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Sunday, September 6, 2015

The truth about running a franchise



by Jason Murphy






WHO hasn’t dreamt of owning a successful brand-name franchise such as McDonald’s or Domino’s, rolling up about 11am in a Mercedes and just watching as the business makes cash?
So when we hear that 7-Eleven franchisees have been caught out underpaying their workers and claiming they can’t afford to pay them properly, it’s a bit of a shock. Most of us think these franchise businesses are a licence to print money.
It turns out the franchise game is tough to win. Often the only people earning less than the kid behind the counter are the ones who bought the franchise.
The life of a franchisee is a life of fees. They pay the franchisor to buy the business, pay a share of takings, and often a lot of other charges.
The founders of Bakers Delight and Boost Juice make it onto the rich lists. Meanwhile many franchisees go bankrupt or end up fighting their franchisor in court.
Franchise disputes are so common the Australian Competition and Consumer Commission has a whole page set up to make sure franchising runs smoothly.
So why on Earth would anyone buy a franchise?
The answer is small businesses fail a lot. A lot.
Survival rates: They’re not that great.
Survival rates: They’re not that great. Source: Supplied
About 10 per cent of the small businesses open at the start of the financial year close by the end of the year. Surviving the first year is no guarantee of a long life. Within four years nearly four in 10 small businesses are gone.
Which is exactly why people buy franchises. They want a successful business model.
But here’s the thing. Some research shows franchises fail even more than independent small businesses.
If you pay a fortune to set up your small business then watch it fail anyway, you’ll be pretty angry.
That’s why there are so many websites and groups set up for angry franchisees.
 Bakers d’Lies is one of them.
 The Facebook page Australian Franchising Scams is another one.
 The page on UnhappyFranchisee.com for Curves women’s gyms is another.
The complaints and legal claims on these websites are sometime questionable, but the anger is very real.
In America half of franchisees say they don’t make a fair profit.




Part of the problem is even that if your franchise is successful, head office knows, and they can often put another franchise around the corner. You know how there’s often a 7-Eleven round the corner from another 7-Eleven? That’s why.
But of course the problem is often clueless franchisees, like the man who bought a bakery and was then shocked to find out he had to get up at 2am every day.
But would a good franchisor let someone so clueless run a business with their brand attached? Wouldn’t they check everybody? Don’t they want everyone to succeed?
In 2010, research showed half of franchisees went into the business based on their “gut feeling”. No wonder so much gut-busting work leads to so much gut-wrenching failure.
Griffith University and the University of NSW did an in-depth study of 28 current and former franchisees this year. It found most had no specific business education and nearly half didn’t even consult an accountant before buying their franchise.
Franchises are not a guaranteed ride to wealth. Picture: AFP
Franchises are not a guaranteed ride to wealth. Picture: AFP Source: AFP
One unhappy former fast-food franchisee described how they fell for the franchisor’s sales job: “The franchisor was saying look at all the foot traffic. In hindsight, there were a lot of people walking past but not walking into the store because it was outside the shopping centre. They were just walking past to go to the shopping centre. Obviously the demographics of the clients in that area couldn’t afford our product. We were new to Australia, we didn’t know about this.”
Another former fast-food franchisee regretted not doing more work before buying into the dream: “They did encourage would-be franchisees to speak to other franchisees. If I had done that I would have heard how hugely unhappy they were with the franchise and how the financial model did not work. I probably would not have gone ahead. Simple as that!”
One retail franchisee described why they cut corners on due diligence: “It cost me $240,000 to buy the franchise … There was no way that I could afford to spend money on a lawyer or accountant. I was totally stretched.”
There is an apparently endless supply of people willing to put their life savings into a franchise without much thought. Some franchises prey on that weakness.
Pie Face opened dozens of stores all over Australia, then swiftly shut a lot of them down and went into administration.
Krispy Kreme did much the same while Eagle Boys Pizza has shrunk from more than 300 stores to under 200 amid a storm of complaints from franchisees.
Still people keep buying franchises.
It’s like being at the casino. People who win keep playing and don’t stop talking about it. People who lose keep their mouth shut and slink away. So if you listen but don’t watch closely, you can get the impression winning is easy.
There are 1160 franchisors running in Australia, trying to sell franchise businesses to ambitious members of the public. Most franchises (60 per cent) are in retail, accommodation and food industries, which many people feel they understand intuitively. It’s easy for franchisors to sell people a turkey.
There is no excuse for not paying your employees fair wages. So if you’re dreaming about owning a franchise, take careful note — it could turn into a nightmare.
Jason Murphy is an economist. He publishes the blog Thomas The Think Engine. Follow him on Twitter @jasemurphy.