The franchising model has proven to be successful, but there are some bad apples out there.
Good franchises can be very lucrative for franchisors and franchisees alike. Bad franchising, on the other hand, can be a spectacular failure. Unfortunately, there’s been a few too many examples of the latter lately.
While we should be very proud of the franchising sector overall, it’s necessary to distinguish between a good system and a bad system. By doing this, not only can we learn to create positive, successful franchise models, but we can also discourage the bad ones.
There are a few things to look out for when determining whether a particular franchise is one to buy into.
1. Look out for fads
Froyo anyone? Where have all the frozen yoghurt stores gone? There was a time when they would line the streets, one after the other, all competing to outdo their competition. They seem to have largely disappeared though, with only a couple of companies still remaining in the Australian landscape.
Fads are concepts that get old quickly. There’s no longevity in the product or the business experience.
Remember Doughnut Time? The company was a copycat of a decadent doughnut franchise in the US. Yes, the doughnuts were to-die-for and the pictures sure were Instagram-worthy, but, that most certainly wasn’t enough.
When it came to the copycat business, only the doughnuts were replicated. The business model was left by the wayside. This soon resulted in liquidation. The empire of 30 stores was dropped to just seven and the staff was dwindled down to less than 100.
Key to remember is that fads get old quickly. Buying into something that doesn’t have a strong business model is very risky.
2. Do your due diligence
Doing your due diligence is crucial. Never, and we mean never, buy into a franchise without talking to at least a few existing franchisees – successful and unsuccessful. Speak to franchisees, both past and present, to determine their experiences.
Firstly, you’ll get the inside scoop, especially when it comes to the franchisor. Key things to look out for include an aggressive or insistent franchisor.
This may raise some monetary red flags – is the business making enough money? A good franchisor, on the other hand, will be patient with you, ensuring you are the right fit for the business before rushing into any processes.
If existing franchisees are speaking about the franchise negatively, walk away. One only has to look at Food Retail Group as a fitting example. With a trail of misery across Australia for small businesses operating outlets under the FRG banner, you’d be crazy to even consider it. These franchisees have given up hope of ever selling and they’re taking the franchisor down with them.
Remember, the business of franchise is a lot larger than you may think. There are some franchises that you’ve never even heard of, from Nutrition Station to Tapsnap and Bizzone. You need to do your research.
3. Ask yourself “Is it recession-proof?”
Another key question to ask is whether the franchise is recession-proof. Our economy is never safe from a recession; such is life. What you’re looking out for though, is a business model that can survive an economic turndown. Or, at the very least, a business model that won’t fail completely with a recession.
For example, if the franchise depends on people spending disposable income, your hazard lights should be blinking. This is especially true in smaller cities and regional towns. Remember, when people are tightening the reigns on their money, the first thing to go is the excessive spending on non-essential items.
The best examples of these include leisure and entertainment franchises such as party entertainment or high-end catering.
4. Find out about their supplier agreements
Finally, where do the supplies come from? While some franchises will leave the equipment and supplies purchase decisions up to you, others will insist on specific suppliers. This may result in poor quality or ridiculously over-priced equipment. Sometimes both.
Just a few years ago, Quiznos agreed to a $95 million settlement with 6900 class-action franchisees who said they were subjected to overcharges for supplies.
Even after the settlement, store owners claimed the company continued to force them to buy food at marked-up prices from an affiliated supplier. Quiznos has since shut down.
If revenues are flat or falling due to a stale product or brand, franchises will often turn to their franchisees as a source of revenue growth.
The most common way to do this is to force franchisees to purchase supplies and equipment from their affiliated suppliers. This is a major red flag.
Be comfortable before you commit
While buying into a franchise can be an excellent investment, you need to be wary of those with bad business models. Do your homework. Research, research, research. At the end of the day, the best protection from franchise duds is prevention.