Its About the Deal, One Common Mistake to Avoid

After years in the business and thousands of engagements we have some very predictable habits of human nature that we have identified. This article deals with one of the most pervasive, and what is on occasion one of most costly.

We see candidates enter our franchise search process at two different investigation stages. The first group are those that come in with no targeted franchise opportunity yet, the second group has already identified either a category or a particular brand they have decided they are interested in and want to get advice on those or to see what else might fit. While both groups come in at a different stage in their investigation they often get to a common challenge to their overall opportunity.

The challenge begins to creep in where our minds look for a simple singular solution to reaching our goals. Once we believe we have seen a viable solution (not always the best) we tend to latch on to that and go into a mode of trying to “Make the identified solution work”. The cost is that these blinders can exclude better solutions to reaching your goals.

Let me give you an example:

We recently had an experienced business owner candidate come through our process for whom we had identified a number of portfolio building options. The potential financial opportunity of each those deals were good but varied. All of the options on his list were scalable portfolio builders but they were from different markets as the candidate’s model and the value of the deal they can pursue
with the brand are both considered. We pick top matches and concepts, not top categories.

Keep in mind that we built his franchise model, his list was perfectly matched to his skills and his goals. Your list might be very different in order to maximize your personal results.

When we built his list there were concepts that operated much like real estate investments as well as those that are consumer service offerings, but none where he would be the operator. He quickly narrowed his list to a concept he felt comfortable with about in the spa category as he was an ongoing consumer of these kinds of services. In his particular list it also turned out that this brand stood out in terms of the deal that he could capture with that particular franchisor at the time.

The franchisor he placed at the top of his list was a proven emerging Franchise that was working very hard to secure capable operators. To that end they had structured a very advantageous multi-unit package deal where that candidate would have saved a considerable sum of money in a multi-unit package. Additionally, he would have had a separate pool of units set aside for him that he controlled for up to five years via a future option arrangement where he could pay for those territories any time during that period to fully own and develop them. He would have controlled a lot of units for a low out of pocket cost.

He also got major concessions in the product and service lineup, interior design cues, development schedule and territory definition. In short, he had hit a grand slam home run in terms of maximizing his deal. There was one challenge he could not overcome, but it had nothing to do with the deal.

While he loved the company, offering and deal his wife did not connect with it in some way that we could never fully identify. It is safe to say it was not the money or opportunity that stopped him moving forward in that deal, those were just too good to pass up.

Here, though, is where the challenge set in. He had a deal that was significantly to his benefit in a space he had comfort with. When his wife halted that process on that advantageous deal he did not look for the next best deal, he looked for the next best spa franchise. Against the other deals he had access to the next best Spa would be ranked much further back than his next best deal did.

I have no problem with the idea of a spa franchise if selected well. They are a moderate (not low) investment, moderate (not fast) ramp up and can produce some acceptable unit economics when they do mature. There are a number of brands in the space and they currently exist in most markets. For an owner operator it may be a lifestyle decision worth trading away some opportunity.

There are concepts that may offer a better cost, speed to ramp up or unit economics for a semi-absentee owner than a spa does. I have been involved in a number of discussions with large portfolio investors as an adviser on opportunities they were considering. Seasoned investors who are building portfolios often rank deals by benefit, not by category. If they are looking at a particular acquisition and it
does not move forward they go to the next best (or even better) deal with a clean slate, whether or not it is in the same space as the last one.

Our spa may have feared that aiming at another space, even if it was a far better deal, would mean he would have a more difficult path to getting the support of his wife. A bird in the hand…

It is unfortunate that he could not consider the next best deal overall as it was very strong. His next best deal was an absentee high growth offering in the fitness space that is roughly the same investment as a spa brand, but really stood out when looking at a ramp-up speed that is nearly two years faster to maturity and in a business that may net more than double what a spa concept would.

When you rank your franchise options, don’t get too attached to a particular market or brand as those blinders may be costly. Find your best opportunity and go grow your portfolio!

Mr. Knauf is a highly sought after, trusted advisor to many companies; Public, Independent and Franchised, of all sizes and in many markets. His 20 plus years of experience in both startup and mature business operations makes him uniquely qualified to advise individuals that have dreamed of going into business for themselves in order to gain more control, independence, time flexibility and to be able to earn in proportion to their real contribution.

Contact the Franchising USA Expert
George’s Hotline 703-424-2980

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