Top ten myths about buying a franchise – Part 1

Generally most Americans are not happy working for someone else or being in the corporate rat race. So the idea of being your own boss and controlling your destiny is very appealing. Besides some of the many “get rich quick” schemes on TV, there is one type of business that seems like an easy escape from the corporate (READ: Dilbert) world. It is to buy a franchise. Now there are many franchises available in a multitude of industries, but they all have two things in common. First, they project the image of financial freedom. Second, beyond a few boilerplate legal disclaimers – “By signing this contract, the franchisor is in no way guaranteeing the franchisee a profitable enterprise” – the franchise company (like a politician) only tells you the good news. So, to shed some light on franchising for readers of this site, I have complied a list of the top ten myths associated with buying a franchise. These items come from my own real life experiences when I owned a second-tier franchise for one year before selling it for a $170,000 loss. This very expensive lesson means that I know of what I speak (write).

1. Buying into a brand – So you think that by purchasing a franchise, you are buying into a brand. And because the brand already has name recognition, you will only need to do a minimal amount of advertising. Basically – as the saying goes – “If you build it, they will come.” Well, unless you are in a fantastic location, you are competing against all the other franchisees/small shop owners in the neighborhood and people are NOT as loyal to any one brand as you think (with the exception of NASCAR fans!). So don’t get lulled into this sales pitch.

2. One-sided contract – The contract you sign with the franchisor is extremely one-sided. If anything goes wrong on your side, it is your problem. And if anything goes wrong on their side, they will take their time fixing it. Sure, they want you to succeed – more royalties for them – but you have no leverage over them if the ship starts to sink. And trust me, if you get too “agitated ” or “pushy”, their lawyers will pull out that contract and enforce it to the letter. And remember, you are losing money, so you cannot afford a decent lawyer to put up a good fight.

3. Turn Key Operation – So you think that buying a “Turn Key Operation” is going to compensate for your lack of industry experience and management skills – right? Well, like most things in life, this is a two-edged sword. The franchisor, in fact, will have policies and procedures that are documented to a shocking level of granularity, but these policies also leave very little room to maneuver when the money is NOT rolling in. Specifically, your fixed costs are in fact – fixed. And your variable costs are not as variable as you would think. For instance, with most franchises, you are required to purchase your products from the franchisor, one of its subsidiaries, or a preferred vendor. Therefore, you cannot go shopping around for the best price on the products you sell because the franchisor will not let you. Their argument is always the “quality factor”. How can they guarantee a consistent experience for all customers in all places if the franchisees are buying different products from different vendors? A reasonable assertion, but one that limits your ability to control one of your biggest costs.

Likewise, payroll is a variable cost, but most franchisors require that you have a minimum amount of staff on duty. A franchisee certainly does not want customers sitting in a long line because there is only one individual manning the store, but it is not very cost efficient if you have the same number of people on duty during busy periods as in slow periods (I am sure you have noticed this). Bottom line, “Turn Key” is great when you are making money but gives you very little flexibility when you need it the most, like when you need to cut costs.

You can find the next two parts of this series via the links below:
Here are three good books on franchising worth reading if you want more detail on buying a franchise and the pro’s and con’s of doing so:
Photo’s courtesy Travelling Fools.

5 thoughts on “Top ten myths about buying a franchise – Part 1

  1. Pingback: Five Factors to Consider Before Buying into a Franchise Opportunity | Saving to Inve$t

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  4. Pingback: » Top ten myths about buying a franchise – Part 3 | Saving to Invest

  5. Pingback: » Top ten myths about buying a franchise – Part 2 | Saving to Invest

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