we just don't do it.
Be Warned of Franchising Gone Bad
Area developers sell franchises to people interested in purchasing a local franchise location. Most people think that a franchise is a safe way to get into business if they have no previous experience, and unfortunately many area developers take advantage of this naivety. They are happy to take people’s money knowing full well that the business will fail. The person signs the franchise agreement, now making them a franchisee, and things go downhill from there.
The franchisee must pay a franchise licensing fee up front even though the license is for a set number of years instead of proportioned out monthly for the entire term. (example: a licensing fee of $25k for 5 years would be divided into 60 month payments) The weekly or monthly franchise fees are set regardless of any profit for that location. If the franchisee is losing money the franchise fee still must be paid.
Area developers find high profile locations with high rents, which give the franchise brand great exposure, but makes it nearly impossible for the franchisee to pay the high rent along with the franchise fees. The equipment and products that the franchisor requires the franchisee to purchase are marked up much higher than what a typical business owner would be willing to pay.
Most new businesses do not take off from the day the front doors open. In most cases, including franchises, it can take many months or years for a business to reach profitability.
What happens to the Franchisee when they can’t make a profit and lose money every month?
The Franchisee goes bankrupt or loses a great deal of money.
What happens to the Franchisor and the Area Developer when the Franchisee can’t make a profit and loses money every month?
They have already been paid up front and retain all rights to the leased space and equipment if a franchisee fails to make their payments. When this happens, they resell that location to the next guy. Usually it’s sold for less than what it would be for a brand new location because the build-out expense is not applicable. Usually this second guy fails to make a profit due to the cost of the franchise fees, the high rent expense, and not enough time to develop a customer base.
If the second franchisee goes bankrupt, they will sell it to a third franchisee, whose cost for the same business is less than it was for the first two. By this time the business has had time to attract a customer base and has trained employees, which in combination with the lower purchase price, gives the 3rd guy a shot at succeeding. As a result, the 3rd franchisee for the same business is typically able to stay in business and make a small profit. This process actually has a name! It’s called "3 off", meaning that the third franchisee will be the one to survive in the same location where the other 2 failed.
Why a Franchise is a Bad Idea for Most People
The franchise agreement is a one sided document that favors the franchisor.
The franchisor and area developers are much more experienced in the franchise business than most potential franchisees.
The franchisor and area developers get their franchise licensing fee and the monthly franchise fees while the franchisee is in business even if the location isn’t making a profit.
Many franchise agreements give the Franchisor and/or the area developer all rights to the franchise, which includes all of the equipment, supplies, and employees when the franchise fees go unpaid by the franchisee.
Franchisors and Area Developers get great exposure for their brand and get to sell that same business to other franchisees if the current franchisee fails. This means they are paid twice and often even 3 times, for the same business!
If the second or third franchisee can survive then the Franchisor and Area Developer makes money each month from the franchise fees. They also make money on requiring franchisees to purchase specific items from them at higher prices than a typical business owner would pay.
In a franchise agreement, the person who takes all the risks, puts up all the money, and does most of the work is the last person to be paid. The franchisor, area developer, landlord, bank, and employees all get paid before the franchisee.