International Law

Franchise Purchase Myth No. 1

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The Financial Post has a story on new Dairy Queen franchises, which contains one of the standard franchise myths.

"Head office is a friend Even before you decide to buy a franchise, the head office of a reputable franchisor can be a valuable resource that can help you determine whether an investment on your part is viable, Shelley says.

After all, a good franchisor doesn't want to open a new store or bring new owners into an existing one if it isn't going to be profitable.

They want the owner to reap appropriate financial rewards for their hard work and, therefore, stick around to grow the business. 

If you don't succeed and thrive, they won't either. 

"We have a unique operation because it's seasonal," Shelley says. "Head office understands that so it's a relationship that works."

There are a number of myths here: the franchisor is not head office, the franchisor is not your friend, and your franchise is not a unique operation.

Your franchisor is your landlord and the person renting you trademarks for a specific period of time.  You are in business relationship, each one trading for what the other considers more valuable.  Your franchise is part of a network, and for whose benefit you have contracted for.

But the biggest myth is the "If the Franchisee doesn't succeed and thrive, the franchisor won't either."

That is dangerous nonsense.  The franchisor has not particular interest in your success apart from your ability to produce gross sales.  The royalties on gross sales are what is in the franchisor's self interest.  Those royalties may be very fat, while your net margins are very low.  This is the reality of franchising.  All franchise systems work this way.

There is nothing wrong with this system - but, it is adversarial at its bottom.  You would do well to understand that you are captive customer of the franchisor before you enter into any franchise agreement.  Your economic incentives are not aligned with the franchisor's economic incentives - which is as it should be.  But, don't buy into the myth "If the Franchisee doesn't succeed and thrive, the franchisor won't either."  That is the surest way to financial disaster, thinking that "head office" is looking out for your economic interest.

Full post as published by Misleading Advertising Law on April 03, 2009 (boomark / email).