excerpted from "OPPORTUNITY KNOCKS"

(The Truth About Canada's Franchise Industry)

Published by Prentice Hall Canada
1995

Ben De Castro is charging through his standard lecture on franchising in Canada in the sluggish 1990s. "Franchisors," he says, "have learned that it is better to have a conservative and rational growth strategy with a vision of long-term growth rather than short-term gain." As the Royal Bank's chief franchise lender, De Castro is one of a handful of bankers who, during the easy-money 1980s, lent millions of dollars to franchisees, with much of that credit backed by a potent combination of franchisor letters of comfort and bountiful federal loan guarantees.

De Castro has detected a sea-change out there. It showed up on a bank survey done in 1993, But that's ancient history. After dealing with franchisors for 15 years, and it surfaces in private discussions. "When you ask [franchise entrepreneurs] what they would have done differently, they all say they would pick their franchisees much more carefully."

To illustrate this point, the garrulous De Castro - who sees himself as an entrepreneurial spirit unsuited to the "conformity" required of a franchisee - grabs a chart setting out the Royal Bank's franchise lending slogan alongside a diagram of a balance and a fulcrum. Therein lies the parable: "It is clear to us," he says with a stern look, "that you have to have a slow and conservative posture in how you grow in the early years."

Which is why De Castro has become such a big fan of a Toronto consulting firm called Dynamic Performance Systems, whose stock in trade is something called "psychographic testing" for franchisees.

For $185, Dynamic Performance Systems provides a franchisor with a "delux" "franchisee potential profile." A prospect must fill out a series of questionnaires. The Dynamic system then determines whether a candidate fits into a mature chain or a new one, and whether the person is - in the argot of the trade-an "employee" (too passive), an "entrepreneur" (too aggressive) or an "intrapreneur" (just right). Using its own statistical methods, Dynamic scores candidates on a range of criteria including "the achievement potential scale" (i.e., motivation), "the enterprising potential scale" (which "predicts the degree of focusing of personal effort" to develop various personal and time management skills), the "uncertainty coefficient" (a measure of "social desirability") and even "the relaxed score" (to tell franchisors whether "the person will be a soft closer, a hard closer, or a probable no closer"). Dynamic's "mission statement" - which the company includes in its sales kit along with some customer testimonials and sample studies - is "to create a world class organisation devoted to helping ensure the success of individuals in the franchise community around the world through the use of validated behavioural assessment instruments." In recent years, two of Dynamic's clients were voted Canadian Franchisor of the Year. It's no wonder Ben De Castro is so impressed.

Behind the sales glitz and the statistical jargon, Dynamic is Fred Berni, a good-natured bear of a man who operates out of an unremarkable office in a suburban Toronto office park. He was something of a jack-of-all-trades before he stumbled across the science of psychographic testing. "I'd done anything and everything," he says with a self-effacing smile. He had never held a job for more than six months. "I was too entrepreneurial to ever work for anybody." Like De Castro, he doesn't think he'd have the patience to be a franchisee. Berni eventually found a job with an executive search firm, where he first became exposed to the art of profiling. And so, in 1985, he opened his own profiling shop, which helped companies recruit sales people. Over the years, Berni’s firm picked up some franchisor clients, and he learned what established chains like Midas look for in prospective owners. "After four and a half years of research," he says with perhaps a hint of overstatement, "we came out with a franchisee profiling tool."

Today, a range of franchisors send their recruits to take Berni’s tests. In most cases, the chain has already made up its mind about the candidate, but the profiling, he says, helps the company determine where that person fits in the system and how they should be trained. After six years, his clients span the franchise spectrum from small chains to "monster organisations," and, apart from a dry spell in 1992, business is brisk, Berni says.

The very fact of Dynamic's existence says something about the state of franchising in Canada in 1995. Consultants have never played a huge role in Canadian franchising, an industry rife with do-it-yourselfers. For a few years in the 1980s, some of the big accounting/consulting houses opened franchise boutiques, with anaemic results. Apart from the franchise marketing firms, a handful of management consultants and the lawyers and accountants who specialise, franchising has not spawned much of a service sector of its own. Still, Dynamic has established itself for the simple reason that there is now a demand for a little prudence, which is more or less what Fred Berni sells, for $185 a pop.

Berni, in fact, says he can detect the difference between the cautious and not-so-cautious franchisor just by looking at his own client list. On certain sales calls, he recounts, "some [franchisors] would say [of the franchisees], `If they can fog a mirror, they're in,' and those are their exact words." Needless to say, such operators don't care much for what Berni's selling. "The franchisor who takes a lot of immigrants on, the ones who don't speak English too well, I don't deal with. They obviously feel there's nothing the profiles can tell them." On the other hand, he feels some chains are becoming "more savvy" than they used to be, despite the burgeoning supply of prospective franchisees. "I think the franchisors are getting more sophisticated as time goes on."

Are they? Comments like Berni’s not only underscore the franchise industry's growing sense of its own weaknesses, but also point to the paradox at the heart of franchising: Chains founded and built by entrepreneurs grow by seeking out compliant, non- entrepreneurial investors who put up thousands of dollars of their own money and are then expected to follow along obediently.

Because of the eager demand for franchises, many chains are unable or unwilling to resist the temptation to oversell and oversaturate small markets-despite ample evidence that such a strategy is almost sure to fail in the long run. As Berni observes, some companies are learning to navigate between the poles of reckless growth and excessive caution. But, as he adds, most of his clients are established players.