Franchise Rage: Keeping it too simple

I get to meet with Texas business owners trying to decide if they should grow or sell their business. The answer generally lies in knowing how to value the business and deciding if that's sufficient for future plans or not.

If growth through franchising appears to be attractive, we then get to work preparing the business for it. This involves defining and documenting their proven and successful business model. We also represent the most successful franchise operations, so in time we are able to bring qualified operators to the business and the operation grows territory by territory.

It would seem to be a simple thing, just follow the proven plan and success will be yours. This should be a KISS, Keep It Simple Stupid, approach to making money; however, life proves success is never that simple. The danger in a franchise strategy for growing a company is the potential for an adverse relationship to develop between the  franchisor and the franchisees. Here is how it can happen.

A franchisee's operation is struggling and the franchisor recognizes that they are trying to operate  outside the proven plan. Warnings about this issue are repeatedly given; however, the operating problems persist and eventually the new franchisee begins to attribute the problems to the franchisor's inability to help them. The two sides continue to blame each other creating a vicious cycle of further bad business. What we have is an example of a sound system being destroyed as a result of the fundamental attribute error.

This everyday error occurs whenever we think an action is being caused by the actor instead of the stage. In traffic a car suddenly cuts in front of us. Our reaction is to think that happened because there is a bad (or rude) driver in front, when in fact that driver could be skilled and polite and narrowly averted an accident by quickly changing lanes to clear a road hazard. As long as all the driving incidents are the cause of other bad drivers, better driving skills that anticipate road hazards are never developed. Instead, we develop road rage.

Blaming problems on fundamental personal attributes of either the franchisor or franchisee is not a simple answer, it's a simplistic answer. Oliver Wendell Holmes said "I would not give a fig for the simplicity this side of complexity, but I would give my life for the simplicity on the other side of complexity." It is the difficult responsibility of both sides to go one step deeper into the situation and ask "Why is the proven method being altered?" What if the issue is not personal character but is the situation? It means a willingness to suspend judgment and get deeper into the complexities of the specific situation and how the model applies to it. Only after passing through this complexity it is reasonable to get back to keeping it simple.

In our process of guiding Active Investors into purchasing a new franchise, we have them contact other franchise owners to learn about their experiences. The alert Active Investor is going to ask how they handle difficulties that might make them question the plan. Is there any evidence of franchise rage?

If you are considering franchises, you want a successful system; but you also want a happy family.

Photo credit: star5112

The Fair "Quantum" Value of a Business

Edwin Schrodinger used a famous thought experiment to try and explain part of Quantum theory. The experiment placed a cat (now known as Schrodinger's Cat) in an unobservable place where after some time there was a 50/50 chance the cat would be either dead or alive. Quantum theory considers the cat to be in a state that is both 50% alive and 50% dead until an observer sees the results. At that time, the probability fields collapse and the cat is either alive (although quite annoyed) or has forever passed on.

This finally answers the ancient philosophical question if a tree falls in the woods and no one is around to hear does it make a sound? We now know that the answer is "probably".

The IRS has defined a term Fair Market Value in Revenue Ruling 59-60 as:
"... the amount at which property would change hands between a buyer and a willing seller when the former is not under and compulsion to buy and the later is not under any compulsion to sell, both parties have reasonable knowledge of the relevant facts."

Such a simple definition creates many probabilities. The least useful are a seller's hope of how much it could be worth and a buyer's hope of how little. There are 3 reality-based paths to approaching the problem:
1) Asset Approach - the replacement cost not considering earning power
2) Income Approach - a discounted estimate of future cash flows
3) Market Approach - comparisons of similar businesses which have sold in the past.

Each of these methods have multiple methodologies which all yield different results and all of them have their appropriate application for specific buyer and seller circumstances. It is the job of the evaluator to accurately assess values based on all of them and then create the combination of probabilities that best represent the scenario described in IRS 59-60. They have to value the state of Schrodinger's cat before the observation. It's a professional opinion that needs to be done by a CPA Accredited in Business Valuation (ABV) or a Certified Valuation Analyst (CVA).

A survey by Inc magazine concluded the 75% of privately held businesses listed for sale do not successfully change hands. The culprit is generally the price. The seller has one probably in mind and the buyer another and they cannot agree. A certified Fair Market Value creates a common anchor for both parties to use in coming to an agreement. Having this common anchor creates the quantum Probably Field that almost always leads to agreement and a successful business sale.

What has happened is the intense observations already done during the valuation pre-collapse the quantum probably fields to a region known to be acceptable to the seller and limiting to a buyer. It's interesting how the intricacies of sub-atomic particles mirror the intricacies of complex business transactions, yet it's all the same universe always acting in the same way.


Image Credit: skuds