Recently, I’ve been experiencing flashbacks. Not the good kind I had in the 60’s, but the worst kind for our industry.
Back in 1988 when I began Dynamic Performance Systems, I would continuously run into franchisors who would accept anyone and everyone into their system, whether the candidate had what it takes to be a franchisee or not. As long as the financials were sound, the words spoken to the candidate were “Welcome to the __(insert company name)__ family!”
Then, franchisors started to see the tremendous costs and problems involved in accepting poor franchisees – lawsuits, bad press, stores closings, lost royalties, bankruptcy etc. It was at that time that the tide began to change for good franchise companies. They did their due diligence, started to use a structured interview process and, best of all, they began to use the FranchiZe Profile!
Now, it seems that we’re back at square one. Since the recession, some franchise companies are becoming less choosy about to whom they’re awarding a franchise. It saddens me when I hear “I can’t turn down a person who has the money. We need the sale.” The last figures I had stated that it costs a franchisor at minimum $100,000 in legal fees when a franchisee fails. Only the legal fees! This dollar amount doesn’t include the expenses I’ve mentioned before such as bad press and lost royalties.
Also, think about all of those great franchisees who are looking to invest in your system. We’ve heard time and time again about potential franchisees that go through the discovery day – all the financials check out, they’re ready to sign and then… they drop out. They pass on your franchise because “they seemed to only care about my money. I had a bad feeling…”.
And, what will become of the franchisees that lose everything when failure happens? They lose their livelihood, their homes, their families, and more. When a franchisor makes the decision to accept poor performing franchisees, it has a tsunami effect not only in the industry and the brand, but in the lives of those they “award” a franchise.
My question is this – is the instantaneous reward of a new store opening worth the eventual huge cost you face when a poor performing franchisee fails? Is history repeating itself?