In our previous post, 5 Advantages Franchises Have Over Solo Small Businesses, we discussed the tremendous advantages a strong franchise system can offer to entrepreneurs. Like anything, franchising also has its disadvantages. Many of these disadvantages are relative, and the degree to which they apply, or even exist, is dependent on the quality of the franchise. Below are 6 potential shortcomings of franchising.
#1: You’re Not the Captain of the Ship; You’re Just a Passenger
The basic premise of franchising is simple: a company allows you to make money with its business in exchange for your capital and energy. The key words in that sentence are “its business.” It is the franchisor’s company; you’re just renting a piece of it temporarily.
While smart franchisors work to make sure their franchisees are successful and have a voice in the direction of the company, in the end, the franchisor has the final say (within contractual bounds). The franchisor is the captain of the ship. And if the captain is drunk and steering the ship towards an iceberg, you will be able to do little more than watch while it happens.
#2: Business Models are Like Magazine Models…
…sometimes when you take away the air brushing, they are not so beautiful. The hard truth is that not all franchises work. The franchise industry has a dark side filled with unproven business models and hard-selling franchisors that know how to push the right buttons to sell the dream of entrepreneurship. The cure for this ailment is simple: do your due diligence.
#3: Good Models Can Have Bad Agents
Okay, I just couldn’t let go of the analogy… Even a franchise model that works cannot survive under the stewardship of a bad franchisor. Not all franchisors know what they are doing; others succumb to the same flawed organizational behaviors that plague non-franchised companies big and small.
Additionally, sometimes Darwin takes a vacation. One would think that a successful franchise system would always evolve. Not true. Sometimes franchises devolve. This can happen for many reasons – poor leadership, shifting priorities, new ownership, departments engaged in the Production Paradox. Whatever the causes, watching a franchise break down after you have invested your time and money is not a pleasant experience.
#4: You Are the Business Model
When a franchisor’s primary revenues come from its own franchise network and not the company’s customers; you have a system where a franchisor is highly incentivized to maximize the profits from their primary revenue stream – you. Unlike a customer who can choose to take their business elsewhere, as a franchisee, you are often contractually bound to buy what the franchisor tells you to through the channels the franchisor dictates. All franchisors make money from their franchise network; it is a question of proportion and incentives.
#5: Neighbors Are for Neighborhoods, Not Franchise Territories
If you read our previous post, 5 Advantages Franchises Have Over Solo Small Businesses, we posed the question: how would you feel if you opened Jim’s Tutoring Pros only to have a Sylvan Learning Center pop up across the street a few months later? Even more disturbing would be to open a Sylvan Learning Center only to have another Sylvan Learning Center pop up across the street a few months later. (For the record, I am NOT saying that Sylvan does this. I am just keeping the example rolling from the previous post.)
Not all franchisors respect their franchisees enough to maintain healthy territories. Franchisors and franchisees can have legitimate disagreements about the best territory size that achieves a balance between franchisee health and market penetration, but franchisors who oversaturate markets to the point of damaging the success of their franchisees should be viewed with extreme skepticism.
#6: You Can Check Out Any Time You Like, But It Is Hard to Leave
A franchise agreement is not a trifling matter, and franchisees who wish to exit a system will have to do so within the confines of their franchise agreements. When a franchise is doing well, this constraint can be a mere formality. When a franchise system is floundering, the contractual restrictions on selling the business can form the legal equivalent of handcuffs. Not to mention, if the entire franchise system is having trouble then you are going to be treated to an up close introduction to the laws of supply and demand. Getting out of a franchise that is having trouble is much more difficult than removing oneself from one that is successful. Think of what happens to a stock’s price when there are lots of sellers and few buyers. It’s the same deal.
The Disadvantage that Is an Advantage
One item that you will find conspicuously absent from the list above is lack of control. I am referring to the micro level, not the Captain of the Ship level. The micro level concerns the basic operational constraints inherent in franchising, such as not being able to create your own marketing or being limited in your product offerings. You will often find this item as a disadvantage of franchising on generic “disadvantage” lists found on the Internet.
While the lack of operational control can be a reason not to pursue franchising, it is not listed as a disadvantage because it cuts both ways. While every franchisee would like as much control as possible over their own franchise location, most franchisees know that the franchisor’s control over other franchisees is almost always to their benefit. As a franchisee, you have invested tens or hundreds of thousands (maybe even millions) of dollars in a brand; you do not want rogue operators devaluing your investment and hard work by running an inferior store and creating bad customer experiences and poor word of mouth.
In sum… While the above list of franchising disadvantages should be heeded, it should not necessarily dissuade anyone from investigating franchising as a path to entrepreneurship. Franchising has been a powerful tool for achieving small business success for many decades. Like any business opportunity, the pros and cons should be evaluated and the risks and rewards analyzed. As always, do your due diligence.
_________________________________________________________
Notes:
Regarding item #4. Assuming it comes from business growth and not a change in the royalty structure, a franchisor who grows revenue through royalties does so by increasing top line business for its franchisees as well. Within reason, royalties are a revenue stream based on the company’s clients, not its franchisees.
[...] For more on franchising advantages and disadvantages, please check back for our upcoming companion post: 6 Potential Disadvantages of Franchising. [...]