How to Validate Franchise System Performance
Synopsis: To make an informed franchise purchasing decision, and protect your interests, you need to “validate” all claims. This article provides the “what”, “why”, “who” and “how” to validate. In brief, be prepared, diligent, listen intently, question respectfully, document consistently, analyze simply, be realistic, and don’t take short-cuts — your success depends on it!
One of the most popular ways to become an entrepreneur is to join a franchise system. Prior to making a commitment, you need to conduct a thorough review of all facets of the franchise system. All franchise systems are required by FTC regulations to provide potential buyers with a comprehensive Franchise Disclosure Document (FDD). The FDD details the franchise, your obligations, the franchisor’s obligations, the fees you will pay, a list of all current franchisees, and much more.
Before committing to join a franchise system, you need to “validate” the franchisor’s claims. Specifically, this means verifying the accuracy of stated financial performance, the effectiveness of training, support, systems and other franchisor furnished resources. Validation is done by speaking with existing franchisees to understand their actual experience and satisfaction as a franchisee.
Validation is a two-way street. As you diligently seek answers to your questions, franchisors are also evaluating how you would “fit” into their franchise system. Franchisors are looking franchisees with positive attitudes, aligned core values, who are “coachable”, possess problem solving skills and solid communication skills. “Validation” is an opportunity to display these qualities.
Why Validate: You do research before making big decisions, such as buying a home, make investments, and deciding where your children go to school. By validating the franchisor’s claims, you’ll better understand the franchise system, boost your prospects for success, help minimize risks to your resources (time, money), and ultimately enable you to make an informed go/no-go decision.
Who Should Validate: You or the person(s) who will perform ownership’s obligations. If you’ve designated a day-to-day manager, consider having them participate on validation calls. Besides empowering them, it’s a good idea to have an extra set of eyes/ears to process the info shared by existing franchisees.
What to Validate:
- Financial Performance: Initial investment amount, time to positive cash-flow, break-even, target profitability reached, post-opening expense levels
- Initial & On-going Training: Gauge adequacy, effectiveness
- Required Systems, Suppliers: Ease of use, reliability, performance
- Marketing: Ask for assessment of pre-opening/post-opening support
- Sales/Lead Generation: Ask how leads are generated, sales conversion rates
- Core Values: Do franchisors & franchisees speak/act in alignment
- Post Opening Support/Coaching: Gain franchisee insight into effectiveness
- Role of the Owner: Have them explain a “day-in-the-life” of an owner.
How to Validate: With the franchisor’s assistance, identify a cross-section of existing franchisees (i.e. a recent opening, one in-business for 1-2 years and one open 3+ years). Schedule and conduct calls, being sure to pose an identical series of questions. Document the findings of each call in the same manner. Seek clarity from the franchisee on any anomalies (sub-par or exceptional performance). Share your findings with the franchisor, being respectful not to create conflicts between franchisees and the franchisor. Note: Some emerging franchisors facilitate validation calls to avoid over-burdening current zees.
Analyzing Your Findings: Review “validation” documentation, then categorize each call as poor, satisfactory, exceptional and note the basis for each categorization. Share your findings first with any other members of your ownership or operating team, who participated in calls/visits, obtain their feedback. Finalize your assessment and discuss findings with the franchisor and request feedback.
Reality Check: Expect to some discontent. Minor issues should be considered just that. Not sure if something’s a big deal or not? Ask the franchisee, “if you knew this beforehand, would it have changed your decision to join the franchise?” Absolutely be alert for “red-flag” issues (i.e. trend of decreasing profitability, legal conflicts, distrust between franchisee/franchisor), and examine each closely.
Everyone’s human – we all make mistakes. It’s how we resolve problems that truly tests our mettle. The same goes for franchise systems. If problems are detected, assess the franchisor’s efforts to resolve, and what’s been done to prevent future instances.
– Prepare: Develop questions beforehand, document findings consistently
– Share: Be ready to explain “why” you’re interested in joining the family
– Listen: Probe objectively, thoughtfully, do not be judgmental, emotional
– Professional: Franchisees may offer franchisor their feedback about you
– Be Thankful: Franchisee’s time and insights are precious
– No Short-cuts: Finish the validation process – your success depends on it
Final Thoughts on Validation: Successful franchise systems have profitable, satisfied franchisees. Validation is your opportunity to prove or disprove this. Validation also helps franchisors assess whether you’re a good fit for their franchise system, so prepare, be diligent, be respectful.
About the Author: Phil Harvey, founder of Prosperity Services, is an accomplished franchise industry professional and trusted franchise advisor. Phil consults with first-time and serial entrepreneurs alike, helping them find, evaluate, select the right franchise and maximize their prospects for success. To learn more about Prosperity Services visit www.prosperitysvcs.com or see Phil’s LinkedIn profile