Franchise What It Is/What it isn't

A discussion on what a franchise is and isn't.

JimB...come in here.

JimB... I've moved this discussion into a new forum for the discussion of what a franchise is and isn't.

JimB Writes:  ... The franchisor has too much protection from the contract in the value/risk/reward relationship, due diligence and effective contract term negotiation not withstanding.  ... The franchisor is free to abandon concern (if it was ever there) over delivery of value to the end user or franchisees and focus on revenue generation from a captive group of “customers”.  The franchisor effectively transfers responsibility for delivering value and all its risks to franchisees and collects a slice of the revenue stream.  The lack of a fiduciary relationship and contract term protection promote abuse if that is the path selected. There needs to be more structural downside for the franchisor to remove the incentive for abuse...

I certainly understand why you feel the way you feel based on your experiences.  To a large degree many of the 'problems' which you've identified are in large part a result of a "False understanding of what a franchise is and what it is not" at the time of investing in the franchise.  This 'false' understandings is created and further supported throughout the franchise investment process.

You've excluded due diligence and contract negotiation, however it is impossible to exclude these two most important components to the process.  They are perhaps more important than the franchisor, the franchise concept, your operating capital, your market or anything else.  Due Diligence & Contract Negotiation are keys to the future endevor.  I will try to break out your comments into the various aspects and address how in my opinion these are often confused as to what is and what is not.

Most of the items which you've identified as structural problems in franchising are not structural problems but rather the structure itself.  It would be like complaining about the structure of a Lamborghini Murielago because it get's 9 miles to the gallon and gets stuck in the mud everytime you go 4-wheeling.  The problem is not the structure of the vehicle but rather the expectations for the vehicle.  If you're on a flat smooth wide-open road with a desire to go from 0 to 60 in 3.8s, cruise along at 160MPH and pass people at 205 then the structure is perfect.

Franchising is a form of distribution used by the franchisor to reduce expansion expense, labor constraints, and mitigate risk.  It is not a shared risk venture with each individual franchise owner.  Both parties have inherent risk associated with the relationship.  The risks of the franchisor is dramatically altered as the franchise system grows, increased in some aspects and decreased in others.  The franchisee will always have 100% of the risk associated with the success or failure of his or her business.   The franchisee will always have 100% of the risk associated with failing to investigate and negotiate the franchise agreement prior to investing.

The Zee is the one responsible for delivering the value to the consumer within the guidelines of the franchcise system.  It is the Zors responsibility to deliver a system which aids the Zee in doing so.  Implementation is the responsibility of the zee.

Success, failure, value, risk, reward etc. etc... it's all comes down to that which you've tossed to the side, due-diligence and negotiation AND that which we have not discussed much here at Bluemaumau, Franchising What it is and What it isn't.

If and when someone enters into the franchise relationship with the wrong expectations the are most certainly going to be disappointed.  If someone is looking for shared investment risk, they should be looking at a partnership and not a franchise. 

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 26th, 2007

Durable Model....

You're most certainly correct when you say "Franchising is a durable model because Franchisees make money.  However, we can not lose sight that NOT ALL FRANCHISEES make money, thus the reason for all the negative commentary about franchising here on Bluemaumau.

Few if any, franchisors want to see any franchisee lose money.  Most franchisors do a good job in fulfilling their obligations to the franchisee as it relates to providing them with a vehicle by which they can make money.  It is true however that a franchisee can be losing money while the franchisor earns revenue from the efforts of the franchisee who is losing money.  This seems to be one of the major 'bones of contention' by many of the Bluemauamua guest.  Although this may seem a bit unfair, it is consistent with the franchising concept.

The initial franchise fee is for the payment to have access to the system itself.  Although the franchise fee can be a substantial part of the revenue stream to the franchisor it is seldom a significant part of their profitability.

The 'royalty payment' is the primary source of profitability to the franchisor.  Therefore it is in the best interest to do all that can be done to preserve and grow that source of revenue.  As a franchisor you try to do this through helping the franchisee succeed in business.  If the franchisee is not going to succeed in business, the franchisor must then replace that franchisee or lose that source of revenue.  Replacement requires finding another franchisee, which becomes quite difficult IF the franchisor is replacing too many in too short of a period of time.  Thusly creating a check and balance by which better franchisors will do as much as possible to assist the original franchisee.

The franchisee should not perceive the royalty payment as the franchisor making money, but simply as an overhead expense like any other overhead expense.  You can not use electricity to run your business, pay your electric bill and then blame the electric company for taking your money and making a profit just because you lost money.

Now in the case of the electric company you knew what to expect before you paid to have your electricity turned on.  Although your electricity may have flickered on and off a time or two, they pretty much delivered what you expected, therefore you do not feel too bad about what you've paid them.

In the case of the Franchisor the same can be true.  If your expectations of the franchisor are right, and if the franchisor provided the service that you expected, you should not have ill will toward the franchisor for taking the money.  Their profitability is their businesss.

The problems begin when the zee's expectations are not congruent with the services being delivered to the zee by the zor.  So now one must determine if the expectations are incorrect or if the zor is underdelivering.  Which brings us all the way back to the ALL IMPORTANT due-diligence and contract negotiation.  If one does not do proper due-diligence how can they possibly know what to expect.  If one does not negotiate the agreement in a way that clearly lays out the expectations of the parties, how can those expectations be understood or enforced if necessary?

IF YOUR A PROSPECTIVE ZEE: It's all about due-diligence and Agreement!

IF YOUR AN EXISTING FRANCHISEE: absent of an outright violation of the agreement by the Zor, it's all about accepting what you've got and making the most of it.  If you're experiencing challenges find someone who can help you overcome those challenges.  Your franchisor should be there to help you, with many of them.  However, they are not there to run your business for you.  You may need to find additional help elsewhere.  I understand that many zee's will find this to be hard medicine to swallow.  Those who do, are most likely to be those who entered into the relationship with the wrong expectations to start with.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 26th, 2007

Still a problem

We may need to agree to disagree.  The investment process supports a false understanding of the extent due diligence and contract term negotiation are required.  I have a difficult time accepting some recent statements made that prospective franchisees do not read a UFOC.  The statements were made from long experience so that issue is what it is.  My position is the franchising process permits exploitation by a franchisor with little or no negative consequence to the franchisor.  I do not say that from the point of view that, surprise, life is tough; it is and is not and so be it.  I doubt you would support the idea that franchising should be exploitive.  That would not be good practice. The reasons to franchise for a franchisor are okay and the inherent risk for the franchisee is okay unless the franchisor crafts a system to simply exploit the franchise owners (and ultimately consumers) with no regard for the value proposition.  It is certainly the franchisee responsibility to deliver value from the business format system that the zor has developed, tested and verified to be a system.  It is your position, I believe, the objective of zee due diligence, among other things, is to verify the efficacy of the zor system.  However, zors have a protected status in the relationship where they may construct, with impunity, a business format that is simply a series of devices providing the appearance of propriety.  My position is a zor can get by with that and, moreover, has incentive to do so by the structure of the franchising relationship.  You say due diligence and I say it is a problem.  Zor due diligence should go beyond crafty schemes to relieve franchisees of their hard earned money. I can respect McDonald’s.  They developed an insightful system into the economics of their franchising relationship.  They protect and manage the value proposition, perform due diligence, make money and allow franchise owners to make money as well.  McDonald’s employed total quality management before it existed

Posted by JimB on May 26th, 2007

Durable Model by FS

Everything you say is the truth, Dale! And, of course, hopefully, a great many franchisees make profits, not just salary, from their franchises but this does not mean also that a great many are put at a greater risk than they realize to lose their entire investment. The true and real risk of the franchised business plan together with the unbargained contract and the lack of a fiduciary relationship, or any investment of capital in the franchisee's business, produces a relationship in which the franchisee can be used and abused by the franchisor when necessary in the interests of the franchisor's profits.
I agree with JimB and his analysis of the relationship but this relationship is here to stay. I feel that the relationship need better oversight by government and more effective disclosure under law of the true risks involved.
I know you diagree with me on this and feel that those who are sacrificed when they haven't done expert due diligence are a necessary sacrifice to insure the durability of franchising as business model.
I know that franchising is here to stay and I know that you are a good man who delivers a good product for his clients.

on May 26th, 2007

Still a problem Jim B Durability----Viability

Tell me, Jim B! Do you think the durability of the franchising model depends on "churning and turning" to a great extent and this is why we have no reliable government sponsored research concerning the failure rate or the success rate of franchised business plans?
What criteria does the SBA use when granting SBA Loans. There must be a point at which they can't justify an SBA Loan; i.e. when the failure rate is considered too high.
Since the growth of franchising is predicted to continue here and throughout the world, and since franchising is such an essential part of our economy today, wouldn't you think there would be some government grants to study the franchising model?
All the clues invite one to believe that it is public policy to hide the true rate of franchise failure to subsidize the franchising industry.
Do you agree?

on May 26th, 2007

JimB,  I’m not sure that

JimB,  I’m not sure that we really disagree on all that much at all, but if we do I'm sure we can agree to disagree without being disagreeable (thus the meaning behind 'pure intentions').

I agree, as I interpret your comments, that the investment process supports a false understanding of the extent of due diligence and contract negotiation that is required.

  • The franchisor, is not unlike nearly any other business and believes in their product, even when such belief is unwarranted.
  • The franchisor like most entrepreneurs (and frantrepreneurs) tends to be overly optimistic.
  • Regardless of packaging, promotion or demand, selling franchises is a sales process and as such the positives are accentuated and the negatives are acknowledged no more than is absolutely necessary.
  • Often there are franchise sales brokers, salespeople, franchise consultants involved in the process whose livelihood is derived strictly from the commissions which they receive as a result of a completed transaction.
  • Often a false sense of security is obtained from being given the UFOC, but one should take heed in the FTC disclaimer.
  • Most franchisors conduct and most franchise candidates attend an Orientation/Discovery Day.  Call it what you want, but it is often Group Selling at its finest!  A franchise candidate should understand that this may be their first Orientation/Discovery Day but IT IS NOT the franchisors first.  Every aspect has been carefully structured to do one thing.  Move ‘qualified’ candidates forward in the sales process.

I too have a difficult time accepting that prospective franchisees do not read the UFOC.  My experience tells me that they do, I also believe that they read the Franchise Agreement.  However, reading it, and fully understanding the full extent of the meaning of what they are reading is an entirely different issue.

Exploitation, most things in life have the potential to be exploitative.  Most things in life are in fact exploited.  There’s exploitation in religion, medicine, legal, automotive and the list goes on.  That does not make it right.  If we disagree on anything it would be the amount of intentional exploitation that exists in franchising.  I do not believe that many franchisors intentionally craft systems with the intent to exploit franchisees.  I do believe that some franchisors begin as small business owners who are falsely led to believe that their businesses can be successfully franchised and that they are capable of managing a franchise company within that industry.  I believe that some business owners optimistically begin franchising under capitalized and economics begin to cause them to focus too heavily on sales and too little on support.  I believe that some franchisors in desperate need of sales will result to contracting with the wrong franchise brokers who are more interested in earning a commission than helping the franchisor find good franchise candidates or helping franchise candidates find good franchisors. 

As for the ‘System’, yes you’ve got my point figured out exactly.  All franchisors ‘think’ their system is the best.  If you own a business and don’t believe in your own product you need to get out.  However, as an investor in your product I’ll adopt your level of belief once I’ve invested.  Not before.  Before, I invest I’m looking for everything which you’ve missed.  It’s also important to understand that especially in the case of a new Zor, the Zor is testing the system…with you.  The Zor could have been wildly successful in designing, developing, implementing and operating the ‘system’ in his or her own market(s), but guess what?  They haven’t tested their ability to sale and support franchisees.  They haven’t tested their ability to transfer their knowledge and experience to you.  They haven’t tested their ability to oversee a network of 25, 50, 100, 500 or 1,000 units.  They haven’t tested their ability to work with you.  They haven’t tested their ability to succeed in your market.  Yes, as a prospective franchisee due-diligence includes closely examining their system.  This is why you ask to see the Ops manual, the marketing manual, the training manual, etc….

McDonald’s is a great franchise system.  It is the one that everyone holds up as a shining light.  Ray Kroc had a great vision.  McDonalds has been around for a long time and was one of the first in the franchise QSR segment.  They have a long and proven track record.  However, they have not gotten to where they are without a few bumps in the road.  They’ve had litigation, franchisee revolts, failures and all the other problems.  McDonalds is like me or you talking to our kids, we’ve been there and done that.  McDonalds has survived, and today all of those bumps, all of that experience allows them to say “Hey, a McD’s is 600 to 1.5 million dollars.  You must have 40% of that amount in non-borrowed funds, show it to us.  Great the Franchise Fee is 40 grand give it to us.  Here’s the agreement, sign it!  Now you can come and go through 9 months of training.  Then we will offer you a location somewhere, and you can move there.  We’ve already got the building built, you’ll need to finish it out, landscape it etc…  You pay us a royalty of 4% + rent on that building that we are letting you use (which will be no less than 8.5%) and we are now married for the next 20Years.  Most franchise systems are not McDonalds and never will be.  If you have a million and a half dollars, and are willing to relocate, odds are after about 3 years you’ll be in pretty good shape.

You sound like a very sharp and reasonable guy, who made a bad investment.  Having made a bad investment does not in and of itself mean that your franchisor was bad or that you were bad.  It does mean that it was not a good fit.  Not knowing more about you and your particular situation I really can’t so who was wrong or where the mistakes were made or what to do to correct and/or prevent the same in the future.  I also understand the difference between a recession and a depression.  A recession is when others are struggling and a depression is when I’m struggling.  I understand that you feel that you’ve been wronged and perhaps you have been.  If you have been, shame on the Zor and I hope you win your case.  And shame on you if you let it happen to you again (said with a big smile).  That does not mean that franchising is bad or that most franchisors are bad.

Again, it doesn’t sound like we disagree on all that much.  I’ve probably now pissed off half the franchise world, so I better shut up.  For anyone considering franchising, it can make all of your dreams come true when you do it right, from beginning to end.  It can be your worst nightmare come true, when you don’t do it right.  Find a trusted advisor and stick with them, from the very beginning.  For anyone whose in a franchise, but failing to obtain the results that they’re looking to achieve, there are ways to right the ship and move full-steam ahead.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 26th, 2007

Guest, Thank You,

GUEST, Thank You, for the kind words!  I'm truly sorry for your pain.  Often franchisees turn to me in their deepest darkest hours, after they've done all they know to do.  It's always a great joy in my heart when we are able to help them.  It saddens me deeply when we are not, usually because they've reached out too late or after the fact.

As it relates to your statement: "I know you disagree with me on this and feel that those who are sacrificed when they haven't done expert due diligence are a necessary sacrifice to insure the durability of franchising as a business model."  I neither disagree or agree or perhaps I should say I both agree and disagree.  I'm aware that at times I come accross as a cold, callused SOB who does not care about the franchisee.  Those who know me, know that this is not the truth.  I am a strong proponent of personal responsibility and accountability.  I do not buy into finger pointing and the 'blame game'.  I will in a heart beat tell any franchisor, that it is their PERSONAL RESPONSIBILITY to do everything reasonably possible to ensure that every franchisee in the franchise network is a success.  I don't care how much time it takes, or money it costs.  As a franchisor there are no sacrafices, period!  Failure is not an option, and the failure of a franchisee is the failure of the franchisor!  There are times however, when for the good of the system, a franchisor must cut a franchisee...this is the failure of the zee and the zor is then doing what the zor is supposed to do, protecting the integrity of the network.

I'll also tell any franchisee, you bought it - you've got it - you make it work!  So the what if the franchisor will not return your calls - so what if you haven't seen them since graduation day.  So what - so what - so what....  That doesn't mean to roll-over and play dead.  It means be the PERFECT FRANCHISEE, and it means that you hold the franchisor to the same high standards that you hold yourself.  It means that you live up to your contractual commitments and you make damn sure that they do the same.  As a franchisee I think you have the right to tell it like it is as long as you have you're facts straight, do it in a professional manner and at the appropriate time and place.  At NO TIME, will I agree that any franchisee should publicly air their dirty laundry.  If you are flying the flag, support the flag.  When you can no longer do so for legal, ethical or moral reasons take that flag down, go on top of the tallest mountain and tell the world just how bad the franchisor is.  But only after you are no longer flying the flag, and you are positive that you are in the right!

Business is tough.  A franchise business in many ways can be tougher, simply because there are more rules to play by and more personalities involved, and an AGREEMENT that dictates both the rules and the term.  Due diligence can not be performed after the agreement is signed.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 26th, 2007

The Captain of the Ship in Franchising is the Franchisor

When the Captain has poked holes in the ship, it is hard to right the ship and "move full-steam ahead" because you are sinking -g-g-g-g------gurgle-gurgle- GONE!
Do your Due Diligence and stay off of lousy ships!

on May 26th, 2007

Thanks

I appreciate you spending the time to share your experience and perspective.  Thank you.

Posted by JimB on May 26th, 2007

I believe

The franchising model is durable because it can work and provides an alternative to many who buy into the sizzle.  I do not have broad experience with the model to know the extent of under delivered expectations but expect the under delivery is extensive.

SBA loan criteria must be fairly liberal or the failure experience would probably be less.  I have not researched the mission of the SBA but would expect to find an objective to support individual opprotunity with a fairly liberal set of criteria.

I would expect the government to offer a rationale for not investigating relationship issues on something other than lack of data.  That is flimsy.  If the predicted growth is realized and abuse of the model is wide spread enough there will be government interference or enough sunshine from the press to help correct.

I do not know if there is enough money in the franchisor lobby to buy public policy.  I doubt it.  I could sooner sign up for regulatory indifference or incompetence.

Posted by JimB on May 26th, 2007

Very Good advice!

Very good advice!  However, If and when you get on a sinking ship, fight like hell to get a life preserver or floatation device and paddle like your life depends on it.  There's always a way to Thrive - Grow & Prosper even in the most turbulent seas.

Which reminds me of a Joke:Have you ever wondered why when flying over dry land they always tell you about using your seat as a floatation device?It's because they put all the parachutes on the cruise ships!   Boooo!

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 26th, 2007