Musings

A Fork In The Road: What If Uber Franchised In California?

Too Long; Didn't Read

  • California's legal pressure on Uber and Lyft to label freelance drivers as employees has led both companies to consider franchising as an alternate business structure
  • Uber and Lyft have three franchise options: a master franchise model, an area developer model, or the traditional franchise model
  • Owning a franchise is a far different agreement than the flexible arrangement Uber and Lyft drivers currently have
  • Labeling drivers as franchise owners still results in drivers being employees, which creates financial issues across the board from Uber and Lyfts profitability, to the everyday price riders would have to pay

Transportation franchises have been around for a long time.

There are business opportunities for emergency medical vehicles, limousine services, party busses, luxury taxi fleets, valet services, even cars with built in hot tubs, grand pianos and disco ball dance floors.

But in the modern economy, the first two words that come to an entrepreneur's mind when thinking about becoming a professional driver are Uber & Lyft.

In the past month, there’s been a lot of buzz around these two brands. California’s legal system has been pressuring the companies to label freelance drivers as employees, and the new legislation brings about an interesting opportunity.

What if rideshare companies franchised?

Wow, talk about a fork in the road. Robert Frost’s famous poem, “The Road Not Taken,” comes to mind here:

“I shall be telling this with a sigh, somewhere ages and ages hence, two roads diverged in a wood, and I took the one less traveled by, and that has made all the difference.”

In this post, we’re going to give you context around the issue, address high level points about the overall implications of this business model, explore three potential scenarios of franchising the rideshare market, and unpack several other marketplace concerns.

Zoom, zoom, baby!

Context on the ongoing franchising issue

If you’re just now joining this conversation, here’s a quick recap of several key write ups. We encourage you to read them in full for greater context.

  • The New York Times published a comprehensive piece about the operational, financial and behavior implications of implementing a franchising model. My favorite insight from this article is, “The companies have argued that this freelance model allows drivers to drive only when they want to. But critics have said it places unreasonable financial burdens on drivers and gives Uber and Lyft unfair advantages over businesses that follow employment laws.”
  • Slate explores this issue from the perspective of the gig economy, which is highly instructive from the entrepreneurship standpoint. Here’s some data that stood out to me. “According to respondents of the recent survey we took on Uber and Lyft potentially leaving California, 84% of drivers would prefer to continue driving for Uber and Lyft without benefits while having a cap on the number of drivers in the area.”
  • The Ride Share Guy digs into the legal context of this story, with a helpful summary of Assembly Bill 5. I commented in this piece how licensing can make sense as a work around, but franchising is way too heavily regulated for Uber and Lyft to just jump into it, especially in California. But with licensing they have far less control over it. They can’t dictate a set of operational standards to comply with and the licensee can essentially run the business however they see fit while using the tech and trademarks. It’s a risky move to let go of control in the most populous state in the country. That has the potential to muddy the brand on a much larger scale if the licensees decide to act inappropriately.

Now that you have a solid background on the issue at hand, let’s start thinking about what this could mean in the marketplace. For the purpose of this article, we’re going to focus on Uber, not Lyft, as we have more information about their company through various research. 

Let’s envision the fork in the road...

What the marketplace looks like with rideshare franchises

The first point to consider is how this business model fits into the franchise registration process. Uber would have to file a Franchise Disclosure Document with the FTC, as well as register the franchise in the state of California. 

Now, California is one of 13 states that requires state-level registration. It often takes months to get an approval to franchise in California and this process happens every year. And if you make a mistake in complying with California franchise law and receive comments back from the state, your timeline to approval gets extended. 

It’s fair to say that Uber might get some preferential treatment, but California doesn’t seem all that fond of their business practices, so perhaps not. 

With that, we’d like to build out three possible scenarios:

Scenario 1: Master Franchise Model

In this scenario, Uber awards the exclusive franchise rights to one individual or entity for the entire state of California. That master franchisee then hires drivers as employees, which Uber’s CEO has already said simply does not work. There would be unintended consequences for passengers and drivers. In a New York Times op-ed, Uber CEO Dara Khosrowshahi explained:

“Why not just treat drivers as employees? Some of our critics argue that doing so would make drivers’ problems vanish overnight. It may seem like a reasonable assumption, but it’s one that I think ignores a stark reality: Uber would only have full-time jobs for a small fraction of our current drivers and only be able to operate in many fewer cities than today. Rides would be more expensive, which would significantly reduce the number of rides people could take and, in turn, the number of drivers needed to provide those trips. Uber would not be as widely available to riders, and drivers would lose the flexibility they have today if they became employees.”

A master franchisee would also have the ability to sub-franchise the entire state to individuals or entities that operate fleets. The issue here is that fleet operators, by California’s measures, would still need to hire drivers as employees which again defeats the business model. After all, the entire reason Uber would be using the franchise model is to avoid drivers being designated as employees. 

An alternative could be for the master franchisee to sub-franchise to individual drivers so each driver owns their own business. We’ll talk more about this in Scenario 3.

Scenario 2: Area Developer Franchise Model

Uber breaks up California into regions and awards Los Angeles County to one individual/entity and Orange County, etc to another individual/entity. Similar to the master franchise, an area developer could manage a fleet and hire drivers exclusively in their county, or they could sub-franchise each vehicle as a business where the driver is the owner, per scenario 3.

Scenario 3: Traditional Franchise Model

Uber sells franchises directly to the driver’s themselves so that each driver owns their own business. This is the most difficult scenario to manage, with the most challenges, but perhaps the most realistic. Why is it difficult to manage? There are 200,000 drivers in California. That means you’re going from 0 to 200,000 franchisees overnight (if you converted 100% of drivers, which they won’t). The paperwork alone would be a nightmare. All potential franchisees would need to be disclosed with the Franchise Disclosure Document, and per FTC franchise law, they would need to wait at least 14 days before they sign a franchise agreement. Specific franchise agreements for each individual franchisee would need to be drafted and sent to franchisees for signature and counter-signature by Uber’s franchise holding company. I wouldn’t want to be the paralegal working on that project. Granted it’s a one time project in the beginning, but what happens when drivers want to exit and terminate their agreement? An entire new franchise legal/compliance division would need to be created or outsourced.

When there’s a fork in the road, take it

Now that we’ve shared context, opinions and scenarios, it’s time to conclude by asking the hard question: How many drivers would actually opt to own a franchise? 

Owning your own franchise vs. being an independent contractor are two different things. A driver suddenly has to form an entity, a business bank account, get licenses to operate, and manage accounting. Not exactly what they signed up for with Uber. Especially considering that only 2% of Uber drivers are active 40+ hours per week. 

Lyft reports that 14% drive 20+ hours. So let’s meet in the middle with a nice round number and say that 10% of drivers opted to become franchisees. The minimum franchise fee required by law is $500 so they’d have to write that check when they sign the franchise agreement. And perhaps that will be attractive with 90% less drivers on the road. Less competition and better share of the market could mean more rides if demand stays consistent. 

But, as Dara Khosrowshahi pointed out in his op-ed piece, trying to meet demand without 90% of your drivers would be impossible. The supply can’t meet the demand and with scarcity comes a surge in pricing, as many of us have personally witnessed on Super Bowl Sunday or Independence Day. Uber no longer attracts those seeking rides with regularity because they simply can’t afford it and while drivers may be making more per hour, the macro-economics crumble.

Point blank, they need the gig economy workers, the plethora of 10 to 20 hour/week drivers to meet the demand, and I don’t know how likely it is that those drivers want to go through the hassle of setting up and owning a franchise for a side-hustle. 

To the contrary, it may actually attract a whole new generation of drivers. Those that never considered driving full-time (or at all) but see a different opportunity now. One with less competition, more upside, and the title of “business owner.”

Either way, the master franchise or area developer franchise come with the same challenges that Uber is trying to avoid. The direct franchise model is the only one that alleviates the employment concern, but opens up a whole new set of challenges.

It’s one heck of a fork in the road for these rideshare companies, and speaking as a franchise development company, we’re keeping an eagle eye on which path these brands ultimately take.

Hope they look back one day and realize it was the road that made all the difference.