Franchise Update Magazine Issue IV, 2015

GROWING YOUR SYSTEM Market trends Getting It Right Online Giving franchisees the information they want BY DARRELL JOHNSON “I f it’s on the Internet, it must be true.” While we chuckle at that, franchisors also know the dark side of the Internet: that there is so much more misinformation than information out there. While it is easy to disregard misinformation for what it is, it is hard to do so when you are protecting the integrity and image of a brand. I’ll describe what I see going on and, by way of example, show a way to take control of online information. First, let’s understand the problem in the context of current events. On the consumer level we use search tools to quickly determine who provides a local product or service. Then we take it further by checking any number of third-party sources for ratings on the quality of the product or service. Is it any wonder the same approach is rapidly being adopted by prospective franchisees, whether considering how much they can make, the likelihood of success with a given brand, franchisor performance relative to franchisees, or the ease of obtaining financing? After all, it’s not just franchisees researching a brand; lenders are, too. This raises two important issues: 1) information accuracy, and 2) information security. While franchisor websites are actively used as a reference tool, prospective franchisees use the behavior patterns formed from their consumer experiences and seek third-party validation. Where do they go? Any number of websites purport to have reliable information on franchising, often from people with an ax to grind. As we all know, there is no independent go-to source for such information that is accurate, objective, and reliable. However, there are plenty of places to get biased information, often under the guise of being reliable. Part of the problem is that we have many websites that don’t rely on infor- 60 mation at all; rather they serve as a rumor or gossip center. While sometimes making interesting reading, their foundation is built on opinion formed around minimal or distorted facts. The problem is exacerbated by having a standard regulatory document (the FDD) that is used by many third-party assessors and prospective franchisees in ways it wasn’t designed to be used. We have spent 25 years evaluating FDDs, gathering additional franchise information, and evaluating all of it. I continue to be surprised at how often someone will take information from an FDD and misinterpret it or use it out of context for whatever point they are trying to make. Creating a solution The solution to the information accuracy issue begins with having commonly accepted definitions for specific terms: success, failure, and area developer are examples. Next comes a consistent way of measuring them. Continuity rate evolved from the need to measure year-over-year stability across brands. The other component of information accuracy is trusting the source of such information. Many websites and a rising number of franchise “experts” are producing information about brands. Are they accurate? Does the expert have a bias? Most do, and we need to find ways of helping prospective franchisees understand this so their reliance on such sources doesn’t lead them to the wrong conclusions. Next comes information security. Here the issue is using information that is not in the public domain for specialized purposes. The whole purpose of the FTC Rule is to help protect prospective franchisees from misinformation. An FDD is provided to a franchisee prospect in a prescribed manner, yet it fails to provide prospects with the infor- mation they really are seeking, starting with the financial results of a franchised unit. Financial information in Item 19 disclosures isn’t mandatory. When used, the rules are mostly about what franchisors cannot disclose, and that’s likely to get worse. The state regulators are considering changes that would prevent franchisors from using company unit information—even when no franchise unit information is available. I think the foundation of a solution is being demonstrated by the Franchise Registry, whose purpose is to help franchisees get funding, which it does by making underwriting information that lenders seek available to them. It does this through four main services: SBA affiliation services, franchise brand information of interest to lenders seeking brands with specific characteristics, Bank Credit Reports, and FUND Reports. Some of the information provided by franchisors is confidential, addressing topics outside the constraints of FDD rules. Some of the information is proprietary from FRANdata. All of it is designed for lenders to help them make better franchise credit decisions. And all of it is secured behind a password-protected website that only lenders can access. Importantly, the site provides real-time information back to franchisors about lending activity with their brand while creating a way for lenders to have direct communications with brands. What c

Franchise Update Magazine Issue IV, 2015 | Page 62