RISK

Risk is a profound blind spot for most people. Few of us possess the innate knowledge or ability to define, recognize, analyze, and mitigate risk. This is especially true in franchising. Here are some reasons for this. First, people often conflate fear and risk. They are two fundamentally different concepts. Second, most do not understand the components that drive risk. Finally, people generally extrapolate their abilities from one arena to another and while the majority of people possess no business risk mitigation experience they think they do.

HOW TO MEASURE FRANCHISE RISK

When defining franchise risk, clients almost always discuss losing their money and failure as the primary risks. Since  risk is traditionally thought of as the likelihood of loss or injury this makes sense. However, while those are risks, they are indications of fear and catastrophizing and can be better understood by prioritizing facts over fear.

Risk and risk tolerance are felt viscerally and are difficult to define. They possess a “know it when I see it” aspect that is often influenced by irrationality. By objectifying risk it can be appreciated intellectually and managed thoughtfully. Stated differently, a notion of risk that removes emotions and randomness is useful.

Risk in franchising should simply be a measure of certainty, predictability, and consistency of return within a franchise system. In other words, lower variability in expected return correlates with reduced risk and the higher return variability connotes greater risk.

In this context, lower risk does not mean you will earn more money or cannot fail. Instead, it means that you have increased certainty to perform at the levels of other franchisees. And, assuming the average return is sufficient for you that is precisely what you are seeking.

To illustrate this concept, let’s look at two franchisors, both of which have 100 franchisees and a mean (average) franchisee net earnings of $250,000.

Franchise “A” has a tight earnings distribution. Eighty percent of the franchisees earn between $200,000 and $300,000. The balance of franchisees earn a little more or less than that range. Franchise “A” has low risk because the expected outcome is highly likely, consistent, and predictable.

Franchise “B”, in contrast, has a highly distributed franchisee earnings profile. Twenty percent of its franchisees earn between $200,000-$300,000. Seventy percent earn less than $100,000 and ten percent earn more than $700,000. Franchise “B” has a highly “randomized” earnings distribution and therefore has significantly more risk.

For most people franchise “A” is the right brand choice. For people with a higher acceptance of risk and volatility AND who are exceedingly comfortable with the business model’s match to their skills and abilities, franchise “B” may also be a good choice.

This is the foundational concept in understanding franchise risk. Mean, average, or median return are not nearly as relevant as the distribution that leads to those numbers. Franchise financial representations vary greatly and some brands are truly scattershot and randomized.

Again, not all franchisors are created equal. Some have stronger business models, systems, marketing, support, and leadership than others. Some franchisor’s success rates significantly outstrip their peers, while others have staggering failure rates.

Overall success rates in franchising mean absolutely nothing to you. What matters is the risk profile of the franchise brand you are considering. Do your research, discern the brand’s true risk profile, and match it to yours.

FRANCHISE FEATURES THAT REDUCE RISK

It is especially important to evaluate franchisor features that increase the predictability of return. Focus on the attributes and features that make performance simpler, more consistent, and allow franchisees to execute on the business plan. It’s precisely those business traits that mitigate risk and improve outcomes.

The following franchise business features permit franchisees to focus on execution. Innovative franchisors are constantly iterating their businesses, creating more formulaic models that improve performance and reduce risk.

BRAND LEAD GENERATION

Franchisor marketing and lead generation is the most important feature that a franchise  can offer to drive performance. Lead generation is multi-faceted. Leads can be generated through social media, google  ad words, website spend, or with more traditional marketing methods. The key component of brand lead generation is that the franchisor is using its proven expertise to fill the top of the sales funnel, and provide franchisees with regular insight into marketing performance.

In my experience, filling the top of the sales funnel is the most significant factor in business success or failure and therefore the greatest variable in performance predictability. Unless you have strong sales DNA and/or a remarkably deep network you should seek a brand with strong lead generation.

CALL CENTERS

Call centers help franchisees in a number of important ways. First, a call center significantly leverages the franchisee’s time by managing calls and administrative tasks. Second, a call center allows the brand to deliver a professional and consistent client experience. Calls are never missed and always handled in a timely professional manner. This is a huge competitive advantage over mom and pop businesses.

Call centers take all different forms with some, in addition to managing incoming client interest, proactively calling potential clients, others scheduling and confirming appointments, while still others will conduct sales on behalf of franchisees. In all incarnations, call centers proffer a huge benefit to a newly-launched franchisee and help to reduce performance variation.

HIRING/STAFFING SUPPORT

Franchisors offer different levels of staffing support. Some identify, screen, and interview candidates for franchisees, while others offer guidance. Hiring support is more indispensable with brands that require specialized employees or in sectors where staffing is particularly tight or nuanced. Because a franchisee is only as good as their team, leveraging the hiring expertise of the franchisor helps to create a more predictable path to success.

ONGOING COACHING, TRAINING, AND SUPPORT

Franchisors proactively provide initial and ongoing training and support. Some franchisors take this to another level by offering personalized one on one coaching. Coaches speak regularly to franchisees, focusing on troubleshooting practices, and ensuring franchisees don’t go down unproductive paths. Coaching quickly corrects and normalizes performance.

BUSINESS MODEL SIMPLICITY

Franchisees benefit from business models that are simple. Avoid joining a Rube Goldberg franchise. Business simplicity takes many different forms such as lower staffing requirements, less process steps, a short sales cycle, or a simple, redundant supply chain. I am always looking for the simplest business model in each sector, because the simpler the business model the more predictable the performance of franchisees.

THE GREATEST RISK IS NOT CHANGING

“Mark, I hate my job but I only have 12 more years to go before I can retire.”

“My job will likely put me in an early grave but I don’t have the courage to make a change.”

“I am meant to be miserable professionally.”

These are actual statements people made to me when asked, “are you interested in exploring franchise business ownership?”

These responses illustrate the significant role that inertia plays in human life. Many people feel trapped in their careers, either frozen in place or uncertain how to act, yet they would rather accept a bad situation than “risk” finding a better one. It supports the clarity in Thoreau’s words that “the mass of men lead lives of quiet desperation.” What he failed to add, though, is that they choose those lives out of fear or absurd misapprehensions.

A favorite aphorism that fuels my decision making is that if a person does not make different choices than absolutely, positively nothing will change. Similarly, the definition of insanity is doing the same thing over and over again expecting different results. You must do different things to get different results!

As Eleanor Roosevelt famously said “No one can make you feel bad without your permission”. The corollary is that no one is stuck in a bad situation without their permission.

I understand that change is difficult. I was certainly stuck for a time. The magnetism of the present situation and the repelling force of change conspire to keep people stuck in place. Change is scary but . . .

The greatest risk in our lives is being possessed with feelings of utter helplessness and remaining miserable, unfulfilled, and sad. Nothing can be worse than this. There is a higher risk to remain in a bad situation than there is to accept a different risk as you extricate yourself.

It takes courage to become more than you are, as much as you can be. The opposite of courage keeps us stuck. Fear is the greatest warrior against change. But do not confuse a lack of courage with a lack of choices. You always have a choice. You can always choose how you want to live and what to do with your life.

If you’re not happy at work, not fulfilled at work, not satisfied at work then you owe it to yourself to explore business ownership. The real risk in life is the difference between what you’re capable of and do not achieve because of fear.

When people tell me that they cannot change and choose to remain stuck I am reminded that the difference between a rut and a grave is a matter of inches. Then I ask two questions.

“What happens with your life if you don’t change?” “Are you willing to remain unhappy?”

Again, choosing to remain unhappy is the greatest risk in life.

The Perfect Franchise

The Perfect Franchise is the one book you need to read if you are considering franchising.

Mark Schnurman is one of America’s top Franchise Consultants, and the founder of The Perfect Franchise. Mark outlines a clear process for finding the perfect franchise.

In straightforward language, he explains how to:

  • Decide whether franchising is right for you;
  • Determine which franchise will optimize your chances of success;
  • Conduct due diligence;
  • Fund your franchise investment;
  • Live the life you dream about.

If you want to be your own boss, this is the book for you!