For over 45 years I
have worked inside and for over 100 companies, directly and indirectly. I
have been their advisor on franchise, antitrust, crisis (bet the company)
management disputes; as well as advised their own lawyers and opposed them
representing their franchisees and dealers.
Accordingly, over an extremely long period of years I have seen and dealt
with just about every kind of problem and issue that can arise in any
franchise or other business replication format.
In today’s franchise business the economy is in trouble; money is tight;
and a lot of business opportunities are being sold as responsible
franchise investment prospects when in fact they are anything but.
The reason so many of these less than qualified deals are sold is that
historically investors have not known how to vet them for investment
worthiness. They have called a few existing franchisees and hired a lawyer
for a few hundred dollars to “read them the contract”. Is it any wonder
that so many lost everything they ever had in this world? You can see and
hear them lamenting their misfortunes on franchise blogs like
www.BlueMauMau.org.
The manner of pre investment due diligence is starting to change. While
the unworthy propositions will not change, the serious franchisor that
intends to deal with his system’s franchisees with integrity and ethics
will more easily be able to differentiate his “real” deal from the bad
ones.
As a resource who specializes in franchise pre investment due diligence, I
find myself in an excellent position to coach franchise companies
regarding how best to present an honest franchise investment opportunity.
I don’t expect McDonalds or KFC to come knocking at my door. They don’t
need anyone to show them how to prove they are legitimate investment
vehicles. But there are franchises that are starting up; franchises that
have been around for only several years; and franchises that are showing a
more slowly rising (or a declining) demand curve for their mature
franchise offerings. These companies not only need due diligence
preparation coaching, but in many instances they also could use dispute
avoidance counseling and sometimes even dispute resolution counseling.
This article is focused upon making your company due diligence ready for
the new franchise investor.
Who are you and what do you provide as reliable consideration for the
price you are asking?
What made you decide to franchise your business, to believe that your
business was replicable? Have the reasons for your decision to franchise
turned out to be reliable? Did you challenge them mercilessly before you
embarked on this journey? If they have not yet proven true, is the
direction in which your effort is heading tending to convince you that the
reasons were good reasons or are you starting to be concerned about
durability?
How people go about deciding to franchise or otherwise replicate their
business is often unscientific, to put it mildly. Sometimes unscrupulous
franchise consultants sell them a bill of goods, painting delirious
pictures of great wealth easily achieved from numerous income streams that
endure like evergreen trees from contract term to contract term. Most new
franchisors (about 75 % of them) don’t make it. Most of them take their
franchise investors into bankruptcy with them when they go. I call those
FranWhacks. http://www.franchiseremedies.com/franwhack.htm
Others manage to get a franchise system off the ground in the sense that,
over a period of two or three years they sell several or many deals. The
many sales new franchises are often associated with professional franchise
marketing firms that can and will sell anything to anybody, taking the
representations they are given to use at face value. Their interests end
with their sales commission. The franchisor and its franchisees have to
live with the consequences. Companies like Dagwood Sandwiches are quick
hitting, then run like hell, never giving a damn about anything but the
quick hit anyway. Others, while well meaning at the beginning, find that
they are in over their heads within a short time. It could be that they
aren’t ready to provide what they promise to provide and went into
franchising grossly underprepared. Still others stall out within a year or
two for various reasons. Markets change. Today they change rapidly and
dramatically.
Where does your system fit? If you are moving ahead, but slowly, how will
your growth be affected by investors availing themselves more and more of
expert pre investment due diligence services that go way beyond reading
the contract and chatting with your other franchisees? Now that you have
to pass a much more astute smell test, how have you prepared yourself to
respond to those issues in a manner that reassures those counseling your
potential franchisees that what you are offering them is more an
investment than a gamble? Moreover, how are you reconciling this need with
the requirements and limitations of disclosure rules?
It goes without saying that if you are misrepresenting significant aspects
of the business, you don’t need me anyway. And I don’t mean just telling
people that yours is a proven concept when that proof is still a question
mark. I’m talking about hard core intentional books cooking phony numbers
misrepresentations. Similarly, if you are ripping off your franchisees so
that they can barely break even while you thrive financially, you don’t
need to call me either. We aren’t talking about that here. I can only help
people who want good operators whose efforts earn them a decent living
instead of bankruptcy court and lawsuits.
And if your franchise is doing well for your franchisees, what have you
done to bring the positive aspects of your investment opportunity front
and center so that the really acute due diligence resources will identify
them and give them the weight they deserve? How do you do that and also
keep an eye on the limits of what you can/should say in your
sales/marketing materials and in your FDD?
That is now becoming the major barrier to closing franchise sales with
intelligent investors. What have you done to evaluate the extent to which
you are qualitatively equipped to survive really competent pre investment
due diligence, due diligence that analyzes the business side as well as
the legal “stuff”? And if you did begin to conduct an introspective
assessment, did you do it or was it done by someone who has no dog in this
hunt and will give it to you straight and tough? Are you in your own mind
better off dealing with tough questions before they come in so that you
can handle them, or do you intend to wing it and just hope for the best?
If you didn’t do the really tough feasibility analysis before you started
franchising, with every possible assumption challenged and answered, how
certain are you that your proposition meets the tests of investment
worthiness that will now be posed by expert due diligence deal
consultants?
And so the questions who you are; why are you are doing this; and what are
you really providing compared against what you say you are providing
become present tense considerations.
Are you ready for prime time in this new season of scrutiny and tight
money?
Being ready for prime time in this high intensity due diligence
environment is an exercise in reality checking. You obviously have to
claim that you are the “real deal”. But put to it with specificity, what
other than fluff responses can you give that will convince an expert cynic
that you are one of the real deals? Where will you look? How will you
identify the insufficiencies, and what will/can you do to buttress the
system in those weak spots that show up under intense scrutiny? When, if
ever, was the last time you even thought in this vein?
How can you do a really serious “challenge everything” analysis of your
franchise system and keep the information that results from it protectably
confidential? Obviously nothing can protect confidentiality in the
presence of intentional fraud. Privileges can be breached and contract
clauses ignored where outright fraud is present. This discussion assumes
that if you do find weaknesses in your system you will be willing to
decide to address them substantively and effectively. Sometimes the
assessments show that nothing more is needed than relationship management
improvements. Other times the assessments reveal life cycle weaknesses
resulting from changes in your business environment over time not being
effectively addressed. On the more expensive side you may find that what
you need can only be provided quickly through acquisition.
Probably the most frequently encountered issue in any system evaluation is
that of managing to cope with market evolution and its impact upon the
life cycle of your concept. The reason is that the rate at which changes
occur increases constantly, so that just keeping abreast is almost a wind
sprint. Illustrative of this is the sea change in computer retailing that
occurred in 1983 – 1986. Seemingly overnight companies that could sell
personal computers right off the back of the delivery truck at full
retail, and that proliferated retail establishments as though the world
would never change found that there were many other computer sources than
IBM and that IBM was recognizing this by its willingness to sell its
computers to any retailer that would buy them. Competition is the most
effective margin and ROI killer in existence. The upheaval was a franchise
litigator’s dream. Similar, albeit less dramatic, evolutionary changes
abound today across many lines of commercial activity. It is highly likely
that your business is in or about to be in a sea change environment that
will make great demands upon your ability to stay real and to prove that
you have indeed stayed real as a pre investment due diligence response.
Very few systems are so large that they can absorb everything with minimal
change or only some cost and price cutting. If you have to compete against
those giants, how will you handle what they can do almost with imaginative
book keeping? If you don’t have to compete against behemoth rivals, how
will you exploit the advantages that open up for you?
This subject gets juicier and juicier the more you think about it, and I’m
not out to write a book here. But with just these tidbits, I think you can
recognize the risks and opportunities that you may not have been
concentrating on as much as you might like.
|
