The Art of Validation
Buying a business or franchise is usually a long-term commitment, in many cases not too different from buying a new car or even a new house.
One of the important things we do when buying a car is the all-essential ‘test drive’. Unless we have been on the road and actually driven the vehicle for ourselves, rarely would we consider buying it. Likewise, with a house purchase rarely, if ever, would a person buy a property if they had not visited and viewed it on several occasions. They would not normally proceed unless they had employed a competent ‘home inspector’ to review and check the condition of the property. And if there is a spouse involved then almost certainly the decision-making is a joint event.
When it comes to buying a franchise, the logic and investigation process should be just as thorough – a spouse should be consulted and be part of the approval process. Franchisors as a general rule encourage potential franchisees to do as much due diligence as possible to ensure that there is a good ‘fit’ before any franchise award is made and a new business established. It is fairly easy to put a franchise agreement in place, but usually much more difficult and costly to undo the process.
It’s important, therefore, to get it right the first time. Inasmuch as franchisors encourage this process, all potential franchisees should take the validation process very seriously and ensure that they do a thorough job of making the calls. In some instances, calls might be substituted for a visit. Where there is an opportunity to meet with an existing franchisee and perhaps even see their franchise in operation, then this is a situation that candidates should readily embrace.
What purpose does the validation process serve? Reviewing web sites, printed promotional material, disclosure document, etc. all have a purpose, and that is to provide the candidate with background information. However, it must be remembered that promotional material is prepared by the company that is being promoted. It is, therefore, important to get a ‘third party’ view of the business.
The purpose of validation then is simply to grasp a firm understanding of how all of the promotional material and discussions translate into a fully functioning and profitable business. The only way that information can be gleaned is through direct contact with individuals that are fully engaged in the business on a day-to-day basis. As mentioned, if there is an opportunity to actually visit a franchise and see their operation first hand, this is a great validation exercise and one that any potential franchisee should jump at. However not all franchises are modeled around such a business model and, in many cases, a telephone ‘interview’ will be the best means of information gathering.
When conducting validation due diligence through a calling approach, there are a number of things the caller should observe. The first is the list of questions to be asked. Create a list in advance – make them as brief yet comprehensive as possible, and certainly do not seek out information that might be inappropriate. The best way to judge the appropriateness of the questions is for the caller to switch places with the franchisee and see how comfortable they would be answering specific questions – a position that the caller may well find themselves in, in the not too distant future.
Callers should always be consistent with their questions. In other words, have a script and stick to the script. If you ask existing franchisees the same questions and are diligent in collating their answers, then at the end of the exercise you can quickly compare the answers to the same questions to see if there is a consistent response, and if that response is what you wanted to hear.
It is always a worthwhile exercise – before you start making calls – to seek input from the franchisors as to the best time to approach their franchisees and the best method. While email is a great way to reach a lot of people quite quickly, it does not replace a voice-to-voice conversation for the validation exercise. Email may be a good way to get a meeting set, but the substance of the discussion always needs to be person to person.
Validation is not an exercise to be taken lightly or pursued in a hurry to get it finished. Validation is usually the end of your due diligence process, and is often the element that tells you to go ahead or pull back. Input from existing franchisees is a key component in information gathering, and needs to be undertaken systematically and thoroughly.
David Banfield is the President of The Interface Financial Group, a position that he has held for over 20 years. He has been instrumental in starting Interface as a franchise opportunity and building it to its current international status. Prior to his involvement with Interface, he worked extensively in the banking, credit and factoring financial service areas.