Dangers of Franchising

Franchising is a branch of the economy that in many countries, including Russia, is only gaining momentum and establishing its own rules. Pitfalls of contracts and insurmountable mountains of unspoken rules - what are the dangers of franchising?

As in any business-related sector of the economy, franchises have their own pros and cons, features and dangers. Before buying or opening a franchise, make sure that physically, mentally, and financially, you are ready for anything.

Strange things that franchisors do

1. Royalty price – the periodic payment that franchisees (buyers of franchise points) pay to the franchisor (seller) for the right to use the brand, logo, technology and the entire business model is sometimes prohibitively high. Even with a quick franchise payback and high percentages of profit from sales, you can remain at an average level of earnings stably and for a long time. Before you make a purchase, carefully consider how much it will cost you to pay out your income from franchises.

2. Lump sum payment – a one-time payment as starting capital is often unreasonably high due to the brand’s popularity around the world – but not in your region. Analyze the market, perhaps no one has heard of Starbucks in your city, so the franchise fee for one may not only be unheard of for you, but also worthwhile.

3. Internal company policy – Chik fil A restaurants, for example, are closed on Sundays... for religious reasons. It's quite strange that a grocery franchise is not open 7 days a week. Food franchises must be open 7 days a week to serve their entire customer base. Although this franchise is still thriving, ask yourself: “Can I live by someone else’s rules?” For example, a franchisor's policy might be: “We are very pro-family—the biblical definition of family. We are a family business where everyone is married to their first wife.”

4. Dependency and Submission - a franchise company often openly imposes on its franchisees not only the business model and all internal rules - it comes to corporate culture, free time, religious views and even simple everyday lifestyle. Be careful whether your views on life coincide with your partner, because in franchising this is more important than in any other type of business.

Franchising Policy

You may or may not agree with the franchisor's view of things. This is your right, your choice, but you will have to take into account the general legislation and how politics is intertwined with franchises.

Policies and regulations, laws and unspoken rules in franchising are too much. It's too one-sided. This is one reason why many potential buyers don't like almost everything franchisors have done over the past few years. Even despite the fact that in most CIS countries, as in Russia, there are no special franchising associations or topical legislation, the rules observed within the administrative, labor and criminal codes still regulate business as such - these are taxes and insurance payments, this is bureaucracy and tons of documentation. For example, what was once one of the beacons of franchising in the United States has unfortunately become just another lobbying organization in Washington.

Some of you are right in thinking that dislike of associations like the IFA (International Franchise Association) and what the executives do there is due to personal political bias, which is quite normal, but the only danger is that no one will give the franchisor a chance to play according to its own rules, for example, not sending income reports to the Chamber of Commerce.

Competition and risks

And even if your reports are professionally prepared and well done, you should be more focused on the overall franchising and joint improvement of the model, and this communication with competitors means sharing techniques, strategies, plans and technologies.

Don't let the profits blind your eyes - always remember the risks:

But don’t be too scared, the pros still outweigh: franchising is a great way to do business. This has helped economies around the world grow. Franchising helps keep small and medium-sized businesses on their toes. Local communities benefit when a franchise business opens. Jobs are being created. Tax revenues are increasing. People who open franchises have taken enormous financial risks to turn their ideas into franchise businesses. Today's franchisees risk a lot to take control of their lives and be their own boss. The main thing to remember: forewarned is forearmed!