10 Major Myths For Intending Franchisors

Franchising can be a great way to expand your business – but you have to know what you’re getting into, says Simon Lord

If you’ve ever talked about franchising your business, you’ll soon find yourself having conversations with people who have strong opinions about the subject – both good and bad. Unless you are talking to someone with first-hand experience of several different franchise systems, you’re likely to come across a lot of half-truths with people repeating what they’ve heard or read elsewhere. Here are 10 of the most dangerous myths for new franchisors.

1. Franchising is a licence to print money

Wrong – at least initially. Before franchising, you have to have developed a successful business and created a brand, products or services and delivery systems that are replicable in other markets. You then need to invest in all sorts of ways – feasibility studies, structural analysis, pilot operations, protection of intellectual property, legal and financial advice, development of manuals and training programmes and recruitment marketing, to name but some – before you grant your first franchise.

The cost you can charge as an upfront fee will not recoup all that investment, and the revenue you gain from your first franchisee will not cover your ongoing support costs. It is only as your franchise grows and others come on board that you will start to see a return on all your hard work.

2. Once it’s established, the franchisees do all the hard work

Wrong again, I’m afraid. Yes, once you reach the established stage a good franchise can be extremely profitable for the franchisor, but it won’t qualify as passive income – there’s still a lot of work for the franchisor to do. The franchisees may be serving the customers, but the franchisor needs to justify every royalty payment that they receive from franchisees. That means providing leadership, research, product development, marketing, support, training, mentoring, communication and much more.

You might note that this requires an additional set of skills to those used to build the original business, so that probably means employing appropriate staff – new staff.

3. Franchise failure rates are low, so it’s a great way for my business to grow

This is a dangerous half-truth. Franchisee failure rates are low – generally, much lower than for independent small businesses, although the statistics are never entirely clear on how much safer. But the failure rate of franchisors is almost certainly higher than the failure rate of businesses as a whole. This is because unless people go into franchising with the right attitude, the right research and the right advice, they are only going to create a whole lot of new problems for themselves.

4. I know this business better than anyone else does, so I can franchise it myself

Plenty of chefs make great hamburgers but they didn’t create McDonald’s. A franchise is about systems, consistency and standards. You might have those in your business but how are you going to communicate them to others? How are you going to structure your business so that franchisees have a territory that is large enough to support them without being so large that they cannot service it properly and leave gaps for competitors? How will you ensure that the fees franchisees pay are big enough to fund the services they need while allowing them a good return on investment? Can you be sure you have the right controls in place to retain the integrity of the brand while giving franchisees the ability to exploit it on a local basis?

I’d bet that most of those failed franchises I mentioned above skimped on getting more than basic legal advice when they started to franchise. Yes, you might know your business better than anyone else – but do you know the business of franchising?

5. I want franchisees who are just like me

I’ve heard this one many times, and my reaction is, ‘Oh, boy.’ Let’s look at it this way. You have built a business from scratch. You have entrepreneurial flair, the drive to challenge the way things are done, a desire always to do better, a willingness to take risks and fail. Do you really want to try to direct 20 or 40 or 100 franchisees just like you? Or do you want people who are prepared to take the systems you have built; to apply them diligently in their own area and devote their energies to what works rather than play with what doesn’t?

You need to select franchisees who are willing to work within a system and who are prepared to listen to advice. Of course they need that entrepreneurial streak to make the most of the opportunity, but too much of it and you’ll have constant battles. As Michael Gerber said, ‘Entrepreneurs do not buy business opportunities, they create them.’ That means that a true entrepreneur will never be fulfilled working within a system. However, an apprentice entrepreneur may find a franchise a fantastic place to learn about business, for the benefit of franchisor and franchisee alike.

6. I want people just like my current employees

If you’re running a successful business with good staff, you might think that all you need to achieve success as a franchisor is more of the same. But several companies have attempted to convert by granting franchises to existing branch managers and it rarely works. Why should this be?

Well, unlike staff, franchisees have to be comfortable with risk and to have built up a certain level of assets. They must be prepared to take responsibility and work harder than ever before in order to learn a new business and create success. People with an ‘employment’ mentality tend to come from a different place. They may be motivated by fear of losing their jobs, or expect things to be much the same as employment except that they will have a share of the profits. They expect the franchisor to act like a boss, to tell them what to do and to take responsibility for the franchisee’s actions, success or failure.

The ideal franchisee needs a mix of abilities – to be able to follow a system but drive it passionately to exploit it to the maximum in their own area. Does that sound like your employees?

7. My business mentor suggests that I franchise and they will help me do it

Many people know the theory of how franchising is supposed to work, but very few – in New Zealand, at least – have actually done it successfully. And even fewer have experience of doing it more than once, in a variety of different industries and with a variety of different structures designed to suit the individual needs of each client. There are only a few consultant organisations in the country that are really capable of doing a proper job when it comes to developing a new franchise (see page 71). Is your mentor one of them? If they have your best interests at heart, they will help you research the specialists who can really help.

8. Franchisees are my customers

Franchisors sometimes say, ‘My franchisees are my customers.’ But it’s not true. While a franchisee may have bought the franchise and be paying ongoing fees, the relationship is much more complex. After all, a customer can walk away if he or she is not happy – a franchisee can’t (or not without significant financial and/or legal repercussions, anyway). It’s also a myth to say that franchisees are the franchisor’s friends. They are not, because the relationship is based upon unequal power – but it can be a friendly relationship.

9. Franchisees must do as they are told

Most franchise agreements include a provision that the franchisee must act in accordance with the franchise’s operations manual. As this manual can be changed by the franchisor, this means that franchisees basically have to do as they are told – right?

Well, no. Apart from the fact that the Courts tend to take a dim view of franchisors who abuse their power, a successful franchise is based upon mutually trusting and interdependent relationships between franchisees and franchisor. Franchisees own their own businesses and they are responsible for their own success. They also build up a good knowledge of their own market. These are some of the benefits that the franchisor probably pointed out when selling the franchise. So don’t be surprised to find that franchisees have their own opinions and won’t meekly do as they are told in the way that staff or managers might. As the old adage goes, ‘You can tell staff what to do – but you have to sell franchisees on an idea.’

10. Franchising is a legal minefield, so I just won’t call it a franchise

It doesn’t actually matter what you call it – franchise, distributorship or just plain ‘business opportunity’: the nature of the relationship will be similar and the business will still be subject to the ordinary law of contract, together with statutory regulation of fair trading, intellectual property and competition. Pre-contractual representations (the most common causes of franchise disputes) are regulated under the Contractual Remedies Act, the Fair Trading Act and common law. And while there is no franchise-specific legislation in New Zealand, any future regulation would be likely to include a broad enough definition to include many of the above. Not calling it a franchise doesn’t change a thing.

So there you have it: 10 major myths for intending franchisors. Franchising can be a great growth strategy for a business but it’s important to start off with the right expectations. Do that – and get the right advice – and you could join the franchise success stories.

About the Author

Simon Lord is Editor of Franchise New Zealand magazine and website and has worked in franchising for over 35 years.

Find out more about franchising your business at: www.franchise.co.nz/advice-centre/2