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20 Tips to Avoid Buying a ‘Zombie’ Franchise

by Ronaldo Derric
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Opinion holder entrepreneur Contributors are their own.

There’s a “zombie franchise” out there. What is the zombie franchise? It’s stalled, but it’s pitching franchise opportunities as if nothing was wrong. Previously loyal customers are being siphoned off by more innovative concepts. The underlying demographics may have changed. Market trends may be working against the brand, but management isn’t forging a new path. Unit level economics are weakening. Management inertia and denial can exacerbate brand problems.

The zombie franchise system is usually full of franchisees who are willing to exit if they can! Poor unit-level economics and undercurrent franchisee dissatisfaction scare buyers, resulting in lower resale volumes. Expansion-minded franchisees look outside the brand.

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don’t get locked up

A new franchisee who misses the signal eventually realizes his mistake. They may find the disclosure insufficient or misleading. They often look back on conversations with franchisees and wonder why they didn’t hear negative feedback. Hmm. Or maybe the company is really out of touch and unaware there is a problem! All of this destroys the franchisee’s trust and usually the relationship.

Zombie System franchisees typically receive personal guarantees, land leases, equipment or vehicle leases, Small Business Administration (SBA) loans, loans to homes, loans to investments, or 401(k) or 401(k) or family or friend loans. loan to. Long-suffering franchisees can’t hire enough help because they don’t have the money, can’t sell the business, and can’t close it. They are basically indentured servants.

Often these brands spend a lot of money on branding and advertising to try to convince potential franchisees that it is still worth investing in. They try to reinvigorate franchise unit sales. but does not attempt to revitalize the underlying business.

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20 signs of a zombie franchise

You’re too smart to be pulled into a weak franchise concept. Here’s a quick checklist to keep you on track with your due diligence and avoiding the zombie franchise. PE excludes brands with these attributes if you are a founder wishing to sell to his private equity. However, unless they’re a refurbish-focused investor, fixing these issues will be on your to-do list.

  1. Lack of unit growth especially by existing franchisees. Talk to as many franchisees as possible. If you have free territories but don’t want to expand, we recommend going ahead.

  2. Low unit-level profitability

  3. Unfulfilled Development Contracts. Franchisees would rather lose their deposit than run and open the unit they were promised. Item 20 of the Franchise Disclosure Document lists franchisees and development contract holders. Connect with those franchises.

  4. The parent company is overly dependent on franchise sales. See how much income is associated with franchise fees compared to regular royalty income.

  5. Corporate parent companies are paying more attention to their supply chains and rebates to generate revenue. Vague disclosures about rebates to franchisees and supply chain costs should also prompt other concepts to move on.

  6. A bloated not-for-sale (SNO) funnel or SNO number that quietly adjusts from year to year due to a weak start to the unit. Google’s press releases and industry articles from the previous year. Management boasted that he had “400 units sold” five years ago, but only 50 units were open and the rest are still on the item 20 unsold list?red flag.

  7. An increase in underperforming franchises. Again, it’s worth tracking down older disclosures to compare unit-level performance over several years. How resilient is the concept? Is the trend positive?

  8. The franchise will stop publishing earnings displays for Item 19 when Item 19 was regularly included in previous disclosures.

  9. Increase in franchisee lawsuits

  10. Franchisees wishing to sell before the expiration of their initial license agreement.

  11. After considering resale options, prospective franchisees drop out.

  12. Franchisee frustration spills over to Internet sites dedicated to publishing stories from unhappy franchisees.

  13. During verification, we found that the franchisee did not follow the system. They developed a “hack” to improve profitability.

  14. Inadequate franchisee verification, inadequate franchisee investigation, or other indications that the franchisee-franchisor relationship is not working.

  15. Shrinking the Candidate Funnel

  16. declining customer interest; declining market share;

  17. Corporate team turnover, especially for field support (they are the staff who work most closely with potentially unhappy franchisees). Do franchisees provide positive assessments of management performance?

  18. There are danger signs, but management seems in denial? Complacency? Is it because of the franchisee? Has anyone on the corporate team ever quit to become a franchisee? Why not?

  19. Is there evidence of continued investment in innovation to keep the brand relevant? Do franchisees say this is a problem area?

  20. Relatively high Small Business Administration (SBA) loan deductions. These are indicators of lag over time, but they are certainly troubling signals.

RELATED: What You Really Need to Look for When Considering a Franchise

Working on the list above? You bet! You are obligated to conduct thorough due diligence. The list above will save you time, money, and headaches. If your signal is weak, don’t waste your time. just move on. There are plenty of strong, healthy, and proven franchise options out there. Be picky and save your time and money. Only the most valuable concepts deserve your attention and commitment.

What if you’re a franchisor and you notice troubling signs of your own brand on this list? Improving unit-level economics and rebuilding trust and strong communication with franchisees Let’s start with These are the two areas of greatest impact for any franchise.

Interested in eventually selling your franchise business to private equity? Staying out of trouble is paramount. A little trouble can have a big impact on the terms of a deal, the valuation of your business, and even which investors take a serious interest in your brand. the bar is raised to Remember that most PE investors in franchises want a growth story, not a turnaround project. Are you building a valuable reputation?

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