What happens when franchisees turn off the Cash Flow tap?

February 19, 2009

tapI do not know, precisely.

But the greatest “winners” may very well be those that  turn it hard off, immediately.

I think anyone with any skin in the franchise game should be re-thinking their assumptions very carefully, right now. With their peers and with a commercial lawyer.

I wrote over at Blue MauMau that I thought franchising was undergoing a crisis of confidence. FuwaFuwaUsagi seems to agree.

This distrust is really different in four ways:

  1. it is for all franchises (not Brand A or Brand B),
  2. systemic (affects all brands),
  3. cataclysmic (most systems underwater in one year?)  and
  4. it is from the franchisor’s lending associates (not franchisees).

This is fundamentally different than in any other time in franchising’s history. Pay attention.

How an Industry Adapts into Into It’s Own Destruction

Unfettered capitalism is exceptionally efficient in allocating resources, maximizing ROI. But capitalism has some very nasty byproducts (externality: spillover costs). Fraud is a well-known example of an externality that markets, alone, cannot correct for. We are seeing now the carnage of short-term only incentives. Totally predictable, totally understandable.

1. Once upon a time, franchisors acted responsibly and achieved an adequate return on investment, ROI. They invested in real industries with competent managers and franchisee partners. Col. Sanders, Ray Kroc.

2. A franchisors decided to cheat. They pushed the opportunistic envelope by treating slaughtering instead of shearing investors. They made a higher ROI than the less sharp franchisors because it is always more profitable to steal than to earn money.

3. A sophisticated understanding, “conspiracy”, cabal was knit together with the franchise bar, suppliers, lenders, regulators, and the media (Big Franchising). There is never any reason to write down anything: each independent party is simply acting in their self-interest by peddling these false franchises. Of course, short-cyclers always cut the apple trees down for firewood instead of caring into the long-term.

4. The public still believed that franchising was Ok but with a few rotten apples. Over time, though, greater doubts were raised even though the information monopoly still was holding.

5. The influence of the few innovator franchisors and Big Franchising grew and grew.  It was going very, very well: no one suspected a thing and the sheep were as docile as anything. Only the chumps didn’t adapt by becoming tyrants themselves. Everyone made out like bandits that was wise to what became more and more to resemble a confidence game or ponzi scheme.

6. Then came the internet and lower-cost sharing of information. This would be technological revolution that not change but destroy the credence good monopolists’ power.

It’s over because their own greed and hubris will result in wholesale investor defections lead by non-franchise bar solicitors.

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