Franchisor Do’s & Don’ts:

“Ladies and gentlemen, attention, please! Come in close where everyone can see! I got a tale to tell, it isn’t gonna cost a dime! (And if you believe that, we’re gonna get along just fine.)”

The origins of snake oil as  a derogatory  phrase trace back  to the latter half of the 19th century, which saw a dramatic rise in the popularity of “patent medicines. These tonics promised to cure a wide variety of ailments including chronic pain, headaches, and kidney trouble. In time, all of these false “cures” began to be referred to as snake oil. A snake oil sales­ man thus became synonymous with a charlatan or fraud.The 1800s saw thousands of Chinese workers arriving in the United States as indentured laborers to work on the Transcontinental Railroad. Among the items the Chinese railroad workers brought with them to the States were various medicines – including snake oil. Made from the oil of the Chinese water snake, which is rich in the omega-3 fatty­ acids that help reduce inflammation, snake oil in its original form really was effective, especially when used to treat arth­ritis and bursitis.

Franchise developers are understandably enthused about their concept. This makes it easy for these skilled salesmen and women to really champion the franchise as the best in the industry. All good, but truth in sales is paramount to the success of these individuals and thus the franchise as a whole. Developers should always be aware that their clients, who are buying their franchise, are often using a lifetime of savings, leaving an existing source of income, or investing in their fu­ture retirement. So my emphatic advice to developers: be posi­tive, but be real!

The single most important rule for franchise developers is NO FPR’s! This is common knowledge in the industry but for those of you that are new to franchising, FPR’s are defined as Fran­chise Performance Representations. Essentially it is telling a prospective franchisee how much money he can expect to make. This can come in a plethora of forms including the time it takes to break-even, time to ROI, and expected revenues.

If a franchisor has an Item 19 in their FDD (franchise disclos­ure document) he is legally allowed to state exactly what is represented and approved by the state in that section of the FDD – which focuses on performances of other franchisees. But there is much more to “being real” than this.

Let’s take a bird’s eye view of 3 areas of focus for Franchisor Do’s and Don’ts:

  • Money
  • Competition
  • What to Expect

Money: As we just discussed, do not misrepresent the real results of your other franchisees, but also, and possibly even more important, is to make sure that you don’t under project working capital requirements. This is the biggest mistake in development that I have seen, and the demise of many a good business. As a franchisor make sure that you are looking deeply into the finance needs of your prospect. How much is his burn rate? Will he be working full-time in the business? What other sources of revenue does he have? Then, put the picture together with a conservative, cautious projection.

Competition: The second area of focus is the competition. Without reserve, I candidly say do not underplay the compe­tition. You can sell the advantages of the franchise focusing on the support, additional streams of revenue, fast start-up, low buildout, etc…. but do not ignore the real threat that the competitors poses. Rather, prepare them with the strategies needed to overcome or out-market the competition.

What to Expect: When doing a discovery day with potential franchisees, it’s great to have a nice dinner or cocktails to get comfortable with the key players in the corporate office, but make sure that the candidate has the opportunity to experi­ence the real day-to-day operations of the franchise at a live lo­ cation. And, if possible, allow prospects to interact with other franchisees at the Discovery Day.