If you have lived out of the country (or under a very large rock) over the last few years, you may not have watched an episode or two (or many) of ABC’s hit Shark Tank. As the network’s website states, “Shark Tank, the critically-acclaimed reality show that has reinvigorated entrepreneurship in America, has also become a culturally defining series.”
It goes on to say, “The Sharks — tough, self-made, multi-millionaire and billionaire tycoons — continue their search to invest in the best businesses and products that America has to offer. The Sharks will once again give people from all walks of life the chance to chase the American dream, and potentially secure business deals that could make them millionaires.”
What strikes me is how anyone considering investing in a franchise opportunity should think (and act) like one of the “sharks,” and yet how often this simply doesn’t happen. Anyone who has attended a franchise expo knows how quickly it can make you feel like a very small fish in a very big pond, with many big fish (some rather predatory) circling around.
A key factor in successfully navigating these potentially dangerous waters is remembering that YOU are in control, and YOU have a great deal of value to a franchise company. Somehow, in the quest to dive into the latest, newest, coolest franchise busines s idea, the notion of looking before you leap is often lost. This is your friendly reminder: don’t just look, do your homework like your future depends on it. It does!
Back to ABC’s website, which reminds us, “But the Sharks have a goal, too — to get a return on their investment and own a piece of the next big business idea. When the Sharks hear an idea worth sinking their teeth into, they’re more than ready to declare war and fight each other for a piece of it.”
See that part about return on their investment? That applies to you, as well. All too often, franchisee candidates forget that this is not a decision to be made based upon emotion; it is (probably) the biggest investment of their lives. Also, keep in mind that the TV “sharks” not only have millions (or more) to cushion any blows that might result from a failed deal, they are only investing their cash. You, on the other hand, are investing (and therefore, risking) not only money, but also your time, energy, credit, relationships, and reputation. It is worth noting that the business moguls who hear the pitches delivered by the Shark Tank entrepreneurs are looking for fresh ideas, but they move very quickly into metrics. Track record, current and potential demand, and unit economics are major drivers in the decision to jump on board with a business, or to walk away. The pitch (or in your case, the brochure, website, or presentation) counts, but it isn’t everything. (Figure 1)
Likewise, you need to take a critical look at facts, not just promises. It’s exciting to think in terms of being on “the ground floor” in a new business, but do you really want to be franchisee #1? If you are the first (or one of the first), your risk factor is exponentially higher than with a company which has shown itself to not only have a desirable product or service, but also has proof that they understand franchising. A business which has been truly successful as a mom-and-pop operation may not translate at all well when the product or service is delivered through the franchise model. Even more frightening is the notion of sinking your life savings (and then some) into a concept which has never sold the product/service to the public, or opened a location of any kind. Can you imagine this causing a feeding frenzy among the sharks? Neither can I.
As much as it pains me to say this, it is also possible that the primary motivation (in some cases, the only motivation) on the part of the franchisor is to collect franchise fees from those signing on, with little or no training or support to follow. Yes, it happens; sadly, more often than you can imagine.
Things get really interesting when the mogul-sharks compete for the business idea put before them. When this happens, each is quick to point out how their background (i.e. retailing, technology, product development) is better suited to the budding entrepreneur’s venture than the other mogul-shark. In other words, they care about “fit”. Just because an idea is a good one doesn’t mean it is a good one for you (or for the market where you want to locate your business). Your success depends as much on how well you fit in with the company’s culture and the demands of the particular business model as it does on the quality of its deliverable to the customer.
Does the franchise opportunity require your presence as an owner/operator? Do you need to be comfortable making sales calls? Do the hours of operation (as well as the number of hours per day/week you need to commit) make sense for you? Is it important that you have experience in the particular industry? These are just a few of the many questions you need to ask the franchisor and yourself prior to jumping into the deep end of the pool.
Just as on the reality show, the numbers matter. Much of what you need to know is found in Item 19 of the FDD, but this document is just part of the equation. Just as important, you need to know how existing franchisees feel about their experience with the franchise company. Of course, you want a good return on your financial investment, but goes much deeper than writing a check and sitting back to watch the money roll in.
Franchisee validation is a much-discussed and often misunderstood (or misrepresented) idea. Commonly, it means the testimonials of a few franchisees who have been successful, have been offered perks for a positive review of their experience, or are afraid of retribution for a negative review. As you can imagine, none of these will give you an accurate picture of what you could expect when you sign the contract. The only real way to get a holistic view of what you are embarking upon is to gain confidential insight from a large percentage (at least 70%) of the franchisees in a system. This can be difficult and time-consuming to accomplish on your own, which is why independent, third-party franchisee satisfaction research can serve as such an important tool. (Figure 2)
Just as you need to be a wise consumer in your less significant investments (cars, appliances, electronics, etc.) you need to be highly critical of all information presented to you. Consider very carefully what you are told by the franchise sales team, franchise brokers, and even the satisfaction/validation research. After more than three decades in franchising (nearly half of that specializing in franchise research), I can say with confidence that only statistically valid response rates (70% or higher), the inclusion of every franchisee (including those with “sold, but not open” businesses), and the guarantee of respondent anonymity will give you something you can sink your teeth into.
Success in a franchise business can be phenomenal, it can be tragic, or somewhere in between. Before you commit to a “sink or swim” situation,
look at your investment as if you were on the mogul side of the Shark Tank. Be smart, be critical, be honest with yourself. Be a shark!
(Figures 1 and 2 are taken from the Franchise Research Institute’s 2016 World-Class Franchise Compilation Research (Data compiled through December 31, 2015)