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A Franchise's Winning Business Model?
I admit it. I just came back from a franchising event, so, I’m pretty wired.
Let me tell you what happened.
I sat down and ate a beautiful 10-ounce filet mignon with horseradish potatoes and brussel sprouts in a hollandaise cream sauce. Then, I washed that down with about 3 Long Island iced teas.
While I was eating, 5 different franchises were allotted about 10-15 minutes each to present their franchise opportunity. Let’s see, there was a “green” residential cleaning company, a company that monitored the servers and computer hardware of your business, a staffing franchise, a massage therapy business, and perhaps one more insignificant concept that I could not remember… Oh yeah, I remember now… it was a company that offered businesses their own coach.
The grand finale was a woman who shared with the group how she could transfer your existing 401(K) into a c-corporation opportunity in order to prevent you from paying taxes and penalties. This was done by purchasing stock of your own C-Corporation. Can you imagine that? Not only did your franchise fail, but you lost all your retirement savings too? No thanks. Give me a big, bank loan I can default on and let me save my dignity and the little bit of money I did set aside during my working years for when I’m old and gray.
Let’s take a look at franchises and the level of opportunity there is for someone willing to invest $75,000, $150,000, or 250,000 or more into a franchise opportunity.
What Is A Franchise?
A franchise is a right granted to an individual or group to market a company’s goods or services within a certain territory or location. Of the different types of franchises, we will mainly focus on the Business Format Franchise. The franchisees usually pay an initial fee to acquire this right, and thereafter pay a percentage of their gross sales to the franchisor throughout the term of their franchise contract.
Let me tell when you franchises work: when it’s burgers, pizza, haircuts, and auto repair. McDonald’s, Hair Cuttery, Aamco, or Domino’s… these are recognized, branded, household names. From one side of the country to the other, people know who they are and what they do. How many times have we walked into a McDonald’s and thought how cool it would be to make a percentage of all the Big Macs and Quarter Pounders that were being sold? ( I did!)
Today, one out of every 3 dollars spent by Americans for a good or service is spent in a franchise business. You like the sound of that, don’t you? So, by purchasing a franchise, you are tapping into a 1/3 of America’s buying power?
I hope you’re not that foolish to believe those type of statistics on face value. Once you take the major players out of the equation, you have thousands of franchise concepts, most of which you have never heard of! If you’ve never heard of it, what’s the value? NOTHING.
I think what I realized from attending the franchising event last night is that there are a lot of lottery winners, offspring of the wealthy, and middle-aged, spoiled executives without the slightest clue how to run a business. They just have four things you don’t: A lot of time on their hands, a mild curiosity, a thirst to overpower subordinates, and… MONEY! The type who could drop $250K on a dead end franchise and not even blink an eye.
Franchising: Is This A Real Alternative To Opening A Business?
One thing I have discovered about business is that it’s a lonely existence. You are solely responsible for channeling all your experience and education into creating a business by yourself.
A franchise leverages the use of its franchisor’s business practices, to receive initial training and ongoing support to the entrepreneur considering buying into its franchise. The real question is this worth $50,000 – $300,000 in upfront franchising fees and ongoing royalties?
The real answer: HELLO NO! ARE YOU OUT OF YOUR MIND? Can you imagine if I offered my services to new businesses in this same capacity, do you think I could bill them for a quarter of a million dollars for consulting and training? Please!
I got an enormous chuckle when during the franchising dinner, last night, each presenter would allow questions from those that attended and they consisted of: “Who is going to be selling to the businesses in my area? and “Who is going to be training my staff?” (You are, dummy!) The crowd was overwhelmingly terrified at the idea of being self-accountable for generating their own business revenue. Especially when the territories allotted can be a little on the small side… or not even in your geographical area of where you reside!
The bottom line is that starting a business from scratch is hard, but having to start a business down hundreds of thousands of dollars is ridiculous! So what… some representative of the business is providing you a few days of training and offering you a few online links to some interactive training sessions his company provides. Their work is done. Yours has just begun.
And it is work. Yet, most of the franchise presenters argued the merits of owning your own business and having more time to enjoy life. What was even more hysterical was the idea of being your own boss. As long as you have financial responsibility to pay back royalty and advertising/marketing fees to the franchisor… and other business debts to creditors… make no mistake about it, you work for someone else! And since you are starting a business, what extra time will you have to spend with your familiy? Was that a joke? They will NEVER see you now.
My feeling was that many of the people who attended the franchise function were looking to be a passive business owner. If that’s the case, why not just buy an existing business and call it a day?
Where Is The Internal Growth Of These Franchise Companies?
You show me any business model where the growth is based on enfranchisement and not the core business, and I’ll show you a business with some screwed-up priorities. Sadly, whether your franchise is successful or not is of little consequence to the franchisor. His money has already been received and will not be refunded. His only loss is in the ongoing opportunity to receive royalties.
In the meantime, his Franchise Team is flying all over the country working with companies that promote franchise events.
Internally, there is no initiative to broaden territory specifically by training and preparing potential managers for additional locations. Isn’t that how most companies expand into new areas? It’s the corporation who succumbs to all the expansion risk. But, at least there’s a connection. The franchisor is only really investing in the business model, there is no intimate, emotional connection to the business itself.
There must be thousands, if not tens of thousands, of franchise failures every year, yet we don’t hear a lot about it. Why? One reason is probably that many of them have signed a “non-disclosure” agreement, a gag agreement, which prohibits them from saying anything negative about the franchise.
Caveat Emptor.
Want To Own A Real Business?
Want to own a real business without thousands of dollars of upfront franchise fees? Try Aflac.
Otherwise, save your money by finding a business concept with a name of your choosing, and invest in the growth and development of your sales team instead!
