By Darrell Johnson
Need To Know
Quality of information trumps medium
L
ong gone are the good old
days of 2002–2007, when
development jokes about fogthe-mirror tests abounded.
As we all have learned over the years,
good jokes have a foundation in reality.
Development was too easy then, and for
the last couple of years it’s been too hard.
We’re gradually seeing an improvement
in development activities. We won’t have
2011 unit totals for a few months, but
what we are seeing is more unit growth.
Where are the opportunities coming
from, and how are they getting financed?
According to Franchise Update’s Annual Franchise Development Report
(AFDR), some of the traditional development sources, including lead generation websites and expos, are declining
in importance to franchisors.
The AFDR showed modestly better
outcomes from search engines through
purchased words and optimization, and
organically through referrals and a franchisor’s own website. While these developments clearly qualify as trends, they
are rather subtle so far. I think the bigger
implication of the direction suggested
by these changes is around the quality
of information being provided, not the
way it is being delivered.
Development has been so defined
by the FTC Rule that I believe we have
allowed the Rule to override common
sense. As a prospective franchisee, I may
want to know how much can I make.
What I need to know is whether I will
be “successful” over time. If your system
has a high percentage of units continuing to operate over time, isn’t that the
best proxy for success that I could judge
from the outside looking in? Every prospective franchisee knows there’s no
guarantee of success. However, if most
of your franchisees are still around after
a few years, I can probably infer from
that simple fact that your system is doing okay. Therefore, I am likely to do
okay. I can’t deduce that from an Item
19 or Item 20. I can’t judge this fully
by talking to a few of your franchisees.
Rather than being constrained by the
FTC Rule, why don’t you use common
sense and develop a means of communicating what prospective franchisees
need, regardless of what they are asking for? Wouldn’t continuity rates defined around unit longevity be a really
strong indicator of success over time?
How about renewal rates? The number of units existing franchisees add to
their current operations? I could go on.
You get the message. This is less about
thinking outside the box than it is about
simply thinking using common sense.
I think the reason there are changes in
the mix of lead generation sources with
no clear-cut trend is that it isn’t about
the delivery vehicle any more. The information age has leveled that playing field
to a large extent. It’s about where I can
get reliable and compelling information.
Want an example? Look how banks are
changing the way franchise information
is being developed and used. Banks are
forcing change on the type and quality of information that you produce, so
you might as well get used to thinking
differently about franchise information.
The limitations of FDDs for credit
risk assessments have been clearly exposed
through this financial crisis. Banks need
information that isn’t in FDDs; and the
information that is in FDDs is, for the
most part, misleading (if not irrelevant)
for such purposes. Credit risk analysis
wasn’t the purpose of FDDs. While for
years banks have tried to extract credit
risk information from FDDs, in reality
FDDs give banks very little useful and
actionable credit risk information. And
forget about asking a bank to validate
anything by calling your franchisees unless you want to give them a good laugh.
Banks need a type and quality of
information that addresses their credit
risk decision-making questions. We’re
seeing the power of this today with Bank
Credit Reports (BCRs), a specialized form
of benchmarking designed specifically
for banks. While BCRs compare brands
within franchising, their real power is
that they provide a level of credit risk
information for banks that allows them
to determine the likelihood they will get
repaid; make portfolio commitments to
specific borrowers, brands, and sectors;
and develop term sheets appropriate for
the risk profile that such information
suggests. The result will be more capital
for franchising. In the process, banks are
disproportionately shifting the amount
of capital away from independent businesses (where they struggle to have any
predictive credit risk ability) and toward
franchising (which has a lot of credit risk
predictability).
Doesn’t the same kind of common
sense hold true for prospective franchisees? It certainly does for multi-unit
operators, who have the knowledge and
sophistication to understand the implications of such information. So why do
we stay mired in old thinking?
That brings me back to what I think
really is going on with lead sources today. Brands that have good performance
are finding ways of communicating that
performance to prospective franchisees,
regardless of the lead generation vehicle.
There are only three requirements: (1)
have good performance; (2) find common sense ways to communicate that
performance; and (3) when doing so,
stay within the good graces of your
franchise counsel and the intent of the
FTC Rule. n
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Darrell Johnson is president and CEO of
FRANdata, an independent research company supplying information an B