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Opinion THe SKeTCH | trEnDs anD DEVELopmEnt

Franchisees: willing slaves or entrepreneurs?

S

aNDreW TerrY professor of Business regulation in the university of sydney Business school

everal years ago Mr J R Rau MP, a member of the Economic and Finance Committee of the Parliament of South Australia which was conducting an inquiry into franchising, shared with us his view of the role of the franchisee in a franchising relationship: You become the first level of risk bearer on behalf of the franchisor, so short of a catastrophic risk it will all be borne by you, not the franchisor. And as soon as your capacity to absorb the risk is exhausted, we will replace you with somebody else who will then absorb the risk on our behalf until such time that there are no fools left in the queue, at which time we may or may not have to put our hand in our own pocket. Secondly, you will have to guarantee our profits, because we will sell you the stuff at the price that we determine and you will buy what we want you to buy etc. You will guarantee our cash flow. And thirdly, after you have done all of that, if you accidentally make a little bit of profit, we will give you a small share of it. Mr Rau’s conclusion – that “in a perfect world we would not have franchises at all because I think they are all nonsense”— is consistent with his view of franchising in which franchisees are slaves, albeit willing slaves who freely enter into the relationship, whose lives are dedicated to serving the franchisor’s interests. “Why”

franchise relationship. Although they are financially and legally independent, franchisees, in a loose sense, work for their franchisors whose financial success is built on taking a little money from a lot of them over a long period of time. Successful business enterprises do not adopt franchising in pursuit of some egalitarian ideal of sharing the love and the wealth with a network of franchisees. Franchising is embraced as the business expansion strategy most likely to improve the enterprise’s bottom line. A company owned and managed outlet is potentially more profitable than a franchised outlet – 100 percent of an outlet’s bottom line profit is invariably greater than a small percentage of its turnover. But this stark equation is of course more than compensated for by the opportunity for rapid geographic expansion of the system with outlets developed with the franchisees’ capital and by the hands-on commitment of the franchisees who are proprietors and not simply managers. Ultimately franchising works because it is a symbiotic relationship which, in the words of the US House of Representatives Committee on Small Business, “has provided the means for merging the seemingly confl icting interests of existing businesses with those of aspiring entrepreneurs

Of course franchisors make money from their franchisees. And franchisees understand and accept this reality. Mr Rau questioned “would any sane person sign up for that?” Why indeed? The reality of course is that Mr Rau’s description is not an accurate description of franchising as it is practised in Australia. The franchisees of the 73,000+ outlets of franchise systems in Australia are presumably sane and the vast majority are happy as well. Franchising could not survive, let alone thrive, in the circumstances Mr Rau described. Of course franchisors make money from their franchisees. And franchisees understand and accept this reality. Except in a very exceptional case of social or not-for-profit franchising it is all about the money. It has to be. Such is the reality of our capitalist free enterprise system and of the nature of the 132| FranCHising maY/Jun 2013

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in a single process that promotes business expansion, entrepreneurial opportunity and shared cost and risk”. The franchisor and the franchisee make different contributions to the process but in this commercial “marriage” the result is greater than a sum of the parts. Unfortunately a free enterprise system cannot guarantee that all franchisees and all franchise systems will be successful but it does not follow that franchises are nonsense or that franchisees are simply slaves or fodder for their franchisor’s expansion. Strong laws preventing blatant franchisor opportunism and informed due diligence are the prospective franchisee’s best friends. F

Franchising Magazine May / June 2013  
Franchising Magazine May / June 2013  

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