The Value of a Reference

The world of franchising continues to grow on a global basis. Franchising in its many different forms employs literally millions of people around the globe and has brought thousands of great concepts to the marketplace. Every year thousands of new franchise units are established and similarly thousands of people make the giant step into self-employment and the world of franchising.

In this column we have talked about the need for due diligence as a prospective franchisee works through the discovery process. What is this franchise all about, does it fit my background, finances and life style? Just a few of the many questions that a prospective franchisee needs to research well before making any commitment towards a franchise award.

Previously we have also stressed the need to ‘take your time’ – there should be no rush in undertaking due diligence – as a franchise award is not just a short-term engagement, for the majority of people it is the start of a long-term career plan. When undertaking due diligence most people can get all of the answers they need from the franchisor, and the franchisor is usually very pleased to provide those answers. This, however, may not be enough. Always remember that the franchisor is ‘slightly’ prejudiced in terms of the answers and information they provide. We are not saying in any way that there could be a problem with the information – we are saying, however, that in many cases the franchisor may not be the best person to consult.

In the majority of franchises, franchisors are not actively engaged in the day-to-day business that they franchise. They act merely as a conduit to provide the franchise framework for others. This is not always the case, and some franchisors actively work in the franchise business with stores or outlets under their own management. The information that a franchisor will provide will always detail whether or not they operate stores or outlets in their own name – the information will indicate how many are company owned and operated, and how many are ‘pure’ franchises.

An important and maybe even crucial part of due diligence, when engaging in a franchise search there should be discussion with existing franchisees. Where a franchise has their own company owned outlets, then they are able to provide information to prospective franchisees from both a corporate and a franchisee level. Where there are no company stores, then the franchisor is proving information based on their experience with the system, and feedback from franchisees within their system. While this may be both current and accurate, it is nonetheless second hand.

A key element of due diligence for any potential franchisee should be a discussion with several existing franchisees. This is the best data that anyone can obtain, as it is both independent and addresses the day-to-day issues and experiences of the franchisee. Before embarking on calls to franchisees, a candidate should prepare a list of questions they wish to address. Those questions need to be deep enough to locate any potential problem areas, while at the same time not too intense that they invade the privacy of the existing franchisee. Most franchisees in established operations are more than willing to talk with potential franchisees and to share their experiences. One of the reasons they are ‘helpful’ in this manner is the fact that they were also, at some previous time, a prospective franchisee looking for information and conducting the same exercise.

It is important to address this task with a pre-determined goal, which is not just to gather random data points, but rather to gather information that will enable the would-be franchisee to gain a broad cross section of options and feedback in order to determine if there are consistent patterns in the answers received. Asking different questions to different franchisees does not create meaningful feedback. Ideally a specific number of questions should be addressed to each franchisee, and then the answers tabulated and compared for similarities etc. If there is a wide diversity of answers, then this may be indicative of a problem within the franchise system. Likewise, if the majority of answers portrayed a negative feel, then again maybe there is an underlying concern.

Obtaining feedback where there is perhaps just one person reporting negatively may indicate not a problem with the franchise system, but rather an individual problem between franchisee and franchisor. This latter situation is quite likely to arise, and just points to the fact that not all persons are a perfect match for the world of franchising or entrepreneurship.

Franchisor information should always be good and reliable, but franchisee information will tend to highlight the real day-to-day operational aspects of the business – something that every prospective franchisee should delve into.

David Banfield is the President of The Interface Financial Group, a position that he has held for over 20 years. He has been instrumental in starting Interface as a franchise opportunity and building it to its current international status. Prior to his involvement with Interface, he worked extensively in the banking, credit and factoring financial service areas.

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