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Many people start their franchising journey by casually researching franchises online. But they quickly realize the research is real work. There are thousands of available options and understanding all the details is time-consuming. While I don’t recommend taking shortcuts on your path to saying “yes,” there are clear shortcuts getting to “no” for concepts that aren’t worthy of your time and money. Be ruthless in screening out brands with potential problems or that simply aren’t a personal fit. Focus on better options. The right fit is out there!
If you’re not familiar with the typical franchise due diligence process, here’s how it works. Most brands start with a large group of potential buyers, many of whom are simply curious about franchising or may not meet the franchisor’s requirements anyway. This initial pool-of-the-curious is gradually whittled down to a small number who actually move forward with due diligence. An even smaller number makes it all the way through the process and receives approval to be franchisees. Finally, buyers make their final decision, and some will drop out right at the end. Buyers can opt-out at any point along the way. The franchisor can also decline to move a candidate forward in the process at any time.
There are common reasons for franchise candidates to drop out at each step:
Upfront: After reading information online or talking to the brand’s lead screener, the candidate’s casual interest remains casual. The screener will ask basic qualifying questions, such as whether candidates have enough net worth to qualify. Many exploring franchising for the first time don’t understand the investments needed. Territory may also not be available.
Information call: Once finished with the initial lead screening, many brands will ask candidates to attend either an informational webinar or one-on-one call with their sales representative to go through an overview of the business. This is usually an hour-long call or could be two calls, depending on the complexity of the model. Candidates will drop out here mostly for fit reasons, or because they lack desire and follow-through to start a business at this time.
Application stage: Brands require candidates to fill out a detailed financial disclosure to ensure they have enough capital to move forward with the process. Merely curious candidates will also drop out here, because they don’t want to share their financials. Those who submit their financials but who don’t qualify also won’t be allowed to move forward.
Validation stage: Candidates start talking to franchisees. If candidates don’t like what franchisees say, they will drop out here.
Discovery Day and final approval stage: Prior to attending Discovery Day, the franchise will do a background check and pull your credit score. If those check out, and if the sales team believes you are a fit, you will be invited to Discovery Day if you say you want to move forward. If the sales team has done their job, attending Discovery Day should close the deal. Most franchises have a 90% or better close rate for candidates that attend Discovery Day. For this reason, you are unlikely to be invited to Discovery Day until the sales team believes you will probably move forward. That’s because skepticism in a group setting is infectious. The sales team doesn’t want someone who is still waiting to be convinced, asking derailing or negative questions in front of other candidates.
How can you save time and avoid going down the rabbit hole? Once you get to the salesperson with detailed knowledge about the franchise (not the lead screener) simply ask these two questions:
1. What percentage of candidates move from an approved application to actually talk to franchisees?
The answer to this question will signal whether the required disclosure document and Franchise Agreement are turning off buyers. Buyers liked the concept enough to fill out a detailed financial application with personal information, and they were also approved as qualified candidates. But after submitting that information and reading the disclosures, buyers didn’t move forward.
It isn’t unusual for some candidates, say 5%-20% in every process to drop out at the disclosure stage due to personal reasons. At this point, the prospect of starting a business “gets real.” They may have to spend to have an attorney review the franchise agreement. If candidates lack conviction about starting a franchise business, they usually stall out at this stage. If there are any tire kickers left at this point, they usually balk at reading a dry 200 to 300-page disclosure. Some are put off by the franchise agreement itself. The one-sided language in favor of the franchisor can be off-putting. It’s a long document crammed with scary-looking legalese.
But for the remainder of the drop-outs, it signals that the information contained in the FDD — including costs, earnings representations and other details — just weren’t compelling to them. The terms or operating requirements didn’t seem like a fair trade off for the investment and risk. Candidates who drop out here don’t even want to stay in the process long enough to speak to franchisees, despite submitting personal financial data and taking the time to read the FDD. If the drop-out rate at the disclosure stage is higher than 50%, proceed with open eyes if you decide to invest more time.
2. What percentage of candidates who talk to franchisees later get invited to Discovery Day?
Wording the question this way is very important. If you instead asked, “How many candidates drop out after talking to franchisees?” you may not get a straight answer. But if you use the phrase, “get invited,” you’re more likely to hear something helpful. The sales team can position exiting candidates as a bad fit and therefore “not invited” to Discovery Day, rather than franchisees themselves choosing to drop out because of poor franchisee validation. You’re asking the question as if you’re concerned you won’t measure up to the franchise’s standards.
Most franchises try to position themselves as an exclusive club that only a few are invited to join, whether that is actually true or not. An example response might be, “Only 20% of candidates who enter validation are ultimately invited to Discovery Day.” That’s very important information! Without making a single phone call to franchisees, you now know that 80% of candidates who have approved applications and who also made it through the FDD disclosure stage end up dropping out based on what they hear from franchisees! Big red flag!
Franchise sales teams don’t have candidates speak to franchisees in the first place if management approval of those candidates down the line is unlikely. All those validation calls can burn out busy franchisees who may get tired of answering the same questions over and over. This is especially true in smaller brands where the same franchisees are getting all the phone calls. Validation burnout hurts future franchise sales. So, if candidates began the validation step, you know the sales team probably thought those candidates were serious and would likely be approved by management. Candidates are essentially “invited” to speak to franchisees before they are “invited” to Discovery Day. If most candidates drop out at this point, you know there is likely a validation problem.
In strong brands, franchisee validation accelerates the sales process. In weak brands, candidates with approved applications fall out of the sales funnel after speaking to franchisees. It’s as simple as that.
Asking these two questions can help get you to “no” quickly and avoid wasting time on the wrong franchise concepts. But don’t shortcut your due diligence on your path to saying “yes.” Keep digging until you are certain a franchise is the right fit for you and your goals.
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