Buying a franchise is one of those big life choices at least on par with buying a house, choosing a career or relocating to another city. But apart from the fact that prospective franchisees will be putting their life savings and at least a few years of their life into the venture, there is another reason why buyers of franchises must be particularly careful, says Byron Jeacocks, BUSINESS/PARTNERS regional general manager.
Although much is always said about the win-win dynamic between the franchisee and the franchisor – the hard work of the individual franchisees build the brand on a local level, and provides revenue for the franchisor to build it on a national level – there are undoubtedly times when the interests of the franchisor and franchisee clash.
Jeacocks gives an example of a franchise outlet in a certain area which is doing particularly well. The franchisee is very happy about his profitability, and to a certain extent, so is the franchisor whose revenue is likely to be linked to turnover. But for the franchisor the success of the branch means there is probably room in the market for another branch nearby.
That is the last thing that the franchisee wants, because when a new branch opens nearby, turnover in his own outlet is likely to drop sharply. So even if the franchisor is doing so much better because it now has two outlets in the region instead of one, the individual franchisee who owned the first outlet has to cope with a huge erosion of his turnover.
The problem can of course be sidestepped if the second outlet is offered as an opportunity to the existing franchisee instead of selling it to a new, competing franchisee. But many franchisors do not allow franchisees to own more than one store, says Jeacocks.
The reasons for this are complex, but at least one of them has to do with another clash between the interests of the individual franchisee and the franchisor. Single-store franchisees are much more likely to follow the bidding of the franchisor, while a powerful franchisee who dominates a region through ownership of many stores can afford to be headstrong, and therefore more difficult to deal with from the franchisor’s point of view.
Franchising may well be a win-win proposition between the franchisor and franchisee when things are going well, but when an outlet struggles to make it, the outcome is often a win-lose scenario with the franchisee holding the short end of the stick.
The reason is that a franchisee usually only has one chance at making a particular outlet work, whereas the franchisor may well have more than one stab at it.
Jeacocks explains that the pioneer franchisees – those who start outlets from scratch – may be perfectly capable business people, but they are often vulnerable to a poisonous combination of high levels of debt incurred to start the outlet, and the struggle to establish a client base from scratch. When the loan finance is just too high and the customers are just too slow to start supporting the outlet, the franchisee loses everything.
Not so the franchisor. If the first franchisee goes bust, the outlet can be sold to a second franchisee who may be less burdened by finance. Much of the hard pioneering work has already been done by the first franchisee who had run out of cash, and all it takes to make the outlet work is a fresh franchisee who is less debt-strapped. The second franchisee is happy, and the franchisor smiles with him/her.
What do these clashes of interest between franchisor and franchisee mean for someone who is considering buying a franchise? Certainly not that you should stay away from franchising altogether. Franchising still offers a great way for a beginner entrepreneur to get into business. Overall, there is more overlap in the interests of franchisor and franchisee than there are clashes.
What it does mean, says Jeacocks, is that prospective franchisees need to be extra careful, even more so than buying a house.
Buyers of franchises need to embark on a detailed due diligence investigation which starts with themselves. First, find out if the franchise suits your lifestyle. “Having a drink in a pub at 9 o’clock is not the same as serving customers at the same pub until late each night,” says Jeacocks.
He recommends working in an outlet of the franchise group you are interested in for a few weeks to make sure that the business suits your personality.
The experience should also give you a glimpse of the level of support the franchisor gives to each franchisee. Further research into this question must be done by speaking to as many existing and former franchisees as possible. For Jeacocks, the crucial question to put to a franchisee of the group you are interested in is: “Would you, if you had the money and energy, buy another of these franchises?”
If the answer is consistently negative, it is probably not a good investment.
Jeacocks recommends choosing a franchise group that allows franchisees to own more than one outlet, and making a detailed study of the constraints that the franchise agreement places on its franchisees.
Also make a very careful study of the levels of debt beyond which the outlet would not be viable. Often the only difference between a successful franchise outlet and one that goes bust is the amount of money the franchisee had to borrow to get it started.
Finally, while you can expect a measure of support from the franchisor – or even the franchisee seller if you are buying an existing outlet – don’t neglect to do your own market research and verification of customer numbers, turnover potential and feet counts. As a new franchisee, you stand to lose most if things don’t work out as promised