Franchise lessons from the Dragon’s Den

I recently watched a repeat of the entrepreneur reality television show Dragon’s Den, in which existing or wannabe business operators pitch to wealthy and experienced investors for start-up or expansion capital.

Aside from the shock entertainment value of seeing the investors dismember the ill-prepared and ill-conceived pitches of some budding entrepreneurs, much can be learned from this show by both current and aspiring franchisees and franchisors alike.

Here are five franchise lessons from the show:

1. Preparation is everything

Entrepreneurs who consistently get shot down in the Dragon’s Den are underprepared. They have done little, if any real market research, no financial analysis of their future prospects, and generally have a “trust-me” attitude which does not fly with experienced investors who receive pitches on an almost daily basis outside their involvement with the TV show.

For potential franchisees, this means preparing a business plan based on real knowledge of the business they propose to operate by rigorously testing every piece of information provided by the franchisor and other franchisees, particularly those in relation to financial performance.

For aspiring franchisors, preparation starts with demonstrating adequate proof of concept. Dragons (i.e. the investors) in the episode I watched were critical of several businesses presented to them by asking, “Is this a fad or a trend?”

Start-up franchisors who fail often do so as a result of franchising something that was not sufficiently prepared in the first place, or which was not sufficiently proven to be an enduring business.

2. Investors buy part of a business, and all of you

Repeatedly the Dragon’s Den investors would question entrepreneurs about their background, experience and qualifications in the type of business which they are pitching. While the questions are designed to reveal more about the business offer, they are equally designed to reveal the character of the person seeking the investment.

Many pitches which at first appeared to represent good investment opportunities crumbled under the Dragons’ questions, revealing a lack of confidence in the business operator themselves.

The same applies in franchising. If a franchisee cannot have confidence in the strength of character of the franchisor and the franchisor leadership team (and likewise the franchisor have confidence in the character of the franchisee), then, however financially attractive the investment may at first appear, it is likely to fall apart as relationships sour.

3. The business must have a significant point of difference

Many entrepreneurs fail in the Dragon’s Den because their pitch is for another “me-too” business which essentially replicates other businesses already in existence without a major and identifiable point of difference.

The need for a point of difference is essential for any potential franchisor seeking to distinguish themselves from the 1,000-plus other franchise offers already operating in Australia.

The point of difference must also be tangible, and preferably quantifiable too, so that even a complete stranger to the business can easily spot the difference from its nearest rivals.

This is critical for potential franchisors in establishing their concept, and for franchisees, can help provide long-term competitive advantage.

4. Seek proper advice, then act on it

Entrepreneurs pitching in the Dragon’s Den don’t know good advice when they hear it.

Experienced business investors who are looking to invest their own money will soon spot holes in the pitch, and often provide insightful feedback to address the problems (even if sometimes the feedback is a brutally honest assessment that the aspiring entrepreneur is totally unsuited for business altogether and should return to their day job).

Likewise, aspiring franchisors and franchisees become fixated on their own sense of reality to the exclusion of just about everything else. That is not to say that a single-minded approach and strength of purpose is wrong, but that the point of seeking advice is to find rather than ignore opportunities to improve.

For potential franchisors, this is relevant in the start-up stage, and indeed, throughout their business life. The same applies to potential franchisees, who more often than not become emotionally wed to the idea of being their own boss, and then fail to seek (or listen to) advice that can help better prepare them to proceed or avoid the investment.

5. Be prepared to walk away

There are many children’s fairy tales that revolve around the concept of exploring and discarding possibilities until the best course of action can be found (think of Alice in Wonderland’s chasing rabbits down holes, or the princess who kisses frogs in search of her prince).

Businesses are the same. Sometimes it is better to explore the idea, and then make a decision to walk away, rather than bloodymindedly marrying the frog and hope that one day it will eventually turn into a prince (while sending you broke in the meantime).

The Dragon’s Den provides this lesson time and again to entrepreneurs. In military terms, this is known as a strategic retreat, yet so many people on the show and in real life fail to recognise that conceding defeat on a bad idea now will preserve their resources for a much better opportunity at a later stage.

While Australian television networks currently serve up endless reality TV shows about cooking, weight-loss, celebrity lifestyles or other such contrived dramas, anyone thinking of becoming a franchisee or franchisor can learn much from watching old episodes of the Dragon’s Den.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level. He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.