The F Word……. F F F Franchise!
Updated: Jul 7, 2020
What's causing all the negativity about Franchising?
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Franchising can be great, but it’s not all roses. It’s certainly not the best choice of growth structure for every business. So what's causing all the negativity about Franchising?
The intention here is not to be bias or bag any particular brand, rather to open an insightful discussion about Franchising and, explore why some people perceive Franchises in a negative light. I will start by sharing some of what I've learned.
The goal is that this blog will help others increase their awareness about Franchising and subsequently, make good informed decisions about their own business ventures.
In a broader sense we hope consumers will gain greater insight into Franchising. This will help all of us make better consumer decisions and informed opinions. It’s a good idea to seek various points of view from other credible sources and, take your time in drawing conclusions and forming opinions.
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The F Word
Don’t say it….. F F F FRANCHISE! Using the word “Franchise” can have the same effect as dropping an F Bomb at a church. In some cases, speaking this very word is enough to instantly shut down a conversation.
I’ve worked in different roles in Franchising over the years and experienced this phenomenon plenty of times, “oh…. you're in Franchising” as they struggle to stop their eyes from rolling in the back of their heads. You may be curious to know why some people are negative towards Franchising. You probably have your own opinion already. Let’s dive in and have a look.
The fact is, Franchising has received some bad publicity. It seems that people are increasingly more weary of Franchising. Media attention is largely focused on the exploitation of employees. This is a serious matter though you don’t need to google too far to learn that exploitation and wage theft appears to be a wide spread problem in Australia, regardless of the industry or business structure. When a Franchise comes under scrutiny however, it seems to make more noise in the media.
Franchising is governed by the ACCC with comprehensive legislation called the Franchising Code of Conduct. The Code is being improved on continually to tighten up areas of concern and punish offenders with stricter penalties. So… What's going wrong with Australia’s Franchises?
It’s not just those employee exploitation cases giving Franchising a bad wrap. There are other core issues of concern though again, these concerns are not just limited to Franchises.
Consider the following two terms:
1. Caveat Emptor is latin for “let the buyer beware”. It implies the buyer is solely responsible for checking the quality of the goods before purchase.
2. Due Diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
These two terms are very important as they put the onus on the buyer to satisfy themselves that their purchase is good. In simple terms 1 + 2 = DO YOUR RESEARCH! You are ultimately responsible.
By law, Franchisors can’t lie or be fraudulent when representing their products, services and business opportunities. Nor can any other business for that matter. All consumers are protected by consumer law governed by the ACCC. With regard to Franchising, Franchisors must give prospective investors detailed disclosure which should including factual information about the business, owners, franchisees and financial position.
The investor however is responsible for reviewing this detailed information and the onus is on the investor to determine if they believe the investment is a good one.
Jumping into a Franchise blindly is not a great idea yet people do this all the time. Relying solely on the system, brand and Franchisor, but not considering all things. It’s not to say taking risks can’t be rewarding as they absolutely can. It’s just ideal that you completely understand the risks and opportunities before diving in headfirst.
Only Invest What You Are Prepared To Loose
Data and analytics provider illion revealed 54,992 businesses went bust in Australia last financial year. The retail industry was hardest hit. It’s safe to say with failures of this magnitude across the board, Franchising isn’t solely to blame.
There are no guarantees you will succeed in business regardless of your chosen business structure. In every structure and every industry there are pros and cons. Good guys and bad guys. Winners and Losers. This, is business. This is the risk you take.
Tarred With The Same Brush
Another phrase I’ve heard a bunch of times is, “I will never go into Franchising because my [insert friend or relatives name] got burnt when they invested in [insert franchise brand]” as they fold their arms conclusively.
Opinions can be easily formed however a small minority of Franchisors and Franchisees are lacking in integrity. Unfortunately, some of those negative opinions are warranted. These issues however, are not limited to Franchising. They exist in all business structures. Most of us have war stories of people being brutally dishonest and misleading, especially when money is involved.
I’ve heard people say “I won’t give my business to any Franchises.” They literally mean ALL Franchises not just one particular brand. Their negative experience/s whatever they may be, appear to have left them unwilling to deal with an entire business sector.
It’s an interesting stance as you may never hear them say “I wont deal with Pty Ltd Companies ever again.” I wager these people are unaware of the many Franchises they still give custom to each week and probably don’t even know they are actually Franchised businesses.
Franchisees are independent business owners therefore they are responsible for their customer complaints. If a Franchisee doesn't provide good customer service, the customer may turn to the Franchisor for help. A good Franchisor should help resolve the matter yet sometimes they don’t. They simply redirect the customer back to the local Franchisee and wipe their hands clean. This can be very damaging for the reputation of Franchises.
Franchising is a well publicised business sector which means it is recognisable by consumers as somewhat of a brand itself. If a consumer has a bad experience with one Franchise, they may tar all Franchises with the same brush.
You Can’t Buy A Good Reputation… You Earn It!
When you launch your business as a Franchise, you don’t receive a good reputation by default. Reputations are earned over time, and though your honourable dealings with other people.
When doing your research be sure to speak with a number of business references. Referees are ideally people who do, or have done business with the Franchisor. It is especially important to speak with a number of current Franchisees and not just the top performers. These discussions will give you some clarity on who you are dealing with and if the Franchisor has earned a decent reputation.
If the spread of referees is diverse enough, you won’t receive perfect feedback. This is actually a good sign because it suggest referees are being honest. In any business group there will be some gripes, this is normal. What you are looking for is to identify and seperate the gripes from any more serious and consistent complaints.
The Blame Game
A gripe from some under performing Franchisees is that they believe they were mislead in the sales and recruiting process. The under performer may become disgruntled and the blame game starts.
Franchisors have strict guidelines to follow under the Franchising Code of Conduct and serious misrepresentations have serious consequences including hefty fines. Unless there is clear evidence, it’s difficult to prove misrepresentations and quite often, there can be a strong opposing argument that the Franchisee is actually responsible for much of their underperformance.
It is also very expensive to take legal action without any certainty you will win. The harsh reality is that Franchisees who are failing don’t often have a whole heap of cash in reserves to clobber the Franchisor over the head with.
The best precautionary measure you can take is to invest in good legal advice upfront. Have an experienced lawyer review the Disclosure Package as part of your due diligence. Sure legal costs can be pricey. Suck it up. It is the cost of doing business. Consider the cost if your investment fails. Good legal advice and protection may actually be the best insurance your money can buy.
Expect To Be Sold To
As more and more Franchisors establish themselves the competition for your business increases. Expect sales executives to try to hard sell you. Expect the marketing material to be glossy and showcase the good stuff. This is normal. Go through it, absorb it, have a coffee and a biscuit…. Now it’s time to get to work and do your research. What’s it really like?
Don’t be lured in by sales pitches. One getting thrown around often is “Franchises are a safer bet compared to independent businesses.” The claim may be accompanied by a convincing statistic however, often there is little said about the source of the statistic or how the statistic is calculated and audited.
Most Franchisors package up a comprehensive “kick start” which is included in your upfront fee. This suits a lot of people who want to learn from experts and don’t want to do it all themselves. This has value however it would be wise to not assume Franchising is any “safer” with regard to business failure rates. Don’t be fooled by persuasive statistics.
Consider word “Failure” indicates the business is closed. What would be ideal is to also consider statistics measuring business success and profitability. Businesses can hang on in a state of severe distress for several years. Some stay in distress and never close.
It's fair to say some good Franchise brands reduce start up risk through their kickstart, just don’t be a sucker for the sales pitch. Franchises don’t necessarily reduced your risk when it comes to business failure rates, or rather business success.
In the Disclosure Package the Franchisor will be required to disclose details of past franchisees and what circumstances and year their agreement ceased. Don’t be alarmed if there are a some failures on the list. It happens. The real question is why?
It would be ideal if there were no failures, but if there is, check to see that the volume of failures is reasonable when compared to that particular industry. It may pay to ask existing franchisees what their opinions are of those failures and what their opinions are of the proposed location, site or territory of the franchise you are considering investing. Ask them about profitability and satisfaction.
Make Sure The Glove Fits
Sometimes people find themselves in a job or business they dislike or are not well suited to. Add to this they may find themselves working with people they clash with. This is a recipe for disaster.
If you are considering buying a franchise, insist on meeting all the key managers, owners (if they are active in the business) and, key staff with whom you will be in business with. Franchise Agreement can be terms of 5 years, 10 years or longer. Not meeting with the team would be like an arranged marriage where you’ve never met your spouse prior. Fingers crossed.
Recruiting new franchisees is a tough gig therefore some Franchisors and sales executives drop their standards and will “flog off” Franchises to anyone. Essentially if you’ve got the money… you qualify. Even if their marketing material states otherwise.
Don’t buy into the sales pitch that “we can teach this system to anyone.” Insist on a reasonable amount of hands on experience before signing up however, don’t expect Franchisors will share their secret herbs and spices upfront. They should however be willing to give you a reasonable amount of exposure to the business operations, products and services. This way you can be reasonably certain you have what it takes to acquire the necessary skills and, remain enthused about the business long term.
Us humans are capable of making some really poor decisions and we end up finding ourselves in some odd situations. Imagine buying a dog wash franchise and realising after the fact that you are allergic to dog hair. Crazy stuff like this happens. Don't be a sucker.
Also, when going into business, consider your own personality type. Buying a Franchise may not suit people who desire complete control or the freedom to be creative. Whilst good Franchisors will listen to and implement beneficial feedback from their Franchisees, it is important to note that Franchise Agreements are usually strict on what you can and can not do. If you desire freedom and control, consider going down the path of creating your own business. We will expand on this later in the blog as this paragraph is quite general in nature.
Poor recruiting standards and the hard sell approach, can lead to a multitude of internal operational problems and clashes over time. Core symptoms include poor customer service, Franchisees leaving, key staff resigning, Franchisees being terminated and worst of all, Franchisees and Franchisors failing. It's a great idea to make sure the glove and the shoe fits.
The Balance Of Fees
Franchise Agreements usually commit the Franchisee to pay the Franchisor an upfront Franchise Fee, and then ongoing fees.
The upfront fee should cover the costs associated with kick starting the business and, ideally leave a reasonable surplus for the Franchisor. Franchisor’s would be wise not be reliant on this surplus to maintain a viable business. Ideally the ongoing fee provides for long term viability.
Ongoing fees should cover the entire costs of the Franchisors business and all things going well, return a reasonable profit. Franchisors rely on this revenue to provide sufficient support services to Franchisees. Added to this, Ongoing Fees cover the investment in business development and brand development.
A Franchisors success is dependent on the success of their Franchisees.
Ideally, Franchisors would get expert advice prior to setting their fee structure and, that advice would involve completing feasibility studies and cash flow forecasts to ensure the fees are adequate, but not too suffocating for the Franchisee.
The balance between ongoing fees and upfront fees is a very important equation. Getting it right will allow for both Franchisee and Franchisor to grow and be profitable. Getting it wrong will see cracks form and ultimately threaten the success of the entire system.
If Franchisees collectively complain about their fees, it is probably because they believe they are not getting value for money. It is up to the Franchisor to remedy this. Sometimes Franchisees just need better communication. To be shown exactly what they get for their money. Other times the value isn't there and Franchisors appear greedy.
There are a number of theories and opinions on how to set the fees. One glove does not fit all therefore, it is wise to not just copy what others are doing. Seek professional advice and study your actual data in your existing business structure.
Consider trailing a few company owned “pilots” first so you can gather some intelligence, actual data and constructive feedback before making any decisions and, whilst you still control everything.
It is important to consider that when you become a Franchisor, your core business changes somewhat due to choosing this new growth structure. Now you not only provide the same goods and services you did previously, you are also in the business of selling franchises and, providing ongoing support services for your Franchisees.
It’s possible the existing business owners and management lack experience and/or underestimate the expertise needed in this field. It’s not uncommon for them to take a learn-on-the-fly approach rather than investing in some specialist expertise.
There is an abundance of information resources available online and you can "wing it" and self educate. Perhaps do both. Self educate and, select some good advisors to help you from the outset. Your intimate knowledge and eagerness to learn, added to their experience should serve you well.
The reality is by growing, you are creating a greater opportunity however in turn, it comes with greater risk. It would be wise to speak to others who have franchising experience and, others who have experienced growth in a similar industry.
Would you sky dive after watching a few youtube videos on how to skydive? The greater the risk, the more important it is to get advice and clear instruction from experienced people.
Please Leave Your Creativity At The Door
The very concept of Franchising suggests it lacks in freedom and creativity. With chains and Franchises, the aim is to replicate and multiply the same model with the goal of producing similar or identical goods and services in other locations.
Some people gripe and others loath business replication models labelling them as formulaic and unoriginal. It's not hard to understand why, especially with the generation of hip and happening millennials and, with consideration to how digitally connected we are these days. It's technically not "new" anymore if its more than a few days old.
Australia has 19 cities that have over 100,000 in population. I've visited most of these cities and it's safe to say there are some wonderful differences to be experienced, yet the service and shopping is well... much the same.
Let's be fair. If the goods and services are in popular demand at a particular location, it would be fair to say that business replication is generally a good idea, at least for the period of time those goods and services remain in demand. These staple goods and services are what people need. At least that's what people believe.
It really comes down to maintaining balance. A good mix of staples and variety. If balance gets out of whack, it may get boring. Boring paves the way for new opportunity. New entrepreneurs take ideas to market and outdated ones reinvent themselves or, close down.
It's fair to say that entrepreneurs who turn their ideas into Franchises and chains, get to be somewhat creative. At least at the outset. Creativity can be stifled however once the business grows. In Franchising it can be difficult to effect change once the group is established. A Franchisor must usually convince their Franchised business partners to agree. Sometimes, all it takes is one or two objections to cast doubt and spoil the party. From basic changes right through to reinvention. Franchises can be slow to implement change. This can stifle creativity and leave them at somewhat of a disadvantage compared to competitors.
Company owned chains often give owners complete control therefore if you believe you may need to make a number of changes or react quickly to competitors, it may be wise to chose a company model for your growing business, or at least, ensure the Franchise Agreements are robust with regard to what specific powers the Franchisor has to implement change.
Good Franchisors understand the above mentioned concepts. They qualify Franchisees thoroughly in the recruiting process to ensure Franchisees are agreeable to the Franchisor having certain powers. It's fair to say not all people want to be creative or have control. Many simply wan't profitable businesses that will reward them for their efforts and give a good return on investment. Many people respect the wisdom, creativity and capital value of a proven successful Franchise system.
Some Franchisors are taking it the other way and relaxing on certain controls. Their agreements give Franchisees greater power to create processes and select goods or services themselves. The Franchisor simply provides core systems and brand support.
Some Franchise are quite creative by their very nature. They offer support but don't stifle creativity. I lead a team of Franchisees who were very creative. We encouraged their creative input within appropriate parameters. This approach proved to be very valuable as some key processes were significantly improved upon. We coined it, "The MacGyver Award."
In a broader sense, as a consumer, you cast a vote every time you shop. Convenience or creativity. Chain or independent. Unique or mainstream. The choice is yours. The fact is businesses will not succeed without demand therefore consumers in their respective regions, collectively have the final say.
Franchisors and Franchisees would be wise to not assume it will work everywhere in exactly the same way. The key is to understand the local consumers and deliver what they want at a price they believe is value for money.
Franchising must be doing some things right otherwise Franchises simply would not exist. The fact is Australia has become the Franchise Capital of the world and so far, it has proven to be versatile enough to keep consumers coming back for more however, time will tell if Australian Franchisors really understand consumers, and can adapt as needed.
Franchising Does Work
According to the 2016 Franchising Australia Survey, there are currently 1,160 Australian Franchise systems and an estimated 79,000 Franchise units in Australia. This dynamic industry contributes $144 billion to the Australian economy annually, generating almost 500,000 job positions.
Franchising is growing and particularly in Australia. In fact Australia boasts the most Franchises per capita compared to any country in the world, including the USA.
This suggests the bigger picture is a positive one for Australia. Franchising contributes significantly to our economy. Most importantly it creates jobs, livelihood and business opportunity for Australians.
This blog highlights some key issues that contribute to the negative perceptions of Franchising however, it is fair to say some of the issues raised, are applicable to business in general. Furthermore the blog is limited to my own experiences, knowledge and research.
Franchising looks like its here to stay and despite some frustrations and issues, the sector appears to be serving many Australians positively, in both a business ownership sense, and a consumer sense.
Franchising has not been so kind to some, but does it warrant being branded the “F Word?" Considering the whole thing, my opinion is no. That said, don't be naive and assume Franchising will save the day if things don't go how you hoped.
Some people won’t recover from their negative experiences and if those experiences relate to Franchising, they may always blame Franchising. But is it really Franchising or, is it business in general? Sometimes it probably is Franchising. No business model is perfect. They are all run by people and sometimes people fail at Franchising. Consider that Franchising may not have been the best choice for that business and/or, that person.
The Franchise industry in Australia is evolving and growing. Laws are continually being updated. This is a good sign as it shows economic activity and suggests the Australian Entrepreneurial Spirit is alive. Yes it appears Franchising is a contributor for Australian innovation, creativity and entrepreneurialism.
Franchising has only been around since the 1970's therefore it's still in it's infancy. It may take some more time for the sector to mature, stabilise and earn back some credibility. Be persistent, patient and open minded. Franchising does work when it's done right.
People are becoming increasingly more aware and less likely to be exploited however we need to be conscious of doing thorough research and encouraging others to do the same. If franchising gets too sleazy and/or cheesy, as consumers and investors, it’s our duty to call them out and take our business elsewhere.
To be frank, if you choose Franchising, you will need to live with the fact that some consumers simply don't like Franchises, and won't ever be convinced otherwise.
Franchise systems should remain a good growth model for certain businesses provided they set a fee structure that works for everyone involved and, provided they deliver quality goods and services, that consumers demand in the specific region.
People should continue to find it attractive to invest in Franchises provided the Franchisor can continually demonstrate value in the brand, systems, products, services, training, fees and ongoing support.
All this means little if we lack integrity. Be sure to follow through, do what you say and say what your mean.
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