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.

Small Business For The Win

There's no question that most businesses-small or large- are hurting in this economy, but it seems like many small businesses are able to hold on to that last string while hope stirs for things to turn around. As you may have already heard, Circuit City among other large companies have recently gone bankrupt, and in my opinion, this is only the beginning of large enterprises failing.

I recently spoke to a friend who owns a Toyota dealership, who said that even they are facing trouble despite being the #1 car manufacture in the country. Toyota as a whole reported it was losing money after a long time, but car dealerships seem to be having a real tough time to make profit on each vehicle. My friend said, "We're lucky to see the cars being sold, even for minimum to no profit, just to see inventory flowing through." This goes to show, if odds are against you, despite having an excellent product which is to the highest quality, you are still a business and can be dragged through sand anytime.

Many of my friends have multiple small businesses and say that some locations are not doing as bad as they had expected. I always say, "In good times, big businesses can make a lot, but in bad times they can lose more." From personal experience, having ownership of a large private company, I think that there are pro's and con's to both owning a small business vs. a large business, but chances to salvage a business seems to be higher when the business is small. The reasoning behind small business strength is the fact that most small businesses are able to control costs tightly. In a bigger company there are far too many lose ends to keep track of when there is damage being done from all sides.

Why do large businesses have "lose ends?"

In my opinion, many large businesses don't think small when profits are flowing in. Company expenses go out of the roof because revenues and profitability can sustain the lavish company dinners, corporate vehicles, etc. When the time to control those expenses comes, it brings the company to a barricade, they are unable to control anything, leading to a huge loss.

What is the true winner?

A large business that thinks and acts like a small business. It is quite simple. I run multiple franchise businesses, but what helps me keep everything profitable, even in the current economy, is my ability to think small. I'm saying that as a company grows, expenses should be kept at the same ratio they were when a business was small. I have had ownership in a large private company as well, where profitability was maintained due to the fact that all staff was able to think small yet look at the macro picture when the time was right. Everything should be kept in prospective. In the end, I always try to prepare for the worst, so when it happens, I'm not being drained.


What is your take on small business?

Starting A Franchise With Your Own Brand?

Most of the franchise brands in today's world started out as a single unit brand. Overtime many of these franchises have grown to be the top in their industries. Some also have been sold from one parent corporation to another and a few still make the founders millions. So if you have a brand, a business model and a product or service that everyone wants, why not franchise your own brand?

There are obviously many things to consider before you decide to actually franchise your brand, but the big one is, will my product or service work nationally? How about internationally? If yes, you may potentially have a big money maker on your hands. A way to review your business and see if it has potential is to cater outside of your general customer base. Try attracting new customers who have never used or heard of your service before. Go outside your home community and market your products. If you see a steady rise in customer traffic, you can see that your product is something that new customers are interested in using.

So if you do find that your product is performing phenomenally, who do you find to franchise your business to?

After going through the proper legal steps and doing all that is necessary to set up your franchise it can be difficult to recruit new franchisees. This is even a difficult task for many current franchisors. Recruiting franchisees is essentially marketing your company. You need to appeal to potential franchisees. If you are a one-of-a-kind business, where there is not much competition in your industry, then you will find fewer struggles convincing a potential franchisee to purchase your franchise over a competitor. However, if you are a franchisor with even a few competitors, you will definitely find struggle. This is nothing to fear, but you should be prepared. Ask yourself: If I were looking to purchase a franchise, what would I want the franchisor to offer? How strong should the franchise be? Entrepreneurs, who are looking for a franchise business, usually look for where they can get the most back up and support for their investments. Make sure you present your brand in a convincing and appealing way. You should also have some established, running locations of your business. You need to show with growth, the bottom line, which is basically what your brand boils down to. What gives Corporation A (yours) an edge over Corporation B (competitor)?

Even though, these are very basic things to consider about growing your business as a franchised business, these are some main factors to initially think about.

Franchise Business or My Own?

Should you start a business of your own or buy a franchised brand? There are many pro's and con's to having a franchised business versus a privately owned one, but there are many things to look at beyond the initial brochures provided from the franchisor.

Before you even think about buying a franchised business you need to ask yourself, if you are qualified enough to be approved with the brand. All franchisors look over your financials, including your debts. You will want to make sure you have the criteria that meets the specific franchisors requirements. Next, you will need to apply to become a franchisee. This process may take awhile depending on the company you are dealing with, as they have to review all of your documents and draw up paperwork. If you are approved, you will be asked to fulfill many obligations such as paying the franchise fee. Expenses start adding up, even before you bring in your first dollar from your business.

So the question is: Should you franchise or not? The pro's of being apart of a franchised business are just about infinite when it comes to operations, but there are many con's as well. Some of the great things a franchised business can provide for its franchisees is that: You will be apart of an established brand, you will have the backup of the franchisor, you will have a general marketing plan, you will probably get the best priced inventory from your suppliers as franchisors negotiate pricing between suppliers and franchisees, you have an established product line and you will definitely get adequate training to run your business. Now these are more of the general aspects that buying into a franchise can provide, but there are more.

As far as being apart of an established brand goes, you will be receiving free publicity before you start your business when you put that "COMING SOON" sign up. When people see brands they like, they look out for the opening of the business. When you are starting a private business, people will probably not know your brand, causing you to have to create a brand image.

Having the backup of a franchisor is great when it comes to having legal disclosures and such because franchises have thought out what things need to be made public with the operations of your business. Privately running a business would require you to have to make your own legal decisions with the assistance of an attorney, where costs can add up.

Marketing is a big part of any franchise. Every franchise has a marketing plan for their locations in play. Being a new owner in the franchise, you will already be apart of an on going marketing network. There are going to be promotions that are ran franchise-wide which you will be notified by the franchise and they will come up with the ideas and concepts of who and what to market. This takes a big burden off of you as far as marketing goes on the macro scale. You will still need to market your business within your community.

Getting the best price from suppliers can really add up to a bigger bottom line and less inventory costs. Franchises generally negotiate pricing structures with suppliers because they are buying as a corporation with multiple units. They are often given bigger discounts than individual locations of the same type of business can get.

A franchise would not exist unless they have already developed a line of products. This is one of the main parts of running a successful business. Your line of products is what your customers come to your business for. Having a successful line of products is of extreme importance otherwise you could be going out of business sooner than later. Franchises often do market surveys of new and existing products to make sure that there is a client base for it. If you started your own business, you would probably have to come up with your own product line.

A necessary part of becoming a franchisee is successfully completing a training course. Training in the industry you are going into is a great service that is provided by franchisors. However, you are paying for the training, but it does make a difference when you are trained than when you are not. Franchisors usually train people on how to manage the business, not just in the retail aspect, but after hours management as well, such as paperwork and more. Training is just a tool, you will learn more after you actually open your doors!

The Con's to a Franchise Business:

The pro's have been stated, now I will go over the con's of being a part of a franchise.

-There are a few general categories of drawbacks with being a franchisee: Royalties, Franchise Policies, and Termination of Contract with Franchisee.

With any franchise, there comes royalties. Royalties are fees paid to the franchisor by the franchisee, for using the brand name as well as additional marketing costs. There is usually a certain fixed dollar amount or a certain percent of sales that is required to be submitted to the franchisor as royalty fees.

Franchise policies are also regulations between the franchisor and franchisee that the franchisee has to follow. Companies usually enforce their regulations and will expect the franchisee to do just as stated. This gives very little lee-way for the franchisee to make his/her own decisions with the business from the operational standpoint. When running a private business you will find more options to do what you want with your ideas, of course within the guidelines of the law.

Leading to the next point, Termination of Contract with Franchisee. Franchisors have a certain amount of leverage where they can terminate the contract with the franchisor if they feel there has been a violation in the terms. This would go through a legal battle with the company, but there are chances of losing the brand name of the franchise and additional expenses that come with a loss. This generally doesn't happen, but there are chances with being involved with a franchise.