How franchises seduce those with the most to lose

Readers may finish the book determined never to invest in a franchise. But Opportunity Knocks suggests the allure of self-employment, and the myth of being your own boss, will continue to seduce those who can least afford it.

National Post
November 2, 1997

How franchises seduce those with the most to lose
Jennifer Lanthier

Only a few pages into John Lorinc’s cautionary tale about Canadian franchising, you may find yourself wondering why anyone would invest in the industry.

Perhaps it’s because they haven’t read this book.

Opportunity Knocks: The Truth about Canada’s Franchise Industry
By John Lorinc Prentice Hall, 367 pp., $22.95

Opportunity Knocks: The Truth about Canada’s Franchise Industry, is an impressively researched look at the myriad of franchises that mushroomed across the country in the past decade. An award-winning magazine journalist, Lorinc has produced an engaging account that charts both the spectacular successes of some franchisers and the utter failure of some franchisees. The resulting hybrid of expose and handbook for potential franchisees could even serve as a primer for politicians considering regulating the industry.

Lorinc makes it clear that franchising benefits from a largely unearned reputation of being a risk-free investment, attracting those who find safety in numbers. Canada now boasts 25,000 franchise establishments, with annual revenues of about $30 billion. Although franchising’s proponents paint the industry as an opportunity for laid-off managers to run their own businesses, Lorinc sketches a different picture. Instead, recent immigrants to Canada and young people seeking to “buy a job” because they face high unemployment have fuelled the industry’s rise.

Proponents of franchising claim that 90% of franchises enjoy long-term survival, while independent businesses are more prone to fail.

But the author, who can find no basis for franchisors’ rosy claims, offers instead a survey by a Detroit university professor that found a failure rate of almost 35% among franchises, compared with 28% among independents. And although another survey found 80% of franchisees were breaking even, 62% were earning less than the franchiser promised. About 40% reported that the franchiser had opened other franchises nearby, encroaching on their businesses to the tune of an average cut in earnings of 19%.

Lorinc’s case studies, which tend to focus on the fast-food sector, expose the risky side of franchising, the soft underbelly that bustling trade shows and hard-sell salesmen in musty hotel rooms prefer not to acknowledge.

Some franchisers inflict a broad array of hidden costs on franchisees: they levy fines when a franchisee contravenes their rules, or strike deals with suppliers to charge franchisees artificially high prices for their goods, then remit a portion of the inflated price back to themselves. One of the most common irritants is the practice of encroaching, that is, opening new outlets so close to existing stores that they cannibalize the first franchisee’s sales.

Some franchisers are so focused on growth that they are willing to sign up franchisees who clearly lack the financial resources or the disposition to make a go of things. If the franchiser makes more from the sale of a franchise than its operation, he may even help to push the franchisees’ businesses under.

The tension between franchiser and franchisee is a constant theme in Lorinc’s work and long before the end of his book it’s clear the typical franchise system is stacked in favor of the franchiser.

So long as the chain is generally healthy and both franchiser and franchisee are making money, that tension may be manageable. After all, the franchiser invented the business, developed its trademark, logos and practices. It’s not unreasonable that, for his pains, the franchiser receive an initial fee (one that can be as low as $10,000 or as high as your imagination permits) and regular payment of royalties.

However, flexibility is hardly a hallmark of franchising contracts and if a business falls on hard times, it’s usually the franchisee, not the franchiser, who loses. A franchisee who falls behind in royalty payments may simply arrive at work one day to find the locks changed and his store repossessed.

Despite the risks, Lorinc makes it clear there are always hopeful new recruits willing to take the place of the disillusioned or bankrupt. Readers may finish the book determined never to invest in a franchise. But Opportunity Knocks suggests the allure of self-employment, and the myth of being your own boss, will continue to seduce those who can least afford it.

Jennifer Lanthier is The Financial Post’s consumer products reporter.


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