True Franchise Confessions

What is it really like buying a franchise? Find out from the horses’ mouths with expert advice added in.


True Franchise Confessions

Walk a mile in a franchisee’s shoes, and you’ll find that it could be a walk in the park – or over crushed glass. We figured the best way to know exactly what the franchisee experience is like is to hear it straight from the source. So we asked six franchisees, ranging from happy to disgruntled, to anonymously share their unadulterated thoughts, opinions and advice.

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And just in case you’re not convinced by the franchisees, we also got two experts to speak out: Michael Seid, founder of franchise advisory firm MSA Worldwide and co-author of Franchising for Dummies, and Robert Zarco, founding senior partner of Zarco Einhorn & Salkowski, a US law firm that represents unhappy franchisees.

Scenario: Happy days!client-eastwood-painting

Confession 1

One aspect that David liked about the moving-service franchise he purchased in the US was its size: “If it’s not a big franchise, it’s easier to feel you’re not just a number in the system, and the market’s not saturated.”

Seid: Smaller franchisors can’t afford to let the first couple of franchisees fail, so they tend to get very personalised and over-serviced.

That’s good and bad – more good for the franchisee. A smaller franchisor may be struggling with critical-mass issues and be unable to offer advertising or proper brand advertising, so it really depends.

In his first year, David set the national record for first-year revenue – largely due to the time he invested. “I worked my butt off that first year or two – seven days a week, 12 hours a day,” recalls David. As a new franchisee, don’t expect easy hours.

Seid: We say in the Dummies book that if your family does not buy in, you’re going to fail. The pressure of not seeing the family during the early days is deadly. We strongly recommend people
self-assess before buying.

Confession 2

A former entrepreneur, Sean is now a happy ramp-rental and sales franchisee in the US, but he warns others not to equate being a franchisee with entrepreneurship:

“A true entrepreneur wants to build from the ground up, but the franchise has already been built by the franchisor. You have to work within their system, even though you do, in a sense, run your own business.”

Seid: Franchisees are not entrepreneurs. They’re entrepreneurlites at best. An entrepreneur wants to chart his own course. Franchisees have to follow a set of rules, and they cannot violate a franchisor’s brand. If you have to have things your way or think the franchisor’s product needs to be improved or changed, you should start your own business.

While Sean’s franchise was marketed as home-based, the franchisor made the logistical considerations clear, and Sean ended up renting storage space for the ramps. Make sure you find out exactly what a home-based franchise entails.

Seid: Ask, “Are there any zoning requirements?
Do I need a van? What kinds of deliveries are coming in? Are customers coming to my house?”

Scenario: The Disenfranchisedwestern-movies

Confession 3

Bradley spoke to franchisees the franchisor suggested and found all were doing very well. However, when he randomly stopped by another of the sandwich franchise’s locations, he heard two hours’ worth of horror stories. Bradley figured this location was the exception to the rule but now realises he should’ve investigated further.

“Don’t just talk to the people the franchisor provides,” advises Bradley. “Stop in at other stores and talk to the owners.”

Seid: There’s an anonymity over the telephone. Call and be very respectful. Say, “Hi, I’m looking to buy a franchise. Is now a good time to talk?” Call those who have left the system in the past year.

One major contention Bradley has with his franchise is unrestrained growth. With no protected area, he found three stores placed less than two kilometres away from his location.

Zarco: The franchisor reserves the right to place a competing unit in a location regardless of the impact that will have on existing franchisees’ sales, profits and incomes. When you join a franchise, you should have an expectation of reasonable impact. Factor into your business plan how your business will be affected by a first and then a second location near you, typically taking 10% and 5% of your sales, respectively.

Confession 4

Leo thought the business-coaching franchise he purchased would allow him to help others run successful businesses, but he quickly became unhappy with his own. Leo felt the education provided by the franchisor became ‘stagnant.’ “They weren’t creating new tools, providing new information or research to help my business,” says Leo.

Before sinking your money into a franchise, Leo suggests some questions to ask franchisors: “How have you changed in the last five years? What are you doing today that is different from last month, especially with technology? What’s the copyright date and publication date of your procedural manuals? If it’s more than a year old, it’s old.”

Seid: Also ask, “When was the last time you did consumer research? Who did it? What were the results? What have you done to improve your product?”

While Leo was well-qualified to offer business coaching, he was dismayed to discover unqualified fellow franchisees. Make sure the franchisor isn’t accepting sub-par franchisees just because they have the money. “If you have to go through multiple interviews, then that franchisor has ethics about who joins the team.”

Seid: Check for psychological and personality testing, serious questions about background and qualifications. And talk to other franchisees – if they’re not up to your standards, get into a system where they are.

Confession 5

Samuel purchased an area development agreement for a Mexican food franchise in the US after the franchise’s CEO enticed him with stellar average unit volume numbers, which he later found to be inflated.

“We had significant verbal misrepresentations,” says Samuel, who claims the numbers the CEO gave him differed from those in the disclosure document.

Samuel also alleges the franchisor used aggressive sales tactics, even ignoring the company’s own financial requirements so Samuel could qualify. A red flag? You bet.

Seid: Franchise sales people are gifted. They play into your ego, drive, future and beliefs. You need an advisor. I send people to lawyers [I trust], because they’ll dispassionately look at a franchise and say, ‘This is crap.’

Zarco: When a franchisor is looking to go public and increase the value of its company, it sometimes engages in aggressive sales tactics by misrepresenting the average unit sales volumes in order to seduce new franchisees.

Sometimes a franchisor will bend the rules when it finds someone ready to put money down to open new units, even though that person may not be financially qualified.

When Samuel asked about marketing strategy, he was told it consisted of giving away free food at events. The franchisor did not heavily advertise; instead, marketing funds were used for the CEO to attend awards shows and to provide free salsa bars for celebrities.

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Seid: Ask the franchisor what results they’re seeing in their advertising. If they’re not measuring results, get up and run – they’re amateurs. Ask them how much of the advertising dollars are spent on non-marketing functions. Most franchise agreements allow the franchisor to spend [advertising] money on administrative costs, which can include the salary of the marketing person up to 18%. It can also pay for overheads.

Scenario: The Big Picturethe-good_western-movies

If you take one thing away from all these experiences, let it be this: There are great franchisors and, inevitably, bad ones. Zarco recommends having an experienced franchise counsellor review the franchise agreement and the disclosure document, and getting a complete and precise understanding of the respective rights and obligations of the parties.

While too many prospective franchisees don’t bother with legal counsel, Zarco estimates 70% of his clients could have avoided lawsuits had they sought counsel from the beginning.

“Don’t be penny-wise and pound-foolish,” says Zarco. Apply that adage to the time and money you invest before buying a franchise, and happy days are sure to come.

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