Unskilled and Unaware: Boy have I been there

butterknifeHow do you know what you don’t know?
You know?

An old joke but a fundamental problem for most franchise investors.

Franchising is a thousand times more complex that I ever  imagined.

While I admit I am not the sharpest knife in the drawer, after studying franchising for over 10 years, there are issues that are only now becoming clear.

The problem is that I overestimated what I knew about franchising.

There is an excellent 14 page paper that everyone should read called Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments by Justin Kruger and David Dunning of Cornell University.

Abstract: People tend to hold overly favorable views of thier abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people ae unskilled in these domains, suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it

The more I have looked into franchising, the more alarmed I have been not just simply because of the personal carnage but because I also discovered that most exiting franchisees misattributed the causes of their business failures.

Newbie franchisees got burned and they leave without knowing the true source of why they failed.

Without knowing an accurate reason, they and their families are vulnerable still to be taking a second time which is what happens in con games a lot (>50% marks good for  a2nd go).

WikidFranchise.org is my attempt to allow people to see the similarities and differences between their experiences and others. think of WikidFranchise as a thousand and more case studies of franchise investors.

I think the overwhelming similarities in the way franchising is run suggest more of a systemic or structural problem, and less a personal cause.

Everyone is responsible for their own decisions, yes. But some decision making situations are so biased as to practically guarantee a pre-ordained, zero-sum wealth re-distribution outcome.

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4 Responses to Unskilled and Unaware: Boy have I been there

  1. Carol Cross says:

    I, too, understand more each day —or I am readjusting my understanding as I travel this road with you and look at the “great beast of franchising.”

    Absolutely, I believe most failed franchisees have no idea what has happened to them and their “subjectivity” and pain keeps them from looking at the big picture. They want to lay blame on persons and situations and don’t want to look at the systemic exploitation enabled by the franchise model, itself, and the ineffective regulation and captured regulators and elected officials who support the systemic exploitation and destruction, when necessary, of franchisees in their own interests.

    Obviously, some franchise systems have 30% and 40% failure of first owners that are not visible to new buyers of the franchise who build the physical unit that wears the brand name. When “churning” is not visible to new buyers and the “profitability” of the units in the system is not visible to new buyers, the new buyer is shocked when the franchised business not only fails to earn any profits, but fails to even support overhead.

    If the average Mom and Pop franchisee really KNEW and UNDERSTOOD that their franchised business might NEVER earn any real profits and that their “asset” — the business of their own — the wasting asset — might not be worth anything at all at the end of the contract period, I’m sure thay would at least look at the RISK and the possible rewards and take another road.

    This! of course! is why the majority of franchisors don’t make earnings claims in the FDD in the US and the Risk can be obscured in the disclosure document, which disguises “fire sales” and “wash” sales as merely transfers within the franchise system.

    Franchises can be sold because buyers mistake the visibility of franchisors as indicating the viability and profitability of franchising for franchisees. The status quo supports the premise that there are profits with little risk and the risk is not disclosed before the purchase.

    We know! because we learned the hard way who is served by franchise laws. Hopefully, we can try to save others from all of this legalized dishonesty — if we don’t run out of strength trying to fight windmills.

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  2. Les, I doubt that there are many franchisees who get burned a second time – not enough to burn.

    However, you may be on to something by pointing out that many departing franchisees still believe in the myth of a “proven system” and that it was their fault for not following it.

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  3. Les Stewart says:

    Michael,

    I meant more that franchisee’s believe it was “this” tradename, or that “black hat” franchisor or area manager that was “caused” their failure.

    They continue to believe that their franchise experience was the exception instead of a well-“cooled out” rule.

    It is natural to fixate on the visible (the person) source of your discomfort and not look past to see the way that individual is playing in this form of commercial drama.

    Stupid pattern recognition.

    Les

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  4. Carol Cross says:

    Additionally, the status quo, in support of franchising as a means to The American Dream of a business of your own, and to grow franchising has done a good job of confusing the issue of franchisor success and franchisee success. The confusing research and coverage of this research and lack of research on actual franchisee failure permits the same dishonest marketing of franchises as ventures with little risk that produce profits for the owners.

    The systemic abuses of franchisees are supported by law and process that protects and encourages the survival of the franchisor as a matter of federal regulatory policy. In retrospect, in again reading the Backyard Burgers Case in Arkansas, the judge clearly explains that a violation of the FTC Rule cannot be used to substantiate a claim of fraud under state law.

    The average franchisee doesn’t want to believe that under law and regulation, they are merely an expendable resource for their franchisor master to try to “prove” the concept in the marketplace using franchisee cheap labor and cheap venture capital.

    It took me a long time to catch on even though Michael Webster told me when I first started to post, a few years ago on Blue Mau Mau, that the FTC Rule had no teeth because there was no private right of action for violations of the FTC Rule.

    Only later did I realize that the FTC Rule, in effect, has no teeth because it premeditates protecting franchisors for fraudulent representations and omissions in the sales process.

    This, of course, is an ugly reality that few are prepared to confront –and especially those failed franchisees who prefer to vent against the visible person instead of the invincible government.

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