So is franchising the only owner-operator option?

Before answering the question above, it is useful to discuss the reasons that companies choose franchising.

The first franchises were motor vehicle dealers. Alfred Sloan who transformed General Motors into a colossus said that once trade-ins became part of car sales, an owner manager would do a much better job than an employee. To this day, almost all car dealers are franchised.

In the early days of the fast food business, companies such as McDonald’s and Kentucky Fried Chicken (as it was then known) used franchising to achieve rapid expansion with limited capital.

In the 1950’s and 60’s fast food was considered a fad. Banks and wealthy private investors had little faith in quick serve hamburgers and chicken, forcing the entrepreneurs who controlled these and other fast food chains to convince smaller entrepreneurs to invest their time, money, pride and prestige in their fledgling businesses.

More recently, franchising has been returning to its roots in the motor industry through becoming a vehicle for tied distribution.

Many building products manufacturers, paint manufacturers, steel importers, toy importers, tyre manufacturers and even farm products suppliers have turned to franchising to secure tied distribution.

However, did these companies really need to go to the trouble of franchising, or could they have achieved the same tied distribution through the much less onerous dealer, agency or joint venture networks?

Franchising has become a buzzword among the 100 or so Australian franchise consultants and specialist franchise lawyers. Dot.com was also a buzzword.

A number of major Australian listed public companies such as Motorola, CSR, Landmark and Pacific Brands achieve effective tied distribution through the above alternatives to franchising.

It is particularly noteworthy that, to date, none of these arrangements have been challenged by the ACCC saying they are caught by the franchise code. 

Companies looking for tied distribution should carefully investigate all marketing channel options before committing to franchising.

Over the years I have been involved in the franchise industry, I’ve often questioned whether ‘franchise consultants’ were really consultants.

Whether they are or not, there are 46 listed on the Franchise Council of Australia’s website. So, regardless of my opinion, some people view ‘franchise consultants’ as consultants. For them to have survived, someone has to be using them.

For this article, I grudgingly accept that ‘franchise consultants’ are consultants and that there are Australians using their services.

How can aspiring franchisors choose among the 46 listed FCA ‘franchise consultants’ and other non listed consultants? Why is it important for them to choose the right ‘franchise consultant’?

If they don’t, they may end up with a Maurice Rousetty, who in a recent Melbourne Age article was described as “founder of the Melbourne accounting firm Rousetty & Co, which specialised in the franchising sector…”. Mr Rousetty pleaded guilty to 49 charges that yielded him $18.3 million gross.

To enhance his image, and convince punters believe they were doing business with a very successful businessman, Mr Rousetty drove a $300,000 Mercedes, wore Armani suits and left $500 tips in restaurants.

To the best of my knowledge, the FCA doesn’t check out the ‘franchise consultants’ listed on its website, e.g., N2N Group, a Rousetty company, is still listed. Also, at least some ‘franchise consultants’ are failed franchisors.

Here are some questions to ask a ‘franchise consulting’ company:

* What successful franchises have you developed? Please identify the people and brands with whom you worked.

* How many franchise programs have you developed?

* Have your clients, you or your company been involved in litigation? If so, what was it?

* What franchise programs have you developed that didn’t work? Why didn’t they work? ‘Franchise consultants’ that haven’t had any failures are either new to the business or liars. Even your eminent correspondent had failures (of course they weren’t my fault).

* Who will be working on my assignment? What are their qualifications and experience? Whom can I call to check on them?

* What is your hourly charge out rate and how do you charge if you overrun quoted hours?

* How are expenses charged?

* What legal firm do you use in preparing the franchise agreement and franchise code documentation?

* How can I terminate your consultancy?

Finally: ‘franchise consultants’ are usually good salespeople. So check out their body language and the words they use.

The title of this article is ahead of itself. The question should really be, “Is being your own boss for you?”

Many people decide to become franchisees without understanding that to be a successful franchisee, they have to be a successful business person. To have a chance of success, potential franchisees need to evaluate whether they have what it takes to run their own businesses.

There are no guarantees in business – even in franchises. The best franchises can’t eliminate all the risks associated with starting a small business.

Aspiring business people should start by evaluating their strengths and weaknesses as potential owners and managers of a small business.

If you want to be your own boss, ask yourself the following questions:

• Am I a self-starter? Can I develop projects, organise my time, and follow through on details?

• How well do I get along with different personalities? Can I develop working relationships with a variety of people including customers, suppliers, staff, bankers and professionals such as solicitors, accountants and consultants? Can I deal with a demanding client, an unreliable supplier or a difficult receptionist if my business interests demand it?

• How good am I at making decisions - often quickly, independently, and under pressure?

• Do I have the physical and emotional stamina to run a business?

• Can I work 12 hour days six or seven days a week?

• How well do I plan and organise? Do I know how to manage cash flow?

• Is my drive strong enough? Can I handle running a business emotionally?  Will I burn out carrying the responsibility for the success of my business on my shoulders?

• How will the business affect my family?  Will my family trust and support me in the difficult, early years of my business years? Will family members work in the business with me? Can my family adjust to a lower standard of living or putting our family assets at risk in the short-term?

• Success in business isn’t automatic. It isn't based on luck, even though a little luck helps. Business success depends primarily on your foresight and organisation.

• Underestimating the difficulty of starting a business is a major obstacle and a major risk. However, it’s a great way to go for those willing to work hard and do what needs to be done.

If you can answer the above questions positively and if your family supports you, there are great benefits in becoming an independent businessperson or a franchisee.

• You will be your own boss.

• Hard work and long hours directly benefit you rather than increasing profits for someone else. You will earn incentive compensation through your hard work and equity increase through growing the value of your business.

• While a new venture is risky, it’s also exciting.

• Running a business provides endless challenge and opportunities for learning.

The growth of franchising has been accompanied by an ever increasing number of ex-franchisor executives, ex-franchisees and retrenched executives setting themselves up as franchise consultants.

However, the very term franchise consultant, is in itself an ironic anomaly.

Franchising is about tied distribution for manufacturers or wholesalers and about rapid expansion with limited capital for food or service businesses.

This article deals with manufacturers or wholesalers. Their main goal is to maximise sales by means of the highest volume and lowest cost marketing channels. Franchising does not, of itself, deliver high volume or low cost.

There are many other marketing channels that can  deliver high volume and low cost, including:

Dealerships

Distributorships

Agencies

Joint ventures

Company owned operations.

Manufacturers need to evaluate all cost-control-coverage tradeoffs. However, when they talk to franchise consultants, these consultants focus on what they know – franchising.

 And, with franchise legislation, a franchise program is far more expensive to develop and operate than any of the above alternative marketing channel strategies. Typically, legal fees for drafting a franchise agreement and preparing disclosure documents required by the franchise code costs around $25,000.

 Manufacturers want tied and preferably exclusive distribution of their products. On the one hand, motor vehicle manufacturers get tied distribution through franchising.

On the other hand, Telstra achieves tied distribution through a license program for its Telstra Shops.  Motorola and Stihl Power Tools achieve virtually exclusive distribution through dealer networks and Tattersalls achieves tied distribution though an agency network.

What marketing channels would Telstra, Motorola and Tattersalls currently use if they had worked with franchise consultants?

If it’s impossible to buy hamburgers in a pizza franchise or pizza in a chicken franchise, what’s the likelihood of being advised to develop a dealer, distributor or agency program by a franchise consultant?

And, to return to the headline, are franchise consultants really consultants or are they simply franchise packagers? I’ve made up my mind.

 You decide

The American philosopher, George Santayana said, "Those who do not remember the past are condemned to repeat it".

Australia, according to the Franchise Council of Australia and other franchise pundits, is in the midst of a franchise boom. Franchise Expos are currently being run around Australia as further evidence of that boom.

However, if one looks carefully at the companies participating in these expos, there are few major franchisors. Will all the smaller companies exhibiting at these expos succeed? Statistical information says, most likely not. In fact, based on a survey carried out by IF International Group in 1995, after 10 years, 67% of all franchise chains started, were no longer in business.

There is an obvious argument that franchising has moved on and that franchisor failures are far fewer than in previous decades. Franchisor failures may well declined because of the franchise code and compulsory disclosure.

However, there has not been one recent survey specifically addressing franchisor failures and how much failures may have declined over, say, the last 10 years.

Potential franchisees should be asking themselves if Australia's 20 million people can realistically support the vast number of franchises in areas such

as:

Coffee Lounges

Mortgage Brokers

Finance Brokers

Wealth Management

Lawn Mowing, Maid Services and Dog Washing Franchise Consulting

I was the Southern Hemisphere's first franchise consultant and the only one in the country for 10 years, so I believe in the concept and the benefits that franchisees receive from ethical and well run franchisors.

However, I have lived long enough to be absolutely convinced that every boom is followed by a bust. The problem is that no one can predict when the bust will occur or who will go bust. Despite the benefits brought by the franchise code and disclosure documents, potential franchisees must always operate not on the basis of carpe diem, seize the day but rather on the basis of caveat emptor, buyer beware.

So, as George Santayana implied, potential franchisees should remember the past and be extremely careful when considering becoming franchisees of smaller, unproven franchisors. Unfortunately, not every franchise is the next McDonalds's, even though the promoters would like potential franchisees to think they are.

It’s a sad, but true fact that franchisees cheated by crooked franchisors or seriously disadvantaged when incompetent franchisors go broke, have very little chance of winning in court.

The Australian legal system mandates that solicitors instruct barristers with the simple result that those with the deepest pockets usually win. Australian lawyers don’t work on contingency, class actions are few and far between and Australian courts level only compensatory damages, not punitive damages.

Contrast this with the United Sates where aggrieved franchisees can hire  lawyers who get paid only if they win their cases, courts award treble punitive damages and class actions are easily brought.

Additionally, a crooked franchisor that mails misleading information has to deal with the FBI, because once fraudulent mail crosses a state border, the offense becomes federal.

Simply put, it’s easier to cheat franchisees in Australia than in America and it’s harder for a cheated Australian franchisee to win in court.

I have a suggestion to level the Australian franchisor/franchisee playing field. However, many honest and competent franchisors will be appalled by my suggestion.

Let me state my orientation. I have always worked exclusively with franchisors and principals and would never do anything to weaken their positions.

Having said that, here is my suggestion – State and/or the Federal governments should provide legal aid to wronged franchisees. If legal aid is

deemed acceptable for accused rapists and murderers, surely there has to be some place for it to help Aussie battlers.

I can hear franchisors now, “Franchisees are never happy, and if you give them legal aid we’ll spend the rest of our working lives in court.”

They will also say that the Australian Franchising Code provides for compulsory mediation. It does, and mediation often works. But, mediation is for honest, competent franchisors dealing with honest franchisees where there is a genuine commercial dispute, not stupidity or cupidity.

Obviously, there have to be mechanisms to ensure vexatious franchisee litigants don’t get legal aid. That mechanism can be vested in the ACCC or a similar organization with the skills to evaluate whether franchisees’ claims are valid and the power to appoint lawyers to provide legal aid.

While we may read about dishonest franchisors being sued by the ACCC or incompetent franchisors going broke, we rarely read about those people that lose their homes, their life’s savings and sometimes their sanity and their lives. We don’t hear about marriages breaking up under the strain of insolvency or about the sense of despair that comes about when good people have nowhere to turn.

At the very least, legal aid for cheated franchisees, should be trialed by a state or the Federal government.