While doing graduate work at the University of Chicago, Peter
Birkeland attempted to conduct a sociology study on a particular
corporation. Unfortunately, that company's CEO didn't want
to cooperate. Undaunted, Birkeland decided to take another
approach, focusing on the franchising side of the company.
Once he began his research, Birkeland discovered very little
academic material on franchising existed. For about four years in
the early '90s, Birkeland worked with franchisees and
franchisors in three companies, attending meetings, going to trade
shows and working in the field. Based on these experiences,
Birkeland has written Franchising Dreams: The Lure of
Entrepreneurship in America (The University of Chicago
Press).
Franchise Zone spoke with Birkeland, president of The Birkeland
Institute, a Chicago-based network performance consultancy, on his
experiences, the current state of franchising in America, the myths
and the realities of franchising and what would-be investors should
know before joining a franchise.
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What was your overriding goal in writing Franchising
Dreams?
I just wanted people to be aware of both the pros and cons of
franchising. From an academic perspective, franchising is
overlooked. People are intrigued with strategy, mergers and
acquisitions, and marketing, but no one really pays attention to
franchising, and it's a huge part of our economy. All the car
dealers, all the hotels, plus all McDonald's, Jiffy Lubes,
almost all those companies are franchises. If you look at just the
number of people who are employed in franchising, that's about
one of every 16 employees. It makes a huge impact on our economy,
so I think it's worth knowing something about this segment of
the business world.
Secondly, a couple of myths about franchising are perpetuated to
the detriment of the person who's going to buy a franchise. One
is that it's completely risk-free, that if you buy a franchise,
a) you will never fail, and b) you'll make a ton of money. Both
of those are myths. It takes a lot of work to make a lot of money,
and there are failures in franchising.
As far as the myth that it's almost risk-free to go into
franchising, where do you think that came from?
A government report in the early '80s showed that
franchisees had a 95 percent success rate. You can't find that
statistic anymore, because it's not true. A franchise location
could, over a 20-year period, have 20 franchisees--one starts and
fails, another starts and fails and so forth, but the company would
count it as a successful unit because there was always a franchisee
in it. There's the problem--it's very difficult to measure
franchise success.
What do you see as the lure of franchising to investors
today?
For one, some franchise companies are looking for silent
investors, and they may be able to give you 15 or 20 percent
returns, which is a phenomenal return in today's market. The
other is franchising runs countercyclical to the economy.
Basically, the last couple of years, we've had a pull back on a
lot of things--well, that hasn't been the case in franchising.
If you're 48 and you lose your job and have two kids in
college, you look around and say, "What am I going to do with
my life?" Franchising is a really good alternative.
One of the things absolutely everybody has missed is that
franchising is kind of the safety net of the economy. If you lose
your job--you could be a teacher or a pilot, it doesn't matter
what you are--you could find a franchise company and say,
"Here's my money, teach me how to run a tax business or a
beauty salon or muffler shop," and they'll say,
"Yeah, we'll help you." That's a really beautiful
part of our economy and something that appeals to a lot of people.
If you have a lousy job or you lose your job, do you really want to
go back to school at 45 and get retrained to do something that
could be equally risky, or would you be better off buying a
franchise and seeing if you could make it work?
Do people who are leaving the corporate world for franchising
have any real grasp of what this is going to take?
I don't think anyone knows what's in store for them
until after they get involved--it doesn't matter whether
it's going to college or buying a house or trying to run the
marathon. Once you start something, you say, "I didn't
realize it was going to be this much work."
The problem comes for both the franchisor and the franchisee
when either the expectations of the franchisor are not clearly
articulated upfront or there's some withholding of information
by franchisees. Maybe they don't actually have the skill set
they say they have, so there's not quite as good a fit as the
franchisor was led to believe. In that case, you could have a bad
situation with either being in over your head in terms of the
amount of money or the amount of expertise required to start. Or
maybe the franchisor didn't disclose the severity of their
management problems.
You mentioned in your book that you think people mistakenly
believe running a franchising is like being an entrepreneur. Where
does that misconception come from?
That's still perpetuated today. Some of these
franchises' Web sites or print ads say something like,
"Are you tired of working for someone else? Come and own a
franchise," and that implies owning a franchise is different
from working for someone else. It's not really.
Franchisees are far more entrepreneurial than a lot of people
give them credit for, but even so, it's not completely owning
your own business. You have to follow a system, you're
operating under a brand, you've agreed to operate under a
license. You can't really change a lot of those decisions, or
you could, but you'd have to negotiate with the franchisor. On
the other hand, if you're a franchisee, you pay for this
accelerated learning curve. You don't have to reinvent the
wheel--they do the marketing, they get the TV spots, they do the
creative work, they've already figured out how much inventory
you need to carry and the cycles of the business and so forth.
There are pros and cons, but if you really want to be independent
and not answer to anyone, I don't think a franchise is a good
choice.
Some people in franchising have coined the term
"frantrepreneur," and I think that's a disservice. I
believe it's more difficult to be a franchisee than it is to be
an entrepreneur. It's more difficult to follow someone
else's system than it is to do it on your own. You follow the
lead, the brand and the operating system all that stuff, even
though it may not exactly be a good fit your environment, but
that's the deal. That's the hard part.
But is there a certain amount of entrepreneurial drive you
need to be a franchisee as opposed to just treating this like a
job?
Even if you think you're buying the most stable franchise in
the world, you still have to make it work. There's risk
involved--you have to put up your own money. Franchisees are very
different from other people who are just looking for another
job--they tend to be more risk-taking and are slightly more
entrepreneurial, more driven, more aggressive than the average
person. There's a ton of people who are bored with what
they're doing and they're just looking for change.
Franchising is perfect for them. They don't have to start from
scratch--they can use the intellectual capital of the
franchisor.
You did a lot of this research in the early '90s. Did you
go back and do additional interviews to see how things had
changed?
There have been a couple of major changes. When I did the study
in 1991, the [International Franchise Association] didn't allow
franchisees to join. In the mid '90s, they started to invite
franchisees in. They do have a lot of programs aimed at making
franchisees successful, whereas 10 years ago it was aimed at making
the franchisor more powerful. That's been a huge change in the
regulation of franchising internally.
Two other differences have occurred over the last 10 years. One,
there's a move toward area development. Say a franchise company
sells you the rights to develop all of North Virginia. The
franchisee then becomes, in some respects, a trainer for new
franchisees. They can build stores themselves, sell the rights to
additional stores to other franchisees. A franchise that wants to
grow quickly can find a really motivated area developer and max out
an entire geographic area much faster than if they had salespeople
trying to do the same thing. That wasn't really a big part of
franchising when I did the research.
The second trend, and I think it's fairly significant, is
there have always been some traditional franchise industries where
you'd franchise and others that were off-limits. Fast food has
always lent itself to franchising, because typically it's a
small footprint. It doesn't take a lot of money to construct
and a lot of people want to own restaurants, so franchising is a
very good vehicle for expansion. Some other concepts just never
really seemed to make sense in franchising, and one of those is
consulting. For consulting, you have to be fairly sophisticated in
terms of your business education. It's like, "Why would
anyone franchise that?" But in the last couple of years,
we've seen some consulting companies that franchise.
There's been a shift from just product-based franchises to
services that sometimes can be very complex.
Do you think these consulting/service segments might become a
staple of franchising, like fast food or residential
cleaning?
That's hard to say. It wouldn't surprise me if that
happened. That kind of business model is very profitable. You feel
you're doing something valuable, that your life has purpose.
You're helping people achieve their goal or build their
business. That appeals to a lot of people, so this might be a big
segment in franchising in 10 or 15 years, a lucrative way for
people to offer these services.
As far as area developing goes, there are franchises actively
looking for people to open several locations rather than just one
or two. Is that going to have a lasting impact on the kind of
person who is a franchisee?
In fact, that's one of the complaints. I was on a radio
show, and a guy called in and said, "I was looking at a
franchise. A couple of years ago, they'd sell me a unit and now
it costs me $5 million, because they want me to develop an entire
area." That kind of shifts a little bit the safety net aspect
of franchising. If you need $5 million to get into franchising,
that really limits it to people who either have that kind of money
or have been successful before. That restricts and changes the
dynamics just a bit.
What are some major areas people overlook when researching a
franchise?
They could focus too much on either the financial returns or the
cost to get in. Some opportunities are good at almost any cost
because the returns are so good, and there are others that are not
good, no matter what the cost. But a lot of people let their budget
drive the process. They think in terms of, "This is going to
cost $50,000 and this is going cost $30,000," without looking
at the business and the people involved. Take your time. You
usually have more bargaining power if you slow down the process. If
people say, "You've got to sign today, you've got to
get this done," a lot of times you're a lot better holding
off. You don't want to have regret.
Do you think franchising will continue to be an important
part of not just the economy, but of people's futures?
If you could be somewhat independent, make a nice living, do
something interesting and maybe have some positive impact on the
community in which you live, for a lot of people in a lot of parts
of the world, that's like the greatest thing ever. [It's
better] than not doing anything interesting, working in a nameless
organization and not being able to see any semblance of output of
what you do. As long as franchising gives people a vehicle to be
somewhat independent and make a contribution to their lives, to
their community, [its strength] will continue.