Franchisees: Just Churning Businesses Or Are They Turning Out Profits?

Franchisors in the United States are required by federal law to tell prospective franchisees how many franchises they sold and retained from year to year. That’s good information for anyone who wants to buy a franchise. But it’s not enough information to help you determine if the franchisees are operating profitably. And that’s what you really want to know.

You might assume that because the franchise company shows more franchises in its network this year than it had last year that the franchisees are making money, and you could assume they’re profitable. But you could be mistaken. And if so, the franchisor doesn’t have to tell you otherwise. It’s only after you invest your money, open your business, and operate it for several months that you find out no one is making any money!

Are you thinking: That no good franchisor? Well, not so fast.

Franchisors don’t always know

Crazy as it sounds, franchisors don’t always know if their franchisees are operating profitably. Yes, they should know, but they’re not required by law to know. And, while they won’t admit it, some may not want to know, especially if it’s a new concept that has yet to catch on, or if the upfront costs are so expensive that it takes a year or longer just to break-even. The franchisor may be content so long as the franchises continue to sell, which they will if it’s the “hottest,” “trendiest,” “sexiest,” or some other useless “est” that catches the eye and the checkbook of people who buy franchise opportunities.

Franchisees don’t always know

Crazy as it sounds, franchisees don’t always know if they’re operating profitably, either. They’re busy! They’ve got a business to run, customers to tend to, employees to train, vendors to talk to, a franchisor to satisfy . . . they’ll wait for their CPA to tell them if they made money. Meanwhile, they’re getting by, paying the bills, paying the landlord, paying the employees, and paying themselves what they can, but never enough to feel that it’s worthwhile.

Now, those franchisees who know they are profitable, well, some may not want their franchisor to know for fear the franchisor will increase royalties, or impose additional fees. Or worse: Tell the IRS!

And those who know they’re not profitable, some of them don’t want the franchisor to know for fear of losing their franchise license. If they can keep their license, they figure they’ll eventually turn a profit; otherwise they may at least be able to sell the business at a loss.

Franchisees don’t always tell all

For all these reasons and others, franchisees don’t always tell the franchisor everything!

Besides, franchisee profit or loss is ultimately the business of the franchisees, not the franchisor. Granted, good franchisors understand that if franchisees aren’t profitable the franchisor won’t be profitable–for long. But not every franchisor is a good franchisor.

That’s why it’s the business of the prospective franchisee to find out if franchises are just churning, or actually turning out profits.

Some franchisors volunteer profit information

Recent U.S. franchise laws have made it easier for a prospective franchisee to learn about the financial performance of a franchise company. Franchisors can voluntarily release this information in their Franchise Disclosure Document (FDD), which they must give at no cost to prospective franchisees. However, the majority of franchisors choose not to voluntarily release this information, and for many reasons, some of them, in fact, good reasons (which I’ll discuss at another time).

So what do you do if the franchisor won’t provide you with the information you need to determine if the franchises are just churning, or if they’re actually turning out profits? 

Good relationships lead to better information

How about: Don’t buy the franchise!

That’s probably not what you wanted to hear. So how about: Develop a relationship with at least one franchisee who will help you get the information. Two to three franchisees are even better!

Chances are pretty good that if you don’t know me and I call you by phone and ask, “How much money are you making?” you probably won’t tell me. Even if I tell you I’m hoping to buy a franchise, like the one you own, you probably won’t reveal too much information by phone. You might spend some time talking to me, answering questions in generalities, but when I get down to profit and loss issues, and I want details, you’re probably going to politely stall that conversation–“Gee, I don’t know, my accountant takes care of all that”–and get off the phone as soon as possible.

But if I make an appointment to visit you, or I offer to buy you breakfast, you’re likely to be more receptive. Once we meet and you see that I’m a serious prospect and that I’m asking good questions, you may be open to a second meeting at which you, and/or your accountant, will share profit and loss information with me.

And that’s how you get the information you need.

Be careful: you may need more info

Even then, it may not be enough information. It could be the franchisee you met with got lucky and made a profit in spite of himself. Or he invested more money than you can invest. Or he had more help. Or a better location. Or the franchisor gave her a once-in-a-lifetime deal.

So when you meet with franchisees, make sure you are comparing apples to apples. “If I open in this kind of a location, and I invest this much money, and given that I have this particular background, and I’m willing to follow the operating system, as you have done . . . do you see any reason, Ms. Franchisee, why I can’t succeed like you?”

Remember: One franchisee’s experience still may not be enough for you to make a good decision. You may need to repeat this scenario a couple of times until you’re confident that this particular franchise is the right one for you and your money. 

I know it’s time consuming. But there are no other good choices. You must be willing to invest the time. And if you’re going to invest thousands of dollars, possibly your life savings, isn’t it worth the time? 

One last point: There are many franchisees who are just churning, without even knowing it, putting in time until they have to sell at a loss or close their business. And they’re in nearly every franchise network–even the good, brand-name networks. At the same time, profit-generating franchisees abound. I can’t tell you they are in every franchise network, or that they are in the network you’d like to join, but you will find them if you ask. 

Photo image by: Borman818

Categorised in: Buy a Franchise

This post was written by Dr. John Hayes