Measuring the Health of a Franchise Program
A franchise system has many of the qualities of a living creature. If its various operating systems are not kept healthy, it can weaken and become ill. Ultimately, if its health problems are unchecked, it can go out of business forever. If you are considering joining a franchise program, it’s a good idea to give the franchisor a full check-up, something like an annual physical. If the doctor were to give your franchise program the once-over, how would the company measure up?
Training, Supply and Knowhow: The internal skeletal features of every franchise program are of primary concern to the health of the business: training and franchisee supply. Every strong franchise system does an excellent job of transferring knowhow through initial training, opening assistance, continuing training, and systemwide meetings (see Item 11 of the Franchise Disclosure Document (FDD) for a description). Also of vital importance: strong inventory supply arrangements in place for the benefit of franchisees (Item 8). Aggressive supply arrangements save the franchisee by offering prices that are not available to independents, offsetting the costs of the system’s royalties. If these supportive internal structures are not in place, carrying information and value to all corners of the system, it could be a sign of serious problems.
Low or No Growth: Growth and expansion are the life force of a healthy franchise program, and like breathing, the absence of growth will quickly threaten a franchise system’s survival. Check Item 20 of the company’s FDD to measure its expansion or contraction over the past three years.
The Mark of a Winner: The trademark of any franchise system is at the heart of the rights granted to franchisees; the trademark must be rock solid if the franchise system is to stay healthy. Item 13 of the FDD will give you an idea of the health of the trademark -- whether it is federally registered with the United States Patent and Trademark Office (insist on it) and whether there have been any problems, lawsuits, or contractual limitations on its use around the country.
Even-Keel Relationships: The mental health of a system is important as well. Are franchisees in the system pleased to be there, do you find some misgivings, or is there deep discontent among franchise owners? If there are recurring problems, you will want to learn about them as soon as you can. The only way to accurately gauge a system’s psychological health is to talk it through with franchisees. Contact them using information in the FDD (Item 20), put them on the couch, ask a lot of probing questions, and listen well. Also look for reliable third-party certification of franchisee opinions, such as FranSurvey.
Defensive Strength: A healthy system is able to resist attacks on its stability. Has your franchise system been tested by its competition, overcome supply problems, defended an attack on its intellectual property, or responded well to a failing franchisee? What about litigation listed in FDD Item 3 – how are legal confrontations handled by the company? As with any organization, a strong franchise program will handle adversity better than weaker systems. How has the franchise program fared in the recession? (Go easy in your assessment on this point, as many businesses were thrown on their backs financially by the market gyrations of the past couple years through no fault of their own.)
Financial Standing of the Franchisor: A franchisor system without solid financial standing puts a lot of people and franchised businesses at risk. The FDD always includes recent financial information about the franchisor; the basic requirement is to include the past three fiscal years of financial statements, audited by an independent CPA, although younger franchisors may not have as much to disclose, and their financials may not be audited. Take the financial statements to an accountant or other financial advisor, and determine if the franchisor has the financial health to succeed in the long run.
Franchise systems span the full range of health, from the robust new up-and-comer to yesterday’s concept now approaching death’s door. If you need to evaluate the stability and longevity of the franchisor and its current health, crack open the FDD and run your own checkup of the entire franchise system.
Andrew Caffey is one of the nation’s leading franchise legal specialists and he represents franchisors across the United States. Caffey served as General Counsel of the International Franchise Association, a member of the Governing Committee of the ABA Forum on Franchising, and Chair of the ABA Forum on Franchising. He also is a member of the bar in Maryland and the District of Columbia, and a member of the Panel of Neutrals of the American Arbitration Association. Caffey has appeared on numerous franchise programs and is a frequent speaker and author on subjects of franchise and business opportunity regulation.
