Slide-Lok's Garage Blog

Why Not To Buy A Franchise & Why You Should Not Buy Products From a Franchisee

Posted: 8/11/2017

Last Updated: 12/14/2017

If you are buying your garage storage, garage enhancement products from or through a franchisor-franchisee, then chances are very good you are over paying for products which under perform. Why?

This question and the answer to it gets to the heart of why we are often asked by both property owners and home improvement contractors in the business of garage floor coatings and storage products why we sell our products through an independent dealer network instead of through a franchise network. The reasons are fairly straightforward and will result in your concluding that it is not in your best interest to buy your home improvement products from a franchise system when having your garage floor coated, or garage cabinets, overhead storage, or slatwall systems installed in your garage.

What Is A Franchise

A franchise business model is where a person (franchisee) pays the product supplier (franchisor) a fee up front, typically in return for an exclusive territory and use of the franchisor’s name, and agrees to buy all products from the franchisor, and often a small royalty on all sales, along with the franchisee’s commitment to spend a minimum level on marketing and hit ongoing minimum product purchases in return for using the franchisor’s name and getting access to the franchisor’s business system. The money the franchisee lays out in the beginning can be tens of thousands of dollars up to hundreds of thousands of dollars, just for these “rights”, with no product as part of the initial cash outlay. McDonald’s, Subway, are among the better known examples of franchises.

When Does Franchising Work

A number of times over the past 15 years we’ve been approached and told we need to switch to a franchise model for our business. These recommendations almost always come from professionals who stand to gain very large dollars in helping us prepare the paperwork and ongoing filings needed to be made in the various states to become and continue to be able to legally operate as a franchise. This process can easily reach into hundreds of thousands of dollars, before ever being allowed to offer a franchise for sale. When looking at this proposition, our research has always led us to conclude that franchising is only appropriate and only works long term, when one of two conditions exists, and preferably both.

First Condition - Brand Recognition

The first condition for franchising to succeed, is to have widespread, household, brand name recognition. In our industry, garage floor coatings and garage storage products, our research leads us to conclude that no company has established anything close to brand name recognition at the home owner, property owner level. The only company that has come anywhere near close to reaching this position is perhaps California Closets, but that name recognition at the homeowner level is in the closet business and not garage makeover, garage interiors storage segment and is not nationwide. From having been in both the garage and closet business for many, many years, we know that the closet and garage markets are very different, so much so, that other than using the same machinery to cut and laminate a closet cabinet, and a garage cabinet, that’s where the commonality ends. The sales process and sales rep needed to be successful in the closet segment are very different from that needed to be successful in the garage segment. Customer’s expectations in this regard are very different as well. Suffice it to say, that we believe there exists two separate, largely unrelated business segments, one being closet and the other garage. So when it comes to the garage segment, while people may have heard of California Closets in some major markets, our research leads us to conclude that name is associated with closets and homeowners do not associate that name with garage floor resinous coatings, garage storage cabinets, slatwall or overhead storage systems. In the garage segment, we believe no company has successfully built a recognized brand name in the market among homeowners that allows or justifies any manufacturer to demand a franchisee fee from any business or contractor for the right to use their brand name.

A player in the garage interiors segment that came close to reaching this level, but then seemed to peak and then crumble and fall apart, was Premier Garage. They seemed to have reached their peak around 2006 to 2008, with dozens of franchisees in many major US markets, and then all but disappeared in the years following the economic crash after 2008. We heard there were a number of lawsuits filed against them, mainly by their own franchise network, unhappy with the performance of their products, training, support, and having been over-sold on the business potential that they paid franchise fees to buy into. In Premier’s case, we heard they have been bought and sold a number of times. A group of venture capitalists bought out the founder, and this group later reached a point where they either went broke or refused to pump in more money, and essentially closed that business down and sold off the assets. Recently, a new group, Tailored Living, seems to have picked up the name and some assets and is trying to resurrect the franchise. In any event, when it comes to the garage market, we do not think any brand has sufficient name recognition with home owners to be able to look a business owner in the eye and be able to honestly ask them for a franchise fee based on the franchisor’s having built up band name recognition that they can take advantage of and benefit from.

Second Condition - Complex Regulatory/Complex Business Model

The second condition that we think needs to exist to justify the expense of a having a franchise network is being in a highly regulated, or complex business, where franchisees are in part, paying their franchise fee and ongoing royalty payments in return from the franchisor keeping them up to date and trained on the highly complex and changing regulatory environment of that business. We do not believe this applies to either the garage or the closet segments of the business. An example of this might be a tax service franchise, where the franchisor, as part of their fee, agrees to keep the franchisee’s staff up to date on changing tax codes and regulations. The garage market is not a highly regulated market where franchisees appear willing to pay franchisee buy-in fees, or maintenance fees for this reason.

For these reasons, we think it is not appropriate to be a franchisor/franchisee in the garage makeover market and we think it would border on being unethical, and perhaps dishonest and maybe even outright fraudulent to do so. The high legal and ongoing administrative costs to establishing a franchise business model for the franchisor and keeping in legal compliance with the various states the business operates in, is a very expensive cost that we are not willing to pass on to our customer in the form of higher product costs. We do not think this would add value to anyone.

Dual Edge Sword & "Churning" of Franchisees

Franchisor’s love getting large up front buy in franchise fee payments from new franchisees, because these dollars are basically “all margin”. There is no product cost, or cost of goods, associated with it. The dollars all fall to the bottom line. Why is this important? Because no one has established brand name recognition with home owners in the garage segment, the dual edge sword that starting a franchise presents in the opening / younger years of a franchise model start up, is having to spend huge amount of extra money on marketing to establish and build brand identity that doesn’t exist. This is hugely expensive. Doing this, we believe, leaves little money for the company to pay operating costs, such that in the early years of the business, we believe these organizations have to live off of franchise fee payments and not profit from actual product sales, which are low, or slow to build. This is a difficult catch-22 to grow out of and shift a company from living off franchise fee start up payments to a model where profits from actual product sales pays the operating costs. Many of these franchises, desperate for franchise fees, then over promise operating results to get a person to buy into the franchise, eventually resulting in missed expectations and what appears to outsiders as a high rate of “churn”, where franchises fail and are replaced by new ones down the road, perpetuating the franchisor’s ability to pay their bills off franchise fees but never successfully transitions to a business that makes acceptable operating dollars off actual sales of products. This is a very real problem and something anyone who is considering buying into a franchise business model needs to carefully consider.

Former Franchisees In Our Dealer Base

Over the past few decades, we have obtained many new dealers who were former franchisees of one of the franchisor business models, so we have a pretty good idea as to the challenges and problems this model presents in the garage market. Many franchisees grow tired of the overly high product prices, promises of help in marketing and lead creation that never come, and who never see these promises actually materialize into higher rates of business and revenue for this local business. These franchisees eventually drop their franchise contract, or they start a second company, independent of the franchised company, and have the second company operate in the same business segment as a dealer and non-franchisee, where all their money goes to real marketing and to buying actual products they can sell. It seems like we always are having conversations with a franchisee or two that reaches out to us because they are unhappy with their franchisor’s products, high costs, and lack of support. Since we are constantly reminded by franchisees of the disadvantages they are experiencing with their franchise relationship, it only reinforces our decision that going the franchise route is not the right one for us and is not the right one for our customers.

The Best Products At The Best Prices

Doing business with a dealer network also has other significant advantages for homeowners / property owners. When a homeowner asks a franchisee for a quote for a project, that franchisee is contractually bound to only offer that homeowner their franchisor’s products, even though the franchisor’s products may not be the best on the market, or may be over priced. In other words, when you do business with a franchisee, you are not necessarily being offered the best product at the best price. Dealers on the other hand, are free to move to other suppliers products if their supplier does not innovate or if their costs become too high to remain competitive. We have talked with many franchisees over the years who have decided to get out of their franchise agreement for these reasons, and we have talked with those who have elected to stay in their franchise agreement because of the high initial investment they made in the franchise business and feeling that they are stuck in the relationship until they recoup and recover some of their up front initial investment they made in becoming a franchisee.

Why Buying From A Dealer Is In The Best Interest Of The Homeowner

For these reasons, we think it is in the best interests of our ultimate customers, the homeowner and property owner, and the contractors and businesses we sell our products to, to put our products into the market thru an independently owned and operated dealer network, and not thru franchisees. This keeps us on the edge, motivated to innovate, and forces us to always watch our operating costs, as we know our dealers can migrate to another supplier’s products if we do not. A franchisee, after paying big money to buy into the system, is typically stuck, trying to squeeze out a return on their franchise fee they paid into the start up side of the business, and this goes on until they eventually turn a corner, or realize they are not getting their money’s worth and the franchise system is holding them back from being successful and competitive. Dealers are not stuck, and are in our opinion, more likely to carry and offer to their customers the best products at the best prices.

© Copyright, 2017, Slide-Lok Corporation.

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