Why Most Franchises Don’t Work!

Why Most Franchises Don’t Work!

Franchises are everywhere today. But are they the ‘way to go? If it’s a McDonald’s franchise I’d say “yes” but for probably 80% of the rest, you need to be very careful. My advice is to check out each one on its own merits and ask the following questions.

Firstly, is this franchise someone’s ‘bright idea’ to sell a franchise network? Is there an existing demand for the company’s products or service? How much competition is there for these products and services? Is the demand likely to grow? This is a point that is often overlooked by budding franchisees. There must be a solid and growing demand for the products or service.

Secondly, what is the franchisor offering by way of ‘support’? Most franchisors oversell this point. When it comes to the crunch (usually after you have paid your franchise ‘buy in’ fee), you find out that what you are ‘buying’ is simply a so-called ‘opportunity’ to own a business in exchange for carrying 90 % of the risk. This risk involves the capital cost of ‘buying a territory’ plus your on-going franchise fees which need to be paid on top of the normal capital required to start a new business.

Thirdly, what are you getting for your franchise fee? The franchise fee is normally 6% of your turnover, of which 4% typically goes to the franchisor and 2% goes towards group marketing of the brand. So what does this mean in practice? If you are operating on say a 25% Gross Profit, then a 6% franchise fee on your turnover represents almost 25% of your gross profit! For example for each $100,000 of turnover, if $25,000 is your Gross Profit, then you will pay $6,000 in franchise fees, which leaves $19,000 to pay all the other bills, leave something for your wages of management and pay a return on the capital outlay that we have mentioned. I would suggest that this is not a ‘level playing field’, in fact it is heavily tilted in the franchisor’s favour! This is the one big killer of most franchises and for this reason I would generally not touch one (I did once against my better judgement and lived to regret it!)

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The exception would be a franchise that was a well-known and proven brand, offers ‘turn-key’ operating systems (McDonald’s is the perfect model here), and has a network of happy franchisees, most of whom are making money. If it doesn’t meet these criteria then walk away!

In fact, this is the ideal way to check out a franchise. Before you buy, ask for a list of all of the franchisees (not just selected ones given to you by the franchisor!) and get permission to go and talk to them. Use the above criteria as a ‘measuring stick.’ If the franchisor is not willing to cooperate in this, then walk away (if you have not already done so!)

If you are looking to start a new business, another option is to work from home with the benefits of very low capital outlay and overheads, no staff, no traffic hassles etc. By learning how to use the internet to access 1.5 Billion current internet users, you can make money on-line from the comfort of your home. That has to be a preferable business model.