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

May 15, 2013

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.

Contact UnhappyFranchisee.com

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

Comments

13 Responses to “DEADLY FRANCHISE MYTHS: The Hot New Franchise Myth by Sean Kelly”

  1. Joel Libava says:

    Thanks, Sean.

    You and I talked about cereal franchises once.

    Once.

    The Franchise King®

  2. SanFranDan says:

    Boy, Sean, are you right. We got involved in a hot new franchise many years ago called Liberty Tax Service. It was started by a guy who had come from H&R Block and also founded Jackson-Hewitt Tax franchise, so we thought we were getting in on the ground level of this “new”, “hot” franchise.

    WHAT A COSTLY MISTAKE THAT WAS!!! THE WORST POSSIBLE MISTAKE OF OUR LIVES.

    Your posting here is right on target.

    I would also be very curious as to why MANY franchises have their headquarters in Virginia. Liberty Tax is one of them and Five Guys Burgers is another. I know there are many more………….hmmmm, interesting how they pick the state of Virginia to set up their Corporation and how the Virginia courts find in favor of the Franchisor in almost 100% of the cases, not the franchisee! Coincidence?? I think NOT! :( Maybe you know what’s that all about, Sean???

  3. ADMIN says:

    Joel Libava:

    I remember also speaking with you and cross-posting about Meal Prep Kitchen franchises & how bad an idea that was. Hopefully we warned off a few from that money pit.

    SanFranDan:

    Sorry to hear about your franchise nightmare with Liberty Tax.

    I’m not sure if VA courts are more pro-franchisor than those of other states. I believe Geeks on Call franchisees had complaints with the VA courts: http://www.unhappyfranchisee.com/category/franchisor/geeks-on-call/

    Relentless:

    I moved the 4 comments you left here to Matco Tools and Mobile Tool Dealer posts, since they were specific to Matco (definitely neither a hot nor new franchise). You can see their new locations in the right sidebar comment list. Also, I responded to your questioning SBA franchise loan default rates in the comment section here: http://www.unhappyfranchisee.com/matco-tools-franchise-distributor-churning/

    Thanks for your comments. Please link to this post from Facebook, Twitter or your blog. Let’s keep spreading the word.

  4. Relentless says:

    Why don’t we focus on the truth? Franchising and those who associate themselves with the franchising industry knowing the truth about franchising yet closing their lips to the truth are the problem with America. Sure, people need income but to take it from those who WORK and distribute it to those who steal and allow others to profit from that theft with false advice and misguided support is wrong!

    A SCAM IS A SCAM! Franchising is a SCAM!

    Tell me a successful franchise company that supports ethical business practices of franchisees? They don’t exist! Franchising is a coalition of crooks who feed on vulnerable people. My vulnerability was thinking that I live in a country where the people are the focus of our government and are protected from criminal behavior of those who might scam them.

    America has become a country of corporate greed where politicians are purchased from the American people for a price in D.C. The people are paying as these scammers in D.C. laugh as good Americans go to work every day trying to pay off the debt that the scammers are taking from the American people. The SBA was created to give Americans the opportunity to own their own business. Today’s SBA funnels free tax payer dollars to scam artists (Corporations) while the average American could never meet all the requirements to get the SBA loan.

    Get rid of free money and make these corporations start selling franchise opportunities which help Americans instead of screwing them. Not everyone is cut out to own their own business because they don’t have the ability to juggle the responsibilities or handle themselves in a way that pleases customers.

    I succeeded. I had felonies committed against my franchise by my franchisor but for some reason I have been rejected by my State Attorney General, Senators, House Reps, FTC, IFA, Vetfran, FBI, State Police, County Police, Local Police and a County Prosecutor. Having State laws to protect American franchise investors is a good thing but if no one will support the laws made on the peoples behalf (enforce them) what good are they?

    Quit acting like there is anything good about the franchising concept when there is NO enforcement or actions taking on behalf of franchisee investors who are churned for profit or the debt the taxpayers have to endure to keep these Scammers operating their scams.

    If there was any good in franchising the good franchisors would turn away memberships to organizations who churn for profit.

    Don’t expect the IFA to refuse to take franchisor fees of those members who churn, or to become a CFE, or to become a member of the Vetfran program they created in order to keep integrity in the franchising industry. This industry is all about fraud. Stealing money instead of working for it.

    Your article is interesting but to me it is distracting. I have eaten at Five Guys Burgers and while I liked the food and the price is not bad the question is does the franchisor take advantage and exploit its franchisees like most other franchisors?

    Some franchises have started out as good opportunities for entrepreneurs to succeed but quickly become CHURN pots when management starts getting greedy. Then that good ole coalition of franchising kicks in and shuts down those who oppose franchising so the churn can go on. After all, how long can a victim of fraud survive without an income to support his family. The Corporate world knows that Americans need money to support their families so if they just hold out and don’t acknowledge their victims eventually they will go away. SOMETIMES THEY DON’T!

  5. Relentless says:

    I got a myth for you. An attorney violates his oath to defend a plaintiff that paid him to represent him for the acts committed against his franchise. Now a web site that was created to expose franchise fraud posts his picture offering his services on his web site. Let’s open up that testimonial page Sean. I know a few people that would let to give their testimonials on your web site. Does Mr. Marks pay you to advertise his fraudulent representation of franchisees on here?

  6. ADMIN says:

    If you’ve got a dispute with your attorney, I’d suggest you file a complaint with the bar association in their state. They often have a process for resolving disputes.

    Relentless, you have a lot to say about many aspects of the franchise industry, and produce a LOT of text. I think you should consider starting your own blog. I’ll be happy to link to it when it launches, and to give you a spot in the Resource directory, as I did for The Mobile Tool Dealers Association. Answer your email if you’d like some advice on getting started.

  7. bill says:

    Relentless is right on target. Franchising which was a good idea in the beginning has morifed into something else. Companies now use it as a tool to make money just on their concept. There is no intent on those companies every of developing it any further. There needs to be some oversight. Just like State’s past blue sky laws about securities sold in their states. There needs to be meaningful legislation designed to protect the interest of franchisees.

    We need a a franchisee organization that represents the interest of all franchisees. The purpose of the group would be to lobby for laws that would level the playing field. We could organize as 501 c (4) and use member dues as our way of generating funding. Only 50% of the dues could be for lobbying the other 50% could focus on skill developement. Even thought I no longer own a franchise I would gladly join as an associate member.

  8. ADMIN says:

    I think it’s important to realize that there ARE very good franchise organizations out there that are dedicated to franchisee success. I worked for one many years ago, and I can tell you there was nothing we wouldn’t do to help our franchisees succeed. If a franchisee was struggling, everyone in the home office took it personally and pitched in to help. The company frequently franchised the A & B locations and kept the C locations as company stores. I went back for a visit recently and while they’ve grown much larger, that same philosophy is still basically what guides the business.

    So the problem is that it quickly becomes difficult to get a franchise from those great companies, especially since they award franchises to their current zees first. There is another tier of franchise companies just as you describe who are just churning and burning franchisees and locations. Many of them create a persona of success that makes them look identical – on the surface – to the good franchises. Take a look at what I’ve written on Beautiful Brands and Camille’s Sidewalk Cafe. From their websites, you’d think they were a great, ethical company, but they have had an extremely high default rate (according to the SBA) and the press regularly prints their deceptive press releases word-for-word.

    Relentless is incorrect in condemning all franchises. His may have been bad, and all tool truck franchises seem to be bad deals, but the truth is that good franchises create a positive impression, and predatory franchisors successfully blend in with them, the proverbial wolves in sheep’s clothing.

  9. SanFranDan says:

    Liberty Tax Service is a huge example of a predatory franchise. It’s CEO is the biggest rip off artist out there. He probably taught your friends over at Beautiful Brands. How the government could look the other way for so many years is beyond me. It all comes down to money. That’s why these skunks are able to get away with it year after year. It stinks. The little guy continues to get screwed. Always. My first and definitely last foray into the franchise world. We did everything right and still got screwed by everyone……the franchisor the most, the customers and the employees all are out to screw you no matter what. Then nicer you are the more you get screwed. And believe me, we had all the right education and background to be a success. Can’t do that working for someone else who’s only objective is to take royalty fees. That business was a success because of me, NOT the franchise one iota. But yet we were handing them huge chunks of money, for what????? For the privledge of using their name????? Had no bearing on anything. My customers came back because of my service to them, no matter what the name on the sign read.

    BTW: It’s the Eastern District Court system in Norfolk that is a bunch of yahoos…..they are bought by the LTS CEO himself. No one gets out of there winning the case except LTS. No exceptions. If an investigation was done today, they would be caught with their pants down.

  10. DiscoveryPointFraud says:

    These deadly combinations were effectively used by the childcare franchise “Discovery Point”. Look up other resources before buying into this. Franchisees have been ruined and those were not disclosed. Not sure why employees continue to work in the corporate. They have seen how one after the other families have been destroyed by this child less couple mercilessly. Discovery Point uses a fixed royalty and not a percentage. Therefore, has no interest in improving your business. Actually they benefit if you fail. They have effectively churned the same location to make more Millions for themselves at the cost of the franchisees and the SBA guarantees. They are well known to take over running franchised businesses for free, be careful.

  11. ADMIN assumes all franchises follow rules and loans that are SBA guaranteed, always tagged with the franchise names. Unfortunately the rogue franchises know how to bypass that. The dialogues before the loan were made with the franchise letter heads, but when the actual loan papers were prepared, there was no mention of the franchising company. Another corporation owned by the franchisers was used. So, the slate remained clean and SBA records did not show that the franchise loans were in bad shape. This was not possible without the help of the bank- they were in it together. the same bank made several loans with SBA guarantees for the same franchise and that would not have been possible if the franchise’s records were tainted. Employees in the franchise corporate helped with this too.
    For example, MaryAnn of Discovery Point corporate collected payments on the behalf of WestAir while the loan was made to Discovery Development and actually the business was related to Discovery Point franchising. This employee should also be taken into consideration to be promoting RICO. She is legal representative of Discovery Point (see Gwinnett County Court) and not illiterate on these things.

  12. ADMIN says:

    DiscoveryPointFraud writes: “ADMIN assumes all franchises follow rules and loans that are SBA guaranteed, always tagged with the franchise names.”

    Most of this site is all about franchisors who DON’T follow the rules so, no, I don’t think that. And I’ve seen plenty of evidence that the SBA tracking of franchise loans is very shoddy at best. I’m no defender of the SBA franchise loan system, and believe SBA loans create a lot of bad situations for franchisees and taxpayers while enabling banks and bad franchisors opportunity for ill-gotten gains.

    DiscoveryPointFraud pls email me at UnhappyFranchisee[at]gmail.com.

    I want to explore both Discovery Point and the SBA allegations… that’s why I just published this:

    DISCOVERY POINT Franchise Complaints
    http://www.unhappyfranchisee.com/discovery-point-franchise-complaints/

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