Why do people buy franchises?

By Sarah Stowe | 29 Oct 2015 View comments

The majority of franchisees say they chose a franchised business rather than establishing their own because of the potential financial returns and the opportunity to be their own boss. However, it could easily be argued that these responses can equally be applied to independent businesses as they also provide the opportunity to be your own boss and to generate good financial returns. In fact, all of the responses given by potential franchisees could equally apply to independent businesses as well as franchised. So there must be other, underlying reasons, for the decision to invest in a franchise.

At DC Strategy, in our research and experience, the key differentiator between those willing to invest in an independent business and those who wish to enter a franchise system is that of risk profile. Franchisees, contrary to popular opinion, aren’t as entrepreneurial as their independent business-owner counterparts _ they arenÍt generally willing to take on the risks of establishing an independent business.

The potential franchisee’s view is generally that franchise systems provide a lower degree of risk and, therefore, a higher potential to provide the very outcomes stated below (particularly financial returns and the building of a saleable asset). They rightly reason that the franchise system has already worked out many of the bugs in the business and, therefore, there is considerably lower risk involved in a franchise.

At the extreme, this thinking can lead to some quite illogical behaviour including a failure to properly investigate and assess the franchise opportunity. There is no substitute for proper due diligence when embarking on any business venture regardless of the business model under consideration. It is unfortunate that many potential franchisees expose themselves to the very risks they seek to avoid through inappropriate due diligence and investigation at the outset.

Franchisors have a key role to play in the recruitment process in this regard. The leading franchisors insist potential franchisees undertake the necessary evaluations of the business and allow the track record of the system to speak for its quality.

Lifestyle or financial?
The responses below can easily be grouped into just two categories _ that of lifestyle (to be my own boss, lifestyle, to be able to work with my family) and the other being financial outcomes (financial returns, to build a saleable asset, to have something to pass onto my kids). The lifestyle responses may be a little short-sighted as entering into any business, whether it is franchised or not, is simply plain hard work _ and there can be no escaping that fact. Why potential franchisees hold the view that entering into a small business will yield significant lifestyle benefits is not entirely clear. To be sure, there are franchise systems which directly address this issue in their design and structure; however, it would be fair to say most systems don’t hide the fact that the business on offer often requires long hours and lots of hard work.

Despite the notion that a significant number of potential franchisees wish to build a saleable business asset or something to pass onto the kids, the majority of franchisees do not back up this apparent desire with a formal exit plan. Instead, the franchise business is often allowed to drift along, frequently beyond the point at which exit value can be maximised, to the detriment of the franchisee and his or her original goals.

There are two messages from these results. For incoming franchisees, the message must be to ensure thorough due diligence is not compromised by personal expectations of what the franchise will deliver.

The second message must be directed toward franchisors: those who don’t address these core issues of risk, financial outcomes and lifestyle most likely face increased difficulty in recruiting quality applicants to join their respective systems. Simply having a great system is not enough.

Source: DC Strategy Prospective Franchisee Research Survey (2008, 2009) (c) All Rights Reserved 2010

DC Strategy is the region’s leading specialist consulting and legal firm. Our research teams are focused on providing quality business analysis to key decision makers and are Australia’s leaders in franchise research. www.dcstrategy.com