Stop Franchising! Your Capital is Just AI Algorithm’s “Training Fee.”

If you are currently considering, or have already invested hundreds of thousands into a franchise — be it a bubble tea shop, a fast-food outlet, or any other seemingly popular brand — what I am about to say might sting. But I urge you to listen, because the truth you might be missing could be slowly draining your savings.

You might not be an entrepreneur; you might be an unwitting blood donor to a brand. More chillingly, in the eyes of AI and big data, you are not even a “person.” You are merely a “node” providing capital, labor, and real-time operational data — a “parameter” within an algorithmic model that can be evaluated, replaced, or even optimized at any moment.

That sounds extreme, doesn’t it? But I speak from experience. In my three decades in banking risk management, I’ve vetted tens of thousands of businesses and witnessed countless rises and falls. Years ago, franchising was indeed a viable model. Brands and franchisees were akin to comrades, jointly expanding markets and sharing risks. But times have changed. Especially now, with AI taking comprehensive control of supply chains, site selection, and sales forecasting, the very essence of this game has fundamentally shifted.

Let me share a true story. Last year, I spoke with a friend, a senior executive at a prominent chain restaurant brand. Over drinks, he confided in me. He said, “You know, my friend, why our success rate for opening new stores appears so high now? It’s not because our product is revolutionary, but because our AI-driven site selection system is exceptionally precise. It can analyze demographic profiles, consumption habits, competitor density within a three-kilometer radius, and even predict foot traffic for the next six months. Previously, opening a new store meant relying on franchisees to shoulder the trial-and-error risk; three out of ten stores might fail, which was painful for the brand too. Now, that’s no longer necessary. The locations identified by AI are almost always accurate. So, tell me, do we still need franchisees to bear the risk of market experimentation?”

No, we don’t. “So what do we need franchisees for?” He took a sip of his drink and offered two words: “Capital” and “Labor.” Think about it: setting up a store — renovation, equipment, initial inventory — you put up hundreds of thousands upfront. For daily operations, you and your family pour your heart into it, working long hours. What does the brand do? It provides standards, supplies raw materials, collects brand usage fees, management fees, and most importantly, profits from its supply chain. You shoulder the lion’s share of the risk, while the most profitable and certain aspects remain firmly in the brand’s grasp.

This brings us to the first crucial issue we must expose today: the principal-agent problem. This term might sound academic, but I’ll use an analogy you’ll understand. It’s like hiring a nanny to care for your child. Your goal is for the child to be healthy and happy (the brand’s long-term reputation), but the nanny’s goal might be to do less work for more pay (short-term extraction from the franchisee). When your objectives diverge, that’s the inherent conflict of the principal-agent relationship.

In a franchise, you are the “nanny,” and the brand is the “parent.” On the surface, the brand wants your store to thrive and be profitable long-term, so it can continue collecting fees. In reality, with powerful AI, the brand’s core objective has shifted. It seeks rapid scale expansion, market share dominance, and the maximization of supply chain efficiency and profit. As for the fate of your individual store? As long as it doesn’t impact the overall performance, and as long as there’s a queue of others ready to pay for a franchise, your survival might hold very little weight in the algorithm’s global optimization.

Your objective (single-store profitability) and the brand’s objective (maximizing scale and supply chain profits) are severely misaligned. And you, the franchisee, are at an absolute informational disadvantage. The brand’s AI knows real-time data from all stores nationwide, knows which raw materials yield the highest profit margins, and knows which marketing activities to push at what times to maximize its platform revenue. You don’t know any of this; you merely follow instructions.

This is where the second killer comes into play: the profit margin squeeze. What does this mean? It signifies a widening gap between the brand’s earnings and your potential profits. For raw material procurement, the brand enjoys massive cost advantages through centralized purchasing, but it dictates the markup at which it sells to you. When you sell a cup of bubble tea, material costs might account for 40% or more of the selling price, and within that 40%, the brand might have already secured a pure profit margin of 15 percentage points from you. After deducting rent, labor, and utilities, you realize that after a month of hard work, you’ve primarily been working for your landlord and the brand. The brand, meanwhile, enjoys consistent, low-risk revenue. It doesn’t directly face consumer-side risks but uses its supply chain to slice off a significant portion of your front-end profits, like a pair of scissors.

The third, most disheartening element is sunk costs. The hundreds of thousands you’ve already invested act like invisible shackles. Your store isn’t profitable, but closing it means that money is gone forever. You’ll constantly think, “Just a little longer, what if things turn around?” Brands understand this psychology all too well. They will paint a rosy picture, offer minor adjustments, making you feel there’s still hope. But in reality, you might just be contributing “how long a loss-making store can survive” data to their AI model. You are using your hard-earned money and precious time to test market limits for the brand. By the time you genuinely can’t sustain it and close shop, the brand has already optimized its model based on data from thousands of “yous,” found a more resilient “next-generation” franchisee, or simply converted your location into a more profitable company-owned store or a new franchise.

This is what I mean when I say you’re not buying a brand; you’re buying a put option with no downside protection. In finance, a put option profits if an asset’s price falls. In franchising, the brand essentially sells you an “option for entrepreneurial success,” but it doesn’t bear the risk of failure. You pay an expensive “premium” (the franchise fee) to gain the “right” to operate under its brand. But if the venture fails, you lose your principal, while the brand has long since pocketed the “premium” and supply chain profits. It has no obligation, nor incentive, to bail out your individual store’s failure.

As the ancient Roman philosopher Seneca once observed, “Every man is a slave to his passions.” In commerce, this often translates to self-interest. The brand’s calculations are always cold and precise. Previously, such calculations had limits because humans couldn’t process such granular data. Now, with AI, it has become the sharpest pair of scissors in the brand’s hand.

So, as an ordinary person, an aspiring entrepreneur, are you utterly without recourse? Absolutely not. Understanding the trap is the first step toward better survival. Your task isn’t to reject franchising entirely, but to arm yourself with a new mindset.

First, review the contract as a risk officer. Before signing that weighty franchise agreement, put yourself in the shoes of a “risk officer.” Don’t just focus on the promised profits; scrutinize these key clauses: 1. Exit mechanism: If you want out, how do you do it? Does the brand buy back equipment? At what price? If the contract is vague or the buyback price is far below market value, that’s a red flag. 2. Supply chain price lock: While raw material prices fluctuate, is there room for the brand to abuse its dominant position and arbitrarily raise prices? Are there clauses committing to fair market pricing? 3. Territorial protection: How far away can another store of the same brand be opened? Is this distance rendered meaningless by AI’s precise site selection? Treat these critical risk points as you would default clauses in a loan agreement.

Second, calculate an “independent balance sheet.” Imagine you didn’t franchise and started a similar business from scratch. What would your cost structure look like? Factor in your franchise fee, brand usage fees, and potential additional raw material costs. Compare this to what it would cost to do it yourself. Is the brand premium and customer traffic you’re buying truly worth the extra expense? Many brands’ appeal is rapidly diminishing in today’s transparent information environment. Consumers care about taste, affordability, and convenience, not necessarily whether the name above the door is “authentic.” Once you run these numbers, you might be quite surprised.

Most importantly, redefine your value. In the age of AI and transparent supply chains, the pure “channel value” and “labor value” are rapidly depreciating. Channels can be optimized by algorithms, and labor can be replaced by standardized management. You must identify what the brand cannot take away. What is it? It’s your and your team’s genuine connection with the local community, it’s the personalized service you provide that goes beyond standard procedures, it’s the micro-innovations you implement based on a deep understanding of your local customer base. Even if you’re just running a bubble tea shop, can you remember regulars’ names and preferences? Can you organize unique, heartwarming local events during holidays? Can you transform a corner of your store into a cozy spot where local students genuinely want to spend time? These “human touches” and “localization” are things that even the most advanced AI cannot quickly replicate or quantify. This is your true moat, the reason customers will walk an extra two blocks specifically to find you.

As the ancient Roman general Vegetius advised, “If you want peace, prepare for war.” Do not rely on the trap not materializing; rely on your preparedness. Franchising can be a path, but it must never be a blind leap. Before you commit your capital, please use the risk management lens I’ve described today to thoroughly examine the cold commercial logic behind that glittering brand promise.

Ultimately, the evolutionary force of the business world marches on. AI, like fire, will both burn away old models and illuminate new possibilities. It compels all of us to shift from relying on brands and channels back to the essence of business — creating real, unique, and irreplaceable value for the people around you. This principle, which I explore in detail in my book, The Evolution of Organizations, posits that any entity (including your small business) must continuously output “negative entropy” — unique value — to counteract internal stagnation and external competition.

Stop merely being the “hands and feet” of a brand; strive to develop your own “brain” and “heart.” Your warmth, your connections, and your unique local flavor are the invaluable assets that algorithms cannot calculate and capital cannot easily seize.
I am a veteran in finance from finsages.org. In this era of increasingly precise algorithms and easily quantified human nature, I aspire to be the one who reminds you to look up at the sky and down at your path. See through the devilish details in contracts, understand the true ledger behind the business, and safeguard your unique value.
Remember, the best risk management isn’t about avoiding all risks; it’s about never handing over the remote control of your destiny to someone else.

The world is vast and magnificent, and we will meet at the summit.