Franchises: The Religion of Business

(This blog entry is not purporting to give legal advice and is solely the opinion of the author. It is not meant to refer to any specific franchise or franchisors.)

I used to own a franchise. My parents originally owned it and then I bought them out and ran it for a few years. At the time, my only real complaint had to do with paying the royalties that didn't seem to have any value associated to them. It wasn't until I sold the franchise that I began to see the parallels with a franchise and a religion. Below are just some parallels, but I might add more if the mood strikes.

Dogma
A franchise has a Franchise Agreement and an Operations Manual. These two documents are similar to religious dogma in that they clearly spell out what you, the franchisee, are required to do, or not do (an astute reader of the Agreement will usually discover that there is very little said about what the Franchisor is expected to do!). They are not scientific documents with extensive references to show that they are valid ways of conducting business. They are declaring the 'truth' on how to run your business based on a formula that other centres may have used to be successful. However, this method of business does not necessarily work in all markets.

If you are considering a franchise, do not assume the franchisor is in business to make you successful. If you are given a Franchise Agreement to review there are two very important things you must do:

1. Do not sign it until you,
2. Consult professional help through a lawyer that specializes in franchise agreements and visit franchisee.org's web page that list some of the worst problems a franchisee may face.

Remember, you will be paying hundreds of thousands of dollars to the franchisor over the life of the contract so don't be afraid to spend a couple thousand to get top-notch advice to protect you.

Tithing
Churches tend to advise their followers to give 10% of their income to the church. Franchisors usually want a percentage of your total sales as a royalty. What is this money giving you? The church gives you a community (at a price) and an offer that you can't realize until after you die. Franchisors may offer even less.

Usually the royalty you pay does not come with any direct benefit from the franchisor. The royalty is what you pay to use the franchisor's name in the market because their name, product or service is what will attract customers. However, as I've heard it said, the franchise usually only gets you the customer the first time, but it's up to you to make them want to return. In many ways, the royalty should be paid only on new customers, not ones that return because they like how you treat them. Beware that royalties come off the sales, not profits, so you can end up paying more in royalties than the gross profit you'll make. Imagine that royalty payment as an overpaid employee who once taught you the business but now sits in the corner playing video games all day, refuses to work but has the power to kick you out if the money stops coming. Try to keep that royalty as low as possible.

Many franchises will form a Franchisee Association (FA). However, many franchisors will attempt to thwart its creation in the way many companies will fight unions. I heard of a case years ago where the head of the FA (an owner of three stores) was forced out of the franchise by the franchisor! Look for a franchise that actively supports the formation (and even provides some funds) of an FA.

Prosyletizing
Ever gone into a washroom at a restaurant and seen a small card above the toilet offering to tell you the story of Jesus? I have, really! Churches want more members and franchisors want more stores and they both will do some crazy things to do it.

The franchisor will usually require that you spend a certain percentage of your sales in advertising. The up side of this is that independent businesses usually underspend on advertising so a franchise can often gain more customers. However, there is a hidden tactic here. Franchisors want to see their name everywhere. It not only helps sales in the stores but it helps the sale of more franchised stores. Franchisors like to brag about their market share because it has a psychological effect on consumers to make them think their product must be good because they see it everywhere.

Franchisors will sometimes feel that they are not getting a large enough share and, if the FA is not worded in your favour, will open up another store in your market. This can cause some of your customers to migrate to the other store thanks to the good name you've developed. Don't let the franchisor open up a competitive church down the street!

Giving
A church will work hard to get an honourable mention in your will. Some won't wait until you die to get ahold of your possessions (Jim Jones, CO$ and pretty much any faith healer). Even Jesus said, "go and sell that thou hast" (Matthew 19:21). Be wary of the franchisor that wants to control your personal assets, too.

Many franchisors want franchisees to sign a Security Agreement. Basically, this can freeze your assets because they get to take them in case you end up owing them money. Want to sell your car? You may need the franchisors permission. In my research, I was told a story of how a franchisee can see their business go bankrupt and then the franchisor sues the franchisee for 'lost future income'. The franchisor then takes the personal assets of the franchisee as compensation!

Apostasy
There is a strong penalty to leaving a church. In some religions and cultures, they might kill you! Franchisors can't do this (yet) but they do want to control your life after you leave.

Most franchisors don't like the idea that you learn how the business works and then use that knowledge to open another business that happens to compete with the franchisor even if you run the business with a different philosophy and methodology. Why are they afraid that you might be more successful than their system? If their system is superior, they shouldn't be worried that you intend to open a similar business near their markets.

Also, beware of any 'leaving' fees. You may be required to pay all sorts of costs associated with closing or selling your store that, again, seem to have no real purpose (other than to shake you upside down hoping for a little more change). A successful franchised store will require almost no work for the franchisor resulting in pure profits in royalties. Don't let them take even more money because they have to do something when you try to leave.

When considering a franchise, it may help to think of it on religious terms. Is the franchisor working for you, or off of you? Are they helping you succeed or themselves? Are their principles 'secular', 'humanistic' and 'democratic' in nature or are they dogmatic and strictly controlling what you do? Look for a franchise that openly and actively supports the franchisees and welcomes criticism. But remember that a franchisor no longer has the secrets of a successful business. Internet forums and even prospective suppliers will provide you with virtually all the information you'll need to get into any type of business.