Best Practice in Franchisee Selection

by Greg Nathan, Managing Director,
Franchise Relationships Institute

Quality franchisee selection is essential for building a successful and prosperous franchise network. We refer to “selection” as that part of the overall franchisee recruitment process that involves evaluating a franchisee's suitability for your business. This is distinct from the marketing phase which is designed to attract good quality leads.

This article firstly reviews four reasons why a disciplined approach to franchisee selection makes good business sense and then outlines some franchisee selection best practices.

Four Reasons Why Careful Franchisee Selection is Vital

1. Success is largely determined by the franchisee

In a recent paper to the American Bar Association on “The Psychology of Franchising” I made the following point:

“Assuming that a franchise system is based on a proven business concept with sound training and support systems, we estimate that around 40% of a franchisee’s success will come through the application of their own hard work and talents. This is a significant amount and a franchisee who does not have the attributes for success is likely to fail. Unfortunately the rigorous screening of franchisees for these attributes is the exception rather than the rule.” (1)

In other words a franchisee’s level of success is going to be largely determined by what he or she brings to the business.

The capability of the franchisee will also determine the contribution they make to the broader business including the amount of local market share they fight for and the royalty revenues they contribute back to the franchisor. That's the upside of success. But what about the downside of failure?

2. The cost of failure far outweighs the initial gains

When a franchisee fails not only do they lose their own investment, the franchisor also faces significant financial loss. Firstly consider the direct and indirect resources required to support a failing franchisee including additional staff, travel costs, management time and professional resources.

Then there is the loss of royalty revenues and local damage to the brand. These costs will typically add up to $250,000 for a retail franchise and can be in the tens of thousands of dollars for a service-based franchise.

But there are also the indirect costs to a franchise system associated with the negative attitudes typically associated with franchisee failure.

3. Negative attitudes are infectious

Failing franchisees will seek to justify their problems by attracting allies and supporters from within or outside the franchise system. Psychologists call the natural tendency of people to take credit for their successes and blame others for their failures as the “Self Serving Bias”. This is explained in the following extract from my book, “The Franchise E-Factor”:

“When things do not go as well as we hoped or if there has been a mistake we shift the focus away from ourselves. On the other hand when things turn out well we want to be in the spotlight…The Self Serving Bias gives us an excuse to blame other people or events when things go wrong. The legal profession of course capitalizes on this very human tendency.” (2)

The fact is that most failing franchisees will deliberately or inadvertently infect the morale of franchisor staff and other franchisees. The negative impact of destructive attitudes in a franchise system cannot be underestimated. Typically the focus and energy of franchisor executives and franchisees will be diverted from where it should be, which is building the brand, looking after customers and maximising profit. So how can franchisee failure be prevented?

4. Inadequate selection procedures are the biggest cause of failure

Research by Professor Lorelle Frazer from Griffith University(3) provides some answers. In her study on the causes of franchisee failure, franchisors and failed ex-franchisees were interviewed for their insights into what went wrong.

While franchisees and franchisors held different perceptions on the importance of such things as support services, franchise fees and communication, there was agreement by all parties that inadequate franchisee selection procedures were a major factor behind the failures.

The study found that franchisors often chose unsuitable franchisees due to a lack of suitable selection procedures and criteria, enabling entry to candidates who were under-prepared, under-capitalised, unsuited temperamentally or who had unrealistic expectations of what running a business was really like.

In the rest of this article we will take a look at what I believe constitutes suitable selection processes and criteria.

Defining the Successful Franchisee

Firstly let’s start with our goal — which is to select a successful franchisee.

A common myth in franchising is that high sales performance by a franchisee is equivalent to success. This is not true. While great sales performers may generate higher franchisor royalties, they may also run a poor business, damage the reputation of the brand and be miserable and angry in the role of a franchisee. With this in mind we define a successful franchisee as someone who meets the following three criteria:

  1. Maximizes the profit potential of their business. Part of this requires building strong sales, but sales must be priced intelligently to maintain satisfactory margins, and a franchisee also needs to control their business costs. Without a profitable business the franchisee will of course fail.
  2. Ensures all customers have a great experience every time. The long-term profitability of a franchisee’s business and the goodwill of the franchise brand both depend on building a base of loyal, satisfied customers.
  3. Is comfortable adopting the role of franchisee. This means the person will participate constructively in the franchise program, attend meetings and engage with other franchisees and the franchisor team. It also means they are prepared to give up some of their freedom to enjoy the benefits of being part of a group.

If we agree that we want people who share this more holistic definition of success and who will strive to achieve it, then we need some practical guidelines on what to look for in a franchisee candidate — a sort of shopping list of attributes. At the Franchise Relationships Institute we have spent the last 10 or so years researching the attributes that appear to promote success or prevent failure as well as finding valid ways of measuring them. Note that attributes are not just personality characteristics — they include anything that makes a significant difference to success.

Here are some of the factors known to impact on success and we therefore recommend franchisors should be screening prospective candidates for these attributes:

  1. Having adequate reserves of working capital should the business be slower to grow than anticipated.
  2. Having an interest in finance and business affairs.
  3. Having the emotional support of friends and family.
  4. Being able to work independently.
  5. Being able to get things done efficiently.
  6. Being well organized and proud of one’s personal presentation.
  7. Having physical and emotional resilience.
  8. Being comfortable selling to people.
  9. Being able to organize and motivate others to get things done.
  10. Having a belief that one will be successful through ones own efforts.
  11. Working effectively as part of a group.
  12. Being attracted to continuous improvement.
  13. Being trustworthy in giving accurate information.
  14. Having a realistic understanding of the franchise relationship and the obligations of both parties.

Screening for these attributes can be achieved through a combination of structured interviews, background checks and relevant behavioural profiling. Though this does take training and resources, it is not overly difficult. The real challenge is for franchisors to make a commitment to use professional recruitment practices. This means drawing on science as well as gut feel.

Using Triangulation to Make Good Business Decisions

One way to bring more science to franchisee selection is to use a process known as “triangulation”. This involves seeking at least three sources of information about a candidate. Scientists often use triangulation in their research to check the validity of their conclusions. They do this by seeking information on a problem from three different angles. If the feedback is consistent they know they are in the right track.

Triangulation can and is also often used in business for making important decisions. For instance before investing in an expensive piece of equipment you would typically listen to the manufacturers claims (source 1), talk to existing users of the equipment (source 2) and read professional reviews of the equipment in industry magazines (source 3). If you get a consistent picture on the product then you can be more confident about your final decision to proceed, or perhaps to proceed subject to conditions.

A franchisor can apply triangulation to the selection process by using three methods for gathering information from a prospective franchisee. I would recommend:

  1. A detailed application form.
  2. A self-assessment questionnaire measuring relevant attributes.
  3. A structured behavioural checklist based on observations in face to face meetings with the candidate.

1. Using an application form

While application forms have traditionally been paper-based it is now common for franchisors to have their application forms completed online using a secure web site.

For instance we have developed an on-line application form which we call a Information Request Form. This asks candidates detailed questions relating to their family situation, background experience, intentions about the business and financial capability. It then automatically produces a report on the candidate providing an overview of their initial suitability as well as alerting the franchisor to any “red flags” which deserve closer attention.

2. Using a self-assessment questionnaire

Another source of information that we recommend is a relevant “psycho-social” profiling tool to provide insights into a candidate’s approach to business, life and dealing with other people.

We also have a Franchisee Self-Assessment Questionnaire which measures a candidate’s attitudes and capabilities related to performance in a franchise business. This Self-Assessment Questionnaire then automatically benchmarks the candidate on relevant areas and highlights their strengths and weaknesses compared to other franchisees.

3. Using a behavioural check list

Finally we encourage franchisors to complete a thorough checklist on a candidate’s suitability. Yes, we also have developed one of these, what we call a Final Check.

This Final Check should be based on a structured behavioural interview and observations of a candidate based on evidence rather than just personal bias or gut feel. Another method of gaining good information on a candidate is to talk with people who know them well. This information can then be quantified using a rating scale which defines what low, average and high behaviours look like in practice. (This type of rating scale is called a Behavioural Anchored Rating Scale or BARS and has been shown by research to be the most accurate way of assessing people.)

Summary

In summary, a thorough franchisee selection process will help you to build a more successful and sustainable franchise system and will save you time and money in the long run.

If you would like some help in implementing a professional and effective franchisee selection process please get in touch with us.

Notes

(1) Greg Nathan. (2006) The Psychology of the Franchise Relationship, Paper presented at the American Bar Association 29th Annual Forum on Franchising.

(2) Greg Nathan. (2004) The Franchise E-Factor, third edition, page 15. Franchise Relationships Institute.

(3) Lorelle Frazer. (2002) Dimensions of Franchisee Failure: Insights From Franchisors and Franchisees, paper presented at International Services Marketing Conference, Brisbane Australia.

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