Franchising is a form of investment.
The greatest 100% unavoidable risk is often glossed over by the industry apologists:
- one party decides how the assets are allocated (franchisor) while the another party owns the assets (franchisees).
This is a very precarious situation to be in and has an analogy with what the investment houses were doing with the stock market in the last 15 years.
Nassim Taleb explains about this disconnect (ownership and control) and how it has lead to the current worldwide economic meltdown:
Q: They were gambling with other people’s money.
A: That’s the point, with society’s money. Banks are gambling with society’s money, funds are gambling with investors’ money — it’s one layer better. So we should have more risks taken by funds and less risk taken by banks, because banks have a severe agency problem. … When I trade I don’t have an agency problem; I have my neck on the line. When a bank or banker trades, it’s not his neck on the line. He has an agency problem, and like [former Merrill Lynch CEO] Stanley O’Neal, if you follow the strategy you’re going to make $160 million, and keep it, even if you blow up. And you’ll do it again.
Click here for the full TIME magazine, October 24, 2008 article.
If you do not understand this Principal-agent problem (imbalance of economic and information), you are disqualified from buying or renewing a franchisee.
- You are flying an airplane while blindfolded.
- Like obeying the law, ignorance of this fact is no defense.
Watch everything that Mr. Taleb says about investing and the stock market (his weblog, Dec 3rd Charlie Rose interview) or you will be in the passenger seat of those that have piloted the world’s economy into a mountain side.
Franchising has such softer sounding “agency dilemmas” in almost all of the critical relationships. You’re in the middle of a spider’s web, really.
Note that the business risk is compounded because these are not only agency relationships but also credence good service exchanges (the franchisee cannot tell if he is being cheated even after the exchange happens.
The agency/credence good vulnerabilities are:
- investor to franchise salesperson,
- investor :: franchisor,
- investor :: franchise banker (more an industry team player than lending officer with a statutory duty of care to the investor),
- investor :: supplier,
- investor :: landlord,
- investor :: general lawyer (before) and especially franchise bar (after),
- investor :: politician,
- investor :: regulator,
- investor :: media,
- investor :: bankruptcy trustee.
Taleb is angry (6:40 video) at the banks. And I think he is fully justified.
- Any individual that isn’t angry as this relates to franchising is either incompetent or profiting from the status quo.
- The sophistic [eg. rhetorical prostitutes, wordsmith mercenaries employing confusing or illogical arguments designed to deceive] unholy trinity on Blue MauMau are fully competent.
That I can guarantee you. You just haven’t spent as much time in the sewer, that’s all.
Every normal man must be tempted at times to spit upon his hands, hoist the black flag, and begin slitting throats.
Nature abhors a moron.
Every decent man is ashamed of the government he lives under.