The reading level for this article is Novice
In my June article (The Truth about Franchising), I pointed out that franchising is not all its cracked up to be. In this article, we look at reasons for this happening. We consider the upside to buying a franchise. And reasons for the initial promise not being delivered on.
Contrary to what Franchising Associations would have us believe, the survival rate of new franchises is worse than for independent business start-ups. And profitability is a lot lower. Before we consider the reasons for this, lets first look at the key benefits of buying a franchise:
Why buying a franchise can make sense
The main advantage of owning a franchise is that you get a ready made, tried and tested, business model. Before the business system is franchised, the franchisor develops a well-defined, highly effective and very efficient business model. By using this model, you eliminate the need to move up an often arduous and costly learning curve.
Franchising started in the fast foods business, where it has generally worked very well. The business involves making and selling a tangible product for which there is a substantial and sustainable demand. This means that the business model is critically important and that it can be clearly defined. The more sophisticated and refined the business model becomes, the more powerful it gets. Mac Donald’s is a good example of this.
Buying a franchise also gives you the ability to leverage off an already established brand name. Getting accepted in a competitive market can be expensive, time consuming and very difficult. The brand equity you get when you buy a franchise eliminates this problem. Provided, of course, that the franchisor has established a solid brand. And does what is necessary to promote and defend it.
Franchisees typically require less start-up capital than they would require if they set up independently. This is because the franchisor has eliminated unnecessary costs in the business system. Access to economies of scale and leveraging off shared resources is enabled.
These are pretty compelling benefits. Why, then, are survival and profitability rates for franchising so poor? What has made a business model with so much going for it, lose its shine?
What has gone wrong with franchising
The basic idea behind franchising is sound and has been put to good use in many franchised business systems. But the nature of franchising a business is such that the process carries within it, the seeds of its own demise.
A major problem with franchising is that it is just too easy to franchise a business. The result is that many franchise systems are of poor quality and do not deliver on their promises.
Recent trends have been towards franchising of service businesses. Typically, there is a greater reliance on the knowledge and abilities of the franchisee. The business model is not as important. And, in many cases, suitability of the business for franchising is questionable.
Franchisors generally agree that they will only succeed in the long term if their franchisees succeed. But in the short term, franchisors can only make more money out of a business system by selling more franchises. And this is not in the best interests of existing franchisees. Support is diluted, territories get smaller and franchisee performance suffers.
All too often, short-term expediency overpowers long term strategic potential. Increasingly, franchises are being sold without territories. Which means that franchisees are totally at the mercy of their franchisors.
There are numerous specialists who have climbed on the bandwagon : consultants, lawyers and banks. They all depend on income generated by the process of selling franchises. Hence all the hype. A lot of people are now involved in the franchising process. And they all have a common vested interest : sell more franchises.
The inexorable growth of the franchising machine is fuelled by constant supply of prospective franchisees. Many of them are desperately looking for an easy, safe way to start their own business. People only hear what they want to hear about a getting involved in an exciting new venture. So the pickings are easy and franchisees often end up being disillusioned.
The bottom line
Perhaps the biggest downside of buying a franchise is that you have limited flexibility and control in running your new business. Small business owners who become stunningly successful achieve their success because they have the freedom they need to do what they have to do. They focus their knowledge, creativity, energy, and resources they didn’t even know they had, on creating wealth. These business owners follow a dream. And it takes them to amazing places.
When you buy a franchise, you have to run it using the franchise system. You have bought into someone else’s dream. This can be very dis-empowering. And the dream may, or may not, take you where you want to go. Franchisees often make the mistake of relying on franchisor support to create the success they desire. It doesn’t actually work like that. You have to drive your own business success.
Without getting behind a focused business vision and taking full ownership of a strategy that will turn it into reality, you are not likely to achieve your full potential. So if it looks like a franchise won’t give you the freedom you need to create your own success, think carefully before buying it.
In conclusion, while franchising works very well for a lot of people, some franchised business systems are not that good. And being a franchisee is definitely not everyone’s cup of tea.