The Business Of Franching - Leveraging Resources To Provide Durability

Author Richard Solomon is a conflicts and crisis management lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.

There is so much drama in any franchise company that investment value analysis usually must be done by an outside firm not imbued with the effects of its Kool Aid. Almost every franchise company I have encountered over the past 55 years of practice has been a boiling pot of salesmanship with goals focused upon throw weight – how many franchisees does it have? How many franchises did it sell last year?

Most franchise companies are privately held. This means that differential financial analysis is an exercise in forensics. There are sacred cows galore, including such things as “campus” extravagance, employment of family members of the owner, activities that professional management probably wouldn’t consider.

There is also myopia in epidemic proportions. It is a “we can do no wrong” mantra that employees are fed in various attitude control programs. Some of these attitude control programs are mind bending. In one there was the insistence that all middle managers be indoctrinated by a whacko psychological regimen operated by a charlatan acquaintance of the boss. This was back in the day when these bozos would lock everyone in a room and not allow anyone even to go to the bathroom. They would be coerced to crawl around on the floor smelling each other. They would be indoctrinated to engage in dialogue that always assumed all to be right in this most perfect of worlds.

That was a tad extreme, but it was not the only company with drama queen management techniques. To be sure, it failed miserably. Part of its failure was caused by the advance of development in its market with no competent adjustment, and part of it was sheer craziness. In another the deconstruction was caused by the owner’s refusal to keep pace with technology and incoherent insistence upon being designated correct in all thing at all times. Histrionics and absurd theater were frequently occurring events. In one example, he constructed a chicken wire cylindrical cage in the meeting room and had armored cars bring a million dollars in small bills to fill it up. That was a prop in his tirade about “This is how much money you people caused this company not to make last year”.

Neronic management styles abound in the world of privately owned franchise companies. External advice was treated as insulting and rejected immediately.

Doing forensic due diligence on these companies either as a business consulting or legal project or as a matter of defending against attacks of one sort or another is fraught with tantrum behavior and denials of reality regarding many critical aspects of the business. Thirty-five years ago I suggested to a client company that was configured somewhat like this that they had magnificent resources capable of franchising multiple varied franchise concepts. Their business was franchising and they had the resources to operate any franchise company as long as they brought along the critical managers of every franchisor acquisition.

The response was “When I want a goddamn lawyer to tell me how to run my business I will call you”. The company then had over a thousand franchisees. Today it has less than one hundred, has rented out a good deal of its “campus” to some organization and is facing imminent total collapse. What a bloody waste!

In the interim competent franchise companies did make conglomerate business segment acquisitions and thrived because they knew that the business of franchising is to franchise, not to sell widgets. To be sure, some of these conglomerate acquisitions were product extension acquisitions, calling upon operational resources that lay within its own management’s experience. Many others were more decidedly conglomerate in the sense that their business segments were rather different and the acquired company’s key management came along with the acquisition. Where congenial collaborative relationships were established among the management of both companies the prospects for success were greater. Some were the product of bad judgment and didn’t fare well.

All of this raises questions of forward looking analysis of a franchise company’s potentialities and competent forensic due diligence investigations of potential acquirees. I have seen this latter component go bad in franchise and other kinds of companies, large and small, privately and publicly held. Post-closing failure to fit can be avoided in almost every instance absent overt fraud. Why then is acquisition planning and melding so frequently inept?

What I see most often is “social” due diligence and turf jealousy. These two are the most pervasive causes of acquisition failure to thrive. The lessons here are few and inescapable. You can’t escape the march of technology or the maturation stage of a firm’s/product’s life cycle. You can’t overcome realities by being assertive and insisting upon a right to refuse recognition of them. You can’t prolong your firm’s duration by acquiring other sick companies in the same business segment that are also on their way to oblivion.

But you can, as history has demonstrated, diversify and extend the life of your firm. To do that you may well have to yield absolute discretionary control of everything in the company, even though you founded it and it is “your child”. Professionalism in management as well as in the forensic due diligence required to enable positive results from acquisitions is absolutely indispensable if longevity in the goal. It takes intelligence and strength to accept what must be accepted in order to enhance the survivability of your company.

These are beyond dispute in the light of history in franchising. So far very few have been capable of what is needed. But if you really and truly do want your brainchild company to thrive notwithstanding the march of technology and market dynamics, you can start by picking up your phone and calling a competent resource.

You can tell if it’s the right resource by the positivity of the direction in which things begin to move when the right resource has been brought in. Give it time to demonstrate its capability to absorb knowledge of the specifics of what is needed and present a cogent plan of action. The health and strength of the enterprise can make it enduring. Nothing else will work.