A franchise is never 'your own' business

I know I'm sending a big negative 'buyer beware' message here, and that there are indeed plenty of reputable chains where franchisees thrive. But after hearing some heart-breaking stories from of people who watched their life savings go down the tube, I don't think the need to do your homework can be reinforced enough.

http://www.cbc.ca
January 25, 2011

A franchise is never 'your own' business
Dianne Buckner

Next week the province of New Brunswick will join Alberta, Ontario and PEI in enacting franchise legislation. I can't help but think this is a very good thing.

Plenty of ambitious Canadians believe that buying into a successful franchise chain can be a wonderful, risk-free way to be your own boss, and reap riches. That may be true in some cases, but not always.

During the 10 years I was host of CBC's Venture, I reported several times on the franchising industry. And most of those reports were horror stories:

  • A Toronto businessman who lost his entire $200,000 investment in a coffee franchise, because head office had control over his lease arrangement and decided to close down the location after a rent increase.
  • A Winnipeg franchisee who was devastated when the chain opened another location very close to his (as the contract said they could), and his revenue was cut in half.
  • A donut shop franchisee who hadn't fully understood the franchisee agreement, and didn't realize that all the savings made by buying in bulk would go to the chain, not into his pocket.

Yes I know that getting in on a hot franchise can be a great thing. But it's never "your own" business.

A more accurate way to view it is that you're buying yourself a job — and not even a permanent one.

"You can't think 'I own this business,'" says Dan So, a London lawyer who specializes in franchising law. "You don't. You're basically renting the right to operate a business for a certain period of time."

So has just published a second edition of his book, Canadian Franchise Law: A Practical Guide. He says he's often had to talk clients OUT of buying a franchise.

"We do it a lot," he says. "It's difficult, because the client is very excited about the prospect. But after talking to them for a while you have to tell them, 'this might be a great opportunity for somebody, but I don't think that somebody is you.'"

Making the grade
I told So about another of my stories at Venture, where we visited a company that specialized in conducting tests for franchise chains, quizzing potential franchisees to see if they were suitable. One key goal: to weed out the entrepreneurial ones. "Entrepreneurs break the rules," the chief tester told us. "They're always trying to find a better way to do things. Franchising is about following the rules, and sticking to the formula."

So says plenty of chains test to avoid entrepreneurial types. He's speaking at an Ontario Bar Association event this month, on the subject of who is suited for franchising and who isn't.

Jim Treliving knows the world of franchising inside out. As the owner of Boston Pizza, and a Dragon on Dragons' Den, he hears plenty of pitches from people who think their business is ideal to be rolled out across the country (or the continent) as the latest, greatest new chain of franchises.

He usually asks them the same thing. "Are you profitable?"

It's amazing how many of them have to admit that no, they're not. I find this astounding, that people who haven't even begun to turn a profit at their first location somehow believe they're ready to sell similar operations to franchisees. And Jim often tells them the same thing.

"My famous quote is, 'If the franchisee isn't making money, the franchisor doesn't make money,'" he says.

As he accurately describes it, the system only works if it works for everybody.

Protecting the franchisee
The new legislation coming in New Brunswick may help make that happen. It's similar to that of other provinces, and many of the provisions are helpful to those who may be considering buying a franchise.

Franchise chains are now required to disclose all sorts of information to potential buyers, including financial results, and lists of current and former franchisees. In other provinces, such as Quebec and Saskatchewan, basic contract law and common law are used.

"We tell our franchisee clients to call these people, find out what their experience has been," says Dan So. "Call the people who've been terminated. Franchisees who've left the system in the last fiscal year are on the list with their contact information."

So also advises taking the information with a grain of salt, since even the very best franchise systems have a few unhappy campers.

I know I'm sending a big negative 'buyer beware' message here, and that there are indeed plenty of reputable chains where franchisees thrive. But after hearing some heart-breaking stories from of people who watched their life savings go down the tube, I don't think the need to do your homework can be reinforced enough.

http://www.cbc.ca/money/smallbusiness/story/2011/01/25/f-vp-buckner-franchise.html


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Risks: 30 different programs of kickbacks, shelf allowances and inside money, Business model had never created adequate investor returns, Buying a job, Can't buy lower priced products, Cannibalization of sales, Current franchisees can’t talk freely, Encroachment (too many outlets put in territory), Due diligence, Due diligence cannot predict or prevent post-sale franchisor opportunism losses, Due diligence cannot stop a predatory franchisor in the future, Gouging on supplies, Head lease advantage, Horror stories are merely anecdotal, Lease margins are an important source of franchisor revenue, Life savings gone, Must buy only through franchisor (tied buying), Rebate sharing, Renting a business causes problems down the road, Supply margins are a hidden added royalty payment, Canada, 20110125 A franchise

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