Noble Romans: A Lesson in the Importance of Research

A good executive knows when to take the blame: when his or her management or lack thereof causes a serious problem. Bad executives like to find scapegoats. That is exactly what Paul Mobley of Noble Roman’s (NROM.OB) did in an article with Daniel Lee of the Indianapolis Star (Also see the reader comments on the article). In describing the company’s expansion troubles, he placed blame for failed franchises fully on the franchisees, claiming that “Some of the franchises we sold didn’t have very much business or being-your-own-boss experience.” His comments make it seem like he was surprised.

He should not be surprised: what does he expect when Noble Roman’s has such low requirements for franchisees? People who probably shouldn’t be franchisees (or who would need lots of help and training to succeed) choose Noble Roman’s over other franchisers solely because its fees are lower. Noble Roman’s then fails to provide proper support and training and the franchisees fail.

With about 1,000 franchisees, one would think that Noble Roman’s has some idea how to select and train franchisees. It is incredibly easy to select only experienced and well-financed franchisees. But Noble Roman’s executives do not appear to care about the success of their franchisees, or even about the ultimate success of the company. All they seem to care about is “growing” as quickly as possible, even if most of the company’s growth is not real (over the last year, 90 Noble Roman’s franchisees opened, but 38 franchisees closed). (Noble Roman’s franchise closure rate of about 3.7% is fully one percentage point higher than the industry average (pdf file) of 2.7%.) And, if Noble Roman’s were to be more selective and were to take the time to train its franchisees, it would not be quite so exciting as a “growth” company.

To anyone who has looked at the company’s financial statements and seen how 24% of the company’s royalties are from one-time initial franchise or area developer fees, it is obvious that Noble Roman’s is not a growth company (number from the most recent 10Q). Potential franchisees would do well to keep this in mind, and avoid companies like Noble Roman’s whose sole selling point is its low franchise fees and requirements.

Disclosure: I am short NROM.OB.