It’s a debate that never ends.

My point of view? No!

It’s an ops issue

But that doesn’t mean anything because the debate isn’t about how much money the development people earn as much as it’s about how much money the operations people do not earn!

And it’s the ops people who keep the debate alive (because the sales people, understandably, don’t want the focus to be on their compensation).

It’s also understandable why the ops people keep the debate alive. They are often the folks who have to “clean up” after the sales person’s work is done (and the money collected) and that’s not what they’re really paid to do.

Problem begins with the need to sell

The problem begins with the franchisor’s need to sell franchises. Many franchise companies rely on new franchise sales just to keep the lights on in the corporate office. It’s not the ideal, but it’s reality. I’ve got a collection of fascinating stories from franchisors who told me about their early franchise sales – sales they later wished they could take back. They realized, sometimes even as they signed the franchise agreement, that they sold the franchise to the wrong person, but . . . they needed the money to make the payroll.

It’s not unusual for franchise companies to sell franchises to the wrong people for the wrong reasons, and for a development person justify this by saying: “We never know who will turn out to be a great franchisee – sometimes the guy we thought would be a winner turns out to be a disaster.”

True enough! I’ve seen that happen many times through the years. But it doesn’t help the debate.

Cleaning up after the sale

In fact, it exacerbates the debate because it’s the ops people who have to clean up the disaster!

I’ve heard the horror stories from ops people. “I met this franchisee for the first time and even though he’d been through our training there wasn’t any possible way that he could succeed as a franchisee. His first question was: How do I turn on my computer? . . . What were they thinking when they sold this guy a franchise?”

Well, Mr. Ops Guy, they may have been thinking about how they were going to fund their next payroll, including your paycheck! . . . Or, how they were going to hit their sales quota. Or . . . any number of other issues.

Getting to the crux of the issue

That doesn’t help, either! Because now Ops Guy is faced with the delicate and frustrating job of helping the franchisee succeed when, in fact, that may not be possible. Or, if it’s possible, it won’t happen without a lot of extra effort on Ops Guy’s part. There’s the rub!

“I love doing my job,” Ops Guy recently told me. “I love supporting franchisees and helping them tweak our system so that they can succeed. That’s how we’re building a brand, and that’s what my job is all about. But I’m not a magician! I don’t know how to help someone who’s not suited to succeed as a franchisee. And frankly, I don’t want that job. But on too many days that’s the job I’ve got. Why? Because they sell franchises to the wrong people.”

Here’s what’s worse: “And what I really hate is that the reward for selling franchises to the wrong people is every bit as generous as selling franchises to the right people. Makes no sense, and it’s an insult to the operations people. We’ve got to work harder to help those franchisees — which costs the company more money – and we’re not going to succeed anyway. So franchisees fail and that hurts our brand. But the sales guys? They got their money and ran!”

Sell to sell, or sell to fit?

No one can argue with Ops Guy. He’s right! But that’s not to say Sales Guy is wrong. There are bad Sales Guys, no doubt about that. They think their job is to sell, no questions asked, and they don’t worry about the “fit.” But that’s not the majority of the franchise development people. They strive to make good sales if for no other reason than they want the referrals. It’s difficult to get a referral for a new franchise sale from a franchisee who has failed! Plus, many franchisors rely on a selection committee to approve new franchises, so Sales Guys aren’t working in a vacuum.

Recently, this debate appeared on Linkedin, and I was happy to read the comments of Jamie Davis, executive director of business development at Donatos Pizza. Here’s a Sales Guy who asked his franchisor to pay him on an “asset basis” rather than a “transaction basis.” In other words, pay him something for making the sale, but pay him more based on the franchisee’s success.

Davis suggested that his bonus reflect “the success of the system” so that he and the Ops Guy would be paid on a similar scale.

Good idea?

It’s got merit. Now it just needs Compensation Guy to figure out a model. If you’ve got one, please share it!

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He said that while consumers love the Fuddruckers brand, management botched up the business. Among other things, “they didn’t get along with the franchise owners,” he clarified.

Who’s managing the franchise?

“Fuddruckers was managed by bankers, accountants and Wall Street types,” he added. But now that the Pappas brothers have acquired Fuddruckers, he said, “(they) know how to manage a restaurant and I think they will listen to the franchise owners.”

Through the years, I’ve had some experience with franchise companies changing hands, and all too often a good brand, even though it may have been struggling, got “botched up” by the new ownership and/or management team. As much as I appreciate “bankers, accountants and Wall Street types,” they usually can’t find their groove in franchising. Their first obstacle is to understand that franchisees do not take orders from the franchisor, and that franchisees are investors who will (sometimes) demand to be heard (not all franchisees are bold enough to tell the franchisor what they really think). When they’re not heard, disgruntled franchisees can easily advance the demise of a franchise brand. Franchise history serves up plenty of examples.

Beware the analysts!

I was recently involved in a franchise acquisition with “analysts” (though I use the word loosely in this instance) and it didn’t go well. The last person a franchisee wants to hear from is an analyst who has never operated the business (or any business for that matter). And when the analysts start making decisions – which is rare, fortunately, because it takes them out of their comfort zone – or when they begin to control the direction of management, any brand is headed for a disaster. Often times “new ownership” sends in “analysts” to band-aid a situation where the obvious answer is better controls by a capable management team and more cash. The latter is often the problem and it can only be exacerbated by analysis, even though the ownership will claim that there’s no sense spending more money until the analysts define the “current situation.” Out come the spreadsheets — but numbers and spreadsheets tell only part of the story and do very little to describe the real issues.

Kiselev obviously knows his role (he doesn’t make decisions for brands) and I appreciate what he said for two reasons:

1. Management, first and foremost, needs to “get along” with the franchisees. It’s a requisite, and it’s not all that difficult to achieve. However, building a relationship with franchisees requires trust, and in a franchise company analysts do not stir up trust among franchisees. Analysts track numbers, but their information is often meaningless without understanding how the business operates (or how franchising works). Not all franchisees deny that they are part of the problem – but they want a franchisor that will address the real issues, not hide behind spreadsheets.
2. Leadership must be provided by people who know how to manage the business, not just build and read spreadsheets. Bankers and accountants know numbers, and generally do not know how franchises operate. Just the idea of franchising scares the hell out of many of them. I’ve seen instances where accountants torpedoed a franchise deal because they didn’t think their client should pay a royalty. The suggested opening a business independently . . . or not at all! Leaders rely on numbers, but a number has never been responsible for building a relationship.

Suggestions for franchisors

Here’s how I interpret Kiselev’s points for franchisors:

• Measure your relationship with franchisees. How good is it? And don’t expect franchisees or prospective franchisees to take your word for it. Where’s the proof?
• Make certain that the people who sell your franchises and support your franchisees understand how to operate the business successfully. If all they can do is talk about their spreadsheets they won’t get to first base with a group of savvy franchise operators. And there goes the trust.
• Listen to the franchisees. If you don’t have a Franchise Advisory Council, create one. If you’ve got one, make sure the franchisees believe it has clout. And once again, prove that you listen to the franchisees – let’s see an independent survey.

Suggestions for prospective franchisees

If you’re looking to acquire a franchise, here’s how Kiselev’s points make sense:

• Evaluate the franchisor/franchisee relationship. Ask the franchisor and franchisees how they size up the relationship. But then ask to see an independent survey that has recently measured the relationship. Franchisors that say they don’t need such a survey, or they refuse to submit to one, probably have something to hide. They’re unworthy of your investment.
• Look at the qualifications of the people who manage the franchise, as well as those who sell the franchises and support franchisees. What do these folks really know about operating the business? How many of them have been franchisees in the past? When they tell franchisees what they should do to be successful do the existing franchisees believe them?
• Who’s listening to the franchisees? Find out! Again, ask for the results of an independent survey. If there’s a Franchise Advisory Council, what has it achieved recently? Are franchisees eager to serve on the FAC? And do those who serve believe they are making a difference within the franchise network?

Franchising isn’t for everyone

Franchising isn’t perfect, which means it’s not for everyone. In fact, it’s not for most people. However, it works almost perfectly when franchisors and franchisees get along. And yet, isn’t it interesting how often franchisors seem to go out of their way to botch it up?

Photo image by: davisseal

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“Because it’s hot!” said Kurt Ullman, vice president of international development for Tasti-D-Lite. And he wasn’t just talking about the weather. Ullman had recently returned from a development trip to Riyadh and Jeddah. He also stopped off in Kuwait. “Franchising grabbed the interest of the Middle East many years ago,” he continued, “and there’s been no slowing down. Many U.S. brands see the opportunities that now exist in that expansive market.”

More Good Reasons

There are several other good reasons for this interest, including:

• The U.S. Commercial Service explains that the windfall of higher oil revenues for Saudi Arabia has created substantial commercial opportunities for U.S. companies because Saudi Arabia recognizes the economic need to balance rising oil export revenues with higher volumes of foreign imports. Now’s a good time to develop a new franchise brand in Saudi Arabia.

• The country has more workers than jobs. Saudi Arabia welcomes opportunities to develop entry-level employment for local residents. Franchising is desired and the franchise sector, now at $1-billion annually, is expected to grow by 12% each year.

• Rising interest in entrepreneurship. Saudi Arabia includes an energetic private sector that seeks business ownership. Saudi Credit Bank provides interest-free loans to encourage entrepreneurial business development!

• Saudi Arabia represents the largest economy in the Middle East. And Riyadh, the capital, is enjoying growth at a rate of nearly 8 percent annually, making it one of the fastest growing capitals in the world.

• The USA remains the largest foreign investors in Saudi Arabia and more than 20,000 Americans reside and work in the country.

Opportunity to Exhibit

If your company plans to explore opportunities in the Middle East, then take note of the upcoming 3^rd Annual Saudi International Franchise Expo & Conference, Oct. 26-28, in Riyadh, which is also home to the U.S. Embassy. Organized by the Riyadh Chamber of Commerce and Industry, this event creates a seamless opportunity for American franchise companies to enter or expand in Saudi Arabia and other countries of the Middle East. Learn more about the expo and conference at www.recexpo.com, and click on Saudi International Franchising 2010. You can also contact Diya S. Abdo, Market Development Manager, Riyadh Exhibitions Company, at +966-1-2295604 ext. 371.

15% Discount Available

When Diya Abdo asked if I would speak at the conference and promote the expo to American franchisors, I said yes with the provision that the expo organizers extend a discount to companies that mention my name when they register. They agreed, so you’ll get a 15% discount off the registration fee if you just mention my name, or FranchiseMastermind.com.

By the way, I’ll be living in the Middle East beginning this September. I’ll be a professor of business and communications at Gulf University for Science & Technology in Kuwait. In Riyadh in October, I’ll teach multiple seminars for prospective franchisees and existing franchisors related to buying a franchise as well as selling master licenses.

If you plan to exhibit, don’t delay! You’ll need a visa for entry to Saudi Arabia and Diya Abdo will help you with the details, but since the process may require a month to two, it’s important to begin making plans now. Visas will be extended only to men; women are not invited to participate as exhibitors this year. Take advantage of the 15% discount that I arranged for readers of FranchiseMastermind.com.

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And yet, how difficult that is for a franchisor to accomplish.

This rambling was generated by a phone call that I placed last night to Dairy Queen International. First I’ll remind you (if you’ve read my earlier blogs) that I love Dairy Queen. I have been a raving fan since growing up in Dover, Ohio in the 1950s. My three sisters and I, along with mom and dad, and our pet dog, looked forward to weekly trips to the DQ in the summer months. Back then the DQ wasn’t open in the winter months. Today, no matter where I live or travel, I find the local DQs.

Until now!

Got Dairy Queen in Kuwait?

I’m moving to Kuwait in September and so last night, when I had little else to do, I got to thinking about whether or not I’ll find a DQ in Kuwait. I have the DQ iPhone app and use it regularly, but it’s limited to the USA. So I called DQ International, got a very friendly young man on the line, and I asked if DQ has an international app for the iPhone. He didn’t know. Hmmm. Little detail. He put me on hold to see if he could find out.

When he came back he told me what I didn’t want to hear – no, DQ doesn’t have an international iPhone app. But he suggested that I use Yowza.

“Will that help me find Dairy Queens in other countries?” I asked, and he said, “It should.”

Well, it doesn’t.

So much for another little detail.

Then I asked him if DQ has locations in the Middle East, and he said, “As in Iraq?” and I said, “As in Kuwait.”

“If they do, they’d be franchises,” he said.

Something wrong with franchises?

Just the way he said the word almost turned my stomach against ever enjoying another DQ. It was as though he was telling me the product would not be very good if it’s a franchise. I didn’t think to ask him, “What’s wrong with franchises?” but I wish I had. I was caught off guard by his apparent dislike for franchises when, in fact, DQ is a major franchisor! Another little detail – making sure that everyone who works for the franchisor understands and appreciates the value of franchises!

He put me on hold to check on Kuwait and when he came back he gave me more bad news (none of which he could help). No DQs in Kuwait. They’re in Qatar and Bahrain, however, and while neither country is close enough to where I’ll be living, at least I know where I have to go to get a DQ. I’m going to teach a franchise conference in Bahrain and I’ll be sure to visit the DQ then.

Geez, do you think I should find out first if it’s a franchise?

I’m not picking on DQ. I don’t want any harm to come to DQ. Truth is, every franchisor struggles with these same issues of paying attention to little details. And there are so many of them! Who would have anticipated that some guy would call and ask about an international iPhone app, or want to know if there were DQs in the Middle East? You can’t cover every little detail and yet some little details are too important to overlook.

Like the value that franchises deliver for a brand that’s franchised! Everyone who works for the franchisor should tout the value of franchising. Imagine how I would have felt had that young man had said, “If you find an international location, sir, you will be happy to know that it’s a franchise of Dairy Queen!” Just a little detail.

Photo image by: Aric McKeown

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I recently interviewed Teat during the Texas Franchise Leadership Tele-Forum. He made the following points of interest to franchisors:

1. Today, franchisor/lender relationships are absolutely critical. While it’s location, location, location in real estate, it’s relationship, relationship, relationship in franchise financing. It’s who you know, and if you’re a franchisor that doesn’t have a network of bank and lender relationships, it’s time to get started!
2. Work with lenders who are familiar with franchise lending even if they’re not familiar with your brand. And, it’s important to work with decisions makers. Business Development Officers are not decisions makers. Work with someone who’s at the executive VP level or higher.
3. Set up an initial meeting with the lender and plan to ask questions about the lender and the bank. Learn about the lender’s credit culture. What’s their “put thru” system like? Is there a fit between your company and the lender? Lenders are impressed by franchisors who want to know about their needs.
4. Let the lender know you’re not coming with hat in hand. Explain that you currently have lender relationships (if you do) but the recession has dictated that you create more “bench strength” among lenders.
5. Ask for the lender’s assistance. Create a team spirit with the lender and work collaboratively to put together a funding plan for your brand. Get the lender involved in your business! Invite the lender to your office; to your conferences.
6. Once you have a program in place with a lender, make certain you send the lender only prospective franchisees and existing franchisees that meet the criteria you and the lender established for the program! The worst thing you can do now is to send the lender a candidate that doesn’t qualify. Be sure to include the lender’s criteria in your franchise sales process.
7. Stay on top of the “put thru” system with the lender. Remain involved. The lender will look to you for help.

The audio recording of my interview with John Teat, and with Mike Signorelli, senior vice president of Southwest Securities, will be provided to all members of the Franchise Leadership Forum.

Praise for Help Your Banker Say Yes!

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Adapted from

Franchisors: When’s the last time you talked to a lender about loaning money to your existing or prospective franchisees?

How good are your lender relationships?

Maybe yours is one of the few franchise opportunities that doesn’t depend on lenders for the expansion of your franchise network – but for most franchise companies, franchisor/lender relationships are now every bit as important, maybe more important, than franchisor/franchisee relationships!

And yet, at a recent gathering of some 50 franchisors and franchisee leaders at the Texas Franchise Leadership Forum, only a couple of the franchisors said they were interacting with lenders. Most of the franchisors in attendance – including major names from the DFW marketplace – said they weren’t even aware that they should be talking to lenders.

But today, that’s part of the new normal in franchise financing!

Today’s lenders expect to hear from you

Publisher Robert Coleman, who spoke at the FLF, and whose company publishes the Best and Worst lists of franchise companies (based on SBA lending), stresses the importance of franchisors getting to know lenders. “Nowadays,” he says, “franchisors must tell their stories to lenders.” No longer are lenders just interested in hearing from a franchisee, or a franchise candidate, about the vitures of a franchise opportunity. No longer are lenders satisfied to attend franchise expos and conventions, and read the trade press, to know that this franchise or that franchise is the one to finance. Now the lenders want to hear it from the franchisor!

Coleman explains that it’s the franchisor’s responsibility (not just the borrower’s) to provide pertinent information to lenders. “Information is key,” he continues. “If a franchise company’s performance is better than (what’s reported in The Coleman Report, or apparent from the company’s FDD), then tell that to the bank.”

How to speak bank

What’s the best way for franchisors to tell it to the bank? Coleman suggests that franchisors produce a brochure or Web site that showcases pertinent disclosure information, just for lenders. “Any way you can get that information out there, do it. The key is the franchisor has to become lender friendly. The franchisor that hides behind non-disclosure, claiming they can’t release certain information, isn’t going to help their case, or the case of their franchisees and prospective franchisees. The more transparent the franchisor, the better in today’s lending environment.”

Of course, franchise lenders have their own means of getting information. They review the SBA’s Franchise Registry (it’s surprising how many franchisors don’t know about that list) and they also routinely read both the Best and Worst lists in Coleman’s newsletters. An appearance on the Worst list is almost certain to stunt a franchisor’s growth, and it discourages both existing and prospective franchisees in search of loans.

If your existing and prospective franchisees require leases and loans, especially SBA-guaranteed loans, you, the franchisor, can help their cause by launching a program to educate lenders about your business. It may be the best move you make in 2010 in terms of expanding your franchise network.

The New Normal For Franchise Financing
A Coleman Webinar

Sponsored by Coleman Publishing. Wednesday, March 17, 2pm ET. Join Bob Coleman, John Hayes, Bob Rodi (major franchise lender) and Geoff Seiber (major franchise finance broker) for this one hour program. Register by phone: 1-800-617-1380 or email.

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Deals are being funded for franchise companies that understand what’s different about today’s lending market. “It’s not 2007 anymore,” says Coleman. “Franchisors need to come to terms with today’s lending environment and adapt to it.” Clearly, most have not, or they can’t!

Busy year for FranFund

Geoff Seiber, president and CEO of FranFund, a loan broker for franchises and small businesses, agrees with Coleman. If FranFund’s business in 2009 was any indication of franchise lending activity, it was a good year for franchising!

Indeed, it was a good year for franchise companies that embraced these principles:

• Previously, a lender’s due diligence focused on the franchisee, not the franchisor. Prior to the recession, lenders looked at franchising as an industry and not necessarily as 3,000 (plus or minus) brands within an industry. Now, there’s much more focus on specific brands. How are they performing? How are they helping to develop franchisees who can pay back their notes? “Many franchisors are unaware of this shift in due diligence,” explains Seiber. Or, are they just not capable of demonstrating to a bank that they can comply with today’s standards?

• There’s less money to lend. The stimulus packages haven’t done what they were supposed to do for small business lending. The situation will undoubtedly improve in time, but even in 2010 it at least appears there’s less money to lend. “Consequently, only the better deals are getting done,” says Seiber. Still, he’s staying plenty busy getting those deals done.

• Banks have changed their model from gaining market share, the old paradigm, to minimizing risk! Lenders now have regulators breathing down their backs and they’re not going to make a loan that they can’t fully understand and support. Franchisors that are reluctant to communicate with lenders, or who can’t help a prospective borrower deliver a transparent loan package, will find that their deals are being rejected.

• There’s more demand for loans than there is supply. Well, maybe not. Research by the International Franchise Association found that at one time in 2009 banks had 20% more cash on hand than in 2008. They just didn’t lend it. The government can kick and scream about lending into a recession, but banks need to be profitable. They want their loans repaid. Franchisees have to demonstrate how they’ll repay their debt before they can get a loan. Once again, the franchisor has work to do. “Today,” says Seiber, “franchisors must help their existing and prospective franchisees demonstrate to lenders why they are creditworthy.” Talking to the bank in behalf of a franchisee can go a long way toward securing funding. Yet, many franchisors won’t talk to lenders! Or don’t know that they should.

Franchisors have new role to play

“In the past,” says Seiber, “franchisors didn’t have to work so hard to help franchisees (and candidates) get funded. They could tell a prospective franchisee, ‘Go get your money lined up, then come back and talk to us about a franchise.’ But it doesn’t work that way anymore.”

Not if you want to boost your development numbers!

Want More From Bob Coleman?

If you’re a Texas franchisor or franchisee, you can hear Coleman speak on Feb. 24 in Dallas and Feb. 25 in Houston. He will make a luncheon presentation to the Franchise Leadership Forum. Registration is free! Also, Coleman will introduce you to 15 lenders at his Franchise Matchmaking event.

Want More From Geoff Seiber?

Order his eBook, Help Your Banker Say Yes! It contains advice for prospective franchisees . . . and it also tells franchisors what they need to do today to help their franchise candidates get loans!

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Message hits home

I don’t vouch for the authenticity of the message, but it doesn’t matter if it’s true or not. The message hits home in other countries, and especially in America where we’ve cultivated the entitlement society. As I listened to the message (and enjoyed a good laugh) it occurred to me that a modified message could serve numerous franchisors who get unwarranted complaints from franchisees (and each franchisor would know the identity of said franchisees.)

After listening to the message you might enjoy my pithy rewrites (feel free to use them in your recording!). . . and if you’re brave enough, please share any rewrites that come to your mind (though I doubt it’s as wicked as mine.)

Message for complaining franchisees

The message would go like this . . .

In order to assist you in connecting to the right staff member please listen to all the options before making a selection.

To lie about why you didn’t pay your royalty, press 1.

To make excuses for why you did not attend convention, press 2.

To swear at a staff member, press 3.

To ask why you didn’t get information that was already included in your franchise newsletter (several times) press 4.

If you want us to operate your franchise for you, press 5.

If you want to reach out and punch someone, press 6.

This is the real world

And that’s not all . . . the franchisor who’s as bold as the high school leaders in Australia might add, as they did, this advice:

If you realize this is the real world and you must be accountable and responsible for your behavior, and the performance of your franchise, and it’s not the franchisor’s fault for your lack of effort, please hang up and have a nice day.

Somewhere in there I bet you can find some New Year’s resolutions!

Meanwhile, I’m working on a pithy rewrite for franchisees who’d like to give their franchisor a dose of the real world! Fair is fair. And it may be just what some franchisors need to hear!

Photo image by: he(art)geek

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How many more franchisors will take this same approach? Dozens! Particularly if they want to start selling franchises again in record numbers.

Franchise financing isn’t anything new — The Dwyer Group has provided it for several decades, which is part of the reason that company will sell more than 300 franchises in 2009. But now more franchisors are expected to provide financing because they’re tired of slow-growth and dependence upon the U.S. Government to kick the economy back into gear.

Jaws fell open

Jenkins, a ten-year sales veteran at Money Mailer, championed the finance program and said he was thrilled when the company unveiled it at a franchisee convention earlier this month. “When our franchisees heard about (the finance program), I’d say there were about 300 jaws that fell open. We’re all very excited about it.”

Excited because the company anticipates franchise lead flow to multiply times four! Sales could likely quadruple, too. In less than a week after the finance package was announced, Jenkins said he had received more referrals from existing franchisees than he normally gets in a year! Once the public learns about the program, inquiries will skyrocket.

Takes only $7,500

While a Money Mailer license costs $37,500, qualified candidates will now be able to join the fanchise company with a $7,500 down payment. Money Mailer will finance the balance and not require payments from the franchisee for two full years. The company will also provide a “launch package” that includes $20,000 in production credits paid to the new franchisee in the first year.

Until the economic downturn, franchise candidates frequently used a home equity line of credit to finance a Money Mailer franchise, but that option ended many months ago. “We had to control this situation (the lack of financing) to ensure our growth,” Jenkins explains, “and our management team decided to put this finance program in place. It will make a dramatic difference in 2010.”

Indeed it will, just as similar packages will make huge differences for other franchise companies that are bold enough, and financially stable enough, to provide financing to their qualified candidates.

Who’s next to fund franchisees?

Learn how Dennis Jenkins manages lead flow almost single handedly at Money Mailer . . . he’s featured in the Franchise Central Blog.

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