Franchise Nightmare
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My Own Franchise Nightmare Began When...
I was made redundant. I got a good payout though and decided I was finished with working for somebody else; I really wanted to be my own boss. I spent a lot of time thinking about what kind of business I could do, but something held me back - the fear of starting a business that would fail and what this would do to my wife and kids.
It was then that I heard about the success rate for franchises. What I read was something like "after 5 years, 90% of franchisees are still in business while 80% of none-franchise startups have disappeared". Wow, this completely blew me away. I had an 80% chance of failing if I started my own business. So all I had to do was buy a franchise and work hard at it to make sure I could earn a good income and have a business that would stay the course.
Made it into an easy decision for me. And so I spoke to some franchisors and they didn't argue with these stats. In fact, I think when I said I was looking for a business with staying power, they even quoted the 90% rule back to me. My next step was to speak to a few franchisees to check the story out.
The Franchisees I Spoke To All Said...
"It is a great business to be in, I love it. You can earn a really great living and create something that is special. There is a huge sense of achievement."
And they all said the same kind of thing - just how wonderful it was. In fact they were so enthusiastic, they practically sold me on the franchise on their own, without the franchisor being needed at all. For the odd one or two I spoke to who weren't doing so well, I kind of rationalised away that they were not as capable as me, or were not as driven or ambitious. Anyway, even these guys lower down the ranks of performers seemed really happy and enthusiastic.
So I thought it was time to get some independent advice.
My Accountant & Solicitor Said...
The franchise agreement was typical and that the fees, while high, were in the normal range too. They also explained that it's not possible to negotiate with a franchisor, you just follow the rules. Basically,suck it up and hand over your cash, franchises are good, safe and reliable places to put your cash.
I paid their bills and said "thank you."
A few months later I got trained up and opened my doors for business. It was only then that I started talking properly to other franchises, without their guards up, over drinks at franchisee conferences or on the phone when things didn't go so well. Finally I started to learn what I wish I had known all along.
The Truth About Franchises
It seemed that many of the franchisees in my area had negotiated some special side-deals with the franchisor. The kinds of things that began to eat at me. Why didn't I get the same special deals that these guys had? I bought the same franchise, so why didn't I get such a deal.
So I started to question why it was that my accountant and solicitor both told me that you can't negotiate. Clearly I didn't, but how come so many others had? Then I found out, after many drinks and late night at the bar, that another franchisee was even paying less money than me for the franchise. So how come I got screwed over? I am not stupid at business and have done some pretty neat deals in the past. Just something about doing it for myself that meant I missed stuff I shouldn't have missed.
And then I got to thinking - all the people who advise you about businesses have a vested interest in selling you a franchise. The franchise associations are all run by franchisors, the franchise expos are paid for by franchisors and so on. So there is no strong voice for the potential franchisee.
Just one thought really nagged me though. Why did other franchisees not tell me the truth about it, before I bought?
Why Franchisees Tell You Lies...
It simply comes down to human psychology.
Let's say you just spent £14,000 on a new car. You have been looking at cars for a month or two and finally decide to get one. You spend a huge sum of money on the car and take it out for a drive. You love it. Of course you love it - you just spent £14,000 on it and you know you can't give it back!
So now let's say you spend £25,000 buying a franchise and another £10,000 to open up in business. You are very proud of what you have done. A year later you are not making huge sales but you have spent £35,000 and a whole year of your life trying to make it work. Somebody calls to ask if you think buying your franchise was a good idea, and what do you tell them? You are not going to say, "Don't do it, you would have to be stupid to spend that much money for this crap!". Nope, you tell them that "I have had a few problems but I love the business and can't wait for next year. The franchise is brilliant it is just that I didn't do it all right to start with and that has cost me."
So the franchisees fool themselves into thinking it is great!
Now of course this isn't true of every franchise - I really wish I had bought a Subway or McDonalds at the right time to really catch the wave. No, the problem is that the crappy franchises ride on the backs of the famous big ones, pretending that they are as good and as profitable for you.
The message I am trying to give you, is what they used to say on Hill Street Blues...
Hey, Let's Be Careful Out There...
Keep your eyes, ears and nose open. Pay attention to your feelings - if it seems to good to be true, it almost certainly is. Listen to what the everybody tells you but make decisions based on the hard facts.
I got stung for £25,000 that I should never have spent. I rushed into the franchise without doing my research properly. I got conned by the confidence of a franchisor who was really a first-rate con-man. The other franchisees were like a cult and I simply didn't see it coming. Of course, I didn't know how to properly research a franchise since it was my first time. Here's a great article on how to buy a franchise that helps you to cut out the bad franchises quickly.
You'll also find questions to ask a franchisor in another hub I've written.
Good luck in starting up your own business.
- Story of a couple who got into a bad way with a bad franchise
It is worth reading about a few franchise nightmares before you commit to buying your own. - story from Entrepreneur magazine about a franchise with a bad name
There's lots to know when you are considering a franchise. Just take the time to do your research before handing over your cash! - Dunkin' Donuts Alleged To Have Sued 154 of Their Franchisees Since 2006
Brooklyn Daily News story about a successful Dunkin' Donuts store partnership that have been run out of business by the franchisor. The story mentions that the franchise has sued 154 franchisees in the last 2 years - scary :-(
Business Growth Blog by Author of The Franchise Workbook
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Comments
Hey Acorn Valley, it's a real pleasure. It is a bit of a mission for me now to help people get to the truth about the franchise they are looking at. There is so much spinning around in your head you get kind of giddy with it. I appreciate your feedback too, made all that typing feel worth it!
Feel free to ask any questions - I'll do my best to answer and help.
excellent hub. franchises get away with murder. I saw this info on about .com
a long overdue change.
The Franchisor Must Tell AllAnother important change in the new FDD is that the content includes more detailed information about direct and indirect parent companies. Disclosure of any lawsuits or bankruptcies must be included. Additionally, the franchisor has to reveal whether any officer of the franchise has any interest in any approved suppliers.
With regard to territory disclosure, the franchisor must include in the FDD information as to whether the franchisor or any affiliates make use of any other types of distribution channels such as the Internet, telemarketing, or catalog sales. Also, the franchisee must be notified of any restrictions imposed by the franchisor prohibiting previous or current franchisees from discussing their experiences with prospects.
Under the FDD, franchisors are also required to provide data that shows how many franchises over the past three years were sold, terminated or transferred. It is important to note that the franchisor selling a previously franchised channel must provide a supplemental disclosure with the name and contact information of the any previous owners from the prior five years. The franchisor must also note the reason for the changes in ownership.
Great feedback thanks cflynn!
The problem as I see it is there are a few great franchises, some good ones and a whole pile that ride on the back of these. There are just too many crooks and dodgy deals done, where a big pile of money is handed over for a bunch of procedures with no backup.
Those changes you post from about .com look excellent - the points about talking about franchise restrictions and franchises sold/terminated/transferred are very relevent in my eyes - these are the kinds of questons that need answers before you buy a franchise.
Great hub! Welcome to hubpages, midnightpiper. I used to a franchise company and I saw how things work :/ . There is only one way to win with it: franchise your own business to others ;)
you are welcome midnightpiper. I am on a mission to spread that particular piece of info. i am amazed with what franchisors get away with. it is morally wrong even if they have their *** covered!!
Hey Funride, thanks for your feedback - it's nice to know the effort paid off. It is such a shame that so many franchisors just want to rip off the franchisees.
Great hub nightpiper - with some worthwile advice.
I' suggest getting Robert Cialdini's very readable book "Influence - the psychology of persuasion" for some incredible insights into the way humans behave, and how marketers take advantage of our hard wired human traits.
Hi Eric,
Hmm, I think I've been recommended that one before and put it into my Amazon Wishlist - I'll get that with my next order. Thanks!
Horrible story here about Dunkin' Donuts catching franchisees out with minor contractual issues and forcing them to sell out at a very low price and to pay a big fine too.
Franchise agreements stink - it's so important to get a good lawyer on your side.
Midnight Piper;
This is another good hub from you.
I have heard wild claims about franchise success, too. I cannot find a reliable study one way or the other. Defining the rules of a meaningful study is hard. I have even heard that 95% of franchises succeed, and 5% of non franchises succeed. That is ridiculous, as you pointed out.
I wish there was reliable data on the success rate of various ventures. Clearly, the 95% success rate of franchises has been shown to be an unvalidated study. I think the SBA was attributed that myth, but they have clearly disclaimed it.
There are industries where the franchise name is helpful, but get ready to fork out serious cash for them, i.e. a Chevrolet dealership. I think the food industry is one. It is hard to build a brand, so the name is in fact worthy of an investment in blue sky for a brand like McDonald's. Bad will comes with it, though, too; so it is important to do your homework, as you wisely suggest.
Google has turned upside down the idea of the repeatable model, though. Duplicate content on a website is the kiss of death to search engines, so the internet MLM model is dead. How many of them fail? I don't know, maybe they are not franchises.
Hi midnightpiper,
A brilliant article with some really important points.
I take it you bought a Cartridge World Franchise, based on what you have said here.
If not it is exactly the same as your experience, within 3 years The UK had 300 CW's. within the next 12mths this will be down to <150.
Hi guest,
It wasn't a Cartridge World franchise I bought, but I feel for you. Horrible that over half the Cartridge World franchisees will have failed within 3 years. Good luck in what you do next. Thanks for adding to this thread.
I have been involved in Car Rental Franchises and have printed my opinions in a hub http://hubpages.com/hub/Car-Rental-Franchise-or-In Needless to say, The only people that make any money are the Franchisors!
There are some great articles on the Franchise Foundations website about evaluating franchise investments, FDD's etc., including the experience of a franchise attorney - franchise expert who evaluated, bought and sold his first franchise. Really good info and tips. Go to these pages:
http://www.franchisefoundations.com/buyingafranchi
You know, I see this all the time. I recommend talking to existing franchisees within the franchise system to prevent this from happening. My website is dedicated to leting franchisees discuss their issues with eachother in a private manner. If you are interested in a specific franchise concept, I highly recommend visiting: http://www.thenakedtruthonline.com.
Some useful info here. It will make people think things through before commiting to a francise. It's always good to hear other people's good and bad experiences so you can learn from them.
Mr Truth,
Talking to other franchisees is great, but you really have to watch for the "I love it because I bought it" syndrome. Too many people don't want to admit, even to themselves, that they've been suckered and so you get positive views even from franchisees who are doing badly.
Unfortunately, franchising is all about growing a business for the franchisor and franchisees are merely expendable resources under the law. Governments and the special interests together with the business media protect the franchise systems.
The flaw in government regulation in the US enables rampant fraud against good faith Americans who invest in franchise. The flaw is the failure of the government to require the seller of the franchise to disclose historical unit performance stastics of the units in the system to new buyers. Thousands and thousands of Americans UNKNOWINGLY buy unprofitable franchises with high rates of failure of founding franchisees.
The status quo PUSHES franchises because all of the special interests gain EXCEPT the franchisees who don't thrive. A franchisor can thrive and grow even as a good percentage of the founding/first owner franchisess fail and lose their investments --especially when they can acquire the failed units through churning to continue to pay royalties and commissions to the franchisor.
The lie about the 90-95% success of franchising is still spread by all of those who sell franchises. Actually 50% of franchisees will fail out of business sometime within the first five years and the status quo works hard to keep this statistic out of the view of prospective franchise buyers.
Pretty disgusting state of affairs! http:thegreatfranchisingrobbery.blogspot.com/
Hi Carol,
I think that's a pretty powerful position you've got, but I don't agree entirely. I do know a bunch of franchisees who are very happy and profitable. I think, like with all things, that there are a bunch of ripoff merchants in franchising, just as there are in most walks of life.
The way in which franchises are regulated is pretty crummy, I'll agree with that. There should be a lot more compulsory information in the UFOC, like financial forecasts, enforced from the moment that the franchise has more than a certain number of franchisees (say after they get 20 on board), along with special warnings when less than 30 franchisees have successfully run the business for a 5 year period.
Midnightpiper
Actually, the statistics concerning survival of ALL small businesses are pretty grim. This is why the government has pushed franchising with ineffective and deceptive regulation that does allow franchisors, who can churn units, to somewhat overcome the terrible odds and perpetuate their chain systems.
Of course, those who do thrive within any system are happy that they are survivors and not part of the percentage who have failed.
The point is that investors in franchises should be given the odds of failure or success, as demonstrated by unit historical performance, by the seller of the franchise and not by other buyers.
It is no accident that the purchase of a franchise is treated "UNIQUELY" under the Uniform Commercial Code and The Franchise Rule.
The only somewhat reliable statistics available from academics like Dr. Scott Shane (Startup Failure --Small Business Trends) indicate that 50% of startups fail at sometime within the first five years and that only 29% are still standing at ten years.
It is because the government KNOWS that full disclosure of the risk by the seller of the franchise in terms of unit historical financial performance statistics would slow the sale of franchises that they refuse to do anything about the flaw that destroys so many good faith investors in franchises.
Hi Carol,
Now we're in violent agreement ;-)
The franchise success/failure rate is basically the same as non-franchise success/failures. The difference, as you so correctly point out, is that franchisors should be forced to explain this up front, before you buy, in the UFOC.
The stats that I've seen came from a study done at the International Franchise Research Centre at a London university, now apparently defunct. In this study they looked at a large number of startups and concluded that franchises were marginally less secure than similarly funded independents.
It makes sense, as the profit margins in a franchise are lower (taking into account the franchisor's cut). It's damning that franchisors lie so blatently and I agree with you that they should be forced, through legislation, to declare the truth.
Thanks for your contribution,
Midnightpiper
Google up the Article by Julie Bennett in the Franchise Times, November-December 2009, entitled "Expose, The unseemly side of franchising during the Wild West days."
Interesting in that she says in this Article that there was a FRONT-PAGE article in The Wall Street Journal in May of 1970 that read: "ONCE CONSIDERED THE DARLING OF WALL STRREET AND THE SAVIOR OF THE SMALL BUSINESSMAN, FRANCHISING TODAY IS SPURNED ON WALL STREET AND CURSED ON MAIN STREET."
Does history repeat itself?
Acorn Valley says:
2 years ago
Thanks for writing this. I'm on the verge of purchasing a franchise and this makes me want to back up and do some more research.