It is not widely recognised but one of the most difficult skills that a franchisor has to master is how to choose the right franchisees. Just as importantly, how to identify applicants who are unsuitable.
A commonly aired truism is that the most valuable asset of any company is its staff. In the case of a franchise business that extends to its franchisees. But in reality, choosing the right franchisees is even more critical than appointing the right members of staff; because mistakes are much more difficult to rectify. Which is how it should be because, while employees are protected by very robust employment laws, franchisees only have contract law to protect them. The only equivalent to an industrial tribunal, to which a wrongly dismissed employee can apply for recompense, is a civil court; the cost of which is very onerous. When one compares the vastly differing financial resources that are available compared to the franchisor, it is easy to see why badly treated franchisees usually have no alternative and write off their loss as a bad experience.
With new and relatively new franchises another factor that further stacks the odds against franchisees is the inexperience and low level of risk aversion of the franchisor. For a franchisor who is in the early stages of growing a network there is a huge incentive to sign up franchisees. The fees that start to come in are a welcome contrast to the cost of launching the franchise. There has been an outflow of funds to franchise consultants, solicitors, territory mapping specialists and franchisee recruitment media, to name but a few. An inexperienced franchisor also lacks the higher levels of risk-aversion that come from suffering the consequences of awarding franchises to unsuitable applicants. These factors combine to make early stage and developing franchises more mistake prone for both franchisors and franchisees.
Back in 1978 when Moshe Gerstenhaber founded the print and copying franchise Kall Kwik, his first rule when assessing prospects was to reject anyone with experience in the printing industry. His reasoning was based on the fact that they would inevitably have preconceived ideas about how to run their branch and would be unlikely to religiously follow his operations manual. Which is obviously essential to produce a consistent quality of service for customers. That rule was right for Moshe Gerstenhaber and it remains a vital factor for most franchises today, although it obviously wouldn’t be the correct strategy in every situation. Tax Assist Direct, where an accountancy, senior management or banking background is needed, is an obvious exception to the rule. But you get the point; the key element is a willingness to follow the system rather than adapt and modify it. Regrettably, it is very tempting to disregard the long-term implications and accept an applicant with industry experience because they would need less training and support.
For the same reason genuine entrepreneurs don’t generally make successful, long term, franchisees because they will try to modify and improve the formula rather than follow it.
Many franchisors are blissfully unaware of this phenomenon and mistakenly advertise for prospective franchisees who show strong entrepreneurial tendencies.
Another problem area is where the franchise has been bought for a son, a daughter, or sibling. The difficulty being that they have little or no skin in the game and often don’t properly engage with the business that has been bought for them. Obviously, this isn’t always the case but the skill for the franchisor is to distinguish between assistance from the Bank of Mum and Dad, which is an ideal source of funding, and some sort of misguided attempt at therapy, which is invariably a recipe for disaster.
Franchisors should also resist the temptation to accept applications from would be franchisees who want to operate in unsuitable areas. And it isn’t always about the number of chimney pots or headcount of population. Failures can arise from locations being situated too close together, as has often happened in the restaurant and convenience food sector. There could be sufficient population but with the wrong demographics. There could be enough houses but of the wrong type. The area could have other constraints such as difficult terrain or lack of serviceability by key suppliers. In these cases, there can be a strong temptation to accept an application from an otherwise excellent prospective franchisee, in the hope that somehow all will be well. The responsibility in these situations lies mainly with the franchisor because a prospective franchisee cannot be expected to understand the finer nuances of what defines a successful territory. They need to be able to rely on the good judgement and integrity of the franchisor. The key point for the franchisor is that the short-term benefit of a hefty initial fee is outweighed by the long-term trouble of dealing with a disruptive or unprofitable franchisee. The key point for a prospective franchisee, when doing their due diligence, is to make sure that the proposed territory has similar characteristics to other successful ones. Also to self-assess their own suitability in terms of the problems outlined above.