Franchising Can Be A Win-Lose Situation

I know a lot of people who own franchise businesses. Including myself, I probably at least one person who is a franchisee of every leading franchise in the world. That said, I hear a lot of stories about how some franchisors put their franchisees through a bunch of "hell" and others really work with their franchisees. I want to discuss a little bit about how actually being a franchisee of a major brand can be a win for the franchisor and a lose for the franchisee.

First off, let me say that NOT ALL FRANCHISORS are bad to work with. In fact, many are extremely helpful and easy to work with. However, there are some who think that they are the kings and should have all the power to do whatever they want. A lot of my friends are franchisees of one brand, which shall remain nameless, but all of my friends have the same opinion about the franchise; which is that the franchisee is full of "dictators."

A lot of time time franchise corporations "experiment" with new products at the franchisees expense. In fact, franchisors include in their franchisee agreement that they have the right to terminate the franchise if the company promotions are not followed by the franichsee. So basically if a franchisor is launching a new product which requires the franchisee to invest $20,000 into their business for new equipment, they are "forced" to do it, or the franchisor can "threaten" to terminate their franchisee agreement, which results in the franchisee losing their investment. Now, you may ask: "Why wouldn't the franchisee want to invest in something that will make their business better?" The answer to that question is simple; a lot of the times when franchisors come up with new products, they fail. For example, in the quick service restaurant (QSR) industry, equipment costs are extremely high. When a franchisee invests in equipment and a new product fails, they basically get pennies back on every dollar spent on equipment purchases, if that. So it is basically like investing in something that will give no ROI, with depreciating value, like a car. That is just one part of a lose for the franchisee.

The next aspect that some franchisees suffer from is in the marketing and brand building. Every franchisor wants their brand to be thriving and well known throughout their market areas. That said, I will give another example of the QSR industry. How many times in a given month, do you hear about free products being given away at your favorite restaurant? Probably quite frequently. National brands like to do this because it basically creates "buzz" around their brand and gives them a great reputation among consumers. So when a franchisor decides to "give something away," it really doesn't mean much to them, except for profits from every aspect. You may ask how; and the answer is from:

1. Royalties that franchisees have to pay franchisors from sales. (Even though products are being given away, some people are bound to buy more than just what is being given away.)
2. When each store buys product from the franchisor. In most big franchises, the franchisor has some cut with the supplier for every purchase that a franchisee makes. So all the products given away for free, will increase sales that the supplier makes, putting more in the franchisors pocket.
3. And the last benefit is that the brand is going to grow that much stronger. This is because they joke is on the franchisee, having to give away a product, but growing the brand as a whole. Franchisees do not own every location, therefore they are, in a way, donating and building "someone elses" brand.

Notice I didn't say that franchisees benefit from promotions and product giveaway's. Which is because they don't. They don't get a kick-back from the franchisor of the product given away, no break on royalties, and they still have their operating costs at the end of the day. Think about it this way- if you were to buy a pack of gum and give it away to someone, with no charge; you lose money, the person you give the gum to is happy, and you just helped spread and grow the brand who makes the gum.

The last thing I want to mention about franchising, is in terms of local marketing. I know people who have tried to market their franchised brand in their local area, when the franchisor stepped in and said, "You can't market the brand, only we can do that because we don't want you to mess up our brand image." In my opinion, that is totally ignorant. If a franchisee wanted to mess up a brand, they could do it in so many other ways. You literally have to get every marketing campaign approved and the last say is with the franchisor.

All of the situations above might drive people away from becoming a franchisee, which is NOT what it is meant to do. It is just stating the facts of real situations that have occurred in the past with franchisees and still occur as on-going issues. There are many more "lose" situations that franchisees face, some are extremely bizarre, which I will save for another day, but you just have to be careful before you sign the dotted line and hand over that hefty check- in rush of becoming a franchisee of that huge nationwide brand.