The five warning signs

Posted on 6th June 2016 at 4:10pm by Carl Reader in Business

There are five major warning signs that you should look for in any network that you are talking to. If you see one of these, proceed with caution!

Sales vs Recruitment


Perhaps one of the biggest warnings should come from a franchisor that is solely focused on selling to a prospective franchisee, as opposed to recruiting a potential franchisee. Now, I’m a realist, and am not of the view that the franchise recruitment process should be solely recruitment with no element of sales – the fact is that at least some sales process is required, otherwise the franchisor won’t recruit any franchisee! But, it is important that the recruitment is a two-way process, and not simply a sales exercise.

To be able to spot this warning sign, you need to appreciate the difference between a sales approach and a recruitment approach. Generally, a sales approach would hide the potential problems that you might have in either your proposed territory or previous experience, and will be peppered with implied promises. Conversely, a recruitment approach would be more akin to a job interview, with no financial incentive. The franchisor would evaluate whether you are suitable for the opportunity, and actively look to turn away candidates who are not suitable for the franchise.

From a franchise network sustainability perspective, you should look for networks that take a “recruitment” approach: or perhaps more importantly, proceed with caution if you are speaking to networks that focus on selling the opportunity and the dream!

Franchisee churn


The next area that you need to look at is “franchisee churn”. In plain English, what you want to know is how many franchisees have left the network.

Your franchisor should provide you with this information during your due diligence checks, and you should not only look at the number of franchisees leaving, but also the reasons why they have left the network. Depending on the maturity of the franchise network, there can be some valid reasons such as franchisee retirement, or preferably franchisee resale to a new incoming franchisee. The warning signs are what we would consider ‘non-voluntary’ reasons for leaving – mainly financial failure. If you see a trend of these, it would be worth having a frank conversation with the franchisor, and perhaps more importantly, interrogate the financial projections with the help of a professional advisor to ensure that you are entering into the franchise with your eyes open.

Unhappy franchisees


We discussed due diligence above, and one of the key checks that you should perform is informal conversations with existing franchisees. If these franchisees are unhappy, or worse hidden from you by franchisee, you need to proceed very carefully.

Bear in mind that each network will have a range of franchisees – the keen advocates, the unhappy few, and the majority who are in the middle. If your first couple of calls happen to be to unhappy franchisees, be sure to extend this process to widen the range that you are speaking to. If the message that you get continues to be negative, this will indicate a worrying trend that is likely to follow onto new franchisees as well as old!

Undue limits and expectations


Whilst you should expect there to be restrictions within a franchise agreement, such as working within a defined territory, you should make sure that these restrictions and obligations are reasonable. For most people, it is difficult to identify the differences between reasonable and unreasonable restrictions, so this is an area where an independent legal review can pay for itself several times over.

One area that you should look at is whether your franchise territory is sufficient for you to generate the projected income. Make sure that you weigh up the demographics and population of the area that you are allocated, to ensure that the income projections are reasonable. You should also review any minimum performance criteria that the franchisor has put in the franchise agreement. Whilst a BFA member franchise has this reviewed as part of their accreditation, a non-member franchise is free to set any minimum performance criteria that they wish without any reference to the actual performance of existing franchisees, and these may be overly onerous.

Negotiations


Negotiations might seem like a good thing for you on the face of it. The franchisor might offer to reduce your initial investment, haggle a bit over the ongoing management service fee, and waive whatever clauses you want within the franchise agreement. Whilst this might be superficially beneficial, it actually points towards a weak franchisor and/or a weak franchise system.

Any franchisor that is worth investing in should be clear that their franchise proposition is of value to you, and in turn is structured with an appropriate financial and operational structure to ensure a true win-win partnership. An attempt to deviate from the initial proposition should sound alarm bells in your mind, as the franchisor is either desperate to shift ‘units’ by selling territories, or alternatively knows that the initial offering is unfair. Either situation is not ideal for the stability of the network as a whole.

The above is an extract from The Franchising Handbook, which is due for release imminently. Follow this link to pre-order and be one of the first to read it!

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