Tales From the Dark Side

Tales from the dark side

When Ellen Burek acquired the Maids cleaning service, she set down some rules that made her workers walk out. Photo: Erik Unger

Every business owner faces the dark side — unwelcome surprises the first couple of years in business. Here is a look at the top seven problems new franchisees face and how to handle them.
1. Too little money, too much work

Consultants at Francorp in Olympia Hills have been expert witnesses for franchisors in more than 80 lawsuits. The problems almost inevitably boil down to a franchisee's unrealistic expectations about earnings and lifestyle, President Patrick Callaway says. "They think they're going to buy in, make a lot of money and not work very hard," he says.

Just like any small business, lack of capital is the No. 1 reason a franchise unit fails. Potential franchisees should take a realistic look at how much capital they have to spend. Mr. Callaway likens it to buying a new car. Sure, car dealers will finance you for a $70,000 Hummer, but how will you make the monthly payments?

Similarly, buyers should take a hard look at the kind of work involved at all levels of the businesses they are considering. Chances are the buyer will end up doing every bit of that work at some time during the first year.

2. Disloyal workers

Eight years ago, Ellen and Glen Burek of Oak Lawn thought they were being reasonable when, as new owners of the Maids franchise, they set rules requiring the cleaners to show up on time and refrain from stealing the supplies. But laying down the law rubbed the 12 employees the wrong way.

"The girls didn't like us and walked out," Ms. Burek says. Mr. Burek, who had quit his truck driving job because of a bad back, vacuumed a lot of dens before headquarters managed to persuade the cleaners to come back to work.

Many franchise operations depend on a low-skilled workforce, a group that typically changes jobs often. Keeping good employees is one of the biggest challenges franchisees face. Some owners pay above market wages, or they add benefits and bonus packages to entice good workers to stay. Employee parties, awards and opportunities for promotion also help.

3. Incestuous competition

Few major retailers offer franchisees protected territories, meaning an identical store can open near you any time the corporation chooses. Compounding the problem, it's not unusual for a franchisor to compete with its own franchisees by setting up kiosks in malls, selling the product over the Internet or building company-owned stores.

Few companies will guarantee in writing that they won't encroach on one of your stores, but buyers should always ask current and past franchisees whether the company has ever cut into their sales. Back away if the franchisees are consistently fighting the company's expansion plans.

4. Turning and churning

Under most franchise contracts, a franchisor can force an owner to sell his unit if it does not meet company standards. And a franchisor who wants to can always find something wrong with a business, warns Carmen Caruso, a franchise lawyer with Schwartz Cooper Chtd. in Chicago.

It's called "churning" when a franchisor forces closures in order to get new franchise fees by selling the unit over and over. Avoid churners by buying into a company where most of the franchisees have been around for many years, Mr. Caruso says.

5. Incompetent siblings

The success of Jack Brown's Chicken Lickin' restaurant in Peoria is a direct reflection of the competence and work ethic of all 487 restaurants in the chain. Mr. Brown may have the perkiest workers in town and keep his restaurant spic and span, but you're unlikely to grace his door if the franchise in the next town sold you a soggy drumstick in a dirty container.

What's your gut feeling about the franchisees you meet? Are they smart? Are their stores clean and their employees happy? Do you like these people? If not, keep shopping.

6. Overpriced supplies

Franchisors typically require franchise owners to buy their ingredients and supplies through company-specified vendors — often, the company itself. Mr. Caruso says he has seen a pizza franchisor overcharge its franchisees 5% to 20% to purchase cheese.

If the brand is strong, it's possible that higher sales will make up for any premium the franchisor charges. It's also possible those pizza franchisees would have made out better as independents. So before you sign on, check out the going rate for the supplies your business will use every day, and avoid franchisors that force you to pay inflated prices for them.

7. Evil stepparents

Companies with franchises sell out just like any other businesses, and new owners often have new ideas about how things should be run.

Such changes can anger franchisees: Just ask the hundreds of Subway franchisees fighting new owners over the use of an advertising fund or the more than 100 former Mail Boxes Etc. franchisees suing new owner UPS over issues including the right to refuse converting their locations into UPS stores.

While franchisees have little control over regime changes, check with industry brokers to find out if a company is a takeover target. It's also a good idea to see what kind of litigation is ongoing between franchise owners and the company.

©2006 by Crain Communications Inc.