AAFD Accredited Agreements Do Not Translate to Good Franchise Investments

SAN DIEGO (Blue MauMau) - The Chair of the American Association of Franchisees and Dealers, Robert Purvin, says that the organization's accredited franchise agreements should not be seen as an endorsement to buy that franchise.

Here is his interview with the Blue MauMau community.

Blue MauMau: What meaning does the AAFD accredited fair contract have?

Purvin: The meaning is that it is a fair contract and a contract that the AAFD has endorsed as being at least 95% in compliance with the AAFD's Fair Franchising Standards. AAFD Accredited Contract Status is NOT a validation of the business model of a brand. The marketplace goes in and buys something because of the sizzle and forgets there may not be ownership of that sizzle.

Often what happens is when you look into a franchise agreement you find that you didn’t buy anything. McDonald’s owns the real estate. It owns the equipment. You have very limited renewal rights so you don’t pick up value. You may buy a revenue stream for a period of years, which may justify your investment, but the agreement places a franchisee in a very precarious position .

BMM: Franchise owners have written us that they perceive the AAFD accredited fair franchise seal as an endorsement of a fair franchise. In the Cuppy’s Coffee case, we understand that Cuppy’s sold many franchises in which your accredited agreement was marketed with the AAFD trademark as if AAFD endorsed the chain as a great franchise investment.

Purvin: While the AAFD's announcement of Accredited Contract recipients is careful to explain that we are approving the franchise agreement only, our website did not properly distinguish an accredited agreement and the fair franchise seal. Cuppy’s also marketed the accreditation in an unclear way.

Still, I will never claim that having a good contract is a sign to buy. It is simply one thing to check off on a list. You know that the contract treats you equitably. It confers ownership and protects franchisee rights. The thing you are going to invest in is going to give you true investment rights.

BMM: If a franchise owner buys a dog [a loser] of a business, what good is it to him to have a franchise that has an accredited franchise agreement?

Purvin: If you bought into a dog enterprise, you have a right of recourse in your AAFD accredited agreement that a typical agreement does not. I will never claim that having a great contract is a buy sign. Rather, having a bad contract is a "don’t buy’" sign. But having a good contract is, "Okay, I can check that one off and now I can go to the next thing on my checklist on deciding if this is a good deal."

BMM: If the accredited agreement is not enough in deciding a franchise, you must see that many buyers may not see the benefit. Worse yet, the markings can be easily confused by potential buyers as a seal that your organization thinks a franchise is certified by AAFD as a good investment.

Purvin: Let me be crystal clear with this. Having an accredited franchise agreement is only one of eight criteria that the American Association of Franchisees and Dealers has for buying a franchise.

Investors would be ill advised to buy from a company that only has a good contract. Seventy-five percent of franchisees in that system must say that they are satisfied that their franchisor is fair in order for that company to earn the Fair Franchising Seal, which is a step above an Accredited Contract. But the Seal also is not a 'case closed' validation of a franchise investment .

Let’s say you buy a health insurance program and that the health insurance meets the federal standard for the patient’s bill of rights. That doesn’t mean that the health insurance company has adequate reserves to meet its business obligations. But it does honor the patient’s bill of rights. I’m not saying that you should buy health insurance that doesn’t have adequate reserves.

AAFD Accredited Contracts do not deal with whether the concept is good or bad, or that the franchise is well or poorly run. I don’t care how good the business is, an investor must be mindful of the agreement. If you bought into a dog [a loser] enterprise, you have a right of recourse that you wouldn’t have had if that company had a typical contract.

BMM: It looks like your efforts last year to accredit the franchise agreement of new franchise systems has surrounded the AAFD with controversy. Why did you start certifying new franchisors? Was it worth it?

Purvin: The franchise marketplace needs more franchise opportunities that offer fair franchise agreements. Our goal is for investors to insist on AAFD Accredited Contracts when they invest, but the marketplace needs product. Our best opportunity is to encourage newcomers to embrace fair agreements to overcome their lack of a business track record. When the Cuppy’s Coffee concept came into existence, they were a start-up. I had no opinion nor had any ability to render an opinion of the investment worthiness of a start-up company. But Cuppy's was willing to come to market with the fairest contract that we have graded to date. And I hasten to add, given the problems that Cuppy's has faced, Cuppy's franchisees have been well protected by an AAFD Accredited Contract. The company has certainly scrambled, but it is meeting its contractual commitments.

If it weren't for being AAFD Accredited, there would have been no commitments to meet!

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Articles in this series:

• Bob Purvin: "Franchisee Associations Are Growing But We Should Be Seeing More"
• What Chain Has the Fairest Franchise Agreement? Worst?
• "The Nine Best Franchises," a Robert Purvin interview
• Blue MauMau's book review: The Franchise Fraud: How to Protect Yourself Before and After You Invest
• Podcast (28 minutes). Listen to an Interview with Bob Purvin, Chair of the American Association of Franchisees and Dealers, on Protecting Yourself Against Franchise Fraud

Other readings:

• AAFD Has Graded About 60 Franchise Agreements by Robert Purvin