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Comment by Nextgrid | Hacker News Reader

I always found franchise initial startup costs to be predatory, as they get paid either way regardless of whether the franchisee actually succeeds. In my opinion they should be abolished and franchisors should only rely on royalties, so that they have an incentive to help the franchisee succeed if they want to make money.

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Given how much it costs to open the restaurant itself, it seems like the franchise fee (for most franchises) is an odd thing to focus on. If I'm going to be spending $1.6M-$2.3M just to build a Taco Bell location, I'm honestly not going to be too concerned about the $30k franchise fee I need to pay corporate up-front. It's a drop in the bucket.

Regardless, corporate is always incentivized to help their franchisees succeed; they wouldn't really have a business without them, and of course they want their cut of sales/profits to be a higher absolute value.

A franchise is barely above MLM. Local "owner" is really an employee, takes on the risk and gets minimal profits.

For Chik-fil-A, yes, since corporate fronts all the money and owns the location and improvements; there, you're maybe a little more than an employee-manager, but not by much. For most others, not so much, since you own the result of your initial investment.

Uh...this is a common conflict between owner-operators and franchise groups.

Also a common area of abuse. There was a sandwich shop chain in the US where this got very ugly a few years ago...

Was it Quiznos with the franchisee committing suicide in the store bathroom with a shotgun?

Yup. But it was more than that one guy, the whole model was crap and they kept selling more units...

https://www.restaurantbusinessonline.com/financing/brief-his...

Which is really a shame since the sandwiches are so good.

If you dont want to pay you join a different franchise or start your own restaurant. I fail to see the issue. Nobodys putting a gun to your head to open up a CFA restaurant.

It's possible to be predatory without holding people at gunpoint.

Again, nobody is telling you to join them if you dont want to though. You can make a competing restaurant yourself.

A predatory option can be present with a choice to join it. People can choose to not take such a deal but those who did, they got the worse of the deal by large margins. Even if they did choose that option, doesn't mean that deal was fair to them.

Yes. All it takes is a modestly good marketing strategy and legalese muddying the water enough to not make it completely obvious until it’s too late to back out or too complicated to advise to others.

I can't really follow your logic there. In my mind for something to be predatory it should be your pretty much only option while promising you the world, an end to your tough situation. If you have a choice and you end up worse off, you just got into a bad deal is all. The deal is fair because both parties thought it was a good deal, no one was forced or desperate. There was no scam involved either (everyone got what they were promised). I can't see how that can be predatory, or even unfair.

When the wolf eats the rabbit in a fair fight, the wolf is still a predator, it's not an exchange of mutual benefit.

I don’t think the rabbit signed up to fight the wolf.

What about a used car salesman lying about the quality of the lemon they are selling someone? The target audience for a cheap used car may be desperate and not know a lot about cars. There may be multiple used car lot options around, that doesn't change the fact that many of them are predatory in their sales tactics.

Also Quiznos collapsed and was blamed for one franchisees eventual suicide due to their predatory tactics that locked franchise owners into paying high ingredient costs that they could not make a profit on.

Is it really predatory? For many owners of a Chick-Fil-A, the money is life-changing, and would take 3-5 other franchise restaurants to equal their level of income as a CFA operator.

How is it predatory? For $10k you get a complete Chick-fil-A restaurant, without having to pay for any of the building or start-up costs. Sure, that means corporate will take a much bigger cut of your sales/profits, but that seems fair, since they're taking on most of the risk. I mean... it's $10k. Tell me where else you can start a restaurant from scratch for only $10k and retain 50% of the profits? As someone who has invested in a (non-franchise) restaurant before, this is potentially pretty attractive, if you want to run a franchise.

Even for a more "traditional" franchise, where the franchisee is responsible for all the start-up costs, even $50k is small peanuts compared to the full cost to bring the restaurant up from scratch. Calling that "predatory" feels like a gross exaggeration.

I actually don’t see it that way. Often a franchise will vet the owner, provide setup assistance, provide location recommendations, train employees, etc. That doesn’t occur in all cases, but arguably most franchises do this and it’s part of the initial fees.

Plus, the national will often pick up all or a large portion of advertising costs.

In many franchise documents I've seen, those costs are shared by the franchises and charged out separately from the royalties. Same for IT expenses and the like.

And yet people choose to buy franchises rather than start their own independent shops. Proliferation of franchises indicates that this is mutually beneficial.

Also, bear in mind that the franchise's corporate brand reputationsuffers when a franchise fails, so there's inherently some risk sharing.

Not commenting on franchising, but I'd point out that, for example, loan sharks are "mutually beneficial" and exist across societies, but they can still be quite predatory.

It is a bit unfair to compare loan sharks to business models liek franchises. Loan sharks can lend you money for anything even if you want to go spend it on something useless that doesn't create any value. Starting a Franchise business creates value even if it may not be highly profitable for someone. I wouldn't call Franchise model predatory even though I am personally not a fan of it because I like complete freedom in starting/running a business. Personally, I wouldn't do franchise (I am too much of a free bird to be caged) but calling it predatory is too much.

Loan sharks appeal to the desperate. If you are in a pickle, you NEED a loan, you don't NEED to start a franchise.

>people choose to buy franchises rather than start their own independent shops //

[Agreeing] There are massive costs (relatively speaking) for an independent involved in just learning/optimising the supply chain. With a franchise you, presumably, can skip this which gives a huge head start.

Also if it's a brand chain then you have the benefit of brand level advertising (which works at a different psychological level to shop/activity/product advertising) which should be more efficient per "lead".

Sure - and franchises are actively marketed, by a commission sales force and any number of people who get a 'finders fee' should you happen to sign up through their channel. There is an active push to herd people into franchises.

They tend to target unemployed middle-aged managers, since that audience is often driven by ego to "be the boss" and has the disposable funds to pony up a large setup fee. I was aggressively targeted when I was laid off last year.

What they didn't know - until we got on the phone - is I'm the target prospect from hell. I certainly have the funds; however, I got them via two decades of finance and strategy work. Old habits die hard. Due Diligence? Don't mind if I do...

I was polite but I laid out my expectations in financial terms based on investments in businesses of similar size. Actual deals which I had managed. Made it clear I had the funds to deliver if they could meet my goals in writing.

They ran like hell.

What did you end up doing instead?

When the axe finally fell, My boss walked my resume over to a sister company in the same private equity group. Had an offer within a few weeks. He gets maximum internet good guy points.

However, in the meantime, I wound up speaking with a diverse assortment of scum, villainy, and ineptitude.

https://resumeskills.us/talent/shortage

You are paying for the brand, strategy, training and lot of risk factors that are mitigated due to the franchise setup. Yes, it is still risky but starting an entire business from scratch is a lot riskier. That's why you pay.

The trouble is that the royalty adds to the risk. That, and you can't change suppliers if they start playing with you.

Independent restaurants, if they hit their market, run into the same problem with landlords, who want to take the profit from exorbitant rents after the the lease expires.

If you read the article, this is where Chik-fil-A is radically different - and cheaper - than its competitors.

This naturally means it's very hard to qualify for one.

They have a brand image to uphold. If anybody were to be able to open up a franchise and run it badly (ie, have rats running around), this would have a serious negative image on the whole brand and would sway people away from eating at the same branded joints again, even though other joints are run by different people.

As such, it is necessary to vet the potential franchisee to ensure they're going to support and improve your brand image rather than damage it. Requiring a "deposit" as such is part of this, as the franchisee will need to at least recover the amount invested by providing good service.

When you pay franchise costs you also get a lot of know how and ready built supply chain. Those things are probably worth it.

It is fried chicken after all - hardly a challenging item to cook, but to perfect it as a recipe, scale and process for "Nextgrid's artisan non franchised fried chicken" will take probably more than $10k and worse of all will take a lot of time in which you will be paying rent and salaries.

Who should abolish them?

Are you being facetious?

It's a valid question. State government? Local? Federal?

International agreement?

The franchise brand owner had no incentive, so while it's possible to abolish them through government. It's not clear why we'd go that direction. Given the franchise brand owner takes on additional risk it's not clear why they'd move to take on risk without gain

In the US, the SBA could go a long way to abolishing them if they so chose. "No more franchises in the 7A program. Have a nice day."

Chick fil a at least can be run pretty passively. I got to know an owner at a local franchise. He owned other franchises and gas stations, had a massive house in a gated community, and had time to lecture at a very good business school in town.

He had managers on every shift running day to day so he never really needed to visit the store, but he did a couple times a week anyway to show face with the staff and even step onto the line and bag orders if it got swamped while he was there, simply to lighten the load on the staff.

If this had been an independent restaurant, he might have been doing things like cooking in the back 12 hours a day to lower his payroll. Predatory is not the word I would use for most franchises these days; passive income is the word I would use.

Can’t own other businesses when a Cfa operator.

I recall subway had "low" startup costs and it resulted in too many locations.

What incentivizes the new location to do due-diligence in picking a good location? If this is placed into the chain owner: What's the difference between a franchise vs single owner?

Chick-fil-A corporate determines all new locations. Corporate cares about the success of their locations because they own the lot, own the building, own the equipment, own just about everything and lease it back to the operator. If an operator violates the franchise agreement they get evicted and or lose their equipment and can no longer operate. It's how Chick-fil-a is able to maintain quality and control. Ever wonder why a Chick-fil-a location doesn't buck corporate and open on Sundays? Because they'd lose everything they need to run their business.

The other costs are plenty of incentive to choose a location carefully.

Even for a Subway. Earning back $350,000 takes a lot of sandwiches.

https://www.nytimes.com/2019/06/28/business/subway-franchise...

Apparently too many subways has caused bully by Subway the corporation of franchisees over good locations.

Opening a Subway franchise is a great way to ensure you'll always be employed -- at a 50+ hour per week job earning about $40k per year. The business model and royalty rate generally require the owner to be an unpaid, full-time employee for the store to turn a profit.

There's nothing "predatory" about assuring that your business partner actually has enough capital to operate a business. The startup costs may be significantly lower for a freestanding restaurant but you also have to shoulder the burden of marketing and establishing a customer base. A national chain doesn't just sit on its ass and collect money from franchisees. The costs of marketing and R&D are enormous but in the franchise model these things are offloaded from the individual restaurant to the parent company.

The parent company has no interest in that location ever closing. They're not house flippers or day traders. They rely on stable long-term income, not random tiny spikes a few times a year. Franchise fees are barely even a blip on the radar of a company like McDonald's.

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