Franchise execs: are you a shepherd or an ostrich? franchisors' strategy of burying their heads in the sand all too often magnifies the risk to franchisees and the brand.

Author:Rozman, Mike

Franchise brands face risks around every corner. From the federal government shifting rules about employment to weather patterns impacting commodity prices, franchise executives need to keep a sharp eye to recognize risks and even sharper wits to determine what risks can be mitigated. Like a shepherd protects its flock and fields, franchisors must protect their franchisees and brands. One point becomes all too clear: the ostrich strategy of franchisors burying their heads in the sand is unacceptable and all too often magnifies the original risk factor.

One crystal clear risk facing franchise brands is undercapitalized franchisees. This risk is so well understood by the industry that a review of public-facing franchise websites reveals that a high percentage of brands present the required liquid asset and net worth levels. Visit your brand's franchise FAQ and you are likely to see clearly articulated liquid asset and net worth levels. This open approach is a fairly new trend among franchise sales executives, who would prefer to reduce unqualified leads from the brand's sales funnel. This disclosure signals that brands recognize the importance of franchisee capitalization levels. But is that enough?

Unfortunately, recent poll data of franchise executives suggests that this positive trend of brands establishing financial standards and publishing those standards in their marketing materials may just be some old-fashioned window dressing. The poll, conducted by BoeFly, revealed that 74 percent of franchise brands surveyed do not verify the assets of new franchisees.

Presumably poll respondents who opt not to verify franchisee assets don't recognize the significant risk an undercapitalized franchisee brings to a brand. Do the 26 percent of respondents who verify assets have it right? Should brands verify a potential franchisee's assets? Let's examine that point by exploring common implications of undercapitalized franchisees more closely. To help illustrate, let's consider a franchise applicant--we'll call him Undercapitalized Eddie, who seeks to join a fictional brand, Tall Mike's Ceiling Fan Cleaners (Tall Mike's for short).

The first consequence we consider when brands don't verify assets comes not at the hands of Undercapitalized Eddie, but as a result of the lax process itself and the signal it sends to all franchisees: the brand doesn't enforce its documented standards.

I'm reminded of the tale of David Lee Roth, famous frontman for Van...

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