3 Classes of Risk: The Known, The Unknown and The Unknowable

September 11, 2009

PetlandElizabethCarlisleAny business has to manage risk.

Before you start an investment, you need to add up all types and then compare them to the likelihood of achieving returns to see if the proposal makes sense to do.

In franchising, you cannot do this with any degree of accuracy before you sign.

Your investment is often tied (a sunk cost) to a losing concept of a self-interested franchisor.

Your debt will be used to make you comply to others interests; not your own.

1. The Known Risks: research your brains out by interviewing current franchisees, make sure the technology is okay, study the vertical market the proposed investment would operate in, do 5 years worth of monthly cash flow statements, talk to lawyers, accountants, former franchisees.  Get some type of idea.

2. The UnKnown Risks: these are real but discoverable. These are ones that come as a surprise that you need to find out before you sign. A good defense: take a minimum of 6 months; do not be pressured into signing. The  best defense is to work as a labourer within  a franchise, for free if you must. If you don’t think you can afford that investment in lost wages, believe me, you can’t afford to be a franchisee.

The Unknowable Risks: these are real but you (or any mortal) cannot quantify or scale them. They’re random but when they strike, they knock you out of the whole game: all your labour, 90% of your investment…all of it: gone. People (especially young people) think that the world is rational and foreseeable. It is not. There are winners in franchising just as there are winners at Casino Rama or Vegas.

Some examples:

  1. a nice franchisor sells out/retires/decides/is forced to give control to someone not so nice or patient,
  2. your VP of government relations cracks jokes about your corporation killing 22 Canadians (food poisoning),
  3. your store is a staggering success and the franchisor wants it for his own,
  4. you are smarter than the franchisor or his heirs (become a threat),
  5. after years of 3 to 4 hours sleep you drive your truck into a group of children,
  6. physical illness requires you to leave (the franchisor picks it up for a song and flips it in 3 months),
  7. the new territory manager decides he likes your store and he happens to be the franchisor’s brother-in-law,
  8. the franchisor racks up too much debt so decides to go insolvent to shake off his creditors,
  9. you spend all your time at work and become divorced (Can you divide your net worth by the number “2”?),
  10. you talk to a few of your peers and get terminated for trying to better your business,
  11. your tradename is sabotaged by some food tampering incident showing up on YouTube (Domino’s),
  12. you’re a Petland franchisee and a photo of 2 drowned bunnies  goes onto Facebook (above and here),
  13. the W.H.O. decides tanning is a deadly health risk,
  14. a competitor contracts for a social media site to trash your shared tradename,
  15. etc., etc., etc.

Franchising is awash with unrecognized, rapidly increasing business risks.

These are all real life examples I have seen that are featured on WikiFranchise.org case studies.

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