Construction-Related Franchises

We received the following E-mail:

“I was wondering if you had any advice for contractors when approached about a franchise opportunity. Recently there has been a basement franchise approach us and frankly there are some appealing aspects to it. But while we know many franchises work – ‘Starbucks and McDonalds etc.’ in other industries I am wondering do they work in the construction industry? We hear things like 80% of franchises succeed and ‘if backed by a large company’ you can feel secure in having all of that Corporate support to work with you.”

“I have some reservations, as it seems the amount they want you to spend on advertising is more than we have spent EVER, the reporting seems stringent and I don’t see in the documentation how we hold them to their end of the support but they can pull at anytime.”

“I was also wondering if you can bring a single line focus into a full custom- design build firm successfully.”

“On the upside- the systems, the contacts, the tightness of the product, the promises of profit and being able to delegate more of the work- might just free up some time- which would be great, because we are getting tired of working so hard for ok returns.”

Thank you for your question. I have an opinion, but it won’t be popular with many franchisers. We have watched franchises in the construction industry for many years, and wrote an article for Professional Remodeling back in 1982 on the subject. (This, by the way, was a different magazine than the present Professional Remodeling.) Twenty-five years later, my opinion hasn’t changed.

Franchises may generally work well for a commodity-based business. They tell you how to can build hamburgers, sell real estate or sell clothing. They tell you how to build your building, how to manage your staff, what equipment to buy, etc. Franchises that work well are almost 100% commodity related businesses where control can be exercised over every aspect of that business.

Unfortunately, that model has not worked long term in the construction industry. The reason is complex yet very simple. Construction has too many variables to control for any one system to work in every office. Think about the people you know in this business. How often do two of them to do the same thing the same way?

When you are selling a commodity (hamburgers), it’s easy to standardize the system and have all franchisees operate the same. When you are selling a service, like remodeling, it’s almost impossible.

I taught a one-day estimating class in Massachusetts in 1988, with over 150 contractors in attendance. During that class, we built an estimate for a room addition. We preselected some 38 to 40 line items from an estimating book we used for the takeoff, trying to give the students a guideline to follow to make estimating easier and more systematized. By the time we had taken off 8 items on that room addition, no two people in that room had filled out their estimate sheet the same way. I taught that estimating class in over 80 cities around the US and Canada for over 10,000 contractors. It happened in every city, in every class – everyone estimated differently.

Although it’s seldom talked about, one of the driving forces behind many construction business owners is the strong need to “Do It My Way.” And there, gang, is where the problems begin with a franchise.

Because of the attitude of so many in this business to go it on their own, they have a hard time adapting to another’s way of thinking. The minute something comes up they disagree with, they will go back to the way they have always done things. I see this all the time in our coaching and consulting service.

So, what have the franchises done to combat that problem? They hire “Field People”. They are called something different at each franchise, but their primary duty is to check in with the franchisees on a regular basis and give them the assistance and guidance needed to keep them in the program and on the track the franchise says is the correct way to run the business. The job of a field person is to make sure a franchisee is following the system.

Does it work? Yes, if and only if the franchiser keeps the ratio of field people at no more than one to every four franchisees they sign into their program. The minute that ratio grows above 1 to 4, the franchisees start to have problems. They do not get the guidance they need to keep them on track (assuming they will listen to that guidance.) The field people can only be in one place at a time. The franchisees start wandering off on their own, and then run smack into financial problems. Most often, the franchiser either is not staying current with the franchisee (because the field people are spread too thin trying to cover too many franchisees) or they do not see or understand the problem. And unfortunately, they often don’t know how to fix the financial problems.

A good example of this comes to mind. The franchisee does not write a good payment schedule into the contract, the owner doesn’t pay as they should and boom, cash flow problems. Field person says, “Well, you need to raise your markup so you have more money in the bank to pay your bills.” Or, “Go to the bank and get a line of credit so you can pay your bills. By the way, you are now two months late on your franchise fee.”

For all their well thought-out systems, the lack of direct supervision of the franchisee is the major cause of the system failure.

This system break down will start to occur when the franchiser attains over 260 franchises. There are several very well known franchises right now in the US that are having problems. One in particular has had several franchisees want to drop their program. Because of the way the franchise agreement is written, they have a huge financial lever against the franchisee to keep them from dropping the program. The franchisee must pay the franchiser their fee each month.

Now, you tell me, would you want to do business with someone that would force you to do business with them if you didn’t want to? Do you think for a moment that those franchisees that are being forced to stay in that program have anything good to say about the franchiser? Very soon that franchise will find it impossible to attract new franchisees and they will fail.

To my knowledge as I write this article, the only company that I know of that has a ratio less than 4 to 1 is a new home construction company, GJ Gardner HOMES. I spoke with one of their people who contacted me before I wrote this article. I told him my concerns and explained the problems with the franchise system in construction exactly like we have talked about here in this article. He told me they were aware of this problem and that is why they have kept their ratio at or below 4 to 1. Time will tell if they are dedicated to helping their franchisees or whether they succumb to the lure of higher profits and start cutting back their staff to reduce their overhead and thus increase their bottom line.

So, when you are approached by a franchiser about joining their ranks, ask the question, “Do you have field people that we can call on for help and if so, how many other franchisees do I have to share this person with?” That will tell you all you need to know before going any further with that company.