Business EthicsI’ve seen a few articles lately about cases of franchisors getting rich while franchisees lose everything, over and over again. Maybe I’ve been in this business too long, but it always surprises me to see people so surprised. I hate to sound unsympathetic, but seriously, people – franchising would not be such a popular, successful business model if the big guys were taking on the same level of risk as the individual franchisees. Some of the nation’s biggest chains are franchised, and they have a lot of collective power. They’ve used that power to make sure that whatever happens, they’re almost definitely going to be alright.

So how does this work? Basically, the SBA backs a large portion of the loans given to new franchisees. If the franchisees can’t pay, the franchisor still (usually) gets the bulk of the money owed to them. Since so many are heavily loaded with up-front fees, it’s not hard to imagine a scenario where a company could make great money even if every single franchise location went out of business in under a year. Royalties are great if they happen, but they rarely make or break the franchisor, especially in a high-growth, super trendy industry (like frozen yogurt in recent years).

Who’s getting screwed over in all of this? Two groups of people – the taxpayers who fund the SBA’s poor oversight, and the individual franchisees whose lives are often ruined by their bad experience with a franchisor. I would never tell anyone NOT to invest in a franchise (though there are plenty of specific scenarios where I wouldn’t advise it). It’s just very important to be aware that access to SBA loans doesn’t mean your franchise investment has any kind of quality, and that your franchisor may have very little incentive to see you do well or help you if you’re struggling.

Want to read more about this conflict of interest? Bloomberg has a great article here. It’s good food for thought as you consider which franchise opportunity is right for you.

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newbieFranchising is a tough business, especially if you’re new to the industry and you only have the funds to give it one good shot. And frankly, that’s an awful lot of people. The typical new franchisee is a middle-aged person with some savings, but not enough to easily recover if the franchise doesn’t work out. On one hand, this does have its benefits. When you need something to work, you’re all in. There’s no doubt, you just move forward and do what needs to be done because that’s your only option. On the other hand, this kind of do-or-die situation creates a lot of irrational emotional responses, both before and after the purchase.

This article on Forbes does a great job of talking about the mistakes we see over and over again from new franchisees. Number 2 is one of the big ones: “Don’t buy a franchise to ‘be your own boss’ or ‘control your destiny’.” A lot of franchises and industry publications go on and on about being your own boss, but what they really want is a heavily invested store manager. When you buy into a franchise, you’re buying into someone else’s system, for better or for worse. If you want to call all the shots, you need to create your own business from scratch. Many people appreciate the guidance, but I always hate to see someone who has purchased a franchise in hopes of running things in their own way.

Number 5 is another big one – “Seek out franchisee complaints online”. I can’t second this enough. Not only do you need to look, but you need to go way beyond the first page of search engine results. There’s an entire field called “Online Reputation Management” where people are hired to use a variety of tactics to push negative things off the first few pages of search engine results. Given the value of each new franchise sold, franchisors have a very strong incentive to hire these firms to cover up bad reviews.  When you’re doing your research, check all the major industry sites and use a variety of search terms to hunt down those negative experiences. It might just save your retirement.

If you’re considering a franchise purchase, definitely read the entire article at Forbes and take it to heart. If you have any other tips for potential franchisees, feel free to leave them in the comments!

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A lot of potential franchisees wonder what it is that franchise consultants do for them. Do you need one? Can you make a successful investment without one? The answers are “no” and “yes”. You don’t HAVE to have a franchise consultant, but it can definitely help you avoid a lot of potential problems and save a ton of time. You absolutely can make a good investment without help, but when you’re investing what may very well be your life savings, wouldn’t it be nice to have a second opinion?

So what’s the process like? Most franchise consultants use a process that’s something like this one:

  • Initial Consultation – Where you discuss your goals, budget, and timeline.
  • Franchise Matching – Where a consultant makes recommendations based on what you discussed in the initial consultation.
  • Introductions – Where you’re introduced to contacts at the franchises that most interest you.
  • Franchise Document Review – In this phase, you’ll get help reviewing disclosure documents that franchise systems are required to provide.
  • Current Franchisee Interviews – Here, you’ll talk with current franchisees to validate claims made by the franchise system.
  • Discovery Day – This phase involves a visit to corporate headquarters to meet the corporate team and get a little more information before taking the plunge.
  • Agreement & Purchase – In this stage, you’ll sign final documents, make payment, and set up your business.

When it’s all said and done, you’ll be the proud owner of a new franchise business. It’s not necessarily so linear for everyone, though. You might uncover information you don’t like at any stage before the final agreement, and at that point you might have to go back a few steps and pursue a new opportunity.

 

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