The Trump Blog

On January 17, Trump University Professor Richard Parker wrote a post on this blog, entitled, “Seven Reasons Why Buying a New Franchise Business Is a Disastrous Mistake.” It triggered a strong response from Trump University Member 1711781, who offered arguments in support of franchise ownership.

Professor Parker has now responded to member 1711781. The result is an exchange that contains a lot of valuable information for anyone contemplating business ownership. So much good information, we decided to publish it on this blog. The first installment has appeared on this blog. Today, we publish the second and final installment.

Put on your thinking cap and get ready to learn from this exchange of ideas.

Member Comments:  "Not everyone is suited to operate a franchise." No $hit! Most people aren't suited do run a business, PERIOD, much less a franchise! Again, having somebody else do some of the work for you, and do it in a way that is PROVEN to be effective, is not a bad thing. Franchises have some of the best marketing and ad campaigns in business. Wouldn't you be relieved that you'd be using a marketing campaign that you already know is going to work?”

Parker’s Response: Normally, I would never even engage in a dialogue with anyone who sees fit to use profanity - I am not certain if you have done so as a means to emphasize a condescending point or a failure to articulate effectively. Nevertheless, I do agree with the point that following a proven marketing strategy is effective but that is on a macro scale. Reducing that to a micro environment for an independent franchisee simply does not translate or even reflect reality.  Take a look at the failure rate table produced by data from the Small Business Administration based upon cases where they provided the financing to new franchises.

Regarding your comments that most people aren’t suited to run a business, I cannot endorse that perspective. I fundamentally believe that anyone who can survive in a demanding job and who has a burning desire to be successful can easily achieve that goal simply by working hard in their own business, conducting effective research, educating themselves, and adopting a “never give up” attitude.

Member Comments: “It's difficult to make money in any business! Ask ANY small business owner in America! And keep in mind that franchise businesses are ALWAYS open to new ideas and looking for new ways to grow the business. In a lot of cases, they look to their FRANCHISEES for ideas. And yes, there is a chance a franchise business can become stagnant, but so can an independent company. That's why an entrepreneur has to be smart about what business he chooses to buy, franchise or otherwise.

Parker’s Response: The key issue here is that you cannot alter to franchise model to any extent because it does not trickle down to the individual franchisees ownership. Franchisors need cohesiveness to success. In fact, their agenda is to get every aspect of the operation in every location homogenous. This includes marketing and even the very franchise agreement itself.

Member Comments: I have EIGHT Starbuck's locations in my city to choose from and I know several of the owners myself. The parking lots are always packed and ALL of their businesses are thriving.

Parker’s Response: That’s great except for one problem: Starbucks does not franchise. As such, using them as an example is simply not applicable. Here’s a direct quote from the Starbucks website:

“Starbucks does not franchise operations and has no plans to franchise in the foreseeable future. In North America, the majority of our stores are Company-operated. As an exception, Starbucks may enter into licensing arrangements with companies who provide access to real estate which would otherwise be unavailable such as airport locations, national grocery chains, major food services corporations, college and university campuses and hospitals.”

Member Comments: If you own a franchise business and you tell your franchisers that you're business is failing and something needs to be changed, don't tell me they aren't going to oblige. Franchisers INVEST in their franchisees (for the most part), and they aren't going to let one of their investments lose its ability to make them money without a fight. I guarantee you that franchisers will tweak their marketing and ad campaigns to make your business successful in your particular location.

Parker’s Response: At this point I can only draw the assumption that you have never owned a franchise and I am shocked that you would “guarantee” that franchisors would tweak their marketing campaign to cater to a single franchisee. I stated earlier that I would attack your points and not the person, but with all due respect, your comment is ridiculous. Instead of me drawing any conclusions, I think the following results of the Johnson Franchise Consulting survey of 1000 franchisees addresses your erroneous assumptions quite effectively:

• 56% feel that the franchisor has not helped them improve their business
• 53% do not consider their business to be a financial success
• 40% feel their franchisor cannot be trusted to help them and their business
• 44% would not have purchased their franchise knowing what they know today
• 62% of franchisees do not feel they are currently receiving full value for their advertising fees paid to the franchisor
• 15% are in some type of dispute with their franchisor

Member Comments: Yes, there CAN BE restrictive rules in the sale of your franchise, but only sometimes. Again, this is another aspect that you should carefully consider before you even purchase the franchise. An entrepreneur, if he's smart, will ALWAYS prepare an exit plan.

Parker Response: The restrictive issues to sell a franchise are not “sometimes” as you quote but almost always. Typical clauses in nearly every franchise agreement include:

• The right of first refusal for the franchisor to purchase the unit.
• Substantial transfer fees.
• The requirement for buyers to undergo training BEFORE they are approved (this is actually a wonderful idea for the franchisor but a real deal-breaker for the buyer)

Member Comments: I'm really just pointing out that yes there are downsides to opening a franchise, but most of those downsides apply to independent companies, as well. This is the beauty of being an entrepreneur, you're always going to take a risk.

Parker’s Response: While there are downsides to independent businesses, they pale in comparison to opening a new franchise. Identifying these issues was specifically the intent of my posting. While I wholeheartedly agree that the “beauty” of being an entrepreneur is the fact that the rewards are commensurate with the risk, one can drastically reduce the risk simply by making well-informed decisions based upon fact, not opinion, but more importantly, anyone can dramatically diminish the risk simply by acquiring an ongoing, existing business, franchise or otherwise, that has a verifiable history of success rather than a start-up (in any guise) where the failure rates are dismal.

On January 17, Trump University Professor Richard Parker wrote a post on this blog, entitled, “Seven Reasons Why Buying a New Franchise Business Is a Disastrous Mistake.” It triggered a strong response from Trump University Member 1711781, who offered arguments in support of franchise ownership.

Professor Parker has now responded to member 1711781. The result is an exchange that contains a lot of valuable information for anyone contemplating business ownership. So much good information, we are publishing it today on this blog.

Due to the length of this post, the post will appear in two installments: the first half today, and the second half next week.

Put on your thinking cap and get ready to learn from this exchange of ideas.

It would have been easy to rationalize not publishing the comments made by member1711781 on 01/18/2008. Nevertheless, I fundamentally believe that those comments echo precisely what the problem is regarding new franchises and how easily one can be misinformed when comments are made that are completely subjective, void of any fact, or ripe with rhetoric.

The great thing about blogs is they provide an open forum to discuss and debate ideas, and they allow a global audience to participate, which is something I embrace. Many blog publishers are highly selective in the comments they allow to be published, which I believe defeats the core of the blog concept altogether.

Having said that, I do wish to thank member1711781 for your feedback however, it is critically important that I dispel the myths you have presented in order to provide the readership with accurate information.

First, your perspective is based upon references to two individual franchisees who you know (one of which does not even franchise their operations) and yet another franchise that requires a $250,000 liquid net worth in order to qualify, which is simply not an option for most people. Drawing conclusions from such an insignificant sampling is neither accurate or effective.

Further, you have not cited any specific personal experiences whatsoever either as a franchisee or business owner altogether unless you inadvertently omitted it.

Conversely, as background to my posting, the resources that were called upon to make the comments I did include:

1. A nationwide survey involving over 1000 franchise owners conducted by Johnson Franchising Consultants.
2. A study of franchisees conducted by Dr. Timothy Bates, a professor at Wayne State University in Detroit.
3. I have personally been involved in this arena for eighteen years.

Before I reply to your comments made, let me state unequivocally that I have a core principal to only attack the point, not the person and so let me address the comments made by member1711781 on a point-by-point basis

Member comment: “Seven reasons why buying a new franchise is a DISASTROUS mistake? I believe you've taken this concept to an extreme. You can't HONESTLY think starting a new franchise is a disastrous mistake. If that was true, why does owning and operating a McDonald's make so many people millionaires? And McDonald's isn't the only example! I personally know a Chick-Fil-A owner who is ALSO a millionaire! And there's three other Chick-Fil-A's in my city!”

Parker’s Response: I absolutely believe it is a disastrous mistake. Using your McDonalds example is simply not a reasonable example because it is completely out of touch for most people.

According to McDonalds own criteria:

• McDonalds requires franchisees that have significant business experience who have successfully owned or managed multiple business units or have led multiple departments and who have significant financial resources.” This clearly eliminates most people financially and anyone first-timers.
• The cost is prohibitive for most people. The minimum amount for a down payment will vary. “Generally, we require a minimum of $250,000 of non-borrowed personal resources to consider you for a franchise. Individuals with additional funds may be better prepared for additional or multi-restaurant opportunities.”

Member Comments: “Whether you're opening a franchise or non-franchise, chances are the business will fail! According the American Chronicle, you have a 1 in 5 chance of succeeding in your new business! An entrepreneur is defined as someone who assumes the usually substantial RISK of operating a business. No matter what business you're getting into, you're taking a risk.”

Parker’s Response: The study by Dr. Timothy Bates, professor at Wayne State University in Detroit, found that the franchise failure rate actually exceeded 30 percent and that franchises made lower profits than independent entrepreneurs. Dr. Bates' study also found that the average capital investment of franchisees was $500,000, compared to $100,000 for independent entrepreneurs.

The failure rate you cited from American Chronicle is exactly my point - an 80% failure rate for new businesses. If that alone is not ample data for you to emphatically agree with my point, I am not certain what other data you would require. While the rate may be somewhat lower in franchises, it is certainly nothing to boast about.

Of course any business is a risk. The question is the magnitude. One simply cannot argue that buying an existing business (franchised or not) where you have demonstrative proof of historical performance immediate puts you at an advantage over a new business - the facts bear this out.

Member Comments: “Of course you have no assurances the business will be successful! The success of the business is determined by the entrepreneur, in both franchises and non. And not all of the time does the franchise company choose the location. And even if they do, that's not necessarily a bad thing! Most franchises are such because they have a business model that entrepreneurs want to mimic because the model is EFFECTIVE, and since their model is effective that means they're pretty good at doing business, which means they're also pretty good about CHOOSING A LOCATION.”

Parker’s Response: Wrong! First, in the vast majority of cases, the franchisor either chooses or is the final approval on location. Second, the franchise concept if based on the model that the franchisee must follow the system - there is little if any room for interpretation. That’s what makes a franchise work. The franchise concept is based upon the notion that the business model has worked to varying degrees in other locations. While the better franchisors will conduct demographics studies and clearly they should be in a better position to suggest locations, it is very much an “if you build it, they will (hopefully) come. While franchisors do not want their locations to fail, their agenda is to sell franchises and populate the landscape with their brand.

To be continued soon . . . stay tuned.

Jeff Elgin’s recent article in Entrepreneur, “Top 10 Reasons for Buying a Franchise,” takes my breath away.  Sure, there is logic behind some of the reasons he spells out for buying a franchise  - you’re also buying a recognized brand, he writes, plus receiving promises of training and advertising. But I have heard them all before and my experience tells me that buying a non-franchised business is a vastly wiser business decision every time. Further, reality dictates that not all franchisors come close to living up to the representations they make when “selling” you the concept.

In fact, I put together a list of my own - called “Seven Reasons Why Buying a New Franchise Is a Disastrous Mistake.” (Notice, I stipulated, a new franchise. In a moment, you will find out why.)

And here are my reasons:

1. The failure rate of franchises is greater than most people realize - far greater. If you ask the friendly franchise salespeople to document failure data, you will see their eyes glaze over.
2. Opening up a new franchise location is only slightly better than a start-up. You have absolutely no assurances that it will be successful. And when you are buying a franchise a lot of the decision about your location is not yours, but the franchise company’s.
3. Not everyone is suited to operate a franchise.  Do you have entrepreneurial fire? Do you dislike being told what to do? Do you want freedom with your marketing plan? If so, owning a franchise is not for you.
4. It is difficult, if not impossible, to generate any significant money as a franchisee.  Period.  There are enormous growth opportunities with owning a non-franchised, independent company. For example, you can acquire additional businesses, open up new locations, initiate innovative marketing concepts, and add new products or services just to name a few. Unfortunately, with a franchise, you may be completely restricted from any of these opportunities and the business can remain completely stagnant.  
5. The franchisor itself can be your biggest competitor. As soon as you start to make progress, they oftentimes will open another nearby location. They will portray it as a way to build the brand and ultimately benefit you, but let’s call it what it is - more competition and often a watering down of your business. Expansion is the number one agenda for most franchises.
6. You have to follow their rules, policies and procedures - even if things are not working.  If your business is not doing well, it’s like being on a sinking ship with no lifeboat.
7. There can be very restrictive terms if and when you wish to sell the business.  If you own and build an independent business, and grow it, you can sell it for vastly more than you paid for it. With a franchise? Forget it.

That’s all the “bad news.” The flip side is that a franchise can be a solid business model for some people’s initial foray into business ownership. This is especially true if you lack the necessary skills or confidence you need to be an employer and not an employee. In this case, there’s a great solution: buy an existing franchise, a resale - one that is already up and running successfully.  Even though the disadvantages I note above will still apply, at least you will be able to investigate its sales and other figures so you have some idea of whether the franchise you are contemplating is a money-maker or a dud.

At Trump University we are very bullish about the approach of buying a business as a shortcut to building wealth quickly and reducing risks.  While a franchise can indeed reduce risks compared to “going it alone” right from the beginning, the same funds (or significantly less money) can often be used to buy an existing business complete with a proven track record, good branding and most important of all - paying customers.