What you should know BEFORE you buy a franchise
By John Counsel
Franchising is one of the fastest growing sectors of the Australian (and global) business scene. It’s also one of the most troubled. In 1993 alone, according to respected industry sources, almost half of all franchise companies in Australia quit franchising — or went out of business. And these were franchisors, not franchisees! (Franchisees went out of business in record numbers, too.)
In recent years, franchisees have found it necessary to organise nationally to protect themselves from unscrupulous franchisors and unethical business practices, and the federal government has threatened to step in and regulate the industry if it doesn’t put its house in order.
A franchise can be an effective solution… or a total disaster. Like any business, it’s ultimately a question of motives — why you decided to buy a franchise in the first place (and whether you’ll be a franchisee or a franchisor).
What franchising really offers
When you cut through all the hype and emotional appeal, what a franchise really offers is a way to counter the three biggest killers of small business:
1. Lack of business know-how
Most people in small business simply don’t know how to run a business — and won’t admit it. A franchise offers a proven* system of successful business know-how.
2. Insufficient start-up capital
The initial cost of the franchise includes the amount the franchisor knows, from experience*, will be needed to do the job properly.
3. Inadequate cashflow
The franchise system is geared to create* cashflow and optimise* profits through national advertising*, purchasing*, administration*, etc.
Done properly, a franchise system offers as high as a 90% plus chance of survival — the exact opposite of the survival rate of small business generally.
In the past, franchising has helped reduce the small business failure rate, but its own survival rate has declined dramatically in recent years, due primarily to the “cowboys” who’ve sprung with less-than-ethical deals to exploit nervous, naive people who see franchising as the heaven-sent answer to their fears about security.
Their victims tend to be former bureaucrats (from both public and private organisations) who’ve been retrenched or taken early retirement and realise that small business is their only real option. But they’re fearful of the well-publicised failure rate of small business, so they rush headlong into deals that sound great, but with insufficient knowledge or skill to distinguish between the good, the bad and the downright ugly! So lack of business know-how still sinks them… like most other small business owners.
What they don’t realise is that, while franchising offers a way to counter the three biggest killers of small business, it offers no guarantee of prosperity — or even survival. The concern is, always, whether the franchisor is ethical, and whether the figures supporting his claims are legitimate. Too many aren’t! For some franchisors, the main source of ongoing profit is to regularly terminate and resell existing franchises.
“Buy yourself a JOB!??”
Franchise companies often advertise using the catchcry “Buy yourself a job!”
They’re absolutely right. Just as a job means relinquishing your freedom to make your own decisions, so do most franchise systems. Few franchisees are comfortable with the restrictions an effective franchise system demands in order to ensure its success.
The truth tends to be that, just like a job, buying a franchise means exchanging your personal freedom for the illusion of security. And it’s only ever an illusion. Your REAL choice is limited to either staying in or getting out.
Results… not just activity!
Free enterprise rewards only results — never mere activity. And in business there’s only one result… profit. It doesn’t matter how busy you are in your business, if you’re not being productive andprofitable, you’re going out backward.
In any bureaucracy the tendency is to discourage (or even penalise) results and reward activity. People moving from this kind of culture into free enterprise are often unaware of this crucial difference when they “buy themselves another job” — something they’d never contemplate in conventional employment.
No matter how good a particular franchise system may be, when you sign the franchise agreement and hand over your money, you effectively take on a new boss who calls the shots and pulls the strings while you put your money (and family assets) on the line. You’re really just a branch manager of the franchisor’s organisation who takes all the risks in order to build the franchisor’s security.
Your freedom is usually limited to a single choice — stay in, or get out.
Is it any wonder that so many franchisees want out within the first couple of years? If you doubt this, talk to lots of franchisees. You’ll be surprised how many feel trapped and frustrated, but are unwilling to leave for fear of losing everything they’ve invested.
Even more revealing, talk to ex-franchisees about their experiences. Horror stories abound about kick-backs to franchisors from suppliers (over whom you have no choice – you’re simply told who’ll supply you and at what prices), inability to extract proceeds of sales from franchisors, misrepresentation of facts and figures, arbitrary extensions of trading hours and conditions and lots, lots more.
The only proven low-cost solution to Killer No. 1 (and, as a direct result, No. 2 and No. 3) is effective training in the areas that really count… those that reduce time and effort and increase profit.
The problem is that most available small business training is about accounting, law, computing and other administration and compliance aspects of business. All necessary, of course, but none of them able to actually produce profit. Instead, they teach you how to process, polish and protect any profit you may be lucky enough to make.
It all comes down to motives
Are you considering buying a franchise because you’re motivated by fear? In other words, is security the main criterion on which your choice will be based
If so, beware!
Fear is the worst possible motive for going into business, because it’s not a motive at all. It’s pure emotion. Fear stops you doing things. It prevents you making rational, objective, unemotional business decisions.
Fear is nothing more than absence of personal control.
The craving for security (avoiding risk and the fear it creates) is what makes people flee into employment, not free enterprise. Remember… an entrepreneur is a person who takes risks and accepts the consequences, good or bad (see “Danger… Sloppy Definitions!” and The Essentials of Free Enterprise).
Unquestionably, risk should be minimised in every reasonable, intelligent way possible. But there’s no way to eliminate risk from small business entirely, for the simple reason that business is always about emotional, irrational, unpredictable people.
Don’t lose the plot. Don’t run so fast and hard from what you think are the risks in small business that you run straight into the waiting arms of a franchisor who may, in reality, represent an even bigger risk once the deal is done.
Most people are driven by fear of loss – either losing what they already have, or missing out on something they think they want. They’re so busy looking over their shoulders as they flee from what frightens them that they fail to see clearly what’s lying in wait ahead. Apply the Bow and Arrow Principle. Pull back and get all the relevant facts before you make your decision. Don’t lose sight of the fact that “Ready. . . Fire. . . AIM!” still requires you to be prepared as the first step, not the second or third. (See “The Rocket Principle”.)
Above all, be absolutely certain that you’re not buying a very expensive Barker’s Egg.
Too often, franchisees discover, too late, that the figures and projections they got from the franchisor never allowed the FACTS to get in the way of a good story with strong emotional appeal.
Emotion is never an effective substitute for objectivity.
Dig deeper! And examine your own motives carefully. (As carefully, in fact, as you should have a good lawyer scrutinise any franchise agreement.)
Here’s a final, sobering thought
If the real reason we go into business is to minimise our time and effort and maximise our income, who do you think achieves this most successfully in franchising?
Is it the franchisee?
Or is it the franchisor?