Things Are (Still) Rotten in the State of Franchising

Fascinating essay. Very eye opening. I would assume that the deck is often stacked high enough that franchisers won't budge so buyers have to walk away.

Will a good franchise lawyer be enough to guide one through the franchise agreement obstacle course?

Susan,
I am one who receives fees from franchise companies for successful placements of new franchisees to their systems.
I am probably one of the very few in my part of the industry who agrees and likes what you write. I am an advocate for my future franchisees, on a daily basis.
I teach the correct ways to research opportunities, and encourage them to find both successful and unsuccessful franchisees in the systems they are looking into.
The truth is out there, and it is not hard to find.
You just have to know who to talk to, and I am one who shows my folks the way.
For the right person, with the right characteristics, and with the financial means, franchising has great potential.
I am proud to promote franchising in my state of Ohio.
Again, Thank you!
FRANPRO

Susan writes: "One of the most important facts you want to know when you go into business for yourself is, "how much money am I going to make?" If the idea of providing pre-sale information is important, then it is a fatal flaw of the FTC's franchise rule that disclosure of some measure of financial performance is not required."

I just wanted to read that again.

Getting systemwide financial data is like a game of smoke and mirrors. The salesman avoids giving any numbers because he "legally cannot tell me".  He then points me to a few network friendly franchises that are willing to share their "typical" financials to give me confidence on investing my life's savings.

Now what's wrong with this picture?

On behalf of the community, let me welcome Ms. Susan Kezios. It's a great honor to have the president of the AFA sharing her insights and participating in discussions about franchise issues on our site.

Mr. Blue MauMau

Okay, for the better part of a week, I’ve tried to keep my fingers off the “comment” button. Like Eve, I’ve succumbed to the temptation! It must be the “Apple Graphic”.

Franchising is as American as Baseball, Apple Pie, and Chevrolet. A strong belief in the Free Enterprise System has been the driving force, behind many of the forefathers of franchising. If you truly believe in America, the Free Enterprise System and Franchising just must also believe that the invisible hand of the market will guide the industry to act in the public interest. I believe that the industry has done an outstanding job in self-regulation.

I think we can all agree that franchising isn’t perfect, and that there is always room for improvement. However, if we look at any industry, we can find things which we personally believe to be morally, ethically or legally WRONG! Look at the medical profession, and the number of medical malpractice suits filed each year. Is the medical profession ROTTEN? NO! Are there poorly trained doctors, YES! Are mistakes made? YES! Are we better off with doctors than without? YES!

If we look at US statistical data, how many franchisees are there? 767,000?
How many franchisors are there? 5,000?
How many Franchisors have registered in the major registration states for the 3 or more consecutive years? 1,300?
How many new franchise concepts are introduced each year? 3 to 400?

Now compare those numbers to actual number of complaints filed against franchisors for false and misleading Earnings Claims. The report prepared by the Bureau of Consumer Affairs found on the FTC website http://www.ftc.gov/reports/franchise93-01.pdf shows that over a 7 year period of time some 4,500+ complaints were filed against Franchising and Business Opportunity type companies. Of the 4,500 complaints only 6% were against franchisors. Of the 4,500 complaints 10% had to do with false or misleading earnings claims. If you extrapolate out the totals it would indicate approximately 27 complaints against franchisors for false or misleading earning claims, over a 7 year period of time. I guess an argument can be made that it is hard to file a complaint against false and misleading earnings claims if earnings claims are not provided. Perhaps this is why so many franchisors chose not to provide them. Does the franchisor not have a responsibility to protect the brand, and would making earnings claim create additional exposure for bringing down the entire brand?

Is the industry not better served by teaching potential franchisees the old adage “Buyer Beware”. Should we not teach franchisors to “Under Promise and Over Deliver” and that Franchising is a Marathon and not a Sprint. Should we not continue to move in the direction of proper selection?
I’ve seldom met a franchisee who will say “I failed because I did not follow the system, I did not ask and accept assistance, I did not do the things necessary to get the desired outcome”. I’ve met many who say the franchisor misrepresented the opportunity.

I think overall the industry has done a good job of self-regulation. I do not think that additional regulation is the answer. I think saying that “things are ROTTEN in the STATE of Franchising” is a BIG over-STATE-ment. But of course that’s just my opinion. What’s yours?

Believe & Succeed,

FranSynergy
Synergizing Franchising 1 Franchisee at a time!

www.fransynergy.com

I agree with Susan that financial disclosure should be a requirement in all UFOC's not voluntary.

Anybody looking to invest in a franchise should complete a through investigation of the franchise opportunity including validating all verbal or written representations made by the franchisor and it's franchisees.

In my view item 19 doesn't have to be a "earnings claim" or a profit/loss statement, but all franchisors should be required to make at least some financial disclosure to help prospective franchisees get a realistic financial picture.

The FTC should take a page from the SEC rulebook that requires FULL DISCLOSURE prior to any IPO.

If franchisors do not know know enough about their business model to make a financial disclosure, then they hold off on franchising until they do.

As a franchise broker I am reluctant to refer a prospect to a franchise that dosen't make any financial disclosure.

Jim Coen, Franchise Perfection, 877-469-3002, www.franchiseperfection.com,
jim@franchiseperfection.com

Susan,

For every horror story, there are many more success stories.  I appreciate your organization and AAFD adding volume to the voice of franchisees.  I don't think more regulation is the answer.  Profranchisee positions are not the answer.  Profranchisor positions are not the answer.  A recognition that both parties need to win to create a sustainable franchise organization is the answer.

In my humble opinion, franchising is a business unto itself.  A company can be an excellent retail chain or restauranteur and at the same time a lousy franchisor.  When we in the franchising community finally realize that franchising is more than just a distribution model and franchisees are more than a single point of distribution, we will righten the ship.  When franchise prospects become more aware of what excellence IN FRANCHISING LOOKS LIKE before they buy, there will be more success stories and more horror stories.

Incompetency, not integrity is the issue. 
Prospective franchisees often don't know who is and isn't a skilled francihsor before they invest.  Don Debolt (former IFA President) Deb Percival, and I got together to write Street Smart Franchising, which clearly shows the telltale signs of who is and isn't a skilled franchisor.

If you take a balanced look at franchising, you will see franchisees invest in the right to be incompetent in a particular industry or field.  If they had the necessary skills and experience, why would they invest in a franchise?  Franchisee incompetence (in the short run) is a given.  Franchisors need to impart their success model to the franchisee as quick as humanly possible.  This is their value to the franchisee.

Competent franchisors are competent in 4 key areas.
1.  Marketing and brand building
2.  Franchisee Recruitment, getting the right team on the field
3.  Training and coaching franchisees into peak performance
4.  Maintaining powerful franchisee and franchisor relationships.

Because franchisors are not uniformly competent in these areas, organizations like Kezios exist.

The Institute of Certified Franchise Executives (ICFE) is training franchise executives in the business of franchising.  Companies like Gappa's Management 2000, Babcock's Nova University and the Franchise Performance Group are working to raise the skill level of franchise executives. 

The IFA has opened the door for franchisee membership which allows for franchisors to hear the concerns of franchisees from the franchisees' mouths.

Companies like Fransurvey are measuring the relationship between franchisees and franchisor.

Companies like Success Handler and Franchise Performance Group and people like Flo Schell exist to coach franchisees to new levels of success, providing more advanced coaching than franchisors typically provide.

So resources are becoming available to help both parties come together to win.

We are missing a strong code of ethics by which franchisors comply.  IFA seldom if ever investigates and removes franchisors for eithical violations.  Instead, they take an arms length approach, and let the courts sort it out, which I believe dimishes the value of the IFA. 

The aircraft carrier is turning.  As the "old guard" of franchise executives (those who were around in the 70's) start disappearing and the new guard (those who understand and value the whole picture of franchising (the fact that franchisors, franchisees, suppliers) all need to win, the ship will turn.

Joe Mathews

Franchise Performance Group
Co-author Street Smart Franchising

I have never met a prospective franchisee that wasn’t eager to join a franchise system that contained energetic, successful, profitable franchisees that were enthusiastic about the future of their franchise business.

 And, yes it is about character, integrity and excellence in franchising! Truly World-Class Franchise companies have no problem being completly transparent with their prospects. Because they have no-fear.

I say we need more openness, more transparency, what do all existing franchisees have to say about their franchise? 

In an open market, where consumers have ALL the information they need to make  informed decisions...the best companies survive and the rest either improve or become extinct. Do we provide prospective franchisees with ALL the information to make the best informed decisions?

Do we really believe that all 3,000+ franchise opportunities are equal?

Is it not obvious that the tragic death of Bob Baber is a symptom of a much larger problem?

Jeff Johnson, Founder/CEO   FranSurvey.com

Here are some interesting thoughts, based on 30 years of experience, regarding why many franchise companies do not publish earnings claims:

1.  Their own locations do not make money and they are using franchising as a "stay-alive" tactic,

2.  An unscrupulous franchise consultant has called them on the phone to tell them they have the greatest new franchising concept and they should stop what they are doing and begin to franchise even though they are not franchise material,

3.  They have yet to finalize and formalize their business model. They actually end up experimenting with franchisees at the franchisee's expense.

It is also true that many lawyers advise them not to disclose information but I honestly believe that will change.

I can also tell everyone that I turn down 60 - 70 % of the companies that contact us to develop their franchise because they are either not ready to franchise, cannot produce an earnings claim (Yes, I only take clients that can - unlike others) and/or their concept is not repeatable.

Who cares if a particular consulting company puts hundreds of companies into franchising every year?  Prospective franchisees should, that's who. 

I believe many franchise companies have no business franchising.

Craig Slavin
Franchise Architects
Franchise Navigator

847-465-0111