COMMENT
Franchises From Hell

By David Kuo (TMFDragon)
December 2, 2005

What do the following companies have in common? Subway, Kall Kwik, Domino's Pizza and Prontaprint!

Apart from being shops that you may see on most high streets, they are also businesses in which you can buy a franchise. Not surprisingly, the cost of the licence can vary considerably from one franchise to another. For instance, establishing a Benjys sandwich-van franchise may set you back around £15,000, but a McDonald's franchise can cost ten times as much!

Over the years, I have met many entrepreneurs who have licensed franchises. In some cases the franchises have proved to be profitable exercises. But there have been many tales of woes too.

For starters, many budding entrepreneurs see franchising as a halfway house between being an employee and being your own boss. That's because you are free to run the business as you wish, though that is often within stringent guidelines. However, in the early days of starting your own business those rules can be a godsend because you are learning how to run the outfit as you go.

As a franchisee you should also get lots to help to ensure that your business is on the right track. After all, failure is neither in the interest of the franchisee nor the franchisor. In this regard, there are usually manuals and procedures to cover just about every eventuality. So if and when you encounter a problem, a solution should only be an index-page away because the franchisor should have a proven system of what works and what doesn't.

There are other advantages of franchising, too. Perhaps the most obvious is that you are buying into a strong brand name. For instance, sandwich shops may be two-a-penny in your town or city, but they are unlikely to have the strength of brand of, say, Subway. Additionally, as a member of a franchise you should benefit from the collective buying power of the group. A print shop with a turnover of £0.5m may only have limited negotiating power, but Kall Kwik with annual group sales of £74m should have lots.

However, franchising has its downsides too. For instance, you can't just do as you like and ride roughshod over the rules. If you are a Chem-Dry upholstery cleaner, you can't venture outside your designated region regardless of how lucrative a job in another area may be. You also are also bound by the terms of the franchise to use the company's "unique, patented, revolutionary carpet cleaning system".

Another bugbear is the higher set-up costs compared to starting a non-franchise business. Consequently, it can take longer for a franchise to reach break even. In fairness though, a franchisor will want to ensure that any new franchise operation meets with its own corporate identity. After all, a shabby set-up can adversely impact the group's business.

Often there are on-going royalty payments to make too. For example, royalties for operating a Domino's Pizza franchise are 5.5% of turnover. So, on annual sales of £0.5m a year, you will need to pay the parent company £27,500. Elsewhere, Cash Converter levies charges of almost £600 a week, or £31,000 a year, to cover its franchise fee, advertising and training.

In summary then, there are lots of things to weigh up before you plunge into franchising. Many of my friends who took out franchises are now no longer involved in the business. What many of them found was that franchising didn't equate to being their own boss at all - in fact, they were only glorified managers. If a business is really that lucrative, wouldn't the company leasing you the trademark want to keep it for themselves?

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