Franchising – The Good, the Bad and the Ugly

Franchise Operations can make substantial earnings. (The Good)

Every hour in the United States a franchise is sold. Franchising has grown into a thriving and established business activity. Large corporations are using franchising as a means for diversification, while franchisees seek it as a competitive edge over other small businesses It is apparent that franchising has become a major force in the food industry. Not only are fast food restaurants franchised today but theme restaurants, catering operations and family style restaurants are being packaged and marketed to a seemingly inexhaustible market of anxious would-be restaurateurs even during recessionary economic times. Franchising is unique in that it probably is one of the few forms of business activity that by its very nature recreates itself by establishing new business units from within itself. The United States Department of Commerce has reported that over one-third of all retail sales are currently made through franchise stores. This growth is expected to continue.

Buying an existing Franchise opportunity (The Good & The Bad)

Owning a successful franchise in the foodservice industry can be a truly comforting feeling. You go to work, hang out your shingle, open your doors and the crowds come rushing in to purchase all of your world famous products. They pay top dollar for them and then go out singing the praises of your establishment and another 50 customers come in and start the cycle all over again. This goes on until you close for the day. Then you lock up and get ready to start the process all over again the next day. Right?

Wrong! This may be the stereotypical version of the way it’s supposed to be, but in many instances this example does not apply. The reality of the situation is exactly the opposite. Be aware that in some cases the candidates who pay fees to purchase a new franchise are really signing on for research and development of the concept at their own expense. These newer Franchisers often have not marketed their product sufficiently to know if it will work in all parts of the country or for that matter, the world. Instead, they use the money of their franchisees to further develop their concepts.

Knowing this, why open a company store in a new market area when the risk can be transferred onto an unsuspecting franchisee? I say “unsuspecting” because the profile of a prospective franchisee usually shows far less experience and exposure in the field than that of an experienced independent operator. And after all, isn’t that the reason a prospective franchisee, usually with little experience, buys a franchise? Be aware that not every franchise can be for you. Today, there are still dozens of fly-by-night franchise concepts that go in and out of business every year, taking many investors down with them in a flaming crash.

Starting a new Franchise. (The Good)

I was involved for many years with franchise operations and problems as a VP and CEO of franchise companies. I understand that franchising is a rapid and relatively low cost way to expand your business when compared to the money, people and time that otherwise would be required to build, open and operate a chain of company-owned stores.

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