Franchisee Profitability: 8 Days, 8 Months or 8 Years
This afternoon in consulting with a client who had recently signed a franchise agreement involving a substantial commitment of capital, I was reminded about the importance of maintaining "realistic" expectations when buying a franchise. When discussing his expectations about his franchise purchase and the business that he will be developing, he was extremely "realistic" as to his expectations and the work ahead of him. That is:
(a) He diligently evaluated the "franchise opportunity" that he was investing in and thoroughly understood that, as with many businesses, it would be a number of months and possibly years (hopefully not) before he achieved a level of profitability and acceptable return on his franchise investment; and
(b) He understood that the success of his franchise rested on the hard work, marketing and business development that he (and his family) would bring to this new business. Significantly, his approach is not one of "lets wait and see" what business comes through the door.
The most important lesson that I was reminded of by my client - a lesson that future franchisees and franchisors may also put to use - is that getting your expectations "right" is critical. When considering a business opportunity and setting your "expectations", franchisors and franchisees should consider:
- Profitability will Take Some Time - Profitability is not guaranteed and, depending on your particular franchise opportunity, may take 8 days (unlikely), 8 months or 8 years (hopefully not). That is, you must plan ahead and account for the extremely realistic fact that you in selling a franchise or purchasing a franchise you must properly communicate and/or understand that reserve capital will be critical. Evaluate the opportunity thoroughly and ensure that you have developed the correct expectation about the future profitability of your business.
- Franchisors Can't (and Shouldn't) do Everything - Buying a franchise does not mean you just pay money and then sit back and wait for business to "walk through the doors". You must be actively engaged in the marketing and "development" of your business. Look to your franchisor as your "partner" and not your "caretaker". Franchisors, be selective about the franchisees that you approve - look for franchisees that will contribute to the development of your franchise system.
Get your expectations right.
Great article and this sounds like the perfect franchisee! We are new to franchising and it amazes me what people expect of a franchisor.
I agree whole heartedly with you. I like that there are other franchise attorneys on the same page as we are regarding the franchisor's role in the system. Thank you for bringing this information forward as we have been.
The above comments are excellent, of course, and from a source that sticks to the truth. Charles Internicola!
However, from the franchisees' point of view, don't franchisors encourage the "unrealistic" expectation of profits when they provide the "startup costs" and "times" to prospective franchisees in the pre-sale process. Franchisors, of course, protect themselves legally in the actual franchise agreement from any inaccuracy of these "startup costs" and, unfortunately for franchisees, are not required to substantiate the "startup costs" with any currently existing facts.
Actually, don't franchisors use the "startup costs" as a financial performance claim, an implied "earnings claim" in view of the fact that 90%, more or less, of all franchisors don't provide even an "earnings statement" in the Franchise Disclosure Document (FDD) -- and it is against the law to provide an earnings statement outside of the FDD?
Really a shame that franchisors are not required to disclose "unit" historical performance statistics to new buyers of franchises that would permit the buyers to see the odds of failure or success and profitability of the franchise they are buying. This flaw in the FTC Rule that governs the sale of franchises to the public invites a lot of fraud, doesn't it!
Let the Buyer Beware and consult with excellent franchise attorneys like Charles Internicola who probably has a special instinct to spot and identify unprofitable franchises and outright frauds.