How Do You Avoid Double Talk When Interviewing Existing Franchisees?
One of the most important steps in the due diligence process of buying a franchise is to interview existing franchisees. I recommend that you interview as many as possible and that you visit at least one and spend at least part of a day exploring the franchise opportunity. After working in a franchise for a day, or a weekend, you might decide it’s not really for you!
Franchisors are usually eager to encourage prospects to speak to franchisees and sometimes they will attempt to direct the process, even though that’s technically against the law. A franchisor can’t tell you who not to talk to. That doesn’t mean the franchisor won’t try to influence who you talk to.
Who should you interview?
When you receive the Franchise Disclosure Document, you’re armed with a list of existing and past franchisees and you should contact them randomly as well as purposely. For example, you might call every 10th franchisee, and in addition, you might find out which franchisees are similar to you in both background, skills, and size of market, and purposely interview them.
My list of 92+ Questions To Ask Before You Invest In A Franchise will be helpful to you . . . it’s been downloaded (or mailed) to countless thousands of franchise prospects through the years, and distributed at many expos, too.
Ask the same questions of all franchisees
It’s a good idea to ask the same questions of all the franchisees you interview — you’re not going to ask 92+ questions, but there will be at least half a dozen that you’d want to ask each franchisee. For example: Given the chance to buy the franchise again, would you do so?
Expect to get double talk
In spite of your best intentions and planning, you’re going to get some double talk from franchisees. Experts like Jeff Johnson at the Franchise Research Institute refer to it as “false positives” and “false negatives.”
It’s difficult to avoid double talk.
Franchisees often suspect that their franchisor is paying attention to what they say to prospective franchisees. Franchisors have been known to ask prospects, “Who told you that?” when prospects report that they heard something negative about the franchise or the franchisor. If a franchisee thinks their feedback will get back to the franchisor, they’re not likely to tell the truth, especially if the truth is negative. if they think there will be consequences for telling the truth, they’ll respond to a question with a “false positive.” Instead of telling it the way it is, they’ll fudge a bit to say that something is “pretty good” or “okay” when it’s actually not.
Perceived competition produces double talk
On the other hand, some franchisees want to avoid what they perceive to be competition from other franchisees. So when a prospect calls a franchisee in Detroit, for example, and the franchisee thinks the prospect wants to open a unit in a nearby market, the franchisee is likely to respond with “false negatives” about the franchise opportunity. They’ll do everything they can to dissuade another franchise from opening in their territory.
You really can’t do much about the double talk, except interview more than just a couple of existing franchisees. When franchise prospects tell me that they talked to one or two franchisees it always makes me nervous because they’re limiting their ability to get to the truth. If you studiously interview multiple franchisees, i.e. a dozen, and you track their answers to your specific questions, you can improve your chances of cutting through the double talk.
One way to avoid the double talk
Jeff Johnson will tell you that you can avoid the double talk by investing in a world-class franchise company. And he knows who they are because he’s identified them after surveying their franchisees. His survey includes almost two dozen questions that will filter out the double talk and get to the truth about a franchise opportunity.
Unfortunately, most franchise companies have not submitted to Johnson’s survey. Many are fearful of what their franchisees would report. But there are currently 21 franchises that have won the designation of certified world-class company. Now that’s not reason enough for you to buy one. You should buy one only after you’ve done your due diligence and determined the franchise company makes sense for you. If it comes with Johnson’s world-class designation, you can feel that much more confident that you’ve avoided the double talk.
Dr. John P. Hayes, has written more than 20 books, including numerous Amazon.com best sellers: Buy "Hot" Franchises Without Getting Burned, 101 Questions to Ask Before You Invest in a Franchise, 7 Dirty Little Secrets of Franchising, FASTSIGNS Business Opportunity, and many more. Hayes wrote Franchising: The Inside Story, one of the first books to teach people how to buy a franchise. He is a faculty member at Gulf University for Science & Technology in Kuwait where he teaches in Business and Mass Communications. Formerly he was the CEO of a major US-based franchisor and he has served as Director of several franchise companies. Dr. Hayes has been a franchisee of several concepts and for more than 35 years has served as an advisor to franchisors and franchisees. His most popular seminars include The A To Zs of Buying A Franchise and How To Capture & Keep Customers. Dr. Hayes teaches seminars at franchise expos and speaks to franchisor, supplier and franchisee groups worldwide. He coaches prospective franchisors and franchisees and edits Franchising Abroad, an e-newsletter for international franchisors.
Comments
Talking with Franchisees
1. Here are the 92 questions. I wonder how many franchisees, whether the succeeded or not, would use such a list?
2. Given the current state of franchise surveys, and the lack of being able to rely upon them, I would recommend that people go to unhappyfranchisee.com and simply stay away from the franchises being talked about there.
3. I would not rely Johnson survey, or any other survey, except to prompt me to look at the FDD in a different light. Representations made by franchisees are not legally binding.
All in all, prospective franchisees would be advised to actually work in one of the franchisor's locations instead trying to determine the answers to these questions by introspection or by survey.
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Outliers deceive
All truths are easy to understand once they are discovered; the point is to discover them—Galileo Galilei, 16th century astronomer
In my reporting of franchise news, the quality of a franchise system takes considerable time and many, many resources to establish. Frankly, with chains that do not have an organized independent franchisee association, it often takes me a year or more of intense work to understand the inner workings of a franchise system. And that is with the collaboration of some of the best minds and tools in the industry - one being franchisee surveys. Once the evidence comes together, it becomes considerably easier for a Blue MauMau reader to understand the truth of a franchise chain.
Webster suggests ignoring the majority and to pay attention to the outlier —any comment about a franchise, no matter what, and no matter who was so fired up that they had to write it on the Internet for all the world to see.
But the problem in scratching off a franchise chain because somebody, somewhere, says something bad about them is multifaceted. I have found that in seeking the truth, there is a problem of using the tyranny of the outlier to determine what a system is like, while ignoring the sea of normalcy.
That is dangerous.
Having said that, I understand that the news is often about the exception. No one wants to read about the millions of planes that land on time. They want to read about the abnormal, the plane that crashed. I mean what reader wouldn't want to know what is happening to the person's shadow in the cartoon above? But even here, the story is interesting only because the viewer knows what the norm is; namely, the other shadows are pointing in an entirely different direction.
Another problem is credibility. As illustrated in a New Yorker editorial cartoon of 1993, "On the Internet, nobody knows you're a dog," mocked a dog to his dog buddy, while typing something on the Internet. When an individual posts anonymously, one never knows who they are. They could be a competitor salesperson trying to malign the competition. They could be a franchisor's employee who has been laid off. They could even be a teenager trying to get a rise out of the adults.
On Blue MauMau, there often are many anonymous comments from purported franchisees. This social media site is designed with that in mind. Reporters can tap into crowdsourcing to find the realities on the front line. But one shouldn't write a franchise brand off just because there is an unhappy comment on it in Unhappyfranchisee.com, on Blue MauMau, or anywhere else. And even if you do use a comment from the crowds, there is a trick in using crowdsourcing.
The challenge is to find the diamond in the rough, to discover the comment that shares something substantive and provides verifiable evidence. Many posts simply attack the leader of a franchise system as a fraudster or not sensitive enough to franchisees. Name calling. These sorts of posts that lack backed-up specifics lack usable content.
In understanding a franchise, it is critical to have a verifiable and credible source, with a way to get perspective on the overall scene. A good population (franchisee) survey can help with that.
My experience with FranSurvey has shown their franchisee surveys to be an early warning system. Several years ago, before Blue MauMau or any journal reported on a troubled taco chain, it was FranSurvey that showed the system tumble in rankings by their own franchisees. That was a heads up that something had been going significantly wrong in their network.
It is my experience that franchisee surveys can be a useful tool.
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Why Outliers are Important
Don, you are missing the most important legal aspect of franchise due diligence and confusing type 1 errors with type 2 errors, to use jargon.
First, will listening to the folk at unhappyfranchisee.com cause you to miss out on a good opportunity. Yes, that could be. You could wrongly reject the hypothesis that a franchise talked about by those folks is bad - when it fact it is good. This is a type 1 error.
What is the cost of this type of error? Virtually nothing, unless no good franchise systems exist. So committing this error is relatively costless.
Second, if you ignore the folk at unhappyfranchisee.com and cast them as outliers, dogs on the internet, etc, then you increase your chances of a type 2 error - you wrongly accept your hypothesis that the franchise system is ok.
What is the cost of this type of error? Potentially devastating. Cuppy's, Quiznos, Dagwood, etc. In fact Don and I know of at least one person who actually read the bad reviews of Cuppy's and thought that the concerns didn't apply to their situation.
Your decision making process in this case is to minimize type 2 error, even if that means making a lot of type 1 errors. (All decisions straddle this type of trade-off and depend on the outcome.)
Now of course, you do have to listen carefully about what is being said at a gripe site - but for the purposes of due diligence and avoiding type 2 errors, I would rather listen to one canary than wait until the mine blew up.
Again, this decision procedure is not aimed at getting to the truth, but avoiding financial disasters.
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The decision not to invest is an inverstment decision. It is
more often than not - especially in franchise investing - the better decision. People fail to realize the value of keeping their money in their own pockets until they have competent vetting. That is why there is BMM.
If people made intelligent franchise investments with proper balanced relationshiop management protocols, there would be no need for BMM and I would have to go learn how to do honest work.
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Doubletalk .... or just business?
I'm not sure doubletalk is a fair term to describe the process. I would consider this process to be more art than science. What this means is that the process will always remain imprecise.
Everyone involved in the business process has a goal -- and that is to succeed. Success is measured in financial terms. Nobody is in this for altruistic reasons. As a potential franchisee, you need to keep this in mind.
The franchisor has a single goal and that is to open new locations. This is how they earn revenue. One can expect the information that they provide to be overly optimistic. For this reason, it is important to interview franchisees and also research competing franchises. Franchisee goals and motivations can be different. Local franchisees may want to dissuade you from opening if they perceive you as future competition. On the other hand, franchisee comments may be overly positive if the franchisor offers them a finders fee for referrals.
I prefer to look at this as a four step process that is too fluid to easily describe.
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Research is only a first step. The FranSurvey information, for example, is something that I see as a starting point. The same applies for FranchiseFacts' National Franchisee Survey which will provide similar information later this year. (Yes, we still want your participation in the survey if you are a franchisee and have not yet participated. Suvey period for 2010 closes in early November. Participation gives you direct access to the results once the survey period has closed.) Franchisor web sites also provide extensive information. This step probably helps to narrow down the franchises of possible interest.
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Visit and interview local franchisees -- ask similar questions. Include franchisees recommended by the franchisor and those you have selected on your own. Are their responses consistent with each other? Be sure to include franchisees new to the system and those in it for many years. Decide, for yourself, which of these franchisees are successful and which are not. I prefer to find franchisees that are struggling but who still have positive comments about the franchisor.
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Call or visit franchisees farther out from the area. They are less likely to consider you as future competition so may be more forthcoming in their comments.
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Review the FOC. Can you live with the terms? If you don't understand the terms, reread the document until you do understand them. This is a legal document that will likely be in effect for 10 years but what you have to do is make a business decision. Consider any legal advice you receive as well as any financial advice. In the end, however, neither has sufficient expertise to heavily rely on for a business decision. Be sure you are comfortable with your options at the end of this agreement. Ten years is a long time and many things can change during this period. A good franchisor can become bad during this time, and vice versa.
Compare all the information you have gathered when making your decision.
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Franchisor opportunism is a Fatal and Uncontrollable Risk
Perry,
There are some human activities that are:
- controllable or
- uncontrollable.
I suggest that investing in a franchise is an uncontrollable situation as the incidence of franchisor opportunism is beyond the franchisee investor's control over time (esp. with sunk costs).
I would reference an old saying
God grant me the serenity to accept the things I cannot change; the courage to change the things I can; and the wisdom to know the difference.
I appreciate the economic value in misrepresenting a high-risk activity as a benign one to unsophisticated potential brand renters (see BP).
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Franchisor opportunism is a Fatal and Uncontrollable Risk
Perry,
There are some human activities that are:
- controllable or
- uncontrollable.
I suggest that investing in a franchise is an uncontrollable situation as the incidence of franchisor opportunism is beyond the franchisee investor's control over time (esp. with sunk costs).
I would reference an old saying
God grant me the serenity to accept the things I cannot change; the courage to change the things I can; and the wisdom to know the difference.
I appreciate the economic value in misrepresenting a high-risk activity as a benign one to unsophisticated potential brand renters (see BP).
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Safest way to avoid disaster
Webster: This decision procedure [crossing off an investment that has an unhappy comment] is not aimed at getting to the truth, but avoiding financial disasters.
Question: What is the safest way to avoid risk and disaster?
Answer: Some risk-averse attorneys say that logic dictates NOT to invest in any business concept where someone has had something negative to say.
Ultimately, staying at home and watching television is the safest thing.
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Investing or Gambling
Don,
By reducing this argument, I suggest you do BMM readers a disservice.
Everything has risk. But there is a difference between "opportunities" that offer:
- quanitifiable predictable returns (investing) versus
- random, open-ended payoffs (gambling).
But then again, when it's someone else's money... who cares?
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Investing or Gambling
Don,
By reducing this argument, I suggest you do BMM readers a disservice.
Everything has risk. But there is a difference between "opportunities" that offer:
- quanitifiable predictable returns (investing) versus
- random, open-ended payoffs (gambling).
But then again, when it's someone else's money... who cares?
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Unlikely
Don, since your conclusion is absurd, then one of your premises must be false. Which one is it?
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Cranky Canuck correct
It is true that the best suggestion is to work at one of the franchised outlets prior to purchasing, as Webster suggests. Very few people actually do this.
And it is true that the franchised systems which are discussed on UnhappyFranchisee.Com are ones which are generally best avoided.
However, the Fishy One does make a good point, albeit in an obfuscatingly polite fashion (BTW: Why is the Kentucky hick being more polite than the Canadian--isn't this the world turned upside down??).
Don properly takes issue with the assertion that a random anonymous gripe on what is--by its very name--a gripe site should be accorded much weight.
My personal suggestion is to pay attention to the substance of the comment(s) about the specific franchise system.
For example, saying that "[P]Rick Schaden screws the franchisees" is not as useful as "This sandwich franchisor made us buy HazMat suits purportedly to use if an employee got a knife cut, and we had to buy the suits from a supplier which gave the franchisor a kickback based on the purchase price."
Saying that "The General Counsel is a scumbag" is not as useful as saying "The GC sends private detectives to take surveillance photos and then demands that we sell our franchise at below-market prices to a favored buyer or else he threatens to send the photos to the IRS."
Use some common sense folks. There are tools out there, and the FDD, FranSurvey, and UnhappyFranchisee are some of the tools which can help you make a decision--but they are not substitutes for your own business judgment.
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There are no "good" or "bad" systems
Don,
Your assumptions are dangerously unidimensional.
As Hadfield points out, the investor threat is franchisor opportunism:
- stripping value from the sunk cost investor via 101 opportunistic, win/lose tactics.
Over a ten year period, for example:
- 100% of franchisors retain unfettered unilateral power to act in any opportunistic manner.
- 100% of franchisors choose to use/not use that discretion to the minor/major financial hardship to 100% or 0% of their franchisees, and
- 100% franchisees have the right to abandon +100% of their initial and subsequent investments in time and money.
To use the terms "good" or "bad" franchisor is a huge disservice to small business investors. This is a gross simplification. Franchisors can act more or less in a predatory manner to some/all of their franchisees during a specific time frame.
If investors are uncomfortable with this degree of business risk and ambiguity, they should go elsewhere.
Assuming that anyone can identify a predatory system is a fool's errant. I know I cannot predict the systemically unpredictable. And I would suggest, no one can. You're gambling with other people's life savings.
If only there were evil people somewhere, insidiously committing evil deeds, and it were necessary only to separate them from the rest of us and destroy them. But the line dividing good and evil cuts through the heart of every human being. And who is willing to destroy a piece of his own heart? Aleksandr Solzhenitsyn
This is my summary:
- Opportunism lies dormant in every franchise relationship. It is not dead unless specifically addressed in writing.
- The abusive symptoms manifest themselves every so often (reports are always Tip of the Iceberg).
- Franchise systems are social systems that communicate tolerated/non-tolerated behaviours.
- The threat franchisor opportunism gets franchisees' compliance 95% of the time (hand moving toward the whip). If you don't like it, (1) sel to the next chump, (2) abandon, or (3) go independent.
- Opportunism is fatal to mom-and-pop investments.
In my opinion, passing off a capriciously changeable, fatal situation as if it were permanently "good", is reckless if one presents themselves as a franchise expert.
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There are no "good" or "bad" systems
Don,
Your assumptions are dangerously unidimensional.
As Hadfield points out, the investor threat is franchisor opportunism:
- stripping value from the sunk cost investor via 101 opportunistic, win/lose tactics.
Over a ten year period, for example:
- 100% of franchisors retain unfettered unilateral power to act in any opportunistic manner.
- 100% of franchisors choose to use/not use that discretion to the minor/major financial hardship to 100% or 0% of their franchisees, and
- 100% franchisees have the right to abandon +100% of their initial and subsequent investments in time and money.
To use the terms "good" or "bad" franchisor is a huge disservice to small business investors. This is a gross simplification. Franchisors can act more or less in a predatory manner to some/all of their franchisees during a specific time frame.
If investors are uncomfortable with this degree of business risk and ambiguity, they should go elsewhere.
Assuming that anyone can identify a predatory system is a fool's errant. I know I cannot predict the systemically unpredictable. And I would suggest, no one can. You're gambling with other people's life savings.
If only there were evil people somewhere, insidiously committing evil deeds, and it were necessary only to separate them from the rest of us and destroy them. But the line dividing good and evil cuts through the heart of every human being. And who is willing to destroy a piece of his own heart? Aleksandr Solzhenitsyn
This is my summary:
- Opportunism lies dormant in every franchise relationship. It is not dead unless specifically addressed in writing.
- The abusive symptoms manifest themselves every so often (reports are always Tip of the Iceberg).
- Franchise systems are social systems that communicate tolerated/non-tolerated behaviours.
- The threat franchisor opportunism gets franchisees' compliance 95% of the time (hand moving toward the whip). If you don't like it, (1) sel to the next chump, (2) abandon, or (3) go independent.
- Opportunism is fatal to mom-and-pop investments.
In my opinion, passing off a capriciously changeable, fatal situation as if it were permanently "good", is reckless if one presents themselves as a franchise expert.
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Hadfield on Opportunism
Les;
I wish this point was better understood by prospective franchisees and independent franchisee associations.
If the franchisor cannot commit to sharing the wealth at the beginning of the relationship, why on earth when times get tough, do you believe that the franchisor will share the wealth?
Some franchise systems have resisted this predatory possibility, but exactly how is not spelt out for all to see.
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Current risk assessment is almost irrelevant
Michael,
Due diligence is for this time: it's a snapshot of discoverable risk.
As time goes by...
risks change.
This makes stale-dated, pre-sale due diligence 95% irrelevant.
IndFAs may help but cannot be counted on to make up for the systemic toxicity in most systems.
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Current risk assessment is almost irrelevant
Michael,
Due diligence is for this time: it's a snapshot of discoverable risk.
As time goes by...
risks change.
This makes stale-dated, pre-sale due diligence 95% irrelevant.
IndFAs may help but cannot be counted on to make up for the systemic toxicity in most systems.
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Competent pre investment due diligence is not largely
irrelevant. What passes today for pre franchise investment due diligence is largely irrelevant because people go to resources that lack directly relevant experience.
Greed is not all bad. No one invests without intending to profit. The profit motive is to investing what heaven is tothe religious observant. When franchisors have a healthy profit motive - greed to some - that is good. Who would buy stock in a church - unless you held all of it?
Surveys done in an institutionalized format are always skewed, which is what makes them largely useless. Surveys are always skewed to serve the interests of the survey sponsors. We know for certain that no franchisor will support any survey that fails to conclude that franchisors are the best thing since sliced bread.
With adequate resources I can get a renown university to conclude after scientific investigation that breakfast cereals that are 45 % sugar by weight are healthy for your children. According to records of the FTC, these were called "The Iowa Studies" subsidized by The Cereal Institute in the 60s.
Dr. FuzzPutz, PhD is of no more reliable character regarding franchising now than those "studies" were back then. Dr. FuzzPutz can manipulate questions and populations to get any survey result he wants. So can I and so can Michael, or Paul. Surveys are largely useless. Competent due diligence is not largely useless.
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Lots of doctors in the house
Dr. FuzzPutz can manipulate questions and populations to get any survey result he wants. So can I and so can Michael, or Paul. - Richard Solomon
That's a good point. Few, of course, would pay attention to your surveys.
Speaking of Dr. FuzzPutz, I think technically you all are doctors (JD or Ph.D). So lowly Mr. Blue MauMau has the accompaniment of Dr. FuzzPutz, Dr. LePuck, Dr. Brewsky, Dr. Arby Trater, Dr. Chicaco Dawg and Dr. Batman.
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JD is not truly a "doctorate"
Re: Frankman's "technically you all are doctors"--
There is a huge difference between a PhD and a JD.
The former must not only complete college, but also get a master's degree (requiring a defensible thesis) and rigorous training within the actual PhD program (requiring a defensible dissertation.)
A "JD" is not really a doctorate in any sense of the word and calling it a doctorate makes about as much sense as calling a poodle a pit bull and expecting to transform him into a guard dog.
Not only do you not need to pursue any Master's degree nor learn a foreign language as a prerequisite, you don't even need to write any thesis (let alone dissertation) to get a JD. In my case, I happened to have a professor who agreed to be my advisor and encouraged me to write the thesis which ultimately became the Penn State LR article on franchising; but my experience was not the norm either at my law school nor at law schools in general.
Obtaining a JD is a prerequisite (with rare exceptions, most notably in NY) to becoming an attorney. It means that you have gone to college plus 3 years of law school. Nothing more. The JD is not a terminal degree in the legal profession, in contrast to an M.D. or Ph.D. which are terminal degrees in medicine or academia.
The whole debate over whether the holder of a JD may properly call himself "Doctor" was contentious back when the JD displaced the "LL.B." designation, and I don't see people with JDs referring to themselves as holding a "Doctorate" nowadays. In academia, while a JD may be accepted in some cases as a substitute for a PhD, if you call yourself a "Doctor" in academic circles it is understood that you have a PhD and if a JD calls himself a "Doctor" the JD will be mocked by the PhD faculty.
Most attorneys go straight from college to law school. Much like our esteemed lawyer-President Obama, lawyers often have no work experience, let alone experience in the business world.
Most attorneys have never even had P&L responsibility for a lemonade stand.
This is why I strongly disagree with Richard Solomon's assertion that an average attorney can vet the business risks associated with a franchise purchase. A business owner who relies on an attorney for business advice (as opposed to legal advice) is a fool.
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Average attorney? You gotta be kidding. I never sdaid anything
of the sort.
I have been in this field for almost 50 years. That insight from almost 50 years of franchise experience is what I draw on.
Any investment can change "personality". The difference bgetween a frachise investment and a stock investment is the ease of exit. That makes frnachising much more dangerous than stocks.
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Ah, Richard-nobody would call you "average"
No one disputes that you advised Moses when he bought the first gefilte fish franchise from Pharoah, and you did indeed advise him that once the franchise fee was paid, that Pharoah would engage in oppressive conduct and drive him from the system once he tried to organize an IndFA.
But most attorneys born since the advent of the printing press are lacking in that depth of business knowlege.
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House pit bulls v howling beagles
I stand corrected. We have the academic pit bulls of Dr. FuzzPuzz, Dr. LePuck (not sure about the Canadian Ph.D. system) and Dr. Windy Dawg in the house pontificating about problems with franchisee double talk / self-report.
The rest of you are howling legal beagles. Or, according to Steinberg, are you prissy poodles? I forget which.
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We disagree
Richard,
You ability to predict which system's managers will become more predatory is amazing.
I presume that warranty/guarantee/guess would be put in writing?
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We disagree
Richard,
You ability to predict which system's managers will become more predatory is amazing.
I presume that warranty/guarantee/guess would be put in writing?
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Les suggests that "investing
Les suggests that "investing in a franchise is un uncontrollable situation."
I think you will find many franchisees who disagree. Granted, there are many reasons why franchisees fail. Some reasons include their misunderstanding of the business or their relationship with the franchisor. However, there are also many instances where franchisees are quite successful. One needs to be able to differentiate between the two.
Richard states that surveys are always skewed to serve the interests of survey sponsors, then summarizes with "surveys are largely useless."
I think you would take exception if I stated that all lawyers are unethical (or worse.) That is clearly false despite the fact that some may fall into this category.
There was a time when surveys were only available for purchase. They were not available to the public at large in the way that we have become accustomed to since the advent of the Internet. The types of surveys you mention tend to be those that are provided to the public at no cost and, as you suggest, may be more valuable from a marketing perspective than from an informational perspective. In most instances, I would tend to agree that the surveys are skewed to serve the interests of survey sponsors. That is why the surveys are sponsored in the first place. From a user's (prospective franchisee's) perspective, you get what you pay for. This does not mean that all surveys fall into this category. Another point to consider is that the Internet has made it far easier for individuals to conduct their own research rather than relying on third party expertise. It also means that individuals who lack proper analytical skills (probably most individuals who have an interest in franchising fall into this category) are more likely to come across these skewed results that are easily misused, misrepresented or relied upon.
Good research is usually available to those who are prepared to pay for it. I agree that this has not often been the case in franchising (although some franchises do conduct internal research that may not even be available to their own franchisees) and is one of the reasons that I started FranchiseFacts. One of our goals is to make this type of research available in the franchising industry. That is why we do not allow third parties to sponsor our research.
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Luck v. Planning
Perry,
It is true. There are many franchisees that have achieved their financial goals.
But that success is impermanent and should not be causally linked to their skill at pre-sale due diligence.
Every casino needs winners of some sore.
We won't get into the Survivorship bias or Lake Wobegon effect, since I'm loathe to cast perils before swains.
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Luck v. Planning
Perry,
It is true. There are many franchisees that have achieved their financial goals.
But that success is impermanent and should not be causally linked to their skill at pre-sale due diligence.
Every casino needs winners of some sore.
We won't get into the Survivorship bias or Lake Wobegon effect, since I'm loathe to cast perils before swains.
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Current 'Risk Assessment' - Polly
When trading securities one learns that "you take risk when you are paid to take risk." Risk assessment is based on current financials, valuations and market conditions with the knowledge that future interest rate, market and event risk are always the unknown. With historical and current data (financials, valuations, market conditions) one can generally assess whether the current investment is valued correctly.
Unfortunately, with franchises it is virtually impossible to assess risk/value. Financial data, even when provided, is too opaque to provide for any true analysis. It is impossible to view historical financial data of franchisees (franchisors' financials are fairly meaningless since they are paid regardless of franchisee profitability). "You take risk when you are paid to take risk" requires the ability to assess the risk. Bob Frankman's reference to the Hatfield's and McCoy's is appropriate. Franchise risk/valuation assessment is much like the wild west.
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Hadfields and McCoys
As Hadfield points out, the investor threat is franchisor opportunism. - Les Stewart
I think I remember that chapter in history.
By shotgun barrel, McCoy pointed to Hadfield that their clan had it all wrong. In the rough and tumble knobs and hollers of West Virginie, the inverse is actually the case. The franchisor threat can be investor opportunism.
The two families had a big fight over the incorrectness of the other's "opportunism" position. Judge Don in Kentucky finally decided the outcome to the family honor. Hadfield was convicted.
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Very Funny History
Very good Bob, I liked that a lot!
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It must be reassuring to see the bison circle
Don,
And Bob's contribution is duly noted.
Well done, BMM agents!
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It must be reassuring to see the bison circle
Don,
And Bob's contribution is duly noted.
Well done, BMM agents!
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The Problem of "self report"
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Sorry I am a little late to this blog.</p>
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The comments in response to John Hayes' post are wrestling with something that we intuitively know is a vexing problem, and it is actually a methodological problem faced by social scientists. It is the problem of "self report." By that I mean, a lot of what we might want to know about something in the world cannot be observed directly, or measured accurately, so we must ask people questions--but how can we know that they're telling the truth?</p>
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I have two examples.</p>
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Quite some time ago I was a researcher at the National Opinion Research Center at the University of Chicago. It's a social science think tank that surveys the general population on a wide range of issues, and we would often run into the problem of "self report." Suppose we ask a person's occupation and income and we receive the response that a plumber makes $1,000,000 a year. We check the original survey response to see if there was a data entry error, but lo and behold the person is indeed a plumber and states that they do make a million bucks a year.</p>
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Even if no other plumber surveyed makes within $900,000 of this plumber, can we be certain that he is not telling the truth? Maybe the plumber understated his income....</p>
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This second example also highlights the problem of self report. There are countless researchers in the social and health sciences attempting to model the diffusion of AIDS and other sexually transmitted diseases. In order to make accurate models we have to know how many partners people have, the frequency of sex, the activities that they undertake, and whether or not they use protection. Short of observing people as they undertake these activities, how can we know that what people say is an accurate reflection of their behavior?</p>
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The problem of self report is widespread. Ask anyone how much they weigh, how much money they make, whether they are happily married...and then ask yourself: How can I be absolutely positive that they're telling the truth?</p>
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Franchising is no different from other activities where accurate information cannot be easily obtained. Without audited financials, without an affidavit you're at the mercy of what the other person tells you and you have to take it on faith that they're telling you the truth.</p>
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What if you work in a franchise operation? Well, you'll certainly learn something, but it is equally problematic to generalize from the operations you're involved in as a "worker" to something that you will create as an owner. How much of the success of any franchise is due to the local environment, or to the leadership qualities of the franchisee, or to the culture that they have created, or to their interaction with customers, or a thousand other things that can impact success?</p>
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Is there any method that can provide an accurate picture of a franchise opportunity?</p>
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Dr. Hayes, you make some
Dr. Hayes, you make some excellent points but I question whether it is truly possible to get the real financial perspective from franchisees. Just look at the "Wendy's" story where the discussion concentrates on what are and are not derogatory comments. Franchisors have, in many cases, contracted out free speech with legal ramifications for speaking negatively about the company - including losing the franchise.