You may have identified a brand that you recognise as being successful and established, but how do you know that investing a large sum of money into the business is the right thing to do? You need to do a fair amount of research into the company and find out whether or not it’s a ‘safe bet’.
Companies frequently contact us, looking to become franchisors. They may only have developed a loyal customer base in their local market, or they may be a company with a household name.
Regardless of their size and reputation, we believe it’s essential to first examine the company’s underlying business before we help them become a franchisor. During a feasibility examination, we measure the client’s company against criteria we use in determining franchiseability.
We sometimes find that the client’s business will never work as a franchise, due to economics or complexity or possibly even a lack of qualified franchisees necessary to meet expansion goals.
Other times, missing elements must be developed before the company invests the significant resources necessary to become a franchisor. In some of these cases, the gaps are so significant that the development of the franchise programmes may be delayed for a long time.
Unfortunately, not every franchise system is developed after a feasibility examination. And, while most franchise systems have the tools and management skills to succeed as a franchisor, many aren’t even viable.
Low barriers to entry
The legal requirements to become a franchisor are very low. All a company needs is a disclosure document that it can present to a prospective franchisee at the appropriate time (and in South Africa this isn’t even a legal requirement and there aren’t any regulators to assess the validity of the disclosure document).
Even so, a disclosure document doesn’t necessarily reveal whether a franchisor’s underlying business is franchiseable or even viable. The ease of entrance means that not every franchise concept being marketed today is worthy of your investment.
Your dilemma as a prospective franchisee is that a well-packaged franchise opportunity may appear to be a great business. How do you really know whether the franchisor understands the business of franchising? How do you know that they have the necessary tools and systems to support you as a franchisee and to grow the business?
Managing a franchise system requires an entirely different set of skills from those used in operating the business itself. The time to find out whether your franchisor understands the business of franchising is before you invest in the franchise. You need to conduct a feasibility examination of your own on the franchisor you’re interested in.
Put them to the test
To be successful, franchise systems must have the right people on board. In smaller franchise systems, the resources available for management and staff may be slim, and your support may come from only a handful of people.
Often, that’s perfectly acceptable, since there are few franchises to support, and the franchisor often over-compensates by providing hands-on and personal services that future franchisees can’t expect to receive.
In larger systems, franchisors often have a staff person or a whole team available for every support service they provide to you. Regardless of the size of the staff, you must be certain they have the human and financial resources to exceed their legal obligations to you.
Experience counts though, and so does a person’s track record. One of the benefits of the disclosure document is that the franchisor needs to provide you with information on the management of the franchise system – their employment, litigation and bankruptcy history.
You need to examine closely who the management personnel are and what they’ve accomplished during their careers.
When you invest in a franchise, you rely upon the franchisor to meet their obligations under the franchise agreement they sign with you.
- Does their background assure you they’re honest and likely to do the right thing when required?
- Have they been convicted of any crimes?
- Do they have a history of bankruptcies or a record of meeting obligations?
- Have they been involved in lawsuits from the franchisee or former business partners?
The past can tell you a lot about the future.
Examine the franchisor’s employment history closely. Look at the performance of their former companies during their tenure – the information may be as easy to find as going to the web and doing an archives search of business publications.
If they came from another franchise, call some of the franchisees in that system and ask for their insights on these people. Talk to the current and former franchisees in the system you’re examining. Ask about their experience with the franchisor’s management team.
Related: Why Do Franchisors Fail?
Look at news articles about the system;if it’s a public company, see whether any of the analysts have followed the management personnel closely. Honest and ethical conduct is essential in a franchisor. A track record of growing and managing businesses is equally important.
The inside scoop
As in most industries, insiders often know who the true professionals are. Franchising is a relatively small industry, and that type of information is readily available if you know the right people to ask or to ask for you.
An experienced, competent franchise lawyer or consultant, active in the industry, can help you source the information you need about the franchisor’s management through their business network.
Make sure the advisors you choose have the right credentials and aren’t brokers or agents of the franchisor. Your professional advisor should also be an active member of FASA.
This is one of the most influential and active organisations for professionals in franchising, and working with a member can be beneficial in finding out the facts about a franchisor’s management style and capabilities.
Remember, you always need to complete your due diligence on any franchise opportunity. But knowing the people behind the franchise are honest and ethical, and have the skills and a proven track record in franchising, is key to reducing your investment risk.