The Devil may care - or the Pitfalls of Franchising your Business

Satan was overwhelmed. Business was booming. He had so many souls coming in at such a rapid pace that he had to lease more space in order to place the damned. Then it struck him. He’s been at this game for, well, a long time. Why doesn’t he license his process out? Charge a franchise fee to any well-qualified would be soul collector with a dream and charge them 8% of their monthly profits. (Satan would have to work out what 8% of a soul was but he’s the prince of darkness! He’s got skills!). The market was rich with well qualified potential franchisees. Half of Congress had been indicted on one charge or another! Satan busily went to work on creating his business plan, marketing and training materials. Before long he had created the-Devil’s Advocate (trademark pending) franchise system. He had more applicants than he knew what to do with. His life as he knew it was never going to be the same. No longer was he concerned with the day to day operations of direct soul collection. No more convoluted deals with folks willing to trade their souls for fame, love or riches. Now he was a franchisor! He had to concentrate on screening potential new franchisees. Did they have the skill set necessary to run their own business? Did they have the necessary funds (of evil) to pay the franchise fee and survive the early days of running their own business? The pool of applicants was huge and well diversified. Satan had the pick of the litter and soon he had 25 franchises up and running. This was the good life or in this case, the bad afterlife. Or was it? At first, Satan was quite happy. His profits, for a while, were steady and rising. Souls were flowing in at a record rate but now he had time to manage the operational aspects of Hell and he was truly enjoying himself. He even took up pitchforking, a hobby he had long set aside due to the time constraints of his business. Something wasn’t right, however. Soul collection started to slow and it appeared the quality of the damned souls wasn’t up to the level he was used to. The inventory seemed to be a little light on politicians, war criminals, dictators and cable tv repair technicians who say they will be at your house between 8 and 12 but show up whenever they damned well please. These souls were tame by comparison. Far too many Canadians for his taste. This was not a good situation. Satan knew evil and this evil was far too good. Satan could not understand where the problem was. He did his homework and he knew his system was first rate. He knew all the advantages of franchising. He put in place a proven system that has stood the test of time and that by implementing such a system the failure rate would be much lower than if some soul hunting entrepreneur wanted to start from scratch without the benefit of Satan’s knowledge or experience. His training program was second to none. If the franchisee followed his techniques success would be practically guaranteed. He had set in place a brilliant support system staffed by his most trusted and vile employees the likes of Pol Pot, Stalin and the creator of Hannah Montana merchandising. He had set up a marketing system that would support the franchisees and he made sure to give each franchisee their own, exclusive territory so they would have an ample supply of souls to cull. So what was the problem? Why so many Canadians? It appears Satan’s greatest strength is also his greatest weakness! His corporate image and brand awareness is Satan and Satan is his corporate image and brand awareness. Who wants to make a deal with the devil when the devil is Mildred Pringle from Great Neck, New York? It turns out that many of the franchisees were focusing on the quantity of souls turned over versus the quality of souls collected. Satan’s brand was taking a beating! A recently convicted felon was asked why he committed his crime he replied, “Mildred made me do it!”. These were light days for Hell indeed! Satan’s problem is not unique. Franchising has proven wildly successful for many franchisees and franchisors but there have been and will continue to be failures. In Satan’s case the problem was quality control. The franchise had his name on it and people expected the type of service that clergy have been hyping up for a couple thousand years.

When franchisees did not deliver the same quality of service as the original concept the brand became tarnished. There are a few other pitfalls in franchising your business. Many folks start a business and are very passionate about their venture. They put their heart and soul into the enterprise. When they decide to franchise their business, many franchisors do not realize they are venturing into a completely new business of selling franchises and providing service and support for those franchises. The franchisor may be top notch at running the business he loves but may not be up to the task of selling and servicing franchisees. Mistakes can be made in the strategic vision by the franchisor. In order to be successful, a franchisor may only need to sell 10, 5 or even 1 franchise to have a well maintained and profitable operation. Often, however, some franchises plan a hyper-growth strategy. They want to explode and expand on the scene. Some are very successful but if the franchisor has not properly planned sales and expansion strategy then there can and will be franchisee failures. A failed franchise just sits there. The franchiser may have collected a fee to start but that monthly percentage of profits payment is no longer coming in. A dead franchise not only hurts the bottom line but many franchisors marketing efforts to attract new franchises is based on the success rate of the franchise itself. If there are a high number of failures it will be hard to attract new buyers for new franchises. Additionally, one of the most popular sources for funding of franchises via loans is the Small Business Administration. The SBA collects and maintains a plethora of data regarding franchises and their successes and failures. The SBA is, of course, more likely to be friendly with their purse strings if the franchise one hopes to buy has a high probability of survival. Below you will see a set of data provided by the Small Business Administration. Franchises with the best performance i.e. lowest percentage of SBA loan failures and franchises with the worst performance i.e. the highest rate of loan failures. (Figure 1)- "Click" to enlarge

Best Performers (less than 1% failure) Sorted Ascending by lowest % (ties sorted descending by # of loans) Source: Http://www.SBA.gov




Note the figures for Subway and Blimpie's Subs. You see two franchises from the exact same industry. Both specialize in making and selling sub sandwiches but they appear to be on opposite ends of the “success” scale. Subway Sandwiches has a 4% loan failure rate. Blimpie’s, on the other hand, has a whopping 37% failure rate. Why? I doubt Blimpie Subs & Salads is making their sandwiches with toxic waste. It could be management of the franchiser, training, support or a combination of reasons.

Franchising has been and will continue to be a great method for entrepreneurs to pursue their dreams of owning their own business and for franchisors, a great NEW business for them to pursue and grow but the successful business owners contemplating franchising their business should prepare themselves for the potential pitfalls and be ready to invest time and money into preparing a strong management, training and support plan. Many franchisors, after discovering that the franchisees may not have the same attention to detail or quality control as the original business, find that their brand has been damaged. If they are not successful in turning these franchises around they could be looking at some serious trouble. They may have to revoke the licenses granted to franchisees which can prove legally difficult if not impossible. They may have to spend a fortune buying the sub standard franchisees out or they may simply stop selling new franchises and live with the ones that have been sold. A common Latin term, “Caveat emptor” - Buyer beware, is good advice for all of us but in Satan’s case a slightly less well known Latin term, “Caveat venditor” - Let the seller be aware! Seems advice he should well take to his dark, frustrated heart.