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5 Ugly Truths About Franchising
Despite what some experts may claim, franchising isn’t all sunshine and rainbows. Here are some of the potential pitfalls within the industry and how to avoid them.
When entrepreneurs are Googling franchise opportunities, they may come across this statistic: “Studies show that franchises have a success rate of approximately 90%, as compared to only about 15% for businesses that are started from the ground up.” Turns out, that stat is completely unproven. Support, brand recognition, lower costs — we’ve all heard of the advantages of franchising, but that doesn’t mean there aren’t horror stories. Subway franchisees were stuck in their contracts, McDonald’s franchisees were suing for discrimination — the list goes on and on. While there are several reasons to choose franchising, there are also several reasons why a franchise can fail.
There Can Be Unrealistic Expectations
When potential franchisees evaluate a concept, they usually go straight to the bottom line: how much money can I expect to make for my investment? This information is primarily found in a franchise brand’s Item 19 of the FDD, a document that outlines financial performance representations.
But it is incredibly important to keep in mind that these are not financial guarantees. Owning a franchise is risky. A lot of factors will go into whether an individual location matches the success of existing locations across the country — market, staff, timing, etc. Franchisees need to do their due diligence and talk to franchise owners to really get the inside scoop on the potential risk of opening a certain franchise.
There are Serious Legal Obligations
Investing in a franchise comes with a myriad of legal considerations that some entrepreneurs may be uncomfortable with. For example, many franchise agreements include a non-disparagement clause, which states that owners will not say anything negative about the company, their service, etc. This may lead to some sticky situations during the validation process, where existing owners may be hesitant to give you the truth due to their legal obligations.
Most brands also include a non-compete clause, which states that franchisees are not allowed to invest in or share information with competitors in the future. This is another factor that needs to be kept in mind.
There Is a Lack of Control
Perhaps one of the most obvious downfalls of investing in a franchise is the lack of control that comes with following someone else’s guidelines. As opposed to the freedom that comes with starting a business from scratch, franchisees will need to abide by the rules and procedures set by the franchise. This means riding the waves of management changes, acquisitions, supply chain issues, marketing strategy tactics, consumer habits and labor market concerns. Subway franchisees, for example, have long complained about the strict supply chain guidelines that prohibit them from making a better profit.
If absolute control over every aspect of the business is something you are after, franchising may not be the best route, although some concepts grant owners more freedom than others.
It's a Lot of Hard Work
One of the key advantages of franchising is the ability to follow a proven system that, ideally, will make your life easier in the long run and eliminate many of the challenges associated with starting a business. Still, that doesn’t mean ownership will be a breeze. Depending on the franchise concept, owners may be expected to run operations themselves for a certain timeframe, which will require being on-site day in and day out. Additionally, many brands have a certain timeline required for opening, which will mean incoming franchisees will need to put in the work to meet deadlines.
It Requires Major Accountability
A franchise agreement is a serious legal document, and it should not be taken lightly. Some brands, for example, require franchisees (and their spouses) to make a personal guarantee that means if financial obligations are not met, the franchisor can take their franchise away, put a lien on their home and garnish their wages. Not all franchisors will enforce such a role, but if they do, it must be disclosed in Item 3 of the FDD. That is why it is so essential to go through an FDD with legal counsel before signing on with a brand.
Franchising isn’t perfect, but it has given countless people in the United States an opportunity to achieve their entrepreneurial dreams. By coming into the process with the proper knowledge and understanding of the downsides, candidates will be able to make the right decision.
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