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Franchisor Competency: As Important as the Franchise Concept

By Ed Teixeira

There are hundreds of franchise opportunities that are based upon a sound franchise concept but for various reasons never reach their full potential. Newly emerging franchise companies need to have competent leadership as well as the necessary financial resources in order to succeed. Although a sound business model is a prerequisite for a successful franchise so too are the business skills and the experience of the franchise leader.

There are varying reports as to the number of new franchise concepts started each year. A report completed in 2007 by FRANdata states that there were 900 new franchise concepts introduced from 2003 through 2005. I’ve yet to find a comparable report since the FRANdata release; however, I would estimate that there are a minimum of 200 new franchise concepts introduced each year. The vast majority of new franchise concepts are launched from small businesses. The owners of these small businesses view the franchise model as a way to grow their current business into a larger company. In many cases, the business platform and perceived franchise represents a sound concept featuring products or services that have customer appeal. Having had the opportunity to consult with a number of these companies, I’ve found many of these businesses can develop a unique franchise with potential profitability that will appeal to prospective franchisees. When we add new franchisors to franchises in their early growth cycle we end up with a significant number of small franchisors. These companies are marketing their franchise opportunities as they look to build their system.

The Franchise is One Component of a Successful Franchise Company

When individuals pursue a franchise opportunity a great deal of attention is focused on the viability of the franchise concept, the market for its products and services and the performance of existing franchisees. In the case of new or smaller franchisors there may be few or even no franchisees in operation that can aid the prospective franchisee in their franchise evaluation. This can make the process more difficult.

What sets many of these new franchisors apart from one another is what I refer to as Franchisor Competency. Since a small franchise company may have limited resources and franchise experience, the importance of their business skills and support staff can mean the difference between success and failure. This is the reason that some franchise companies never get off the mark. For example, not having adequate working capital and deciding to launch a franchise company may be the result of the founder having unrealistic expectations or failing to understand what it takes to start up and grow a successful franchise company. Sufficient working capital is a requirement especially for developing marketing and training programs, growing the franchise and supporting the franchisees.

Judging Franchisor Competency

If you’re evaluating a franchisor with a limited track record and few franchisees, you’ll need to dig a lot deeper into the qualifications and capabilities of the leadership of the company. I would urge you to include a savvy business person, be they family or professional, to assist in the evaluation.

Following are some important items to consider:

What is the business experience of the owner? If they have weak business credentials then who will support them in operating the franchise?
How strong is their business management experience?
How successful was their original business? Asks lots of questions regarding revenues, expenses and profitability. Your objective is to confirm that they in fact ran a successful business and aren’t using a marginal business as the basis for the franchise.
Identify their amount of franchise experience. If they don’t have any then who in the organization does?
Ask open ended questions regarding their strategy and objectives for the franchise. Are their expectations realistic or “blue sky”?
Is the new franchise properly capitalized? This information should be on the balance sheet in the Franchise Disclosure Document. Ask if there access to additional working capital. Many franchise companies get stalled because the franchisor doesn’t have the financial resources to sustain the growth of the franchise.
Finally, be objective in your review of the founder/owners credentials. Ask yourself if you’d provide capital to the founder to be used to operate the franchise network. If the answer is no than why invest in one of their franchises?

The franchise industry includes a number of franchise concepts that have positive features and great promise. However, if the leadership of the franchise lacks the business skills and financial resources to successfully develop, administer and support the franchise then be cautious when making your decision to invest in the franchise.