Opinions expressed by Entrepreneur the collaborators are his.
Many people start their franchise journey by casually researching online franchises. But they quickly realize that research is real work. There are thousands of options available and understanding all the details takes a lot of time. While I don’t recommend taking shortcuts on your way to saying “yes,” there are clear shortcuts to getting to the “no” for concepts that don’t deserve your time and money. Be ruthless when it comes to removing brands that have potential problems or are simply not personal. Focus on better options. The right fit is out there!
If you are unfamiliar 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 the franchise or may not meet the franchisor’s requirements anyway. This initial group of onlookers is gradually reduced to a small number who actually move forward with due diligence. An even smaller number go through the whole process and get approval to be franchised. Eventually, buyers make their final decision, and some will give up right at the end. Buyers can turn off at any time along the way. The franchisor may also refuse to advance a candidate in the process at any time.
Related: 4 things to do and 5 things not to do when exploring franchise concepts
There are common reasons why franchise candidates drop out at every step:
In advance: After reading information online or talking to the person in charge of brand selection, the casual interest of the candidate remains casual. The examiner will ask basic qualification questions, such as whether candidates have enough equity to qualify. Many who are exploring the franchise for the first time do not understand the investments needed. It is also possible that the territory is not available.
Information call: Once the initial selection is complete, many brands will ask candidates to attend an informative webinar or an individual call with their sales representative to get an overview of the business. It’s usually a one-hour call or it can be two, depending on the complexity of the model. Candidates will leave here mainly for reasons of adaptation or because they do not have the desire and follow-up to start a business at this time.
Application phase: Brands require candidates to fill out detailed financial information to ensure they have enough capital to move the process forward. Only curious candidates will leave here as well, because they don’t want to share their finances. Those who submit their finances but do not meet the requirements will not be able to advance either.
Dissemination phase: The candidate reads the franchise disclosure document (FDD) and leaves.
Validation phase: Candidates start talking to franchisees. If candidates don’t like what franchisees say, they will drop out here.
Discovery Day and final approval phase: Before attending Discovery Day, the franchise will check your background and get your credit score. If they take a look at them, and if the sales team thinks you’re right, they’ll invite you 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 closing rate for candidates attending Discovery Day. For this reason, you’re unlikely to be invited to Discovery Day until the sales team thinks you’re likely to move on. This is because skepticism in a group environment is contagious. The sales team doesn’t want someone who is still waiting to be persuaded, asking derailing or negative questions in front of other candidates.
How can you save time and avoid going down the rabbit house? Once you reach the seller with detailed knowledge about the franchise (not the person in charge of the selection), just ask these two questions:
1. What percentage of candidates go from an approved application to actually talking to franchisees?
The answer to this question will indicate whether the required disclosure document and the Franchise Agreement are disabling buyers. Buyers liked the concept enough to fill out a detailed financial application with personal information, and were also approved as qualified candidates. But after sending this information and reading the revelations, buyers did not move forward.
It is not uncommon for some candidates, for example, between 5% and 20% in each process, to leave the outreach stage for personal reasons. At this point, the prospect of starting a business “becomes real”. They may have to spend for a lawyer to review the franchise agreement. If candidates are unconvinced about starting a franchise business, they will usually stop at this stage. If there are any tire kickers left at this point, they are usually reluctant to read a dry disclosure of 200 to 300 pages. Some are rejected by the franchise agreement itself. Unilateral language in favor of the franchisor can be unpleasant. It’s a long document full of scary legal language.
But for the rest of the abandonments, it indicates that the information contained in the FDD, including costs, profit representations, and other details, was simply not convincing to them. The terms or operational requirements did not appear to be fair compensation for investment and risk. Candidates who drop out here don’t even want to stay in the process long enough to talk to franchisees, despite sending personal financial data and taking the time to read the FDD. If the dropout rate in the disclosure stage is above 50%, proceed with your eyes open if you decide to invest more time.
Related: Follow these essential steps before buying a franchise
2. What percentage of candidates who talk to franchisees are then invited to Discovery Day?
Asking the question this way is very important. If instead you ask, “How many candidates are leaving after talking to franchisees?” you may not get a direct answer. But if you use the phrase “receive guests,” you’re more likely to hear something useful. The sales team may position dropout candidates as ill-adapted and therefore “uninvited” on Discovery Day, rather than the franchisees themselves who decide to drop them due to poor franchisee validation. You’re asking the question as if you’re worried about not living up to the standards of the franchise.
Most franchises try to position themselves as an exclusive club to which only a few are invited to join, whether true or not. An example of an answer might be, “Only 20% of candidates entering validation are finally invited to Discovery Day.” This is very important information! Without making a single phone call to the franchisees, you now know that 80% of the candidates who have passed applications and who have also passed the FDD outreach stage end up dropping out according to what they hear from the franchisees. Big red flag!
Franchise sales teams do not have candidates to talk to franchisees in the first place if they are unlikely to get management approval from those candidates below. All of these validation calls can exhaust busy franchisees who may get tired of answering the same questions over and over again. This is especially true in smaller brands where the same franchisees receive all phone calls. Exhaustion of validation harms future franchise sales. So if the candidates started the validation step, you know that the sales team probably thought these candidates were serious and would probably be approved by management. Candidates are essentially “invited” to speak with franchisees before being “invited” to Discovery Day. If most candidates drop out right now, you know there’s probably a validation issue.
Related: Ready to attend the day a franchise is discovered? Follow these 7 steps to get ready
In strong brands, franchisee validation speeds up the sales process. In weak brands, candidates with approved applications fall out of the sales funnel after talking to franchisees. It’s as simple as that.
Asking these two questions can help you get “no” quickly and avoid wasting time with the wrong franchise concepts. But don’t forget about your due diligence on your way to saying “yes”. Keep researching until you are sure that a franchise is right for you and your goals.
Business strategies, entrepreneurial advice and inspiring stories are all in one place. Explore the new Entrepreneurial Bookstore.