The easiest way to rent a business

Do you think renting or owning is better?

Like most answers, it depends. If you can rent at the right price, in a market where prices are not increasing, you’re better off renting.

However, in a market where prices are increases, owning can be better because of market capitalization.

In business, you don’t hear of many people renting a business. There are some rent to own, and vendor financing options that look a lot like a business rental.

The definition of renting is to let someone use something in return for payment. In business, most rentals are called something different. Rented businesses are called franchises. Franchisors would never admit to that. But the contract is clearly written in favour of the franchisor. The control is held by franchisors while a franchisee pays for distribution rights with an ongoing monthly or percentage of sales royalty.

Just like renting a home, renting a business can be perfect for someone who doesn’t have the ability to start or run their own business.

Having been a franchisee as well as a corporate employee for a franchisor, I believe until now, the facts surrounding franchising have been exaggerated.

I invested in a franchise to give my family a better life. I was tired of being a slave in the corporate world. Having been downsized, I decided never to return to work for someone else. I wanted my future to depend on my actions, not on a corporate decision made by people in towers who I did not know.  I made the conscious decision to buy a franchise. I thought I was buying a business, in which I was the owner. What I bought was the worst job I ever had in my twenty years of employment. 

Financial returns were ok. I took a paycut from my corporate world job. I worked more hours than I had ever worked before. The business was mine, in my mind.  After 7 years of being bullied, threatened, and enslaved, I sold my franchises to someone else who was sold on the dream of franchise ownership. And I’ve never been happier.

Franchises brag that their success is based on systems. There is truth in that statement. But some franchises have better systems than others. And some systems are not for the benefit of the franchisee. They are implemented at the sole benefit of the franchisor.

In Michael Gerber’s foundational book, “E-Myth Revisited”, he discusses the topic of franchise prototypes. I believe he is bang on when he explains the need for systems in all businesses. I think he may be oversimplifying the success rate of franchises compared to independent businesses. Here’s the reality, most independent businesses don’t incorporate systems so they risk failure at a higher rate than a franchise.

What’s the definition of failure? Gerber doesn’t tell us. Can a franchise business not fail, yet the investor goes broke? There are countless examples of franchises started where the franchisee loses the original investment only to sell the business at a substantial loss to relieve themselves of contractual obligations with the franchisor, government or landlord. The business continues its operations. The original investor goes away to lick his wounds.  So take Gerber’s statement with a grain of salt. Franchises don’t generally fail but franchisees do.

In one franchise example, there were seven franchisees I know of who went broke over a seven year period. In a market where 15 franchises existed, that is a failure rate of almost 50%. The businesses stayed open. The franchisee either lost their franchises to the bank, the landlord or the franchisor. Or they sold them at significant financial and emotional losses.  Yet the brand looks favorable to new franchisees as it had to investors seven years earlier because all 15 were still open.

When I worked for a 100 location franchisor, we used the Boston Consulting Matrix to categorize our franchisees. The first category was for the stars. These locations and franchisees were optimistic, growing, and producing profits for the franchisor. The second category was the question marks. It included those who were stuck, sitting on the fence, not growing, but not declining. They produced profit for the franchisor but could easily be stars or dogs. The third category was the dogs. They were pessimistic, with declining sales. There was profit for the franchisor but it wasn’t as good as the other two categories. It was the dogs we were actively trying to remove from our system through coercive tactics. It represented 33% of the network.

Brand recognition is another selling point for franchisors. Our franchise system opened five new locations in a western territory where the brand was already familiar to eastern people who moved to work in the oil industry. The systems didn’t save the franchisees. The brand recognition didn’t help them. The marketing team couldn’t offer them hope. Within two years, they all failed and the franchisor retrenched and abandoned the territory to the detriment of franchisee investments.

If an entrepreneur understands the required systems, they can build a franchise prototype that has the potential to being as profitable as a franchise in the same industry.

Don’t misinterpret my words, I’m not against franchises. I believe the facts have been one-sided, skewed toward the success potential and not equally balanced with the downside of franchise investment.

Go forth and learn. Knowledge IS power.  Franchises are rented businesses. And sometimes it's better to rent than own.