My Franchise Experience

[wobbycarly]

Sorry to hear about your story... what a nightmare! I also had a business that went bust, but that story makes mine seem like a positive experience!

Going back to Aaron's question.. when you were first signing the contracts to get into the franchise, did you have it reviewed by a solicitor and get legal advice?

It's one thing to get legal advice, that supports one's decision, and another to be able to enforce the contract!

We bought into a vending business - the contract stated that the distributor would source the venues. They did a (very) few then dragged ... and dragged ... and dragged. It was always "Oh, we'll be down there in a couple of weeks" - "Yeah, we'll do it Friday", etc, etc.

Finally seek to enforce the contract - "Oh no, sorry, we've wound up the company, and we have no assets so it's not worth suing us."

Learning experience PLUS

 

[Hysteria]

It sounds like a nasty experience.

At risk of teaching grandma how to suck eggs, always get legal advice before signing anything that you don't understand. Companies are very good at writing contracts that are extremely one-sided, and deny all liability.

The other thing to bear in mind is that what's promised when someone is selling an opportunity doesn't necessarily match what's on paper. And if the two differ, it's the contractual version that has legal standing as this is what you've agreed to in a binding manner.

So if they tell you that the site will cost $270K, you will receive quotes from three fitters, and that it will be open in five weeks then you want those in the contract itself.

I had a bad experience doing a piece of software development work a few years back. I was promised money upfront, agreed a basic spec, and so forth. It was for a mobile phone game, and I massively underestimated the work needed to convert it onto different handsets (the technical version is that the J2ME platform was highly fragmented, so write once run everywhere doesn't happen). However, the time scales I was working to were those given by them, and they should have known they were optimistic.

Oh, and the payment scheme was based on royalties that took a small percentage of the total revenue after the other company had taken their expenses (undefined), with no upfront payment for myself. Oh, and there was an offer of money to complete the project made in my discussions.

The end result was that I spent a lot of time over a twelve month period working on what should have been a couple of months to finish on the original estimates. I was threatened with everything from non-payment through to being sued to recover their losses. I ended up handing the assets over and telling them to finish it themselves.

Subsequently I learned that any serious software house would have charged around $100K to do the job, and I'd have been lucky to see more than a fifth of that. The company was renowned for not paying unless they were threatened with legal action. And I wasn't the only person to have gone through all this - I spoke to another victim during an interview for a role at UBS a few years later.

Had I been a bit cleverer, I could have pushed the original one sided contract back to the other company and told them to come up with something a bit more even handed.

In Hysteria's case I'm guessing that it was the same mix that I had of being inexperienced in business and dealing with a pack of sharks.

One question for the OP: Are you planning on starting anything up again?

My fiancee has recently started up here own business, just getting off the ground at the moment doing marketing etc so will be helping her for a while.

 

[Deena]

Sorry to hear of your bad experience.

My girlfriend and her hubby bought into a franchise. Alarm bells rang for me when they had to sign all of thier insurances over to the franchise, and take up a huge amount of income protection, also signed over to this company. In the beggining all seemed well.

They lost everything, they are now bankrupt, after 18 months.

 

[Property Meister]

Sorry to hear of your bad experience.

My girlfriend and her hubby bought into a franchise. Alarm bells rang for me when they had to sign all of thier insurances over to the franchise, and take up a huge amount of income protection, also signed over to this company. In the beggining all seemed well.

They lost everything, they are now bankrupt, after 18 months.

which one? 18 months is a relatively short period of time

 

[willair]

My fiancee has recently started up here own business, just getting off the ground at the moment doing marketing etc so will be helping her for a while.

I hope this time round you have the experience to see what going to happen before it happens,and it's always very hard when you are bombarded day and night by hard sell agents and their sidekick promoters promising massive quick wealth,My wife and myself bought into a Nth Qld Freehold Hotel over 20 years now,the first week and the 2 times we flew in the place was packed,but after the ink was dry on the contract and we took control from day one it went backwards and downhill that fast ,it was only when we went out one night for dinner that the table next to us were all having a big joke about the village idiot
that had bought the "Hotel"and how the local football team were given free beer in the front bar every time we walked in the door prior too
the settlement,we lost 2 properties on that one,but what i learnt from that experience was priceless-Greed Always Overtakes Fear-..good luck this time around..

 

[Property Meister]

the first week and the 2 times we flew in the place was packed,but after the ink was dry on the contract and we took control from day one it went backwards and downhill that fast ,it was only when we went out one night for dinner that the table next to us were all having a big joke about the village idiot
that had bought the "Hotel"and how the local football team were given free beer in the front bar every time we walked in the door prior too
the settlement,we lost 2 properties on that one,but what i learnt from that experience was priceless-Greed Always Overtakes Fear-..good luck this time around..

with respect to that, how on earth could you have avoided that debacle? I assume you checked the books, or was it a cash business where you had to take their word for it?

 

[Deltaberry]

If the franchise was easily able to make money with you putting in minimal hours, then the franchisor would've opened the shop himself. No need to franchise to you.

If the franchise requires you to work there from 7am to 10pm in order to make some sort of money, then it depends on how much $$$ you could make from it. If it's say $50k, you might as well go get a government job.

 

[Ace in the Hole]

These franchises seem very limited when it comes to capital appreciation, because there are so many of them, just like buying into a large apartment complex.
The cashflow may be good for some franchises, but unlikely to get the kind of growth an independent start up business could get.

In the case mentioned previously, franchise purchased for 600k and sold for 1.1 mil after 5 years of running the biz very carefully.
This does not seem to be a very good return considering the initial outlay required, unless the cashflow was extremely good, ant then, should have sold for more than 1.1 mil?

 

[willair]

with respect to that, how on earth could you have avoided that debacle? I assume you checked the books, or was it a cash business where you had to take their word for it?

Very very simple i used to trust what i was told,our Accountant went over the books-both books,the Legal person we have used for over 30 years said it looked all upfront ,it was trading at about 12k a week just
front bar trade, side room bottle shop,15 rooms and a small motel on the side of the property on a seperate title,but my plan was to turn it into a Backpakers ,and that's where the problems started the local"old style" council would not let us go down that road,plus the Hotel came with a longtime Barmaid who after 2 weeks went to work at the other Hotel 7 klm's down the road,most drinkers went with her,next the person who ran the kitchen left, So in the end we were both working from 7 in the morning till past 12 at night 7 days a week for sweet **** all,then the killer was one of the other Hotels started a huge high volume bottle cheap bottle shop bottle sales fell 80%,front bar trade fell over 70%,and there is no money in renting cheap rooms out per day or week
to the local Sugar Cane Mill workers too much drama,the best part about those 6 months were when we did the exchange sold up,and driving back to Brisbane and after all the market is king,it always will decide who is right and wrong..

 

[evand]

My next door neighbor at a previous place i used to live bought a digital printing franchise shop front. It was a disaster from the start.

Not only was his ego bigger than his ability but the site was flawed and he lost a lot of $, hit the bottle big time, his health suffered and seeing he was in his late 50's then his retirement is pretty much stuffed. It was to be his retirement cash cow baby. Sad but.........

 

[Perchy]

Why do people go into franchising, other than the branding?

 

[Ace in the Hole]

Why do people go into franchising, other than the branding?

A few of my guesses would be:

• "Investing" in a new business for instant start up and cashflow.
• "Hoping" an established franchise will be in strong demand in your chosen territory.
• People new to business want an "easy" way in and are prepared to put up a sizable investment to get started fast with a "proven" system.
• People fall for a sales pitch where promises of high profits are made in emerging markets from doing very little work and virtually no risk involved.
• People aren't confident to start up their own business and are willing to pay bid money for hand holding.

 

[evand]

Because they buy the myth that is a proven and safe business model. With support from the franchisor, rather than going it alone.

Why do people go into franchising, other than the branding?

 

[Hysteria]

Because they buy the myth that is a proven and safe business model. With support from the franchisor, rather than going it alone.

So true. That was part of my undoing. For someone like myself who had not been in business you can quite easy fall for there sucker punch.
"Welcome to the family, our success is your success, all our stores are profitable and you have our full support..blah blah blah".
However if they had told me that the store would have cost the 480k would I have proceeded. Certainly not. They were a pack of liars.

 

[Hysteria]

Timing can play a part if you are looking at getting into a Franchise. But there are risks as there can be risks with property.

Get in early and you can make good money and profits get in to late and you buy at a premium.
A new franchise will start with a low entry costs, and say a franchise fee of say 10 grand. Total cost with stock lets say 180k. People start to notice these new stores opening up, from one store there is now 20. These are the excellent A grade sites. The smart investors are in making there money. People are buying the products. Profits are good.
Because the Franchise is in the early stages banks are reluctant to lend so you really need your own capital to fund these sites. Risky stuff.

The franchise expands, soon there are 50 stores. The Franchisors phone is ringing hot with people wanting these stores. Fast forward 2 years. There are now 150 stores. These are B grade sites. The Franchise fee is now 70 grand. Store costs are now somewhere between 250k to 300k.

Year 5, 300 plus stores. saturated the market. They dont care, they cant get rid of these C grade sites quick enough.They are getting there 70 grand for franchise fee and there 8% and 3% royalty and marketing.
By this stage the system is proven and banks are lending money. People are using there house for security and loosing them 2 years later. The smart investors who purchased the early stores have sold up and moved on.

Year 8, completey saturated. Not much interest from investor. Franchise fee drops back to 15 grand. They start reviewing the store costs and business structures as partners are going bankrupt.

They expand overseas. Repeat and rinse.

 

[Aaron_C]

I find that with franchises the franchisor will take all the prime A spots and then sell the B and C locations to new investors.

 

[eKwatee]

I won’t mention the brand name for obvious reasons.

Why wouldn't you name the brand, the reason isn't obvious to me. I thought naming the brand might help someone reading the thread from ending up in a similar position as you did.

 

[Aaron_C]

Why wouldn't you name the brand, the reason isn't obvious to me. I thought naming the brand my help someone reading the thread.

The forums here are pretty strict on potential defamation law suits. That is why the brand name is withheld.

 

[cloudyday]

I have a pal that knows someone who owns a huge franchise system and the owners words to him was something like.. "The little guys do all the hard work for us and make us the money, they take out $400k loans so we can give them a job"

 

[Hysteria]

The forums here are pretty strict on potential defamation law suits. That is why the brand name is withheld.

Also when you sell your store or surrender your store back to the franchisor you have to sign a document:
"Release Of Deed And Surrender"

This is a legal document you sign, it prevents you from taking any further action, be it legal, talking to the media etc. I dont know if this document has been challenged in a law of court at all.