A long time ago there was a business owner who needed to grow his business but the business was such that it was not practical to grow entirely with employees.  There was a need for other locations and it was important to have someone running it who understood business risks and who would treat the business as if it were their own.  The business made widgets, or serviced widgets or simply sold widgets.  The point of what it actually did is not important.

The visible growth of the original business would be enhanced by having more centres or operations.  So they went off in search of a partner who could contribute capital to set up another office/factory/shop and who would share in the profits of the new business with the original owner of the shop.  The success of the new business was as critical to the original owner as it was relevant to the “New Operator”.  They worked together to build it and make it profitable so they both had something to share later.  Then hopefully down the track there would be opportunities to create more.

The product was ‘widgets’ and both realised that they had to make a profit so that both got a return.  Sound familiar.  We’ll call this a “Franchise Type A”, where the franchisor is seriously interested in the legality and success of its franchisee.

What was to happen later was that businesses were established that created ‘franchises’ as products.   The product was not so much what it did but more the actual sale of the package to the “new operator” coupled with a demand for regular payments thereafter regardless of how the business performed.  In the worst examples that I have come across in my insolvency career there was little help from head office, continual demands for money and absolutely no care about the fact that one of their operations failed.  Regrettably the design of some of these “business opportunities” specifically meant that the operator would have to cut corners to make any real money as operators.  We’ll call these “Franchise Type B”, where there is little or no care for the franchisee.

Whilst you do hear about McDonalds millionaires, you don’t hear about the failures.  Because when it occurs it is dealt with early and the problem resolved together, franchisor and franchisee.  Not necessarily everyone is perfectly happy with the result I’m sure, but it’s essentially invisible to the general public.

With increased public scrutiny of business operations and the increasing ability for regulators and others to trawl through data and find failures and mistakes the “Franchise Type B” model will continue to fail, potentially with significant exposures to many involved.  On the other hand though, the “Type A” operations will equally continue to flourish.

Just like phoenix operators it all has to do with the intent, rather than the model.  Good businesses, with good systems and staff, who change and react to the current market will always survive; almost regardless of how they are structured.