Six Reasons Why Franchises Suck
August 16, 2007
It’s not that I’ve got it in for franchises. It’s just irritates the hell out of me that most websites on the Internet are pro franchising for the simple reason that they make bucket loads of cash out of franchise advertising.
The ones who run forums are the worst. I’ve often seen them delete negative posts about franchising, and they always seem to leap to some crumby franchisors defence. But - I’m willing to bet that not one single one of them have ever been a franchisee. The good news is, I have, and I’m only to happy to balance the scales by giving you the lowdown on franchising. So, if you’re considering throwing your hard earned savings into a franchise, consider these reasons why franchises suck:
1) You have to pay the franchisor, even if you don’t make a profit. That’s right - you pay the franchisor a percentage of your turnover. As they’re getting their money anyway - there’s not much incentive for them to ensure that you make a profit.
2) The people running the franchise are rarely experienced business owners, so how can they possibly train you to be one? Think about it, even if the franchisor was once a successful business owner - the people running his franchise for him have probably never owned a business in their lives, and are never likely to be. If you were a successful business owner, would you work for someone else? So the chances are, you’re paying a heap of cash to people who don’t have a clue, to train you to run a successful business.
3) Regardless of what they tell you - you don’t really own anything. Buying into a franchise is more like a lease. Your initial agreement will normally be around 5 years. If the franchisor refuses to renew it - you don’t get your initial investment back.
4) They will tell you, they’re selective about who they recruit as franchisees. The truth is, it’s not that easy to find a suitable person who can also come up with the cash to invest, so more often than not, they’ll take on anyone, regardless of whether they’re the right person for them. Consider this. I was a franchisee with a company who recruited anyone they could get to begin with. Initially - they took on people who wanted to buy themselves a job. Then they decided they wanted people who wanted to grow a big business. After that, they took on a couple of sales people, and they decided they wanted to recruit sales people. Then they realised that sales people don’t always have management experience, so they began to recruit former managers. So, what do you think happened to all the people they’d recruited previously? They squeezed them out, which brings me to point number 5.
5) Just because a franchisor has a low “failure rate” it doesn’t mean they are a good bet. They may not have terminated many agreements, and few of their franchisees are likely to have gone bankrupt, and here’s why. Franchise agreements are set up in such a way that the franchisor literally has the franchisees by the balls. If they don’t like you, for any reason, or you’re not performing as well as they hoped, it is extremely easy for them to squeeze you so you have no choice other than to leave, rather than be terminated - and no, they don’t give you your initial investment back. If you go bankrupt afterwards, it doesn’t matter to them, as it won’t blemish their records.
6) Start up costs are ludicrous. You can expect to pay £30,000 ($60,000), which will often include some overpriced equipment, and training which is mediocre at best. If you set up in business on your own, you could use some of that cash to invest on a proper business training course, then at least you’d have some left over for cashflow.
If you’re considering buying a franchise, think very carefully, and remember all these glossy magazines and websites that promote franchising are doing it for one reason only - they make a lot of money from the industry.
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I must admit, I did think that franchising our business out was something to consider. have yuo read “E-Myth” by Michael Gerber? It’s a good read about turning your business into a franchisable entity - whether you choose to franchise it or not.
I believe in going down this path, but I’ve always had a nagging doubt about franchising it out. When you look at it from the perpsective of the people you sell a franchise area to, it somehow feels wrong.
Maybe the way to go is to simply open the branches yourself and hire in the right people and centrally manage the branches with a little more control over it.
It’s something to ponder.
Hi Ian - Gerber’s book is great. But, whilst everyone needs to systemise their business, it doesn’t mean they should franchise it.
Deciding how to grow a business, especially if you want to expand nationwide is tough though.
a) You could do it without outside investment, but that could take a long time.
b) You could float it on the stockmarket, but a lot of people don’t like doing it that way either, because one minute they have to answer to nobody, and the next they have to justify every little thing they do to the city suits and shareholders.
c) You could franchise it. And many people do choose this option because it seems the easiest, fastest way to grow a business. If it was run ethically - it may turn out ok, so long as the owner was powered by something better than his own greed.
But there is a big downside to being a franchisor too, and this is it. Just one mistake or bad move made by one franchisee could ruin the reputation of the whole network. It’s a scary thought, but you could build a massive business, only to have one idiot ruin it all, through negligence or dishonesty.
Personally, if I could manage it - I would choose option a first. But, if I couldn’t grow my business to the size I wanted, that way, I’d choose b) over c) any day.
I think I have to concur with your A-B-C.
While I love Gerber’s book, I am more attracted to systemising the business and making it franchisable than actually franchising it.
I’ve never been attracted to franchising it for the same reasons.
I do like the idea though of awarding equity to someone managing a branch. But only after they have proved themselves.
Not every employee is as motivated to go that extra mile. I suppose that’s why a franchise is attractive and does seem to work at least occasionally!
Because your neck and personal finance is on the block, I imagine as a franchisee you would be more motivated.
But it still doesn’t appeal to me. It’s attractive because the working capital and indirectly the equity is given away in this way.
But I suspect if you have Acme Liverpool Ltd, Acme Manchester Ltd, Acme Carlisle Ltd etc, you can retain most of the equity and give some away only to those who prove their desire, skills, capability and most importantly attitude/ethics.
But that doesn’t give you the capital necessarily to grow it that way as fast.
I do suspect though that whichever way you cut out, Gerber’s approach should be taken to your business anyway.
You have to turn the business so that you can effectively exit and work “on the business” rather than in it. You therefore have the opportunity to create the additional branches whichever way is right to match your ambition, available capital and time.
If you have “the manual” anyway, that is what’s needed whether it’s just a fuly owned branch with employees or a franchise.
For me, conceding a small percentage of equity of separate limited companies for each region may make sense.
I’ve seen companies in our industry with masses of working capital simply act like the borg and do it by acquisition.
I have no idea though how successful this really is.
I suspect the cultural challenges of integrating and changing the acquired entity must have similar challenges to a franchise approach.
Maybe that doesn;t work either. Anyway, these are pipe dreams as I don’t have the capital to acquire!
Ian - be positive. You will have the capital eventually.
After I’d read Gerber’s book - I still struggled on the how to systemise bit. So I got Brad Sugar’s Instant Systems and it helped. I don’t recommend all his stuff tho. I watched one of his video’s and to be honest, I couldn’t stand the guy, because he bragged about ripping people off when purchasing houses, but the Instant Systems book was helpful.
Luckily we have an absolute genius of a systems person. My better half has her own company (we share the same office) and she does a combination of IT coaching and bespoke systems. She has a programmers who has written a whole business process for us which can be passed easily between people.
They get a pop-up on their screen with their photograph.
It also links into mobile/pdas and the next job is to use if for the engineers to receive their jobs, client addresses, and get signatures captured electronically.
We’re also going to use a web-based fornt end so clients can book jobs directly.
It’s actually part of the reason we have been able to cope with 4 engineers instead of 9 and was an absolute God-send.
Losing the paper-work is such a relief! They would sit in engineer bags, cars and houses and we would have to constantly chase them, and weren’t alway s certain some jobs were complete or not.
Not necessary now, but we can even ad in a module so we can track where the engineers physically are and how long they were there! Useful if we grow again and employ engineers we don’t know.
Like in Gerber’s book, think the system needs to be the main manager, and any management time which used to be spent on stupid paper chases and phone calls chasing engineers can instead be spent on building a team and motivating the inviduals to improve.
For the first time, we’;re even considering some proper structured training and using the knowledge base the system is building to share best practices.
For example, the engineer that takes 15 minutes to configure a wireless router and gets it right first time, will share that knowledge with the engineers who take more than 30 minutes.
Should be really god when it’s finished!
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