Editorial

Awarding Your First Franchise

We have, on more than one occasion in this column, referenced the need to exercise caution when awarding franchises. The new franchisor, fresh from spending perhaps a hundred thousand dollars or more to develop a Franchise program, will soon find themselves put to the test, when a less-than-ideal candidate comes calling.

But as we have stated again and again, the success of your initial franchisees, perhaps more than any other factor, will have a huge impact on the success of your franchise program.

The Nature of the Beast
Let’s start with a key assumption. No business is foolproof. Fools are simply too ingenious. They can find ways to destroy even the simplest business.

Put another way, no business system is so strong that it can survive franchisees that are stupid, undercapitalized and lazy. So if you sell Franchises to these prospects, they will fail. Period.

Once they fail, and, in fact, while they are on the way down, they will be listed in your Offering Circular, along with their address and phone number. And your next prospective franchisee will call them. Every book on Buying a Franchise and every expert in franchise sales will counsel them to call. And rightly so.

And what do you think the failing/failed franchisee will say?

“Mr. Franchisor was a great teacher, and the system is flawless. In fact, the only reason I failed is because I am stupid, undercapitalized, and lazy…”

Of course not.

They will say that the business is much more difficult than it appears. The franchisee will talk about the long hours, and how the franchisor (you) does not care. And by the time they get around to telling the prospect about how they lost their house, their wife, and their 401k, and how they now live in a cardboard box underneath the train station, one thing will certainly be true.

You will never sell that franchise prospect.

Ironically, this marginal candidate will not only say the worst things about you, but will require the most work from you, will pay you the least amount of royalties, and will be the franchisee who will be named “most likely to sue you” in your annual yearbook.

If this marginal franchisee is your 25th franchisee, you probably can weather the storm. But if this franchisee is among your first ten, you have problems. And if this franchisee is your first, you may be so distracted that you never get your franchise program in line again. Moreover, your first franchisee will often set the tone for your entire franchise program.

The First Step -- Screening for “Stupid”
So what criteria should you use? We generally recommend that you start with the big three, and that you add needed skill sets (sales ability, Restaurant background, etc.) and personality fit from there.

The big three?

Capitalization/credit

Intelligence

Work Ethic

Obviously, it is imperative that you, as a franchisor, take the “award” part of Franchising seriously. Franchise sales is not a hunt for the next check. It is a true screening process. But some criteria, like capitalization, are much more easily quantified than others.

When it comes to capitalization, the franchisee’s needs will vary depending on a variety of factors (such as amount of leverage typical in the investment, speed at which the business typically achieves cash flow, other sources of income for the franchisee, etc.), but ultimately, most franchisors can readily identify a number at which their franchisees will have sufficient capital to open a unit and get to profitability.

TransUnion, Experian and Equifax are the three primary players in the credit reporting industry. Options for creating a subscriber account are provided on each of their websites. All three companies offer the opportunity to acquire credit and related reports online.

For those businesses that require more vigorous screening, there are two more names worth knowing. SentryLink is an excellent resource for conducting background checks including criminal history, property ownership, and driving records. Credit checks can be run nationally, or by state. Intelius focuses on criminal checks, bankruptcies, small claims activity, tax liens, address history, and court judgments.

The more difficult part of the screening process involves looking for intelligence and work ethic. Unfortunately, like other screening processes, the “screenee” knows how to play the game too.

These candidates often come to you because they want to buy your franchise, and they will answer your questions with the answers you want to hear. Obvious questions (e.g., Excuse me, but are you stupid?) will, unless you are interviewing Forrest Gump, meet with the obvious answers.

So it is imperative that we ask our prospects questions that will provide meaningful information relative to these criteria. The iFranchise Group has, over the years, developed a number of approaches to develop meaningful answers. For example, in addressing the question of work ethic, one might envision the following conversation:

So what do you do in your spare time?

I like to work around the house and golf.

Really? I am a golfer too. What’s your handicap?

I am a six. How about you?

You now know two things. This prospect is spending way too much time on the links to be actively involved in many businesses, and, of course, don’t ever golf with him for money.

Likewise, if you ask about someone’s typical day, and your answer comes back that after a brutal eight hours, your prospect feels a need to go home and unwind before a brisk evening of television, perhaps this prospect does not have the energy level needed for your particular business.

Screening for “Fit”
Perhaps just as important as the big three is in the area of “fit.” Start by looking for particular skill sets that will help the franchisee succeed. Are sales skills important? Does our franchisee need a background in a particular industry? Professional certifications or licenses? Will franchisees with a certain type of personality be more likely to prosper?

When it comes to personality, one thing you certainly want to avoid is a prospect that is too entrepreneurial. While this may sound counter-intuitive, the last thing you want is an entrepreneur for your first franchisee. True entrepreneurs want to do nothing more than to try to change the system. And there is no worse time to award a franchise to an entrepreneur than your first franchise, as this franchisee will set the tone for each subsequent franchisee that joins the system.

While there is no sure test for entrepreneurism, look for prospects that have started numerous businesses. In addition to the obvious, look for other characteristics of the “rule-breaker” – the entrepreneur’s defining characteristic – such as changing jobs frequently, a spotty driving record, and a less-than-stellar record of academic achievement.

When it comes to fit, some franchisors also swear by personality testing. They will identify top performing franchisees (if they have them) or top performing managers, and will then ask them to take a standard personality test. With those results in hand, they will then ask franchise prospects to take that same test – and will see how the results compare. Of course, when it is your first franchisee, you need to make some assumptions about these characteristics.

Perhaps one of the most important – and overlooked – “fit characteristics” is how well you and your prospect will get along. Do you share the same philosophies? Is your relationship contentious from the start?

The franchise relationship is a long-term one. If you are going to be successful as a franchisor, you should start with the attitude that every franchisee will be someone who you will have to live with for years to come. And nowhere is this philosophy more important than when awarding your first franchise.

Originally published on Entrepreneur.com