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Parallax: The apparent displacement or difference in apparent direction of an object viewed from two different points that are not in a straight line with the object.
Paradox: one (such as a person, situation, or action) with seemingly contradictory properties.
— Merriam Webster Dictionary
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The Parallax Paradox franchise
One of the most interesting things about franchising is a strange phenomenon that I will call the “franchise-parallax paradox.” The same franchise is often seen at the same time by some observers as a great business opportunity, while others hold the exact opposite view.
Assuming neither party has a personal interest in the answer (such as sales commission) and disregards questions of personal suitability, what often separates these two disparate opinion holders is their relative franchise experience. Their different points of view create completely different perceptions about the attractiveness of the concept as a company. They will also likely have very different views on the long-term prospects for that franchise.
Information asymmetry creates potential winners and losers. This economic truth also exists within franchising. For example, experienced franchise operators, franchise development professionals and consultants who are deeply rooted in franchising know which brands are moving in the right direction and which brands to avoid. This spills over into which brands you do and don’t want to see on resumes you receive for corporate franchise jobs. Private equity investors are also much better positioned to avoid bad drafts (or at least lower their offer price) compared to individual franchisees who don’t have the same investment experience, industry connections, and sources of advice. To improve results, especially for new franchisees, the franchise industry in general needs to make better use of data to describe what a high-quality concept looks like.
High-quality franchises have common traits and metrics that correctly identify them as high-value – marketing spin metrics. For example, strong franchise validation scores, as measured in franchisee surveys, combined with a high number of license renewals and new extension agreements signed by existing franchisees, are verifiable data that usually indicate a high-quality franchise. This data can be measured and tracked over time. Unit-level profitability, high customer satisfaction scores and opening 100% of units sold are other examples.
The real characteristics of a high-quality franchise are based on data. But the franchise industry has sometimes developed amnesia about this. The relative merits of a particular franchise are attributed to “fitting” or mere disagreements, rather than being scientifically substantiated. Inflated sales and overly aggressive marketing are overlooked with a warning emptor the industry shrugs, largely backed by a mountain of case law. This leads to a situation where the ‘haves’, with information about what a quality franchise actually looks like, make a decision about a brand, while ‘have-nots’ can be influenced by influencers, slick marketing, paid recommendations and unscreened lists . So the same brand can be seen as a great opportunity or a dog depending on who you ask and their understanding of franchise quality.
Related: How to Choose the Best Franchise to Own in 2022
Research into franchise concepts
As a potential franchisee, be methodical in your research into franchise concepts and involve as many people with franchise experience as possible. Network with reputable brokerage networks, franchise attorneys, franchise experts, and franchisees themselves. Talk to competitors and get their impression of any franchise concept you are considering. You need to know what all these people who are steeped in franchising know and also get as much data as possible about the franchise concept itself.
Also look at the type of franchisees that the concept attracts. Are all franchisees first-time entrepreneurs? Do they have any background in franchising? Or are they more experienced operators? Groucho Marx once famously said he didn’t want to be part of a club that would actually let him in. But with franchising, your potential franchisee group is sending out an important signal. Ask yourself, “Why does the franchise favor this particular type of candidate? Why is this type of candidate attracted to this company in the first place? Do I think they will be successful? If they fail, what is likely the reason? What Did these franchisees know about franchising before opting for this concept?
Finally, has the brand aroused interest from private equity? It won’t be easy, but try reading where a franchise you’re considering falls on the PE interest spectrum. Does private equity actively roll up multi-unit operators or brands? Have they acquired near competitors? Franchising continues to consolidate around platforms. If the brand you’re considering isn’t part of a platform yet, but hasn’t reached scale on its own, try to figure out the reason for flying solo and staying small. If private equity has already looked and taken a pass, you may want to do the same.
A brief case study perfectly (but extremely) demonstrates the franchise’s parallax paradox: Burgerim. With a rousing entry into the US market and little actual corporate history in its home country of Israel, Burgerim sold quickly more than 1,500 franchise licenses between 2016 and 2019. It opened only 200 locations before imploding, earning the company a rare lawsuit from the Federal Trade Commission.
For experienced restaurant operators as well as some franchise analysts, industry reporters and private equity investors who unfolded the story, Burgerim’s rapid franchise sales pace was a nightmare. First, the menu and operating model were complicated, but the franchise sales pitch was aimed specifically at inexperienced buyers. Consumer demand was largely unproven. Homemade comparisons to other wildly successful burger concepts, such as Five Guys, smacked of eclipse, as the models were completely different and Five Guys had a real operational track record. Also, Five Guys attracted a strong base of experienced multi-unit restaurant operators that Burgerim did not.
According to FRANdata, there are approximately 775,000 franchise locations in the US alone. About 50% are restaurants and food-related retail outlets. Restaurant operators are also often operators of multiple establishments. So there were plenty of proven operators who could have been franchise prospects of Burgerim. But according to Restaurant Business, Burgerim’s ads specifically emphasized the low entrance fee and the lack of experience required. “Facebook and Instagram Franchise Ads Said” NO EXPERIENCE NEEDED in capital letters saying people only needed $50,000 to open a restaurant.” This should be a huge red flag. But to the inexperienced, the story seemed appealing. Same brand. Two completely different perspectives based on both franchising as experience in the restaurant industry.
Also absent was private equity stake in the brand. A legitimately valuable and fast-growing franchise brand will normally attract private equity interests. But private equity remained eerily silent as Burgerim continued to make headlines with its rapid license sales. Future franchisees might not have picked up on this, but lenders, analysts and the industry press should.
Related: What You Should Really Consider When Considering a Franchise
How to avoid the bad side of the franchise parallax parallax?
Burgerim, of course, gives an extreme example. But there are currently actively marketing franchise concepts that seasoned franchise observers may perceive as sleepy, risky, overpriced, unappealing, or simply need more time to prove themselves. If you are a potential franchisee, how can you avoid getting caught on the wrong side of the franchise parallax paradox? You need to close the knowledge gap by leveraging the knowledge of as many insiders as possible.
First, make your own decision criteria based on demonstrable data, not marketing hype. Make sure you are clear about your goals and how the franchise will help you achieve those goals. Put data against those specific goals. For example, “I need to make at least $125,000 a year owning these two units after paying back my initial investment to make this business venture worthwhile for me.” Okay, how many franchisees in that concept have actually achieved that? Involve reputable, experienced guides in your process, including a franchise attorney.
Second, get help, but ask anyone who recommends franchises to you about their experience, training, and compensation. Ask for references. Experienced and well-trained advisors with years of experience are available to place happy franchisees in good concepts. Wait to find a great advisor with a proven track record.
Third, network, network, network within franchising. Attend franchise conferences. Join the International Franchise Association and learn about franchise best practices. Meet a range of people with franchise experience. Talk to competitors about any concept you are considering. Talk to franchisees. Would they do it again? Why?
You can and should close your franchising knowledge gap, but you must be willing to put the time and significant effort into due diligence. Help is there if you ask for it. Experienced franchisees and subject matter experts can help you pressure-test your assumptions and prompt you to ask the right questions. Vetted lists can help you discover key selection criteria and questions you should ask, but they’re just the starting point.
Franchising is a proven model. But not all franchises are equally compelling businesses to run, let alone suit you. The most dangerous element in the franchise purchase process may be your own belief that you know more than you actually do. Be thorough and tap into franchising’s extensive knowledge base so you can make a data-driven decision like an insider.