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Why Business Franchising is a Bad Deal

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Why Business Franchising is a Bad Deal

The most often cited reason to go into business is to make money. At least that is what you are supposed to believe. If that was the only motivation, there are many other options to turn a quick buck and avoid all the pit falls and responsibility of making a payroll. For the brave of heart and persistent of will, starting your own business is a dream come true. Therefore, at first look, it seems reasonable to follow a pattern of a proven winner, when the leap requires putting your entire net worth on the line. Franchising has the appeal of lessening the odds of failure, to the uninitiated.

Risk is a financial condition that few appreciate until their feet are held to the fire. Entrepreneurs strive for the best business they can build, while an investing licensee wants to buy into a formula that has a track record with a guaranteed return. Why else would anyone be willing to pay a substantial fee and share profits to put up a sign?

Jonathan Lister of Demand Media, cautions the perspective businessperson, accordingly about business operation constraints in
Negative Effects of Licensing & Franchising.

"The parent company or franchisor you sign a franchise agreement with has the right to control a large portion of your operational decisions, including setting prices for goods or services, determining location decor, and mandating employee uniform requirements. These constraints rob you of the chance to put your own stamp on your franchise location. This may make you feel like less of a small-business owner because you don't truly have total control over your company. In the end, you have to adhere to the parent company's demands to preserve your franchise agreement."

Also, consider the cost of franchise fees.

"Making regular payments based on a percentage of your revenue from sales is a routine requirement as part of a franchise agreement. This means you don't get to keep 100 percent of your revenue regardless of how high or how low your sales are for any particular month, quarter or year. These regular payments can damage your franchise location's ability to pay bills and sustain growth if sales are slow when you open for business. The parent company may also charge you a one-time franchise fee to secure the rights to use the franchise's name and reputation in building your business."

Such constrains drive away and offend true enterprise warriors. However, in an economy that rewards bean counters and legal wizards, more than dedicated hard working ownership, the model of the franchise business came into being. Bankers love this prototype, as they shun lending to individuals and family businesses.

It is a mistake to believe that only shrewd, sophisticated and experienced business capitalists sign-up for a franchise license.
Joel Libava bills himself as a top franchise ownership advisor. He lists eight stupid reasons for buying a franchise business, where you can examine his reasoning on each point.

1. You can’t get a job.

2. It’s hot!

3. There’s a prime location open right by your house.

4. You’re in love.

5. Your Aunt Tillie and Uncle Mort, just back from their 28-day cruise, mention "this restaurant" they ate at in Barbados.

6. You’ve always wanted to be an entrepreneur.

7. You read something either online, or in a magazine that said, "you should really take control of your life now."

8. You’ve finally found a business partner.

OK, so you are smart enough to avoid the trap of emotional sentiment and you have the good sense to hook up with a flagship name company. What is the price for such peace of mind?

According to the Wall Street Journal, you better read the fine print in your contract. "Franchisees typically sign lengthy agreements that require them to follow the rules of the franchiser, which commonly require arbitration to resolve a dispute, thus restricting their ability to file individual lawsuits."

Probably the most ignored area of business is the fact that legal obligations and exposure to litigation is constant. So are you better off with a franchisee agreement that imposes binding arbitration based upon a contract written to protect the interests of the franchisor?

Making a business decision on the merits of potential profitability of the venture is common to any endeavor of commerce. However, the added burden of becoming a glorified manager for the parent company seems less than prudent. The kicker is that you risk your own money and agree to satisfy all the bills, before you can take home your first dollar of compensation.

This may be rhetorical, but if you are reading Franchising For Dummies, you are a pinhead.

Seek advice from only those franchise lawyers and consultants who have a serious depth of experience in franchising.

Don't assume you have any rights not stated under the franchise agreement.

Consider your exit strategy.

Be careful of what you may guarantee.

Know a franchisor’s rules before investing if you want to own a separate business.

Get everything in writing from the get-go.

Carefully read Item 11 in the FDD.

Make sure you understand the boilerplate in the agreement.

Know the difference between a franchise broker and a consultant or advisor.

What are you getting yourself into? Do you really need to jump through all these hoops before you get down to the serious task of working a business?

Negotium advocates the merchant economy and by definition, a merchandiser in a commercial enterprise is selling a product, service or an idea. Buying from a supplier may require a contract, but a sole proprietor does not need permission to engage in commerce.

When the consumer patronizes a franchise operation, they are contributing to the demise of an independent and a middle class ownership economy. Boycotting international named brands is a step forward in restoring a prosperous and widely shared shopkeeper economy. Dump the ad hype and buy from local merchants.

James Hall – December 11, 2013

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