Flashback 10 years ago and ask a room of franchise executives about how many franchise brands exist? The answer would have been about 4,000. Flash forward to today, and the answer is the same.
What’s the problem with this answer?
For every new franchise brand created, another one dies.
I was recently talking with the former owner and CEO of one of those dead brands. I asked him if he would do it again? He said, “hell no” – that he was burnt, franchisees were bad and suppliers lied. I explained to him that I thought he was wrong. Here’s why:
1. He had the capital, but didn’t spend it wisely. Many franchisors don’t invest properly in franchise development. They look at franchise development as franchise fees. However, franchise development leads to royalties and ultimately a potentially great sale to private equity. Franchise development creates futures. If franchise development is done right, it leads to franchisees validating because your team (the collective) helped change their lives. When I told him this, he didn’t argue. He said he believed this to be true, but he simply didn’t know how to spend $$$ on franchise development.
2. He had a true point of differentiation, but didn’t own it because he didn’t know it. I told him that many of the emerging franchisors who fail do so because they really don’t understand their place in the market. Without this understanding, consumer dollars are left on the table. With it, sales go up and when sales go up, interest from prospective franchisees goes up. When I explained to him what I believed to be his points of differentiation and his why and why now positioning. he didn’t argue, again. He said he had a lot of mouths filling his ears with information, but few were based on data.
3. He had a “leadership” team, but it wasn’t a true leadership team. I told him that he certainly had bodies in those roles, but he went for the cheapest employees possible. I said that had he taken two of those salaries and invested both into one expert, he would have gained valuable experience from that hire that would have impacted sales. He said he assumed that the number of bodies was going to impress franchisees more than the caliber.
4. He believed his own hype. He had investors banging on his door to give him money to help grow his brand. He loved this attention. He felt like a rock star in the industry – invited to all of the parties and asked to be on the board of the International Franchise Association through one of the vendors. We discussed a few things. I said, “When you know what hit the fan, where were those party invites?” He replied, “They quickly dried up.” I asked him if he felt that they were friends at the time of the climb, and he said certainly. I asked him how he felt when they left him behind, and he said abandoned. We talked about the equity investments. He said he went for the one who wined and dined him the most. I asked where that investment landed. He said he didn’t do full due diligence and the investment dried up. The point is, trust everyone but cut the cards. Be careful with those who give you all the great claims without the true meat to back them up.
5. He signed anyone. We talked about his base of franchisees. I asked him whether he would enjoy getting a beer with them or not, and he said no. He said they demanded a ton of his time. It’s hard to turn down franchisees in the beginning. But when those franchise fee checks are used to keep the lights on, the franchise isn’t properly capitalized to begin with. Even though many successful franchisors who have been through the stress of start-up stages suggest that you need to be very careful in the beginning, new franchisors still take those checks. Trusting your gut is important. Feeling like you would grab a beer with those prospects is important.
This franchisor grew to 30 locations – and then came to a halt. Franchise validation was shot, not much was being spent on growth and all of those suppliers who kissed his butt had run off, unwilling to help this franchise brand figure out how to get to the next stage.
Franchising is tough. Once you become a franchise, deals don’t magically come in. You have to really be invested in the operations and the growth if you want to win. You have to be super selective when it comes to your franchise partners. And you have to be willing to grind it out.