Franchise Risk Tolerance
In a sense, franchising is a method of business expansion whose primary benefit is risk minimization. In all human endeavor there is involved a learning process. This learning process requires going through a series of trial and error encounters wherein knowledge is gained by trying and failing, trying and failing again and again and eventually trying and succeeding.
This process is generally called the learning curve. In the context of franchising, the ideal situation is that the franchisor has gone through the learning curve and has learned the secrets of success for the specific business.
This is fundamentally why one would buy a franchise, to minimize risk and give one the best possible chance to succeed. The challenge to the prospective franchisee is that no two franchises are alike, and just because a company is using franchising to expand does not automatically mean that the business model is proven and profitable.
Franchising succeeds when each party derives a mutual benefit from the relationship. Franchisor, and Franchisee, must both derive financial benefit. If profitability is not shared, that franchise system is doomed for failure. If there is a mutually beneficial relationship then rapid growth and establishment of the brand is inevitable.
Risk is minimized only when the franchise system has proven the ability to generate a ROI and profits to a high percentage of its franchisees.
Often the so called “hottest” franchises out there are ones that the “newest” and there has no been enough time and experience for the model to be proven. The concept of risk minimization in franchising is implied, it is not proven for every franchise system.
It’s very important to determine the level of risk you are able to tolerate. If you wish to minimize the risk totally then you should be investigating franchise opportunities with a long track record of success in an industry that is not affected by advances in technology or the internet.
If you willing to accept more risk then you can consider some of the newer emerging concepts that offer you the ability to establish yourself early in the marketplace.
Ultimately there is always risk, the important questions is how much risk can you tolerate and how much risk is present in the franchise opportunity you are investigating.
Jim Coen, Mr. Franchise
I have learned franchising from the ground up. I’ve been a franchisee for a bad franchisor. I’ve worked for good franchisors and I’ve worked for marginal franchisors. I’ve helped many franchisees succeed.
I provide a consulting process that saves you time and money in your franchise search and provides you with the tools to make the right choice for you and your family.
Call: 617-469-3002
Comments
I think I would trust Jim Coen MORE than I would trust any other franchise consultant.
He is the only one who admits that CHURNING does exist and that it is protected by ineffective regulation and that even MATURE and highly visible franchisors idulge in churning when their concepts are not doing very well.
Jim would tell you that franchising is a business model that does minimize the risk for franchiSORS but that is very risky for franchisees who don’t do their due diligence with EXPERTS who know what is HOT and what is NOT. He also is a believer in assessing the RISK for the franchisee who should at least start out investing in a franchise that has a record of providing some return on the investment.
I like Jim Coen.
I like Jim Coen too.
I have talked to more than a few experts about churning, and most agree that struggling, low volume franchisers have found it more profitable to churn than to try and grow by adding new locations. PirtekUSA is an example of a small struggling franchisor that repeats the churning process by Terminating franchisees and then selling the territory while the Termination is proceeding. PirtekUSA did this in Florida, Texas, and Connecticut and Tennessee and California. In some cases Pirtek lost its court case and the new franchisee lost everything.
Pirtek effectively churns territories years after a particular franchisee goes bust, by leaving out details (lies by omission) and suggesting that the new franchisee use the old name. (See my blogs Pirtek Park Rose AKA Portland) PirtekUSA even resorts to selling franchises to its own employees. You would think an employee would know better, but Franchisors have a way of pulling the wool over the eyes of its loyal ne’re do-wells. Be very careful when looking at franchises. If it is not a Blue Chip franchise, and there are only a few, you should talk to every past and present franchisee. If you cannot get full and complete information about every franchisee(Past and Present)or if the excuses do not add up make sure you run for the hills.( or call me, I have the info) In the end franchisors like Pirtek, dupe more prospective franchisees than they can afford. Churning is a self correcting situation, its just a matter of time before the well runs dry, so make sure you get the complete track record. If it is true that a sucker is born every minute, then churning will continue. However, if the information contained in blogs like this is disseminated properly franchisers like Pirtek will be unable to Churn. If you have any questions about Pirtek and the many Pirtek failures and bankruptcies please call me at 813-318-1258, or e-mail me at fixxme@aol.com. Thanks to Ron and Kiwi for making all the information possible, have a great day. Scott.
Update summer 2009. PirtekUSA goes through round of lay-offs! More than 20% of the once fat PirtekUSA payroll has been chopped. The President of PirtekUSA, Morgan Arundel admits that Pirtek is struggling. No new franchises have been sold in years. Pirtek franchisees are closing at an alarming rate. Right now as many as 8 franchisees are scheduled to close. This represents almost 1/3 of all US based Pirtek franchises. Recently Pirtek Plano (Dallas TX) filed for Bankruptcy see http://investing.businessweek.com/research/stocks/transactions/transactions.asp?ric=WFC. Pirtek Plano has joined the Pirtek Bankruptcy list which includes Miami, Tampa, Nashville, Anaheim, Tucson, Portland, Boston, and many others. PirtekUSA is experiencing a melt down of sorts, Kevin Kelley states that the new sales requirement for MSSU’s is now over $20,000 per month. If you evaluate Pirtek by the numbers you will see that their own advertising claims an average MSSU sales number of less than $13000 per month. In more than 14 years of trying to sell franchises PirtekUSA and its owner Morgan Arundel have only managed to Terminate, Close Down, or have go Bankrupt more locations than have ever been succesful. The dismal Pirtek record speaks for itself. If you would like more details, or have any questions concerning the numerous Pirtek Failures please contact me. Scott Layer, 813-318-1258 or fixxme@aol.com. Kiwi, when does Indianapolis close? I heard soon!
I am always frustrated reading the hotest franchise lists as stated as they generally include the newest as they are growing the fastest as they populate the region with new locations. These same lists should include longevity tests and other measures that show the risk of churning.
Generally, I think franchises are a bad deal for someone with great business sense and ability. But having said that they can be a great stepping stone for a nine to fiver to break free from being an employee with the security of a large company behind them.
Write a Comment