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A system’s health and future depends on how comfortable novice franchisors are with one simple word. For some, saying “no” is second nature. Others warm up to it throughout the franchising process, as they turn down this structure, that royalty fee, or those territorial restrictions. Learning to exercise the power of the veto in these instances is a breeze. It’s the moment when an unfit candidate eagerly agrees to write you a check for $25,000 that you truly discover what you are made of.
Identifying the types of candidates who will help your system thrive is only half the battle. The real challenge involves knowing when to turn down those who don’t fit the bill.
“No” can save you millions
Given the low average close rate and slow sales cycle, it makes sense that franchisors would want to pounce on the first opportunity to award a franchise. However, the costs of signing a sub-par candidate in haste are too steep to ignore.
Ill-equipped or undercapitalized franchisees are expensive. In the long run, you’ll pay higher costs to support low revenue-generators while receiving little or no royalties in return. If your problem franchisee is your inaugural franchisee or one of your first ten, you may find yourself in a position where you’re exhausting your resources too early in an effort to save them -- depriving others within your system or stalling your program’s growth altogether. Failing franchisees are also more likely to pursue litigation against your system. Bear in mind that you’re obligated by law to list all litigation and failed franchise operations in your Franchise Disclosure Document (FDD), which potential candidates will heavily consider as they evaluate your opportunity.
All in all, the long-term financial risk that comes with choosing unqualified candidates far outweighs the joy of awarding your inaugural franchise. When vetting candidates, make sure that they are adequately capitalized. Examine their liquid capital, net worth and credit score. Each system may vary; however, most franchisors targeting single-unit operators look for at least 30% of the initial investment in liquid capital, a credit score of 700 or higher, and 100% net worth. Pay attention to a candidate’s debt service ratio, as well. If there’s any doubt in a candidate’s ability to reasonably pay off start-up debt in addition to existing debt, they may not be fit for the long haul.
“No” guards your validation
Prospects doing their due diligence will, likely, speak with current franchisees. Just as the honest opinions of satisfied franchisees can boost your credibility, those of a floundering franchisee can make your franchise salesperson’s job much tougher. Not to mention, underperforming franchisees will lower your reported averages, making the financial performance representation in your FDD less attractive to potential candidates.
When it comes to lead generation, franchisee validation can be your greatest asset. Make sure you set your franchisees up to win with outstanding support, but also be mindful of who you bring into the fold. Do your best to gauge a candidate’s intelligence and work ethic -- unteachable traits for success. Ask about how they spend a typical day to determine whether they’ll spend every hour overseeing operations or planning their next vacation. Consider his or her work history, vocabulary, overall demeanor, and academic accomplishments. You should also make time to assess relevant technical abilities and keep an eye out for soft skills like punctuality, honesty, reliability, and good communication skills. Be critical in your assessment of what it would be like to enter a business relationship with this person, as well as whether there would be mutual benefit, immediately and in the years ahead.
Know when to say goodbye
No matter how long you’ve waited for your first franchise sale, remember that the franchisor-franchisee relationship is a lasting one. With each sale, you choose to devote your resources toward propelling a stellar franchisee or compensating for the shortcomings of a weak one. Particularly for novice franchisors, it’s worth considering that your first few franchisees set the tone for the rest of your system. Thus, it’s critical that you are prepared to identify the signs of unqualified candidates and to harness the power of “no” when necessary. Your entire franchise system will be better for it.
Mark Siebert is CEO of the leading franchise consulting firm iFranchise Group. Reach him at 708.957.2300 or firstname.lastname@example.org. His book is “Franchise Your Business: The Guide to Employing the Greatest Growth Strategy Ever.”