Franchisers, the lowest of the low. (Long)

The BBQ Pit
261

Saw this on one of the FB Franchise groups. Not an atypical experience:

Long post, but would appreciate feedback!

I’ve been trying to sell my franchise for 11 months with no success. What started as frustration about my own situation has evolved into discovering what appears to be systemic problems across the entire franchise system. I need honest feedback from experienced franchisors and franchisees.

My Current Situation:
3 years in business
Annual gross revenue: ~$1.2M and gross profit of 140k.
Even though I’m showing gross profit, I’m broke. Taking out loans to afford life. I’ve had multiple bookkeepers look at my books.
Total investment: Approximately equal to my gross profit
Goal: Break even (or get as close to $0 as possible)
Market interest: Essentially none after nearly a year of trying.

What I’ve Discovered Beyond My Own Unit:
Initially, I thought this might be a “me problem” - and the franchisor has been very effective at making owners feel that way. But after talking to other franchisees, a disturbing pattern has emerged.

Financial Reality Across the System:
Reviewed P&Ls from multiple owners: All showing 2-5% net profit (owner-operator level)
Conducted an informal survey of 100 owners, 30 responded
Of those 30, 20 were grossing over $500K annually
All of them paying themselves less than $50K/year
None have employees - 100% are owner-operators
With 15% royalties on gross revenue, the math simply doesn’t work to hire staff. I’m in the same position as most of the other owners and even with me showing a gross profit, I’m cash poor. I’m taking out loans to stay alive.

The Broader Pattern:
This brand has been around for a couple of years, and most early franchisees are either closing or trying to sell. I’ve spoken with owners of other brands under the same franchisor’s portfolio - they’re experiencing identical issues. Some of these owners are reportedly pursuing legal action. Meanwhile, the franchisor appears to be grossing close to $1M/month across their portfolio.

The Validation Problem:
The only franchisees giving positive validation are new owners who haven’t yet experienced the financial reality. Everyone else I talk to is living the same struggling existence.

My Core Questions:
Is this normal in franchising? I thought franchising was supposed to be a mutually beneficial relationship, but the incentives seem entirely misaligned - heavily favoring the franchisor while franchisees barely survive.

Is it typical for a younger brand to have this much early franchisee turnover? Closures outnumber expansions significantly. Like not even close.

What are my realistic options here? I’m willing to sell at a steep discount, but there’s zero interest. Do I just walk away? What are the implications? I funded this with a Heloc. Does that mean I have to file bankruptcy? For those who’ve been in similar situations: How did you get out? What would you do differently?

The Personal Toll:
I need to be honest about where I’m at: This situation has been absolutely devastating. I’ve never struggled with suicidal thoughts before in my life, but this has pushed me to the darkest place I’ve ever been. I feel like I’ve taken 100 steps backward. The weight of this situation is crushing, and I just want to move forward with my life.

What I’m Really Asking:
Am I missing something? Is this actually normal in franchising and I just had unrealistic expectations? Or is this system fundamentally broken? Because this is the exact opposite of what I thought I was signing up for even after multiple years of researching.

What would you do in my position?

Just fucking heartbreaking.

262

Agreed - heartbreaking.

Any idea what type of franchise it is (not that it matters)?

263

He didn’t reveal the franchise but did say it was in the trades (painting, plumbing, etc.).

264

Sounds like maybe CertaPro?

265

Is there a significant number of franchisees who bought a franchise despite having never visited a going location, and asking questions?

266

Generally in the franchise buying process there is a day where you meet the principals and are taken on a tour of one of the franchises. Your also given a list of franchisees who are willing to take your call if/when you want so you can ask questions about it. And, of course, the franchise disclosure document lists franchisees who have left the system in the past year, and the prospective purchaser should really call those people as well.

Now it’s possible to buy a franchise without doing the above (except for ‘discovery day’, which is almost mandatory), but most purchasers do the above. However, it’s common that they only hear what they want to hear, so sometimes the bad news and warning signs are completely ignored.

267

Had a meeting about a month ago, a couple wanted to talk to me about their investment in Resting Rainbows, a pet crematorium franchise out of Miami, FL. They were a week away from signing the agreement, it was a $500,000 investment which they were going to largely finance.

There are not a lot of franchised units with this brand, most of them in FL with zero presence in TX, so the financials available were of the corporate location. Running my numbers, it didn’t look like the worst investment in the world, but numbers only tell one side of the story. (Part of my calculations include figuring out how much the franchisor would make off the franchise, and for Resting Rainbows, it came to about 15.25% of top-line revenues.)

In talking to them, I learned more about the business model, which is as follows:

  1. Buy a crematorium
  2. Put it in an industrial location
  3. Open a small storefront in the wealthier part of town - this is where you sell high-margin urns and shit.
  4. Reach out to local veterinarians and sign agreements with them so that when they put pets to sleep, you are the business they refer as a crematorium.

So I’m listening to this and they tell me they’ve gone through the discovery day process, done their due diligence by calling the (few) franchisees, etc., but were still hesitant as it seemed like a life-changing decision where they would now be committed to working on this thing at the franchisors pace and not theirs.

So I told them: “Well, you now know the business model. You even know you can buy a pet crematorium, something you likely never thought was a thing for sale prior to this process. So I have two questions for you:

  1. This company has zero presence in Texas. There is no brand identity, nothing. So what are you getting for your 15%?
  2. One of my favorite sayings is “God gave you eyes. Plagiarize.” Now that you know the business model, the inputs, even the pricing structure, what is stopping you from not signing this agreement and just starting your own pet crematorium business, one where you keep ALL your revenues, one where you own ALL the equity value, one that you can build out at your own schedule?”

They looked at each other with dawning realization. Told me that they never thought of this. To which I responded that perhaps, with their acquired knowledge, that they would be best to take their time, put together a business plan w/ projected financials, do some market research (call vets and find out if there is a demand for this service, and if so, who is currently filling it), and start their own crematorium business, save the 15.25% top-line revenues, and tell these guys to bugger off.

I talked to them last week and that’s exactly what they are doing. They didn’t sign the agreement, and are in a much better (and calmer) mental space now that they can do this at their own pace, not the franchisors.

Another crisis averted!

268

How often do the people pitching this to a prospective buyer just flat-out lie and omit things? It seems from some of your past posts on the subject that it’s not particularly rare.

Not that it removes the burden from the buyer, of course; everyone who wasn’t raised in a cave should know that a person going into business is wading into shark-infested waters, and they need to be on their guard. But I had the impression that predatory practices in this field were more the norm than the exception.

You are like a superhero, seriously.

269

This was my first thought as well just one paragraph into your story: I’ve literally never heard of “Resting Rainbow” in my life, so what benefit is there to buying a franchise instead of starting your own independent business?

(The only benefit I can see is possibly benefitting from their fancy website and length of time the franchise has been in existence to make it look like your new business has a longer history than it really does…but Resting Rainbow has only been in existence since 2018.)

270

ISTM the advantage of a franchise is that the parent company supposedly knows how to do everything and will teach you everything you need to know to own and operate a small biz. Opening a small biz completely on your own is a daunting prospect, but lots of people want to “be their own boss”, and may have no particular conception of what product or service they want to provide. Overall they’re paralyzed by the known unknowns and their fears / guesses about the volume of unknown unknowns. Which is probably a good thing; it’s damned hard to make a successful small biz ab initio w no experience in the relevant industry as an employee. Being scared shitless is fully appropriate.

To those sorts of wannabe business owners, opening a franchise looks like the big easy button and/or a nice set of training wheels to get you going at first, then you’ll ride off into the happy sunset after benefitting from HQ’s big boosters.

The problem of course is that under lax US law, franchises can be little more than elaborate but carefully lawyerly legal cons played on the franchisees, where no matter what happens, heads headquarters wins, and tails the franchisees lose.

So the big easy button turns into the big boat anchor around your neck. But the marks newbie wannabe business owners don’t know enough to recognize the boat anchor until it’s locked around their neck.

271

JohnT, the consultant who actually helps people!