We have all seen it; Mr. Wonderful, Lori, Robert, Barbara, Damon and the ever surprising Mark Cuban circling potential businesses to see if they are investment worthy.
The popular show “The Shark Tank” gives those of us in the business owner community, and those who wish to be, a way to watch how proven investors evaluate businesses from pure start-ups to more mature concepts.
How can you use those lenses to evaluate opportunities for your investment in a franchise brand?
There are some pretty identifiable criteria that the Shark investors use to sort the field that we can learn from:
• Current Stage of Growth
• Capability of Founder
• The Market for the Product or Service
• Financial Performance
• What Can I Add to the Equation
• Do I Trust You?
One of the first questions the Sharks ask a business owner in the tank is about their current stage of growth. They are trying to gauge if they are looking at a product with no real company behind it; a start up, young venture with traction; or a more mature concept with real momentum.
The goal is to find those companies early enough to maximize their investment, yet far enough along to make it safe.
If you watch the show you have probably seen times where the sharks are okay with the concept, but make a point of investing in a great team. No matter how new or mature a concept is, without the right team your investment will always be at higher risk. The capabilities of the people involved can sometimes make an investment safer and more rewarding.
In the franchise world we guide our candidates the same way. Find the right team and a concept that will allow you to maximize your investment. A new brand that is still learning may increase risk, but drop a great team into a new brand and you may find a fun place to empire build. Mature companies will give a perception of comfort, but the best of their opportunity may have already been tapped.
A big brand is not a sure path to individual success while newer brands can offer risk mitigation and high growth to a franchise candidate that can be comfortable in that scenario.
The next thing the Sharks seem to look for is an understanding of where the product or service fits into the market. Is it a short fad or does it have the potential to be a long term plan? They know that fads not only limit overall earning potential, but increase risk as there is no way to know when demand will evaporate in a fad. In some cases on the show they have identified products where demand may have already run its course and identified a fad via sales trends where there was a precipitous decline.
When we work with our candidates we ask many of the same questions about the companies we source for them. We want to see that it is an exciting concept because we can identify a ten or more year demand for the product or service, a common term of a franchise agreement.
When the Sharks feel comfortable with the stage of growth, the market and the team they often circle right back to the numbers if they are considering making an offer.
This is where they start asking probing questions of the people that generate the activity. They don’t make assumptions, they ask questions and assemble their own mini pro forma.
As you are looking at franchises it is critical to gather good data so that you can make solid business decisions. Trying to gauge financial performance of the parent company or potential earnings of a franchisee from a Franchise Disclosure Document alone will leave you with a partial picture at best and this makes it hard to make a quality business decision.
In evaluating numbers go to the source, ask the franchisors about their audited financials and talk to their franchisees about their numbers. While both can be sensitive conversations, it can be done in such a way that you can get the full picture you need.
Also before they make an offer the Sharks do a little personal gut check about how the business fits them and their expertise.
One of the most common reasons you hear a Shark bowing out is that the business is not one that they can add value to. Their skills, strengths, contacts and resources could not help the concept succeed.
This is far different than the much less common reason of just not liking the product. The Sharks are making business decisions and they know that there are more customers than just them. The idea that they don’t like the product is rarely a final decision-maker over whether it is a smart business to invest in.
Just before the Sharks invest you will often see them give the business owners one last long look where they size them up and make their last call: Do I trust you with my money?
They can’t ask that question first, it has to be last. They need to have gone through the, albeit abbreviated, investigation. They have to ask questions, build a relationship and check off other criteria first. On a few occasions you may have seen Sharks decide they could not trust someone and bow out, but it tends to happen after all stages of the investigation and not right up front.
As you look at franchises this is your Discovery Day Visit; your Franchise Shark Tank Day. After checking off all the boxes on your investigation and going to visit the franchisor, as one last gut check before moving forward just give them one last serious looking over and ask yourself: Is this the company that you can trust to best put your money, skills, strengths and abilities to work in the pursuit of success?
Do you trust them?
Above all keep in mind, sharks don’t often swim alone. Think like a Franchise Shark and soon you may be safely swimming among them!
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.
For more information: Website: www.FranGuide.com