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A calculated risk: buying a franchise

Do risk takers buy franchises?

I thought so, until I interviewed franchisees for Franchising: The Inside Story, the first book written about how to buy a franchise. When I asked franchisees how they felt about taking risks, I got an education. I thought franchisees were entrepreneurs, and entrepreneurs are risk takers, but it turned out I was wrong.

Is it do or die for you?

Franchisees may think of themselves as entrepreneurs (even though many franchisors prefer not to sell to entrepreneurs), but they do not see themselves as risk takers – the people who put everything on the line with little or no assurance of a safety net. When risk takers buy or develop a business, they invest their life savings and more (money borrowed from banks, family and friends). For the risk taker, it’s do or die.

For the franchisee, it also may be a do or die scenario, but it doesn’t have to be. If you select a franchise opportunity with a good track record, one in which most of the franchisees have succeeded historically, your safety net is the franchisor. Franchisors are responsible for providing franchisees with a plan for operating the business, plus training and ongoing support. When you face a challenge as a franchisee, you contact the franchisor for help.

You can’t call a friend

An entrepreneur, on the other hand, may have to face challenges alone. Risk takers can’t easily call a “friend” in the same business because they are competitors. Instead, risk takers try to figure it out on their own, and that often leads to failure.

This is not to say that franchising comes without risks. Not at all. As one prominent franchisee told me, “I am a calculated risk taker.” In other words, he did his homework before buying multiple franchises.  Savvy franchise candidates “kick the tires” (two or three times) before they buy a franchise. They ask all the necessary questions, they visit the franchisor as well as existing franchisees, and they make certain their personality is compatible with their franchise of choice. For those reasons, franchisees are not risk takers. They take calculated risks.

 

 


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6 thoughts on “

A calculated risk: buying a franchise

  1. Bob Whyte

    John:

    You’re definitely right about the entrepreneur/risk taker paradox when it comes to people buying franchises. As a broker, I always felt that what lead most people in the direction of franchising was that they believed that a proven model reduced their risk–well, maybe! Fundamentally, I think that’s true. But we both know that not every franchisor is “A” caliber. I worked with a bunch of successful franchisors because they had successful franchisees.

    Bob Whyte

  2. johnhayes Post author

    Hello Bob . . . we are always faced with the challenge of separating the good from the bad when it comes to franchisors. Fortunately, that’s not difficult to do today — and often times it’s a good broker who can help a candidate get that done.

  3. Steve Whiteside

    Hi John,
    I could not agree with you more. I found in most of my research that most franchisees are calculated risk takers like you say or they are not risk takers at all and are looking to buy a job they will love and maybe have a bit more of a upside.

    I also notice many franchisees are immigrants and they just cannot find a job that will take into account their skills and education from their home country so buying a franchise is a great option for them.

    The more interesting question is, are franchisees entrepreneurs? I do not think one can answer this with a yes or no. Many franchisees are entrepreneurs and they normally own large multi-million dollar franchises or they own smaller franchises but multi locations.

    Being a entrepreneur and a franchisee has its ups and downs as entrepreneurs usually want more control, in a franchise organization control must be shared between the franchisee and the franchisor. But a entrepreneur is also good at calculating risks.

    A good example is the Private Business Colleges I own. They are a franchise. The risk of starting a accredited college and waiting two years before one can get government funding as well as having to create curriculum and systems to run a Private College is a large task. But buying a franchise I could have all of that overnight. Then I could grow the franchises and buy more.

    So in the long run every franchisee is different and every franchise organization is different. The great thing is I believe there is a franchise out there for all entrepreneurs or people who are not entrepreneurs. There is pretty much something for everyone. And I know you are the expert in helping people with that.

    Thanks for the great blog post!

    Steve Whiteside, PCC, PhD
    President
    Coach With Steve
    http://www.coachwithsteve.com

  4. Angela Carpenter

    Wow, was THIS an eye opener. I’m so glad I ran across your website. My husband and I have been talking about where to invest our money and always saw being a franchisee as taking a huge risk, but now it makes a lot more sense. You just step into that role, take it step by step, and the model’s been proven. Almost makes it a no-brainer. Considering you have a “cushion”, can find a location that makes sense, and there is a need, it sounds like a great opportunity. Thank you for this article.

  5. Louisa

    I hear people talk about “calculated risks” so often. This does actually seem like one though. There is more to calculate than in most areas where there is so little background to research you’d be just as well going to a casino and placing a bet. By choosing an established franchise with a good track record as you say, this is what you calculate and hopefully the thing which reduces the risk.

  6. Doug

    There is an element of risk in any facet of business. You are always taking a chance, you can do your homework and “kick the tires” but until you take the wheel, you have no idea if your business is going to be the one that succeeds. Businesses close every day, and I can’t believe that has to always be the fault of the business owner.

    That’s why I think it is a risk, and also why it has to be do or die. Can you really afford for it not to be? Do you really want to throw away an investment like a franchise?

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