franchise Churning: Sell ’em, Take ’em back and Sell ’em again

December 14, 2009

“I should have bought a fucking Hortons,” so Peter told me.

Maybe yes. Maybe no.

Peter Bell is an original.

He and I were Ontario Nutri-Lawn franchisees in the 1990s. He was in a partnership with a “friend” Marc Thiebaud at OGS, in the Oshawa/Whitby area.

Peter is smart. He didn’t take the legal dead-end like I did. But both he and I signed based on false earning claims delivered by wonky pro forma income statements.

In 1998, from the franchisor’s unusual point of view, Nutri-Lawn had 24 successful Ontario territories (ie. open, paying royalties).

From the franchisee investor another picture emerges. From 1990 to 1997 of the 24 territories:

  1. there were 17 franchisee ownership changes,
  2. 3 were on their 3rd franchisee, and
  3. 11 were on their second.

In 8 years in Canada’s most prosperous province.

Zero bankruptcies because everyone else sold their pig of a business to the next mark. I defied their stupid, hard-to-enforce non-compete clause and took my customers into another company while I fought them in Court. Mine (I think) was the only legal challenge and subsequent, rather high-profile bankruptcy.  Summary

Peter and I both got hung out to dry, but God, we had a few laughs.

Churning: the rapid selling, failure, retaking and re-selling of franchises. Can be intentional or unintentional but the outcome is the same for the investor. Useful to change the logo (old on top).

Lipstick on a pig.

A hallmark of even the bluest of “blue chip” systems.

Difference between a Cooperative and a Franchise?

December 2, 2008

Much, much less than you’d think.itsawonderfullife1

1. A franchise promises a proven business model that the investor can use over a specific time period to achieve a reasonable rate of return. In exchange, the investor loses significant human and economic rights and a little-appreciated sunk cost regime. You rent a trademark, method and operating manual.

  • For many operators, this promise proves to be a cruel lie.

Modern franchising is often a way of re-distributing cash from the investor to the franchisor. A deceit to capture capital and labour while avoiding labour laws.

Not all systems are managed in an opportunistic way but 100%  franchise systems reserves the right to do so upon their whim.

2. A cooperative (co-op) is:

…defined by the International Co-operative Alliance’s Statement on the Co-operative Identity as an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise. Source

You are an owner: As it becomes more profitable, you as an equity owner benefit.

A credit union is an example of financial services that are rapidly organizing themselves to serve national small business shareholders/owners (not customers). Desjardins has 5 million Canadian member-owners. In the province of Quebec, the  caisse populaire have evolved are extremely important for retail customers.

  • The best-known representation would have been The Bailey Savings & Loan in the 1946 Christmas classic, It’s a Wonderful Life. Something about not having to crawl to Potter?

But the cooperative impulse manifests itself in much more creative ways. One of the cornerstones of every franchise system should be a franchisee-directed, professionally-managed buying group. Every industry has their sector-specific product buying groups, financial and insurance service providers, etc.

  • For example, MedBuy is a Group Purchasing Organization, GPO which is owned by several large Canadian teaching hospitals. It negotiates supply contracts on behalf of its shareholders for drugs, medical and surgical supplies, linen, etc. It has been running very successfully since I helped write it’s original business plan at Victoria Hospital in London in 1990.
  • I did the preliminary work on creating a fertilizer and pesticide GPO for 24 independent lawn care operators that I knew through Landscape Ontario and the Professional Lawn Care Association of Ontario.
  • My experience is that franchisees who pay, say, 6% royalties have at least an additional 6% hidden royalty because of the franchisor’s margins on their product purchases.

Sometimes the margin on equipment, supplies, software, renovations, etc. is much worse. It is a lie that tied buying provisions are chiseled in stone. Everything is negotiable if you know where to look for adequate leverage. Don’t expect flowers, but the NPV of purchasing freedom is very substantial.

Most franchisees conclude very quickly after signing up that there is no secret sauce and precious little value in the royalty and advertising fund payments. It’s just best to consider those payments as a form of charity.

  • With some help and some solidarity, most unthinking, boilerplate franchise systems can be converted to a franchisee-lead cooperative.

Whether or not franchisees are wise enough to invest in their own future, is an open question.

The best place to start is the greatest commodity of all: cash [financial services].

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