, and (3) the real estate/site selection process.
You can also promise a prospective franchisee that they will experience some sort of buyer’s remorse even many months into their business journey. We all go through that. When they actually go through these periods, they will not be as bad relative to if they were not forewarned.

Mitigating Actions:

  • Go over the typical “buyer curve” and explain the normal range of emotions that will be experienced by pre-conditioning a candidate for these periods.

10. Not Incenting Your Development Team on the Right Metrics
Is there anything wrong with holding your development team accountable for identifying the “right” candidates? Often times, we see only select members of a franchise organization have their bonus or any part of their compensation “at risk” based on the actual performance of the franchisee group.

Mitigating Actions:

  • Align your incentives with the sales team’s. You want profitable franchisees and so should they. Structure your bonus program accordingly.
  • Celebrate the discipline of passing back the check to the franchisee prospect that just doesn’t seem to be a fit.

David Omholt is a Certified Franchise Executive (CFE) and the Senior Franchise Advisor of iFranchise Group’s Dallas, TX office. He specializes in franchise development and marketing strategies for businesses in the greater Dallas/Forth Worth area, regionally throughout the Southwest and beyond.