Tuesday, May 12, 2015

Does Franchising "Suck"?

I left you alone for a few weeks - "pesky" clients, franchise registrations, mediations and other work matters have dominated my time (thanks to the franchise gods) ... and nothing was striking my fancy to rant ... uh, blog about until I came across two articles.

The articles: Why Being a Franchise Owner Sucks (The Business CheatSheet) and Does the Franchise Industry Need Reform? (Blue MauMau). So you see I am not responsible for the bawdy title of this blog. Come'on its in quotes!

Both articles draw from surveys and analyses done by FranchiseGrade.com (never heard of them until I saw the articles but I see from their site that they have an impressive advisory board that includes some of my colleagues from the American Bar Association's Forum on Franchising.)

As you may guess from the titles of the articles, some franchise owners are not happy. Here are few excerpts:
  • More than half of franchise owners think that they don’t make a fair profit
  • 91% of those surveyed were in debt, and around 66% operate at a loss or are breaking even
  • The average turnover rate is almost 10% per year
  • 10% of all closures are folks not renewing their franchises
  • FranchiseGrade estimates that over 50% of franchises do not make it full term (this sounds high to me)
  • 2% of all franchise systems account for 55% of all terminations
So who is at fault? Being "The Franchise Contrarian" my answer may surprise you (or not). 

I place fault on the franchise buyers. It is a marketplace people! Franchises are being sold in all manner of businesses, in all shapes and sizes, sometimes by people who just have a concept, not a fully-functioning business! There is no "permit" or "license" to become a franchise-seller, no governmental agency "approving" the success or quality of these businesses, no industry program vouching for the legitimacy or financial stability of franchise concepts. 

Now we do have disclosure requirements and some states have registration schemes. But my observation is that most buyers DO NOT conduct enough due diligence, do not hire experienced franchise counsel, do not grasp what it may take to turn a profit, and think that all franchisors have the pot of gold at the end of the rainbow.

So yes, in this marketplace of franchised businesses, "Buyer Beware" - use the tools that the regulations provide and stop buying under-performing franchises and untested concepts.

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