Let’s start with two things. First, your Item 20 may not be affecting your
franchise sales process. Second, if your Item 20 reflects a problem within your system, this article will not tell you how to massage it. You’ve got to deal with that problem.
Having said that, let’s look at Item 20 through a prospect’s eyes. Many prospects don’t look at Item 20. If they do, they may not look beyond the ‘units opened’ column. A savvy investor, serial franchisee, or an individual who is data-driven, however, may very well deep-dive. Additionally, if a prospect is working with a strong franchise coach or broker, again they may get into the weeds on these numbers.
So, can your Item 20 affect your franchise sales? The answer is; 1. Absolutely. 2. It can affect your franchise sales in predictable ways, and 3. There is a predictable ‘tell’ that you can look for.
Let’s take a look at each.
When Item 20 Shows More Than Slow Growth
You may think that if your Item 20 is causing you any issues, it’s in the units added column. That’s likely not correct; slow, steady growth is considered a sign of restraint by many prospects. However, if they see significant attrition in your system they are going to stop and say ‘wait, what’s going on here’. Also a prospect seeing significant attrition might look at your Item 19 & think to themselves ‘yeah, but these are only from the people who survived.’ So the Item 20 can have far-reaching effects on your development process.
How to Tell If Item 20 Is Affecting Franchise Development
You can usually tell Item 20 is affecting franchise development when a candidate loses faith in the model after FDD review but before validation. That is the clearest signal. The candidate may have gone back to Item 20, crunched the numbers, and changed how they see the system.
Item 20 problems can surface after validation as well if the issue is highlighted by existing franchisees.
That knowledge alone is important. It isn’t going to change your Item 20, but you need it to mitigate the impact on franchise development.
What Can You Do If Your Item 20 Is Problematic?
What you can’t do is change the history. You can’t turn a closure into a transfer. You can’t not report a reacquired unit.
The biggest impact you can have on your Item 20 is protecting it going forward. You can turn a future closure into a transfer. If you have a sound location with operator issues, investing money to help that franchisee exit the system may have a strong ROI.
If your Item 20 tells a story you don’t like, make sure you understand that story. Do you have four locations that left the system, all owned by one franchisee? Make sure you tell that to a prospective candidate. Don’t wait for them to bring it up either. Do it during an FDD review.
Was there a significant change in leadership that led to a housecleaning? That explanation isn’t very compelling if the change happened last year. If it happened two or three years ago and you can show consistent growth since then, it may explain the exits disclosed for the second or third year.
No matter what your Item 20 says, make sure you and your development team know the actual story behind it. When appropriate, communicate that story.
What Not to Do with a Problematic Item 20
If your Item 20 shows significant numbers of openings and closures, stop and identify the problem in your system. If you’ve already done that, make sure you are actually addressing it.
Don’t try to fudge the numbers. It’s tempting to try to turn a closure into a transfer or otherwise dilute Item 20. Very short advice on that: don’t.
Wrap-Up
Do you know what’s in your Item 20? Do you know if it’s affecting your
franchise development?
Do you need somebody to help you ask these questions? Then give us a call or
schedule some time to meet with Franchise Beacon.
