Franchising Is Not for Everyone

Franchising has strong benefits and strengths that have helped it contribute over $1.5 trillion to the economy.  However franchising also has drawbacks that each person considering it should understand and internalize to ensure that franchising is right for them.  The drawbacks are generally three: lack of independence, inflexibility and the risk associated with the franchisor's performance.

Lack of Independence

A categorical strength of franchising is the detail and rigor in which every aspect of the business model is defined, refined and inspected for compliance.  If you're a true entrepreneur that needs to chart their own course and make all the decisions, this may be incompatible for you.  If you're unable to exercise your needed degree of freedom, that will negatively impact your quality of professional life.

Most franchise systems have very little creative license built in.  Some relatively new franchises rely on their early franchisees to provide creative direction and solutions as they refine their systems.  If you're more independently minded, you may find a compatible home there.  Otherwise, almost every aspect of operating the business is laid down in the manuals.

Most franchisees value the training and field support provided by the franchisor early in their business life.  As time goes on and the franchisee gains more experience, they may look on field staff monitoring visits as an intrusion - it is after all your business.

Another change of attitude occurs during the maturation process.  Royalty and other fees paid by the franchisee are at first necessary and are recognized as fair compensation for values the franchisor provides.  Later, the franchisee questions the value and resents paying on-going fees.

Finally, the national reputation of the franchise is only as good as the local franchisee's performance.  This is most evident whenever the quality of a national food chains food supply is called into question.  Thus any franchisee can harm the reputation of all outlets in the chain.

Inflexibility

Franchising with its refined and tested systems and processes ensure consistency.  However, that rigor can sometimes limit a individual franchisee or franchise system's ability to respond to changing market, consumer or competitive demands.

When considering a franchise concept one must ask yourself, "Will I be excited and motivated in doing this years from now?"  These is truth in the saying, "Do what you love and the money will follow."

Risk Associated with Franchisor's Performance

With over 4,000 franchises available in North America, it is easy to understand that not all franchises are the best run or soundly based companies.  A franchise agreement effectively 'hitches your wagon' to that franchisor's capability and competence.  One may not meet their highest potential soaring with a flock of turkeys.  I'll discuss four types of franchisors: established, new, unethical and incompetent franchisors.

An established franchisor represents the least risky type of franchise opportunity. Their business model and concept will have been fully tested in a number of locations, situations, type of owners and probably a number of consumer cycles.  Because of these factors the initial cost may be relatively high.  However, for someone whom security is important, this type of franchise will be very attractive.

With a new franchise, there is nothing intrinsically wrong with going in this direction; it just carries more risk.  Early in a franchise's development, more effort will go into selling new franchises than into providing support services, cost control may result in some deficiencies in services, and financial resources will be strained.

Another risk with a new franchisor is the possibility of complete failure if they are unable to sell enough franchises to sustain the organization.  In contrast, franchises like this sometimes offer the highest returns.

Finally, with a new franchisor you have greater independence and flexibility. Depending on the risks you are prepared to take, this type of franchise may be attractive, or one to be avoided.

For the unethical franchisor, their objective is to make a quick profit off a trusting prospective franchisee.  They have no intention of entering a long-term support relationship with the franchisee.  These franchisors set-up a shell franchise with no foundation and sell to prospective franchisees who fail to perform adequate due diligence or validation.  The lesson learned here is partner with professionals like a trusted CPA, franchise attorney, and a professional advisor like Franchise North America.

Finally, an incompetent franchisor is not out to defraud someone, they simply are unfit to start and build a successful franchise system.  That may be for any or all of the following reasons:

• The basis business is unsound
• The franchisor is under-resourced
• The franchisor is inept

Careful validation must be done to ensure that the franchisor has tested the business concept through market research, as well as successfully operated (i.e., generated adequate sales and profit) the model in company-owned or pilot operation. 

An incompetent franchisor is unlikely to be able to fund and sustain the business for at least two years before generating a profit from selling franchises.  In addition, training and support materials will typically be insufficient and of poor quality.  Be especially wary of franchises expanding geography aggressively.  You don't want to be a new franchisees thousands of miles away from headquarters unless they've demonstrated the ability to support others as far away.

Remember, it is quite expensive to be an established and ethical franchisor.

Finally, an inept franchisor may be enthusiastic about the concept of franchising but has little understanding of how and why the system works or of the services that will be provided.  Run the other way.  A single successful business does not constitute a franchised concept.

With so many franchises to choose from, it is important that you partner with the right one.  One that will fit your profile or personality, but also with a franchisor team that you can trust and rely upon.