I’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.