Is Now The Perfect Time to Buy a Franchise?
January 21, 2009 by Sean Kelly
Filed under Business
Is Now The Perfect Time to Buy a Franchise? Some think so… especially those who sell franchises. In this Fox Business interview, Franchoice CEO Jeff Elgin discusses why he feels now is the perfect time to start your own franchise… and which segments of franchising are best in a down economy.
http://www.youtube.com/watch?v=JDbx4itBPcE
WHAT DO YOU THINK? SHARE A COMMENT BELOW.
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Can’t listen to this U-tube video, Sean, because it says “embedding disabled by request” —-whatever that means.
Of course, franchising has always grown in recessions over the past thirty years because when there is a lack of good jobs in the economy and there are layoffs and reduction of forces and early retirements and buyouts, the franchisors open their jaws to catch the fallout and to redistribute the money of the prospective franchisees into THEIR pockets. Gross sales is the name of the game.
This allows the mature franchisors to better SURVIVE the recessions themselves because when they can sell NEW franchises out the front door and abet the firesale of failed stores out the back door, the big name brands do compete with each other and survive the recessions.
VERY DANGEROUS TIMES for prospective franchisees, however, that I’m sure you will point out.
Thanks for Franchise Pick that will save some of the little fish. It was wonderful that you, Sean Kelly, warned of Brooke Insurance way back in 2007. I read yesterday that, now, one of the Banks is after the Special Master in the Bankruptcy Court because the securitization is such a mess and nobody appears to know where the money went. The Bank wants the Court to chastise the special master in the bankruptcy proceeding.
Want to bet this won’t be the first securitization that will have gone bad?
I didn’t realize they’d furnish an embedding code in youTube when embedding is disabled.
I replaced the embedded video with a plain old link. Have at it.
I had at it and NOW still can’t access ——Guess they don’t want any discussion on Franchise Pick about “the perfect time to buy a franchise.”
Carol:
My bad. I had a bad link in there.
Try them now. Or this one:
http://www.youtube.com/watch?v=JDbx4itBPcE
The irresponsibility of Fox Business News in letting this man on to push franchising to the unsuspecting public —and to Veterans who are eligible for QUICKIE SBA loans that will help to hold up the franchiSORS in this bad economy.
At least she asked that important question, i.e. How do you get paid? He is a broker !!!!!!!and with the Internet and ignorant or complicit business reporters, he is free to present franchising as a good choice in a bad economy on Fox Business News. How disgusting!
He gets paid by the franchisors who don’t tell him how unprofitable their franchises may be or how many first buyers of their franchise may be failing because they want to continue the churn in the interests of the gross sales of the system.
The conspiracy of the status quo to hide the generally high risk of most franchises is really disgusting. Hopefully, some are just ignorant, like this reporter, of the way retail franchising is conducted.
Carol:
Hair still grows even in a recession. And when hair grows, someone will get paid to cut it.
Did you miss that part? ;)
Seriously, there are many franchises that are doing very well in this economy. McDonald’s is kicking buns. Church’s Chicken is posting consistently high same-store sales. McAlisters Deli continues to be strong. There’s a little start-up franchise chain that sells farm fresh roll-your-own tobacco… sales are through the roof because they are 70% cheaper than cigarettes…
We are all products of our experience, and your franchise experience was obviously bad enough for you to condemn franchising across the board. I’ve seen the bad, but also the good.
Last week, I ran into a franchisee I hadn’t seen in 10 years. He flew in from California for “Auntie Anne” Beiler’s 60th birthday party. He still has his stores, they are still profitable, and he went on and on about the early support we gave, the programs that made him a success, and how it changed his life and his family’s life for the better. It was a great reunion. Friends, franchisees, coworkers in the best franchises are like family.
I’m sorry you never experienced that with your franchise… but don’t you think it’s just as irresponsible to say all franchises are bad as all franchises are good?
I can tell you many many successful franchisees who would have failed if they had started up their own businesses from scratch. Are you saying that no one should buy a franchise ever – that they should all do it on their own? Or are you saying that no one should start their own business, period?
Should no one invest in anything because there are Bernard Madoff’s in the world? No… they should be extremely careful and deliberate. But there is also a risk in being afraid of ever taking a chance or experiencing business ownership.
FYI… If you wanted to take FOX to task for its political reporting for the past 8 years, I’m right in there with you!
No Sean! I know you get MY point. If a franchisor produces a franchise that produces profits, etc.. and has 10% or less of failures, and the new prospect KNOWS this, this is GREAT. The new prospect goes in knowing that there are 10% odds of failure and maybe 75% chance of actually making profits, etc.. and accepts this risk up front.
I’m sure there are some good franchisors out there as you say. But, the fact remains that exploitive franchisors and the brokers have the opportunity to trick new prospects because of government regulation that permits them to obcure MATERIAL unit performance statistics, the most important risk factor, from NEW buyers.
You know that these brokers like FranChoice will sell anything that is listed on the SBA Franchise Registry. You know, also, that there are a lot of losers on the SBA Franchise Registry and that the FranData risk profiles do NOT report the actual risk of the investment as reflected by so many franchisees who give their businesses away to cut their losses, and who have home equity loans, etc.. that they continue to pay on.
Legitimate franchise companies are geared up to make the most money by creating, nurturing and growing successful franchise locations manned by happy, profitable franchisees. An unsuccessful franchisee in a good franchise system costs the franchisor money and is a bad experience for all concerned. The companies I’ve worked with are not interested in making money via churning or squeezing every last cent out of their franchisees. Selling franchises can be a very expensive proposition – happy franchisees create referral business as well as multiple unit sales.
Look at the number of multi-unit and multi-concept franchisees. If they were being held over a barrel, they wouldn’t keep buying franchises, would they.
However, there are some who are sales machines oriented to make money by getting newbies in the door and making money whether they’re successful or not. They tend to be disproportionately visible because they do a lot of advertising, have aggressive, highly visible sales and broker teams, and aggressive PR efforts.
Companies like Cuppy’s Coffee may NEVER have intended for their franchisees to open or succeed long term… and they certainly reached that goal. They weren’t even set up to collect royalties, for crying out loud. They made plenty on the upfront fees and the construction process.
However, franchising is great and it’s terrible, depending on which system you join. Some of the best are the solid regional chains who care about their brand, care about their franchisees and care about their customers. They are not generally the ones shouting from the rooftops how great they are.
Multi-unit franchisees are no doubt sophisticated business people with access to more money, etc.. than the single-unit franchisees, and thus have more bargaining power with the franchisor. They have their own conventions —-one coming up soon.
I’m sure the multi-unit franchisees know up front the possibility of profits and they are spreading their risk, unlike the single unit franchisees.
The goal of the franchisor is the same, of course, to grow their gross sales upon which they realize their profits.
I’m sure that the multi-unit franchisees have access to the SBA loans and this acts as a subsidy for them. The Franchisors, of course, are not elibible for government guaranteed loans because franchising is a multi-level legal pyramid scheme, or something like that, and the hard assets are owned by the franchisees.
I still don’t understand why franchisees should be eligible for SBA guaranteed loans for a small business, when, in truth and reality, the franchisee doesn’t really own a business of his own in any sense of the word because the “sales” are owned by the franchisors and the assets are dedicated to the franchisor.
Multi-unit franchisees are no doubt sophisticated business people with access to more money, etc.. than the single-unit franchisees, and thus have more bargaining power with the franchisor.
A huge percentage of franchise ownership consists of multi-unit franchisees who are well capitalized and sophisticated. McDonald’s has 31,000 restaurants, 75% of which are owned by franchisees. YUM! Brands has 36,000 units in 110 countries. I highly doubt that these franchisees would agree with your assessment that they are part of an MLM scheme.
The problem with your position is that you don’t acknowledge the two divergent sides of franchising. McDs, Yum!, Wendy’s, etc. cater to investors with capital, attorneys, accountants, and extensive experience. The top 5-10 or so add up to more than 100K units easily. To equate this with MLM is silly.
Your criticism, in my opinion, is relevant within the “Be your own boss, buy a job” segment of franchising that is geared toward the less sophisticated, first time business owner who will take out a $350K SBA loan secured by their home, but won’t shell out $11.95 for Franchising for Dummies, much less $1,000 for a franchise attorney to review their agreement.
That’s a segment – not all or even most – of franchising. Yet you criticize all of franchising because of this one segment… and turn a blind eye to all those dedicated to helping franchisees achieve success.
You often quote Robert Purvin, head of the AAFD, because he’s done a great job identifying some of the problems in franchise legislation. But last year he named Cuppy’s Coffee as a great franchise and McDonald’s as one of the worst… a now defunct company that ruined countless lives recommended over a solid company posting record gross margins at the unit level. Why? Because he focused on one element of the relationship – the agreement – and failed to look at the big picture.
I think you’re doing the same thing – focusing on one specific element without looking at the big picture.
Yes, Sean! I agree with your criticisms, in part. The Cuppy’s mess was an eye opener for me as I could not see where the AAFD Award was not misleading to new single unit prospects.
I am focused on the FACT that the regulation of franchising to begin with was for the purpose of permitting franchisors to prove their franchises in the market place without being subject to charges of fraudulent inducement/concealment, etc… as long as they were compliant with the FTC Rule.
It is out of this original sin that so many prospective franchisees have been hurt. This explains why so many loser franchises appear on the SBA Franchise Registry.
You don’t deny, do you, that the franchisors use their status on the SBA franchise registry to imply government approval of their franchises, and that most “normal” prospects believe that the government wouldn’t guarantee loans for unviable franchises with high failure rates.
There is a great difference between a multi-unit investor who is actually investing to achieve profit, and a single-unit investor who is investing to provide a job and income to replace a job and income that has been lost.
You cannot deny that franchisors target both types to their advantage.
I think that McDonald’s and Yum Brands, etc.. are LEGAL Multi-Level Marketing schemes, are they not?
Could you explain the difference between a legal and an illegal MLM scheme?
I think that McDonald’s and Yum Brands, etc.. are LEGAL Multi-Level Marketing schemes, are they not?
Not at all. MLMs are pyramid schemes where members make money by recruiting other members into their “downline” who then recruit others… and the members at the top get a piece of the fees of all below them. From what I’ve seen, most of the revenue flowing is that of fees, not sales to end users.
The area of franchising that smacks of MLM is the Master Franchise arrangement, with flat fee royalties, like many of the health club chains.
However, franchises like McDonald’s bear no resemblance to MLM. These are legit businesses selling that make money selling food to the public with a powerful brand, thorough training and proven systems.
It is not such a bad time to invest in a franchise, provided you do your killer due diligence and choose the right franchise for you.
There are many still doing well in this rotten economy; what you hear about in many other blogs are the sad stories(Quizno’s). The good Franchisors and successful franchisees (Subway)rarely surface on these blogs to show the positive sides in this industry.
There are many new leasing opportunities and franchisors are hungry for new franchisees, so there are deals to be made out there if one fits for you. Do not be discouraged. Do more research and you WILL find one
mrfranchiseman.com
Franchisors who routinely make NO earnings claims in the FDD’s CANNOT come out on the Internet on these sites and promote their franchises as profitable to counter bad reviews by franchisees who feel that they were cheated and defrauded because of misrepresentations of success and profits made in the sales process.
Such response would be against the law as stated in the FTC Rule. Success and Earnings Claims can only be made WITHIN THE FDD AND THE ACTUAL CONTRACT, Over 75% of retail franchisors make NO earnings claims in the FDD —-and especially the big franchisors. The farce of disclosure continues.
Churning, which is enabled, under the FTC Rule does ensure the perpetuation of big franchisors during recessions who can sell NEW franchises our the front door and discounted failed units out the back door because of their great visibility in the economy that suggests viability to new buyers of their franchise.
The franchisees in the QSR sector are put at greater risk during recessions when the franchisors have price wars to ensure that THEIR EBITDA’s can be sustained during the recession.
The saturation of the QSR sector by franchisors who want to grow market share to compete with MdDonald’s is felt by the franchisees who are merely expendable resources for the franchisor to use in the competition for market share.
Ironically, there is NO competition between franchisors to capture the cheap labor and cheap venture capital of prospective franchisees because prospective franchisees are not given disclosure of the UNIT historical performance statistics (even an agerage) in the disclosure process governed by the FTC Rule.