My Feelings on Franchise Businesses

You are probably reading this blog because you have read my book Business Websites That Convert, and you want to see what I have to say about franchise businesses.

My Personal Experience

By now you probably realize that I do not like, nor do I advocate the franchise model, especially for service businesses. I wasn’t joking about what I have said. I did learn all the bad things that can happen in a franchise business the hard way.

I have had an existing service based company since 2001. I had been approached by several companies over the years asking me to consider being part of their “team.” I use that word in quotations for a reason.

In 2007, I was approached by a franchisor that had been around since 1995. They talked nice, and had all of the verbose flyers and franchise testimonials. Their system at the time would have me as an area developer  and my employees would become franchisees.

I found out later that the FTC frequently cracks down on these systems because they turn employees into glorified subcontractors in an effort to avoid payroll taxes. Each level as it goes down passes more liability onto the lowest level until the bottom ranked franchisees end up working for less than minimum wage. This is possible because they are paid with a 1099 instead of a W2.

They had made an offer that I initially rejected. The franchisor asked what would it take to get me “onboard.” I gave some conditions, not even sure if they would respond back.

They offered what looked like a generous compromise. I was getting tired of certain mundane tasks in my own business that were becoming tiresome. I did accept their offer.

Then the Troubles Started:

At first the struggle wasn’t that much different than being a solopreneur. I had decent years in 2008 and 2009. I had my best year ever in 2010, only to have it come crashing down in 2011.

The franchisor sent out new contracts to me and my franchisees asking us to sign them and send them back. The contracts stated that we would waive our initial fee structure in favor of an increased fee structure. They raised the fees 2.5%. This doesn’t sound like much, but in the grand scheme of business, every percentage point counts.

 

money
scales

Let me give you an example: the franchisees have to pay for their own gas to drive their cars to the job sites. If the price of gas goes down, let’s say gas drops 50 cents a gallon. Should I start charging the franchisees more to offset more of my costs? Absolutely not! This is the same thing they were asking me to do.

When I asked the powers that be why the rates were being raised, they answered “This isn’t costing any more money. It’s an even exchange.” What? That wasn’t the question I asked.

So, I asked the question again. The powers that be refused to answer and then babbled on about how this wasn’t costing any more money upfront, and they didn’t understand why I was being difficult.

I wasn’t so much being difficult as I was being honest. Yes, I have been known to be difficult (not much… stop laughing), but this was just plain dishonest. In the end, the franchise corporate left my rate and my remaining franchisees’ rates the same.

The main lesson about franchise businesses is this: Do not let anyone else have control over your business.

If you feel that you do not have the knowledge to start your own company, get the knowledge you need. The reason why so many businesses fail is because of not planning everything out.

There's Two Facets of the Franchise Business:

  1. You have a successful business and you want to franchise it to expand using other people’s money (In this case the franchisees). Let’s say you have a successful landscaping business. You have developed a business model that is profitable and it’s working for you. There are business books that talk of turning your own business model or brand into a franchise business.

I would emphatically encourage you not to go this route. When you franchise your own business model,
you are opening up your business to class action lawsuits and other litigation. There are legal firms
that deal solely with franchise litigation. Their entire practice is built on suing franchise
companies.

2. You have saved your money and you want to start a business. You feel that a franchise business would
shorten the learning curve to making money.

I think I thoroughly explained why this model isn’t a good business above. In almost every instance
that I have researched, you can make far more money without being in a franchise system.

Will it be easy? No. Owning a business is hard work. I can personally attest to this. There is no
shortcut.

Profit Margins in a Business:

If you are a franchise business owner with a single location, your net has to be 25% of your gross revenue. Let me explain- If you have $50,000 a month in revenue, your net profit has to be $12,500 for that month. This is after paying your employees, business overhead, and rent, etc. The net I am talking about in this instance- $12,500 is before you take your salary. Depending on your corporate structure, you might take part of that as your salary, pay some for taxes (depending on your corporate structure), and then put the rest into a business reserve fund.

Don’t confuse this with EBITDA (earnings before interest, taxes, depreciation, and amortization). My 25% figure is based on having taken all of those expenses (except taxes in some cases). You must have healthy margins in a business (any business) if you expect to survive.

When I give some business owners the 25% of the gross figure, they cringe. This is because they realize that there is no way to realistically make enough to cover their own living expenses. If your franchise business is only generating $10,000 in volume a month, there is no way you can live off the 25% (in this case that would be $2,500 a month!)

Depending on which type of business franchise you are looking at and the industry it serves, the numbers may be quite different, but for a single franchise location business the magic number is 25%.

Learn From My Mistakes:

Unfortunately, I have learned the profit margin requirement for franchises the hard way. Learn from my pain on this. Do not be fooled by professional looking UFOC’s (Universal Franchise Offering Circulars- these are required by the Federal Trade Commission to sell a franchise), flowery marketing done by the franchisor companies, and anything else franchisor companies use to try to sway you to their way of thinking.

Some Things Franchisor Companies Say:

This is a business in a box. A “ready made” business plan.

This is the biggest crock. Business plans are less than a dime a dozen. You can have them produced for free online. You basically put the numbers in and they run a spreadsheet and give you totals.

 We have reduced the risk of going into business.

Reduced the risk for whom? The corporate franchise office is only interested in limiting their own risk. They will not expose themselves to risk just to help you and your business.

Franchise businesses have a greater chance of success.

Compared to what? Statistics can always be skewed to say what you want them to say. In some instances they may have a slightly longer lifespan, but look at the profit margins.

This is the “hot new franchise.”

If I had a dollar for every time I heard this, I would have a lot of dollars. If you hear the words “hot new franchise,” run for the hills.

We provide ongoing training and support.

In some instances they actually do, but in my personal experience and also talking with others in the franchisee business system, the training is from people that have never owned their own business. They are employees of the corporation. They say what they are told to say.

Be your own boss and control your destiny.

Not said that much anymore. FTC has cracked down on statements like these. This can very easily be construed as an illegal earnings claim by the FTC. If you are in a franchise system, you have to do it their way.

Why Do People Keep Buying Franchises?

The average person that has never owned his own business or been self-employed, will frequently fall for the pitch that tells them that the franchise system they are looking at eliminates the learning curves in business and they can rely on an already tested and developed system. Go to Google and search for “franchise horror stories.” There is a plethora to read about franchise experiences that have gone wrong.

There are some franchisor companies that start you out on a sliding scale when it comes to management fees and royalties. To try to hook you in they offer a generous percentage at first, but usually within 3 years the fees are so high there is no profit margin. This must be disclosed in their UFOC or FDD (Franchise Disclosure Document). The typical UFOC and FDD are usually well over 100 pages long. They must include income disclosures, current franchisees, and former franchisees, and a heap of other data.

If you are even considering a franchise, have a lawyer or accountant- or, preferably both read the UFOC and FDD to make sure there are no surprises. Many franchises today are not sustainable from the get go. People pour their life savings into owning their own business, and end up either broke or bankrupt in the end. Franchises can very often be dream destroyers.

Another Problem:

The Problem with Websites for Franchise Businesses

It probably seems like I’m beating a dead horse here, but when you have a franchise business, even websites become a problem. A really big problem.

Franchise owners are severely limited when it comes to websites:

  1. More often than not, you have to use the same website that every other franchisee in that company uses. (See Chapter 6) If the people in the franchisor company that oversees websites has no artistic sense, uses outdated web designs, poor layout, then you have no recourse to have any changes made.
  2. If they do happen to let you have your own website, they can limit everything you put on it relating to “their” company (trademarked name, logos, images, slogans, etc.)
  3. You are restricted as to what content you post about the parent company. Corporate has to approve everything.
  4. You cannot run any backlinks to your/their
  5. Your social media presence is also restricted.
  6. If their website sucks (and many of them do), you can’t do anything about it. You are stuck with it.

My Final Thoughts:

In three words- Don’t do it. Don’t buy a franchise business. The odds are greatly stacked against you. In any business the odds are not great for you, but why shoot yourself in the foot before you even get started?

Do not try to make your existing business a franchise system business. Yes, corporate franchise companies make a lot of money from the labor of their franchisees. But, at what cost? The increased exposure to legal liabilities? And, if they are honest with themselves, the moral dilemma of selling a business plan that is not profitable.

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