Is buying a franchise like buying a house?

Written on the 4 November 2011 by Jason Gehrke

The words “buy” and “sell” are often used in relation to the acquisition and transfer of franchise businesses, but what do franchisees actually buy?

The overwhelming majority of people who are attracted to franchising are first-timers in business who are drawn by the branding, support and infrastructure provided by a franchise chain that takes the pain out of reinventing the business wheel.

Without prior experience in business, potential franchisees have no comparable frames of reference in their decision-making process, and consequently often revert to the same types of processes used in other major acquisitions, such as the purchase of a car or a house.

In buying either a car or a house, the purchaser is required to still undertake their due diligence to protect their interests, and for houses (and most cars) will also need to sign a contract.

Of course the nature of the due diligence between the purchase of cars and homes compared to that required for the acquisition of a business is very different, although many of the same principles apply.

One of the commonalities is the emotional investment in the decision being made. People buy the cars they drive and houses in which they live based on a number of factors, all of which can be summarised as simply a liking for the car or the house.

This emotionally-led decision (along with the elimination of options the buyer didn’t like) then becomes the frame of reference by which they also seek franchises (ie. they seek to acquire one they like), without appreciating that liking something may not be enough to actually make any money out of it.

A key difference between the transaction to acquire a car or house and a franchise is the outcome itself, which many potential franchisees don’t fully understand up front.

The outcome referred to here is ownership. When a buyer puts their money down to buy a car or a house (or a fridge, TV or anything else), the item becomes theirs. This ownership of the item (even if it is mortgaged to a financier) allows the buyer great freedom to do pretty much what they please with the item.

If they don’t like the colour of the house, they can repaint it. If it’s too small, they can extend it. If it’s too old, they can renovate it, and so on.

Likewise with buying a car. The new owner can drive the car fast or slow, on bitumen or on dirt, with roof racks or without, and can accessorise the vehicle to their heart’s content with window tinting, towbars, entertainment systems, mag wheels and so on.

Cars and houses are usually bought under finance, and where conditions are applied to the ownership of the item, it is usually dependent on the loan being repaid and kept up to date.

Buying accessories for the car or furniture for the house involves the same process of making a desired selection, paying for it, then choosing what happens with these items thereafter.

The point is that by paying their money, the buyer can do more or less what they please with the item they’ve bought. Ownership provides the freedom to determine the future look, feel, fashion, usage, functionality and worth of the item bought, and generally this freedom to choose is determined almost entirely on the person’s ability to pay for the item and whatever they wish to do with it afterwards.

Which brings us to the acquisition of a franchise, which, on the face of it involves a similar process of “buying” something, however the outcome is totally different.

A “buyer” will go through a similar process of finding something that appeals to them in (or slightly above) a price range they can afford, as if they are buying a car or a house.

But while having the money alone may be enough to qualify a person to buy a car or a house, it is just one consideration in the process of acquiring a franchise, which is why franchises aren’t bought.

A franchise is defined as a conditional grant, which is very different from outright ownership. The conditions attached to a franchise grant are set by the franchisor in the best interests of the system and the brand, and which may change over time. Failing to observe the conditions of the grant at all times may result in the grant being withdrawn.

So unlike the case of buying a house or a car where the vendor is paid their money and then has no further interest in the item sold, a franchisor is not only paid the money upfront (plus usually an ongoing fee), but also takes a very close interest in the ongoing welfare and performance of the franchise. Ultimately, the franchisor also has the power to withdraw the franchise if the franchisee fails to follow the system guidelines which they are required to uphold.

Therefore buying a franchise is very different from buying anything else, yet precious few franchisees fully appreciate this in advance.

By subconsciously equating the purchase of a franchise with the purchase of a car or a house, potential franchise buyers also assume that the ability to pay and a desire to acquire are enough for the purchase to proceed.

Nothing could be further from the truth. Most franchise systems have rigorous selection criteria and seek specific attributes among potential franchisees that money and desire alone cannot overcome.

Failing to understand this in advance can be both confusing and annoying for a potential franchisee who learns they do not have the necessary attributes to join the system on which they had set their sights.

For this reason, potential franchisees need to be informed up front that there can be no guarantee that they will be successful in their quest for a franchise. Many systems can do better in this regard by changing some of the words used in the franchise application process.

A simple first step is to refer to potential franchisees as candidates instead of buyers, leads, etc. The use of the word candidate conveys that there can be no guaranteed outcome in the selection process, irrespective of how much money the person may have or how keen they are to join the franchise.

To be a successful candidate in other walks of life requires that a person have the qualities required to survive some kind of screening or elimination process. Unfortunately when the perception of buying a franchise is subconsciously compared with buying cars or houses, candidates at first acknowledge the ability to pay as the only qualification required to be granted a franchise.

By referring to potential franchisees as candidates, and explaining the selection process up front, franchisors can more effectively identify both suitable and unsuitable candidates, as well as improve the quality of new entrants to the system, while at the same time demonstrating real value in the franchise grant on offer.

In doing so, franchisors also reinforce the conditional nature of the franchise grant, making it clear to incoming franchisees that accessorizing their businesses like they would with a new car or a house will require the consent of the franchisor, and cannot be done on a whim alone.

After all, every other franchisee in the network has made a similar investment, and protecting the value of those investments requires that all franchisees must adhere to standards in the operation of their businesses.

For these reasons, “buying” a franchise is very different from buying a house, and should be approached by both franchisors and franchise candidates very differently.

© Jason Gehrke, 2011.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.