DEADLY FRANCHISE MYTHS: The Hot New Franchise Myth by Sean Kelly

Deadly Myths of Franchising: The Hot New Franchise Myth By Sean Kelly

When people find out I’m in franchising, they invariably ask: So what’s the hot new franchise?

The idea of the hot new franchise – that exciting new company or concept that bestows instant multimillionairehood upon those in the right place at the right time who have the savvy to act (and invest) quickly – is one of the most prevalent and dangerous myths in franchising.

The siren song of the hot new franchise has drowned the hopes and dreams of thousands of normally prudent people by luring them to invest in such unproven, high risk ventures as eBay drop-off store franchises, meal preparation/meal assembly kitchen franchises, men-only fitness clubs, all-cereal restaurants, drive-thru coffee kiosks and more.

The hot new franchise concepts would be high-risk ventures even as independent start-ups, but once the burdens of franchising are heaped on, they are almost invariably toxic and doomed to fail.

To avoid falling into the hot new franchise trap, you must understand The Basic Franchise Value Equation, and why a better (albeit less fun) question is “So what are the tested, proven & successful franchises?”

The Basic Value Equation of Franchising

Here’s the single most important concept you need to understand about franchising: When you buy a franchise, you agree to start a business with some inherent & significant burdens.

Burden #1 is an upfront franchise fee, typically between $30,000 to $50,000, that you must pay the franchisor.

Burden #2 is that you must continually pay a percentage of your gross sales (regardless of whether you’re profitable) through the duration of your franchise agreement. If you fail before the end of your term, you may still be liable for an approximation of what royalties might have been had you remained open for the full term of your agreement.

Burden #3 is your loss of autonomy. Forget all those franchise ads about being your own boss and calling your own shots… when you buy a franchise you agree to do what you’re told, and to adhere to the rules and restrictions imposed by the franchisor. When you buy a franchise you can be told what you can sell, who you can buy from, how you can market, and how you price your products and services.

So why buy a franchise? Prospective franchisees assume that they will gain benefits from the franchisor that far outweigh these significant burdens. Some of these benefits may include instant name and brand recognition, efficient, established operational procedures, tested marketing programs and techniques, powerful national or regional advertising, group buying power, and the backing of a support team with years of experience.

If a given franchise requires the burdens of extra fees, royalties, restrictions and requirements but fails to provide benefits to (more than) offset those burdens, the franchise will likely fail fast and hard.

The Franchise Appeal of Boring, Old & Successful

McDonald’s is a good example of a franchise that works. A McDonald’s franchisee takes on the upfront burden of paying a $45,000 franchise fee and paying a 4% royalty, plus advertising fees and co-op contributions. In addition, McDonald’s franchisees must do what they’re told – such as maintaining the controversial Dollar Menu, and adding required equipment and products – whether they like it or not.

Few would dispute that the benefits McDonald’s provides – from expertise in site selection to universal name recognition to powerhouse national advertising – far outweigh the burdens. McDonald’s provides a proven system, finely tuned from years of trial and error, that takes the guesswork out of business ownership.

Strangely, many hot new franchises, despite having unproven concepts, no track record or national advertising, charge fees and royalties equal to or exceeding those of franchise giants like McDonald’s.

Here are a few examples of Hot New Franchises from recent years:

iSold It In 2007, iSold It was named Entrepreneur magazine’s hottest new franchise. They charged a $22,000 franchise fee, a 10% royalty and 3% advertising contribution for an unproven, experimental storefront concept selling people’s stuff on eBay. With an initial investment of $138,000 – $198,000, iSold it sold more than 400 franchises. Just over 200 opened before it was clear that the experiment was a failure and the chain crashed. The original franchisor is gone, and a smattering of stores remain.

Cereality is a cutesy, all-cereal restaurant still sold by Kahala, franchisors of Cold Stone Creamery, Blimpie, and other much maligned franchises. Donnie Deutsch on CNBC’s The Big Idea said “I love this. This is genius.” USA Today wrote: “The latest fast-food concept is so absurdly simple, self-indulgent… well, how can it fail?” Obviously, it can fail quite easily, as every one of the $200,000+ cafes have failed… some in less than 6 months. Despite the fact that just an airport kiosk and a tri-branded location remain, Kahala (aka Bad Ideas in a Bowl) is still hawking the Cereality franchise opportunity.

Make & Take Gourmet was one of a number of much-hyped “meal assembly kitchen” franchises with clever names like Dream Dinners, Super Suppers, Supper Thyme USA & My Girlfriend’s Kitchen. The hot new idea was to charge busy, professional women a fee to use a commercial-type kitchen where they could prepare gourmet meals to freeze and serve later to their families. Amazingly enough, it turned out that working women actually have their own kitchens and freezers in their homes! The Make & Take Gourmet chain imploded and most of the meal assembly kitchens have disappeared, along with the $300,000+ each they burned up in the process.

Not Every New Franchise is Necessarily Bad

The failure of hot new franchise concepts is not an indictment of every new franchise company or new franchise brand.

Five Guys Burgers and Fries is a successful, relatively new franchise company. But Five Guys was a variation of an existing concept based on a proven fact: We know people will eat burgers and fries, and we know what they will pay for them. Five Guys Burgers and Fries had the benefit of decades of established data, experienced management and an established industry & supply chain.

Compare that to the hot new franchise concepts, which are predicated on unproven assumptions, such as gamble that people will pay others to sell their junk on eBay, will pay regularly pay $6 for a bowl of Fruit Loops, or will pay someone else for the privilege of making their own frozen food.

Other hot new franchise owners are gambling that online access to video game software won’t wipe out every video game store, that people will buy gourmet food (at gourmet prices) from a food truck, or that people will pay to send Fido to summer camp.

There’s nothing wrong with trying an experimental, high-risk, innovative business venture … just don’t pay for the safety of a proven system when the concept itself is an experiment.

If you want to innovate, do it as an independent business.

If it works, you can always franchise it yourself… once it’s an old, boring, and highly successful business.

ARE YOU FAMILIAR WITH THE HOT NEW FRANCHISE MYTH?  WHAT DO YOU THINK? SHARE A COMMENT BELOW.

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Tags: Franchise myths, hot new franchise myth, Sean Kelly, franchise due diligence, how to buy a franchise, best franchises, how to open a franchise, franchising, franchise information, franchise warning

GUEST POST: Franchising is a Scam!

(UnhappyFranchisee.com)  “Perseverance” is a former franchise owner who claims he was railroaded by an unscrupulous franchisor.

He has since expanded his opinion to include all of franchising as an orchestrated scam.

Perseverance writes: 

“I’ll offer some real truth! Franchising is a scam! Franchising garnishes the support of the IFA (International Franchise Association) a Non-Profit organization which is made up of anyone who wants to profit from screwing American investors.

“The IFA has created several organizations like Vetfran, Minorityfran and FranPac to ensure that their relationship with the American entrepreneur is CONTROLLED and LIKED by the politicians. Vetfran and Minorityfran were created to make their franchisors look like franchisors who care and support those who have served our country or are not part of the majority. These are issues we as Americans hold to high esteem. Our troops and the rights of EVERY American citizen is what makes us proud to be American. They use these organizations to promote their popularity as someone who cares.

“FranPac is an organization, which boasts on its own website of its accomplishments of, lobbying officials who run for elected positions within our government. Donating money to get them elected. They are proud of how they have used the money donated by franchisors to BUY OFF political support whether it supports American Entrepreneurs or not. The politicians are IGNORANT of FACTS about franchising because the truths are hidden in F.D.D.’s (Franchise Disclosure Documents). F.D.D.’s present failed franchisees whom franchisors say just didn’t have it or were never meant to be business owners.

“Lawsuits in F.D.D.’s do not show the true seriousness of how franchisees are affected by FALSE FRANCHISE opportunities. As we speak there is an attorney settling 35 clients (franchisees) against its franchisor. None of these unhappy franchisees will be able to warn future victims of the fraud imposed on them by their franchisor because they will have to sign agreements that will inhibit them from exposing or explaining their fraud in the future. These 35 clients who bought fraudulent franchises will be forgiven of their debt by their franchisor (they still owed money on their fraudulent franchises) and their credit will be restored but their attorney will receive more money for mediating their case than all 35 franchisees will get.

“Why was this attorney selected by these 35 unhappy franchisees. Because he was the ONLY attorney who would take the cases of victims who trusted a franchisor to sell them a viable franchise. No doubt that in each state these 35 unhappy franchisees tried to find help in their state with an attorney or political figure but no one would help. Why?

“Arbitration Clauses is why. Arbitration clauses keep attorneys out of a court room where decision and judgements can be made. Decisions and judgements which would enable future laws to be made to protect franchisees.

“Franchisors don’t like arbitration as well either. Because it costs lots of money to go to arbitration. That opens up the forum for mediation. Mediation is an agreement between the franchisee and franchisor to resolve their disputes without going to arbitration. What franchisors do in mediation is STALL!

“Stalling causes the franchisee to move on with his life, find another job and forget about the past. These franchisees were once productive American workers who contributed to our American Society paying their taxes, having excellent credit and property with equity are now forced to give up on change or protecting his fellow American. To except his defeat by Corporate America and worry about his own tail.

“I can not blame these franchisees for excepting this offer. Our politicians, attorneys and corporations know they control the American people. A Constitution founded by our forefathers to keep government from controlling us has captured the majority and left the American people with no voice. “

DO YOU AGREE WITH “PERSEVERANCE”??  IS FRANCHISING AN INDUSTRYWIDE SCAM? 
SHARE YOUR OPINION BELOW.

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CHAMPION CLEAN Using Bogus Franchise Statistics

Today’s award for bogus franchise survival statistics goes to… Champion Clean!

Sean Kelly wrote an article on bogus franchise survival rates (Lies, Damn Lies & Franchise Statistics) that said to beware of franchise companies using claims like this one (from the Champion Clean franchise website):

According to a Departement of Commerce study, most new independent businesses fail. The data indicates that only 43% of newly started businesses survive until their second anniversary and only 33% are still operating after 3 years. That means almost 70% of new businesses don’t make it through 3 years!

To minimize their risks, many consider purchasing a franchise opportunity – and the reasons are obvious. The same Commerce Department study showed 94% of franchise businesses were open after 2 years and 93% after 3 years.*

These franchise survival statistics are fraudulent and franchise marketers know it (or should).  These stats were publicly discredited in Congressional sub-committee hearings back in the late 1990s.  In 2005, International Franchise Association President Matt Shay issued a warning via a widely circulated letter and email to members which said:

…It has come to our attention that some IFA-member companies may be providing information about franchising that is long out of date and no longer presents an accurate picture of the sector.

Of particular concern is information claiming that the success rate of franchised establishments is much greater than that of independent small businesses.

Many years ago, the U.S. Department of Commerce conducted studies about franchising which presented such statistics. That information is no longer valid. The agency stopped conducting such studies in 1987.

We strongly urge you to remove any information from your Web site and published materials that make such a claim. The use of such data, in the absence of current research, could mislead prospective franchisees who are attempting to conduct responsible investigations….

Yet franchisors, brokers, franchise websites and other cloud merchants continue to sell the illusion of  franchising being a virtually risk-free way of being in business for yourself, but not by yourself.

How many life savings and homes are put at risk each year by trusting franchise owners who think they have all but eliminated the risk of business ownership by buying a franchise – any franchise?

How many franchise prospects also believe in the illusion that franchising is somehow regulated, and that some law enforcement agency, the FTC, or someone is preventing franchise sales creeps from telling blatant and public lies in order to part newbies from their hard-earned money?

How many millions of your tax dollars are repaying banks for the SBA-guaranteed loans the proceeds of which were paid to franchise charlatans who misdirected qualified prospects from legitimate franchise opportunities?

Maybe Champion Clean didn’t get the memo.

Maybe Champion Clean didn’t get the IFA memo.  Maybe they did and don’t care. Or maybe they hired a clueless and/or sleazy franchise marketing or web company.

Either way, I’d be real wary of franchise companies that want you to think you can’t fail… especially when so many others say they already have.  (See CHAMPION CLEAN: Is This Franchise a Rip-Off?)

WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

If you represent a company discussed on Unhappy Franchisee and would like to provide a clarification or rebuttal, please contact us in confidence at unhappyfranchisee[at]gmail.com.

* Text & Chart: Champion Clean web site.