Franchising: The American Dream?
An author speaks out on the pros and cons of buying a franchise.
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.
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.