Franchise Business

Peter Birkeland, author of ‘Franchising Dreams.’

Franchising Dreams

Ever wondered what it’s like to own a Burger King? Or a Jiffy Lube? Peter Birkeland can tell you. In the new book, “Franchising Dreams” (University of Chicago Press), Birkeland explores the world of franchising, giving both the insider and casual reader an eye-opening look at the myriad challenges and uncertainties faced by franchisers (the umbrella corporation) and franchisees (individual units) alike. 

Think that owning a franchise guarantees you a successful business and healthy income? What Birkeland reveals will surprise you. By spending three years working in the franchise units of three different companies—identified in “Franchising Dreams” by the pseudonyms King Cleaners, Sign Masters and Star Muffler—Birkeland gained unique insight into the often confrontational relationships between franchisers and franchisees, and why it often takes a monumental effort to make a franchise successful. In the book, Birkeland also dispels some of the long-standing myths about franchising, relates his own “social profile” of franchisees, and exposes the one-sided nature of franchising contracts. 

Birkeland recently took time out from his duties as president of the Birkeland Institute (“a company focused on increasing network and individual performance”) to speak with Failure about what really goes on inside franchised businesses, and what ultimately makes them succeed or fail.

Why did you decide to write a book about franchising?
I didn’t have anything against franchising and I didn’t know anything about the business model. But I was interested in studying one particular company—I ended up calling it King Cleaners—because it had some overarching corporate values that I thought were intriguing.

First, I hooked up with a franchisee who was a member of my church and started working in his franchise unit. Then I did an academic literature search, and found out that what I was experiencing wasn’t detailed or documented in anything academic. The academics were interested in ‘How many units were franchised and how many were company owned?’ or ‘Where were the franchise units located?’ I found that my experience was under the radar screen, and I thought it was a ripe area of study on its own merits.

What did you take away from working alongside franchisees? 
I was surprised at two things in particular. First, I was surprised by—I don’t want to say an antagonistic relationship between franchisers and franchisees—but a fairly confrontational approach. I thought they would be tightly aligned, that everybody would be on the same team. I found that they have different perspectives and different ways of approaching problems. 

The other thing that was of interest was how much work it takes to make money in a franchise unit. I don’t know of any franchises where you can just show up, work eight hours [a day] and make a ton of money. It takes a lot of effort, and you sometimes have to employ your spouse, parents or kids. So the transformation of the family-owned business from the little retail mom-and-pop place to a big chain franchise was an unexpected result. 

What range of income can a franchisee typically expect to make? 
The first couple years they might not make anything—they might lose money. Or they might make something meager. There are successful franchisees in every single system. There’s not a system that’s going to survive long-term where everyone is losing money. In some cases—say, a General Motors or Ford dealership—people can make tons of money. On the other hand, with some of these small retail franchises the numbers tend to be quite a bit lower.

What typically entices people into buying a franchise?
I think there are two general reasons. Some people want to be in the business world and feel like they have no other alternatives. They may have had another career, or they might have been in a corporate position and for whatever reason decided they needed a change or were forced to make a change. They don’t have enough time to start their own business or can’t think of one so they decide to get a franchise. 

There’s another group that thinks owning a franchise is owning your own business. They go to trade shows where numerous franchisers are exhibiting their service offerings. They look around and see what’s interesting or who they like and then buy a franchise. 

Do you believe it’s irresponsible for franchisers to sell franchises as an entrepreneurial opportunity?
I think it’s much more entrepreneurial than working in a large corporation. But it’s probably irresponsible to make wild claims about how much money you can make—‘You’re going to be a millionaire’ or ‘This is an easy business and all you do is sit around and wait for things to happen.’ You can make money at almost any business, but it takes a lot of work, and that needs to be explained to people up front. You need to have a lot of energy and it might be two or three years before you really get things going. 

How does one go about purchasing a franchise? 
Basically, all sorts of magazines feature [ads for] franchises. You just ask for literature, or you can go to a trade show and look at a hundred or a thousand of them. 

In the book you describe companies like McDonald’s and Wendy’s as being conspicuously absent from franchising trade shows. What separates those companies from the smaller franchises of the world? 
The difference between some of the high profile franchisers—the ones that have been doing it a long time or the ones that have a lot of success—and those that are just starting out is the perception that McDonald’s is a better investment. Whether or not that’s true I don’t know. I didn’t study them, but I do think there’s a queue of franchisees waiting to get a McDonald’s. If you can’t wait you might look at something that’s not as high profile and say ‘Hey, I can make this work.’ 

Who is buying these franchises? 
I think it varies by the price point. You can get some franchises for six to twelve thousand dollars. You can get others for one or two hundred thousand, some for eight hundred thousand and some for ten million. With the more expensive ones people will often put a group together and buy them in partnerships.

You just mentioned four different price points. Could you give an example of what you would get at each one? 
If you look at the lower end franchises—like King Cleaners [an office cleaning service]—the franchise fee is fairly limited and the cost structure is limited because you don’t need an office or a lot of inventory and you do the work on the clients’ premises. You can make some good money in those, especially if you are in the right neighborhood. You may do the work yourself or only have a few employees. So the franchise fee and what you pay for is really an operating manual— the right to operate in a particular location and to represent yourself as an agent of that franchiser.

Once you need a building—as with Star Muffler—it’s probably one hundred sixty to one hundred eighty thousand dollars to construct a building with four bays and get the equipment and so forth. That’s the more typical investment—someone who has to either build a new unit or buy an existing unit. If they buy an existing unit then they pay, based on a multiple of current sales. They may also have to upgrade to new colors or a new style or whatever. That could be in the two to three hundred thousand dollar range. 

Now some of the [fast food] restaurants could be seven hundred thousand to a million dollars. Then the high-end distributors of heavy equipment, machinery, automobiles and hotels would be much more expensive. 

In the book you quote one attorney as saying that franchising contracts are “worse than servitude”? Why would anyone sign the kind of contract that franchisees typically sign? Isn’t it like paying someone to become their indentured servant? 
That’s putting it strongly, but I think people sign these contracts because most of them are business people and not lawyers. So their sense is that ‘I’ll sign this contract, but I’ll file it away and I’m not going to look at it.’ Also, a lot of people don’t look at the contracts carefully because they don’t think it’s going to matter. 

I asked one of the franchisees, ‘Did you look over the contract or did you use a lawyer?’ He said, ‘I didn’t use a lawyer. They’re not going to change the contract anyway.’ And he’s probably right. These are standard contracts that a company uses and they don’t make that many exceptions, certainly not for new people. A lot of times they are presented as “take-it-or-leave-it” documents and people just sign them because they think it’s a part of doing business. 

On a related note, why would anyone put up the capital necessary to buy a franchise? Especially when they have to pay royalties on top of that. In essence, aren’t they simply paying a company to become a manager of one (or more) of their units? 
That’s essentially what they’re doing. I think it’s a sense of security and there is a little bit of a safety net. If you’re running a business on your own, you are completely on your own. But if you’re at a franchised company you ought to be able to call them up and say, ‘I need some help here.’ Or ‘I’d like to know something about our marketing or advertising.’ Or ‘I’d like to get some training for my employees in customer relations.’ The corporate structure offers a franchisee benefits that, at least initially, seem like you could never get working on your own.

In “Franchising Dreams” you lay out your social profile of franchisees—the Neo-franchisee, the Disillusioned franchisee and the Sideliners. Explain that. 
That was based on quantitative analysis. I had gotten to the point where I understood the challenges that franchisers and franchisees faced and I had been seeing similarities across the three companies. So I did a quantitative analysis called “clustering.” It takes all the variables and uses algorithms to find out which variables are most similar. There were three fairly distinct groupings. I put together labels that I thought described those three profiles. 

One is the Neo-franchisee, a fairly well educated, highly experienced person who comes into franchising in their late thirties to early fifties. They’re the type that is going to be successful no matter what they do. They are driven, fairly curious, they will argue their point, and the franchiser doesn’t scare them. A lot of them have deep pockets. I found these Neo-franchisees to be fairly sophisticated business people with a lot of financial resources and a fairly aggressive management style.

The second group of people bought the story that if you just buy a franchise and show up you can make a ton of money. These Disillusioned franchisees were a little bit younger and had used a lot of their personal resources in order to buy a franchise unit. I think they had the misperception that they were going to be on Easy Street once they got the franchise—that things were just going to happen and that it wasn’t going to be hard to sell or manage. Rather than buckling down and working hard, they vented their anger on the other people in the system who were successful. Or they vented at the franchiser, whom they maybe believe caused their plight or sold them something that they didn’t think they were buying.

The third group I labeled Sideliners—you might want to think of the term “backbone.” They are the people who just quietly go about their business. In short, Neo-franchisees are the grandstanders, the Disillusioned franchisees are the squeaky wheel and the Sideliners quietly do their work. 

What percentage of franchisee’s would you estimate ultimately view having bought a franchise as a mistake? 
Most of the Disillusioned franchisees—and that’s probably twenty-five percent of the people, seem to regret doing it. Now, I don’t know if they’d be able to do any better in another venue. So I think there’s a fairly significant portion. I also don’t know if it’s any different than people who go work for a big company and realize that it wasn’t a smart move. But in franchising, since people typically pay for that right to operate, it makes a much bigger difference whether or not you’re satisfied.

Do people expect too much from their investment? 
I think it’s expectations and for some reason there’s a myth that maybe stems from the 1960s when people were clamoring to get franchises. Before the Internet run-up in the mid-nineties, one of the largest Initial Public Offerings was Boston Chicken. I remember calling my broker and saying, ‘Why couldn’t you get me some shares of that company?’ Before all the changes in the economy over the past five or ten years franchising was seen as one of the key ways of accumulating personal wealth and to run your own show. And I still think that’s true for a lot of people. 

What are the biggest challenges for franchisers? 
There’s always the challenge of these disgruntled, disillusioned franchisees taking up a lot of your time and not implementing the programs effectively. They may take short cuts that devalue the trademark and hurt the end-user or consumer. So you have to spend time policing more than developing the program. You might also get stuck in some unreasonable litigation that takes resources and time. 

The big challenge for the franchiser is that they lack the face-to-face contact with franchisees. They don’t see franchisees that often and there becomes a distance between people based on the fact that the corporate headquarters are in, say, Salt Lake City, Utah and there are franchisees in Bangor, Maine. The amount of time they can spend interacting with these people and understanding their values and making sure they understand strategy is fairly limited versus a company where people are on site. That challenge cannot be underestimated. 

What do franchisers look for in a potential franchisee? 
The good franchisers look for values. There are some who will say, ‘Hey, this person has industry experience, therefore they can get up to speed quickly.’ That may be true, but there is also the potential that if someone doesn’t share your values it will lead to conflict down the road. The savvy franchisers hire people who share the same values; they know they can train people in the operations and management practices. The best franchisers recruit people that they think will fit ideologically, and then train them to operate the business according to their standards.

After that, who knows what franchisers look for? They might just wait to see who shows up at these trade shows or who asks for information and just follow up with those leads. 

Whoever has the money . . .
Yeah, definitely that. For some of the smaller franchisers and those that are struggling, the sale of a new unit can make a big difference. They might bring in people who might not serve them well long term.

What do they want to avoid in a potential franchisee? 
I think it’s probably specific to each businessperson. There are some people who will take someone who has failed at other businesses as a good risk, because they feel this person is going to work hard to make this work. There are other people who will take the same person and say, ‘My gosh, you haven’t been successful at anything; you’re definitely not going to be successful here.’ 

On the other side, what are some of the biggest challenges for the franchisees? 
There are challenges in taking over a new location or taking over an existing location and starting a new business. If you’ve never done it before you can become overwhelmed. All of a sudden everything is on your shoulders. You may have to manage a labor force that is very different from what you’ve ever dealt with before. You may have mostly teen-agers, or teen-agers who don’t speak English, as the people you are depending on to make your business work. So there are day-to-day management challenges and operational challenges. 

There is also bookkeeping and finance work you have to do to make sure you’re making progress towards your financial goals. You certainly have to manage the relationships with the franchiser that sold you the franchise, who ultimately helps you in your success. And then you have to manage your relationship with the other franchisees in the system. So there’s a lot of work that franchisees have to do once they’ve started out. And there’s a lot of work prior to that making sure it’s a good fit for the person that’s thinking about going in.

Is it true that some franchisees feel that growing their business is not necessarily in their best interests? 
If you talk to franchisers a lot of them believe that is due to fear. People get comfortable with knowing they are going to make X amount of money and they are comfortable with that. They have a nice lifestyle, they’re not killing themselves and they’re happy. Let’s say they make seventy-five thousand dollars a year and they have four employees and their sales are six hundred thousand dollars. Maybe they are quite comfortable with very consistent revenues and salary and so forth. From the franchisers’ side they might say, ‘You’re just afraid to grow.’ 

Is there any dirty little secret when it comes to franchising—something that franchisers don’t want people to know? 
There was a myth in the 1980s that franchising is much more successful than owning your own business—that there is a ninety-five percent success rate. That’s a myth that is quite beneficial to the franchiser in enticing people to come in and buy a franchise unit. It’s almost fail-safe. ‘Hey, give us your money and you’re going to be successful—not a problem.’ 

Now, if you ask people at the regulatory level to give estimates of franchise success they will not answer that question. I don’t think it’s a dirty secret, but the success of franchising compared to owning your own independent retail operation might not be overwhelming in favor of the franchise business. People don’t really talk about success rates at all. They used to in the ’80s, but now those numbers are hard to find. It was one part of their past that was not really truthful and no one is talking about it anymore. 

Stepping back for a second, how do you think the average person views franchise-oriented businesses like Jiffy Lube and Mail Boxes Etc?
Probably just the way I did before I started studying this. I thought people would be more aligned to a common purpose, that they would be making more money, and that it would be a little bit easier. Most people probably don’t give it a lot of thought. That is, they don’t know if companies franchise or not, and if they do they probably think that the franchisee is making a lot of money. 

What do you see as the future of franchising? 
The safest guess is that it’s going to be more of the same. It’s fairly regulated now by the federal government in terms of disclosure laws, in terms of how you can recruit people. There are some state guidelines—you have to register with the state if you intend to sell franchises. You have to reveal any litigation against you if you are a franchiser. So there are parts of the business model that are likely to remain the same.

I would predict—I don’t know if my book will be instrumental in this or not—but as people become more sophisticated and have more knowledge they will gravitate towards the franchisers that share their values. They would maybe take a little bit of time to think about the values of the franchiser and what the other franchisees are like? Is this someplace where I’m going to fit? 

But I don’t think it’s on the decline at all. It’s a good growth strategy for many companies and I think it will probably continue. 

What is the one overriding thing you would like readers to take away from “Franchising Dreams”? 
I think there are two types of readers. There are the people that are thinking about [getting into] it, and then there are the people who manage franchises from the corporate side who might just get a perspective on what some franchisees are thinking and what some of their challenges are. 

If you’re looking for a franchise—and I don’t necessarily think it’s a bad business model—you should go into it with some awareness of what the challenges are, what some of the tensions might be, and how you can manage those in order to be successful.