Setting Up a Franchise Can Be Hard. Beware of Gimmicks!

Just when we thought we had heard of all the games and gimmicks in the franchising industry we recently learned of a new twist that is being rolled out by some companies that are trying to do franchise development work.  These companies are now offering to franchise your business for “no money upfront”. Instead, they inflate their fees and propose to take payment from your future franchise fees and/or royalties, in other words making money off your success (not to be confused with companies that require you to give them equity in order to franchise your business). This is a new twist, no equity (because that is a hard sell) but instead “give us ongoing monies and we will just cap it off”.  

Yep that’s right, these companies claim that their hand in your pocket for all incoming monies will be capped off at a certain point but for how long is unknown (and one of the many problems with this arrangement). Obviously this means that you will end up paying much more than what the services from these companies are really worth (a super inflated cost to franchise your business).

We find it hard to justify. Why should you pay more than double the amount for services to franchise your business when in reality the work is only worth so much? Typically when someone needs a service the expectation is that there is a one-time fee and you are done. Not sure why anyone would want to marry themselves to a company for an undetermined amount of time for a one-time service. Most business owners pride themselves on being fully autonomous. Think about it, if you hire a web developer to create a website for you, would you continue to pay the web developer every time you make a sale off your website? Probably not. Good arrangement for the web developer but not so much for the business owner. We’ve never heard of this type of arrangement. Sounds kind of silly, doesn’t it?

Sure it may sound enticing if you are already bootstrapping your business and you want to franchise your business, but think about it… if you are already bootstrapping your current business you really shouldn’t be looking at franchising in the first place! The bigger problem is that later, if you find someone to buy your franchise, you won’t be able to support your franchisees. It becomes a perpetual problem of being underfunded.  Bottom line, these other companies are taking advantage of business owners, like you, by enticing them with “no money upfront” to get from you what they can resulting in franchising businesses who are underfunded and should not be franchising at all (so many problems with this it is a recipe for disaster). This practice of “no money upfront” is viewed by us and many attorneys as trickery, shady and a desperate move by companies who cannot otherwise secure clients.

A Few Things to REALLY Think About

Why should anyone except for you who created the concept and is doing all the day-to-day work benefit from your revenues? Unless of course these companies are also offering services to sell your franchises, which is fine if it is a traditional franchise broker relationship (which means a one-time commission given to the broker if the person they bring to you purchases a franchise).   To read more about using franchise brokers see our Learning Center article, “Franchise Brokers: Be Careful”.

On the other hand, if under this “no money upfront” arrangement you are the one who will be selling your own franchises, are you going to be pressured to get a certain number of franchises sold in a specific amount of time? Perhaps forcing you to spend more money on marketing and advertising than you would have otherwise spent had you been doing it at your own pace. You may even feel pressured to award franchises to less than qualified people simply because you feel rushed to meet some predetermined quota (from the company who franchised you under the “no money upfront” program and has their hands in your franchise fee revenue, royalty fee revenue and/or other ongoing revenues).

Let’s not forget about being underfunded. What would someone think who is looking to buy a franchise if they found out that you (the business offering the franchises) couldn’t even afford to franchise in the first place? Who in their right mind would want to buy into a concept that is underfunded? This is exactly why franchising is regulated, to protect the consumer (learn more about how franchising is regulated).

The Franchise Maker Difference

Our philosophy is we would rather see you spend your money to advertise, market and create different initiatives for your franchise system, rather than spend a ton of money to franchise or jump into unrealistic arrangements. This is why our fees are transparent and flat (see our article on why our fees to franchise a business are less). We believe you should know exactly how much it will cost you to franchise and you should only pay for the true value of the services provided. 

It does NOT make sense for every business to franchise. In fact, our President turns away 90% of the businesses that contact us wanting to franchise for various reasons; not just for being underfunded (read “Can Any Business be Franchised?”)!

At The Franchise Maker we take franchising very seriously because it affects everything from the economy to peoples’ lives. No gimmicks, no strings, no long-term commitments… just honest work. If you are interested in franchising your business, Contact Us. We will be happy to explain our flat fee program and determine if franchising your business actually makes sense!