Franchise Truths In A Box

John Kavanagh challenges the promise of franchising being a safer bet than going it alone.  In his article he suggests franchise prospects should consider the implications to franchisees when their brand is sold from under them and when the franchisor becomes bankrupt. But he could have covered so much more.

I would suggest that John’s research should have shown up that such occurrences are comparatively rare and that there are far worse aspects of franchising for prospects to consider.  We cannot dispute the often terrible cost to franchisee networks when such events occur; however prospects must become aware that there are endemic abuses practiced by a very large section of franchising.

Steve Wright of FCA ‘says the appeal of franchising is people who have no experience in running a business can buy entry into an operation that is already established, has a recognized brand and marketing strategy and provides support. ‘  Business out of a Box 

The facts are indisputable.  Substantial reporting of complaints from around the world indicate systematic exploitation of franchise slaves to many a franchise contract while governments look the other way in the name of "competition."

Even in viable and successful franchise systems contractually mandatory rebate income streams that go past fair dealing seem often to be too great a temptation.  In rogue systems they can be one of many elements of an overall strategy to turn over franchisees and profit from that turnover.  Ensuring franchisees fail to meet renewal criteria or are terminated on vexatious breaches of contract can be extremely profitable.  Most cannot comprehend the level of franchisor riches involved.

Most franchisors control less than transparent and tempting advertising funds.  Negotiated advertising is typically secretive and limited information contained in fund audits provides no confidence and great suspicion.

Quite often we see where the most successful franchisees become targets of franchise encroachment where their efforts ensured that their territory became temptingly attractive for additional and nearby assignment fees.

In the current economies of the world franchising has slowed in line with tightening credit while franchise system growth needs to meet infrastructure costs cause a greater propensity for abusive practices.

‘What the latest study shows is that many franchise systems are relatively new and untested in a recession, many are too small to remain viable long-term, turnover in the  industry is high and there is a high level of dispute within systems.’  Lorelle Fraser - Asia-Pacific Centre for Franchise Excellence

Many participants, both franchisees and franchisors are relatively unsophisticated business people.  Anyone can start a franchise for anything with a good sales pitch where the test of the system is in the hands of first, second and third generations of franchisees.  If the system fails who are the parties who carried the risk. 

Too often we read of the damage caused by abusive operations managers with minimal grey matter and zero ethics who hold back internal system development because their role and capabilities are restricted to selling franchises to dunces.  They are employed because they are bullies that can contain franchisees and assist them to fail.  Internal problems are not fixed; they are ignored until all hell breaks out and the brand suffers.  When the brand suffers those holding the greatest risk suffer.

To increase brand revenue franchisors often sit a franchise where the rent is a killer but the revenue is greater.  Verbal manipulation of figures make the financial model somewhat different to the reality.  Franchisees hold all the risk.  Franchisees are often solely selected on the basis that they can muster necessary finance.  It doesn’t matter whether they have the ability to succeed.  In some rogue systems it is actually better for the franchisor to select franchisees who will most definitely fail.  They hand back the business quickest. The franchisors turnover is greater. Franchisees hold all the risk.

Forced promotions that guarantee cash flow and royalty and destroy the franchisee profit line are far from uncommon.   Sold off as ‘price leader’ advertising; new franchisee prospects simply do not appreciate that such public brand awareness does not indicate a viable model.

According to the Asia-Pacific Centre for Franchising Excellence, 17 per cent of franchisers reported having been in a dispute with at least one of their franchisees in the past year over a matter that ended up being referred to an external dispute-resolution organization. Causes of disputes include compliance with the system, territorial issues, communications problems and fees.

Lorelle Fraser reports 17% of franchise networks end with external dispute mechanisms.  Naturally franchisors lie about dispute numbers – it is not a good look when trying to sell franchises.  I suggest that the numbers would be considerably higher – no one questions the veracity of the franchisor and their input is confidential.

And what of the disputes that are not handled externally?  Are they resolved reasonably or are they simply shut down by the superior financial strength of the franchisor, hired bullies and ‘revised’ interpretations of contractual obligations that were said to be quite different prior to signing.   I would have to conclude that franchisee complaints that don’t make it to a third party dispute resolution process are far greater in numbers than the 17% that is reported.

The franchise industry has done an excellent job of selling its strengths. But aspiring franchise investors need to be clear about the risks they are taking when they decide to buy into a system. 

There is no legislated protection for franchisees who cannot fund their own attempt at justice.  The only protection for those determined to enter into franchising is a level of due diligence that they don’t comprehend because the industry doesn’t want them to comprehend the real risk or the often complicated task of determining whether the model and the franchisor is viable.  Once a contract is signed the only options for franchisees are to work their butts off and hope that in the lifetime of the contract they and their families are not completely destroyed.

Are there franchise systems where scamming isn’t prevalent? Sure, lots; and some subtle systems contain franchisees that don’t believe they are being scammed to any great degree. They are viable so they live with it.

While governments ignore the scams in franchising governments are complicit in those scams.  Where there is no ability to achieve fair complaint resolution in franchising governments are complicit in maintaining the growth of scam franchises.  Governments have blood on their hands.

For quality franchisors that are fed up with the negative franchising publicity that effects their growth; they need to be a part of the solution.  The rogues in franchising need to clean up their act because one day the internet will find them and that day will be the beginning of the end of selling their franchises and the beginning of their franchisees gaining a voice and screwing back.

Related Reading:

• 99% 
• State Opposition To Federal Laws 

Dr Emerson has said inter-business contracts will come under the scope of two Government reviews - the unconscionable conduct provisions of the Trade Practices Act and the franchising code of conduct - and these contracts could be considered once those reviews were completed. -  Emerson’s Options Paper Outcome Due this Month.