Franchisee Failure: Logical Reasons or Lame Excuses?

personal accountabilitySome time back, posted on LinkedIn was a discussion about franchising that generalizes negative franchise experiences, places blame for the experiences on “improper practices” and ultimately forces the franchise community to defend its practices, and ultimately, its integrity. My question is, “When do franchisees take responsibility for their own actions, or in many cases, their own in-actions?”

Too often franchisors are assumed to have done something wrong in the franchise sales process, when in fact, they have been diligent throughout the process. Certainly, that does not mean there aren’t franchise sales professionals taking shortcuts and providing misleading financial performance representations. I’d be a fool not to acknowledge that this occurs! But in having surveyed hundreds of franchisees that have failed over the past five years, I have discovered a multitude of issues that may have contributed to franchisee failure. And, in only a handful of cases did these franchisees complain about false promises or improper disclosure from their franchisor.

Some of the issues that may have contributed to franchisee failure include franchisees’ lack of general business skills, little or no emotional support at home, personal or family members’ substance abuse, and as a result of just sitting back and waiting for business to come to them. With this in mind, I believe franchisee training should address business 101 skills and franchisees need to understand the necessity of grassroots marketing. With respect to the “family and personal” issues, although franchisors cannot and should not be family counselors, many do promote their franchise as a family, and as such, should attempt to identify problems when franchisees begin to show signs of failure. At least they should keep their eyes and ears open for troubling signs outside operational issues.

As we’re discusing franchise failure, I would be remiss in not first referring to my own personal experience as a franchisee.

The following is the actual LinkedIn discussion along with a few key responses. As we have always done in the past, the responders are kept anonymous and are only identified by their Linkedin position statement or by a review of their LinkedIn profile. As always, your comments are encouraged and should be submitted in the section provided below this post.

Franchising – Have you bought yourself a prison sentence?

I have recently had a number of discussions with people who had been looking to improve and secure their futures by investing in a franchise, a proven business model that, whilst perhaps not leading to a grandiose life style, should offer an honest income and self fulfilling future.

Acknowledging that there are many successful franchise opportunities, however I have been shocked by the revelations that have unfolded through my discussions. In some cases, plights of despair, with franchise agreements being sold on the pretence of realistic earning that do not even come close to reflecting reality. Many feel conned and trapped by lengthy contracts, weighted heavily in favour of the franchisor, but struggle through with acceptance because they are not necessarily dependant on the income. On the other hand, some find themselves in serious financial difficulty, with dwindled saving, remortgaging and further borrowing to survive and support a non viable business, with no easy exit and the threat of legal action for non conformity or failure to keep the business going.

If you were running a small business and it turned out to be a non viable proposition, you would most probably take the decision to close it down, learn from the experience and move on. However, one franchisee told me that they had “bought themselves a prison sentence”. As a result of the franchise they had no funds remaining to fight a case or exit from the business and were fearful of their harsh and unsympathetic franchisor.

Senior SEO and Marketing Consultant provided some perspective from outside the franchise community:

“This tragedy speaks to two serious issues that are not in fact confined to the franchise business model, yet are, due to contractual agreements and financial outlay up front, most often more severely felt.

First there’s the issue of false / misleading and otherwise deceptive sales tactics used by unscrupulous people.

The second is people wanting to buy a dream more than a business – people who truly do not comprehend the complexities or depth of commitment required in running a business in any economic situation, let alone our current economic landscape. These people almost always do little true due diligence in just about any aspect of a business model.

While many of these people are more vulnerable to unscrupulous sales tactics (as in they don’t bother to hire a accountant to do an in depth accounting, or a business attorney / barrister to review the terms), just as often many buy a business that they are not truly passionate about or think it won’t involve 60 hour work weeks at certain points.

While we can not condone unscrupulous business sales practices, we need to truly hold those looking to buy a franchise or ANY business accountable for their footwork and business sense.”

A Director of Development at a National Franchisor submitted a very detailed response:

“Given the current conditions, I think the question makes for an excellent discussion. Since no direct question was posed, I’m responding to your general request for comment regarding what I paraphrase as franchisees who buy a franchise which is not viable and then feel trapped by the terms and of the franchise agreement. For me, you’re looking at three components: (1) integrity of the selection process (sales process), (2) performance of the franchisor and franchisee, (3) contemplations on the missing “no fault” termination by the franchisee (the prison).

1. The sales process is not a yes/no or right/wrong proposition. Each franchisor is defined by a number of characteristics: lifecycle, capitalization, experience, management team, strategy, customers, etc. Likewise, each prospect has different personal goals, experience, talents, discipline, and aptitude for being a franchisee within the confines of a system. Alignment between the Zor and Zee from the onset is critical. I understand the UK does not have Disclosure Laws which makes this process all the more difficult and important. The question every Zee should ask is… am I prepared to fail? In my experience, prospects would rather “make money now” than conduct disciplined due diligence to select the opportunity making them easy prey. See link for more.

2. Mutual Performance is required. Need not be said but was not mentioned in your post. I’m a firm believer that businesses don’t fail for one reason alone but a series of bad decisions over time. With that being said, I’ve found one of the fastest ways to failure for a franchisee is lack of capitalization by the franchisee to carry through a rough opening or difficult time. A solid turnaround often times requires capital that just isn’t available. Franchising is a strategy for growth using other people’s money. Franchisors rarely bailout franchisees.

3. The thrust of your question really is the word “prison” which I can only conclude evolves from the reality that while franchisors can terminate the franchise agreement based on default conditions a franchisee does not have the courtesy of a “no fault” termination. (ie… Franchisee may terminate the franchise agreement/close the business with 60 days notice.) As a franchisor, it’s important to note that we’re building a system with a number of franchisees and only one franchisor. The strength of any system is its size and stability. Allowing franchisees to simply walk away is not always in the best interest of the franchisor, the customers of the brand or franchisees who might be operating nearby. Indeed, a no fault termination could cause havoc for a system at the first sign of danger.

Still, franchisees actually have three exit options: (a) find a buyer (nearby franchisee, someone looking for a new challenge, which can be approved by the franchisor. etc) and transfer the agreement; or (b) request a “workout” from the franchisor; or (c) declare bankruptcy as a franchisor usually reserves the right to legally terminate the Franchise Agreement in the event of bankruptcy or other creditor issues. If the Zor/Zee were aligned and both worked hard to make the business work, the Zor should be able to find a way to let the franchisee out of the deal. More often than not, a reasonable workout can be provided with the franchisor assuming the business or closing it on mutual terms with the franchisee. Workouts don’t work when the franchisee is unwilling to take some/all of the responsibility for the failure of their business. It’s not the job of the franchisor to bail the franchisee out… indeed doing so would cause challenges for the system and tax the successful franchisees that are performing. In all cases, it is very important to clearly review the terms of the agreement and seek legal advice.”

A very prominent franchise consultant provided his perspective:

“I can only add that I’ve been involved in franchising for 30 years and during that time I’ve certainly met unhappy, disgruntled and failed franchisees — and some who failed because they selected faulty franchise systems and didn’t necessarily do anything wrong themselves.

Fact is: Not all franchise companies are created equal. Some are better than others.

The thing that always gets me is the failed franchisee who is boo-hooing because they’re “held prisoner,” they had no options, they “bought a job,” they didn’t know any better, they were misled, even lied to . . . come on now. It’s possible that happens to some of the people some of the time — but it doesn’t happen all that often EXCEPT to people who allow it to happen.

People don’t want to accept that there are no guarantees. They think they should be able to buy a franchise and be wildly successful just because it’s a franchise. They’re shocked to find out that it doesn’t always work that way. And if you ask them how much homework they did, who they asked about the opportunity, did they ask others: “Is this the same as buying a job?” . . . “Do you feel imprisoned by the franchisor?” . . . “Do you think you were misled about how much money you can earn?” . . . etc. etc. etc, it turns out they didn’t do any (or much) real homework.

Thanks to the recession, we may be coming out of the Age of Entitlement, and that will benefit franchising, network marketing, and all other forms of business.”

A Founding Partner of a Media Business provided his perspective based upon prior ownership of a franchise:

“My wife and I owned a franchise on the East Coast for a while. We used it as a transition from the corporate world to getting the courage to do “our own thing” and form our own business. Here is my take on franchises (we investigated 10 franchises before buying one specific franchise): we dealt with a really good, top-notch franchise consultant, by the way:

1. You’re essentially using your capital to “buy” a new job or career. It just comes wrapped in a business model which may or may not work depending on your region, local area, local culture, and most important, your level of effort and seriousness.

2. As long as you’re a franchisee, you will be paying rights, royalties, percentages of your hard-earned income, to a franchisor. That money comes off your top line, by the way.

3.Some franchises are innovative and create significant improvements in their products or services; others have founders who lose their excitement or will to develop innovations when they’ve made their money, BUT you’re still paying royalties and fees to them.

4. Many franchises and franchise types are profitable only if one obtains employees from the bottom of the economic barrel, because they must pay “bottom of the barrel” wages in order to break even or make a profit. That level of employee is often undependable, turnover of employees is inordinately high, and one often spends days without adequate staffing when employees don’t show up.

5. Because one hires from the bottom of the economic barrel and is paying not much over minimum wage, one feels (at least we felt) that we were exploiting people.

6. Finally, “owning” a franchise, because of the often restrictive nature of the business model, the marks, the methodologies, is just as often about NOT being in charge of your own business as it is about being in charge of your business. When all else fails, read my comment number 1 above.”

Last, an entrepreneur of what appears to be an independent business responded:

“Isolating individual experiences and calling that a pattern or problem with franchising might be a little misleading. It’s not a perfect world and if you have 100 of anything, a certain percentage of that number will not pan out for an infinite number of reasons. there are a lot of bad franchisors out there, and there are a lot of bad franchisees. As for the bad franchisees, a good franchisor should 1) never should have awarded to them and agreed to their locations etc and 2) some franchisees never follow thru on the execution and hard work.”

Need additional food for thought? Here’s another interesting article.

*This post was originally published on this site December 2010.

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About Paul Segreto

Entrepreneur, Franchising & Small Business Professional, Top 100 Champion Small Business Influencer Awards 2014 & 2015, Popular Blogger & Podcaster
This entry was posted in Franchise Development, Franchise Sales, Franchise Training, Franchising and tagged , , , , , , , . Bookmark the permalink.

2 Responses to Franchisee Failure: Logical Reasons or Lame Excuses?

  1. Pingback: Tweets that mention Franchisee Failure: Logical Reasons or Lame Excuses? « franchisEssentials -- Topsy.com

  2. Julia Kinslow says:

    Paul:

    Great post on presenting a balanced and realistic approach to owning a franchise or any business, for that matter.

    I think the biggest take away for me is to commit to completing the due diligence upfront before diving in and to surround yourself with knowledgeable and successful people to help you along the way.

    Best, Julia

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