Franchises: Golden Opportunity or Fool's Gold

You have probably seen the comedy routine where a group of guys are playing cards when a stranger walks up and asks them what game they are playing. Somebody from the game shouts out something like:
"Three card Schnowzer."
"Three card Schnowzer? What's that?" asks the stranger.
"Sit down and play," says one of the gamblers, "and we'll teach you."
So the stranger sits down. He is told a bunch of mumbo-jumbo about how the
game is played, but is much too complicated for him to take in at once. So he is invited to play a few hands and observe everyone else.
The other players appear to be conforming to a set of rules. One guy yells out, "Schnowzer!" shows his hand and collects the money. The others seem disappointed.
They show the stranger what a "Schnowzer" is. They compliment him on how fast he is
learning. But every time the stranger thinks he has a winning hand, he is told some new reason why he hasn't won. He might have a "Schnowzer," but his opponent has a "Schnowzer" plus an one-eyed jack. He learns the one-eyed jack is what makes him the loser and the other player the winner. The routine always ends with the stranger losing all his money and the other players congratulating him on how well he has done.

As ridiculous as this game might seem, it occurs everyday in business world. Large corporations are constantly seeking methods to invent their own game. Franchises frequently fall under this category. Touted as the safest way to enter the market place, they have their drawbacks too. Franchises can be charged for record keeping, accounting and administration expenses. Additionally, many franchisees are severely restricted in their advertising.
The biggest caveat, though, is the contracts always favor the parent company. The apparently innocuous condition that inventory must be bought from the franchiser exemplifies this. Presented as a way to save franchisees money, it is often used to create a monopoly. In the cellular phone industry many telecommunications firms had dealerships test the waters for them. When the product proved itself, they asserted their monopoly power by restricting inventory to dealers. Always low on stock, many customers left the dealerships and went to the corporate outlets.

If you are tempted to go down the franchise road, there are several things you can do to safeguard your journey. First, you can check with other franchisees to gain insight as to how the parent company operates. Second, learn how many franchises failed in the first four years. This is an excellent indicator of your chance of success. Third, investigate all previous litigation against the franchise. The federally mandated Uniform Franchise Offering Circular requires this material be disclosed. Finally, check the warranty clause with a lawyer to review the options for getting out of the franchise agreement. You can obtain much of this information through a local Chamber of Commerce, Dunn and Bradstreet or by calling the American Franchise Association at (800) 733-9858.
You already know the person who invents his own game is invincible. There is no way you can win. Avoid being drawn into their game. If you are in their game, get out-you can only lose. If you can, lure them into your game with your rules. If you have a contract with someone that is trying to play this game, remind him or her of their legal obligations.

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