Prospective franchisees don’t do their homework

Martin Mendelsohn 2012

Far too many franchisees fail to make a proper and thorough investigation of the franchise they are buying, warns Martin Mendelsohn, franchise lawyer, author and academic.

Mendelsohn (right) also criticises prospective franchisees for taking too much for granted, including their own position and attitude.

“Prospective franchisees must understand that franchising has its limitations,” he says. “It does not provide a route to automatic success for all, but it does provide a business framework which reduces, but not eliminates the risk which is inherent in establishing and running a business.

“Ultimately if things go wrong, franchisees often seek to blame someone else and that someone else must be the franchisor. That is frequently looking in the wrong direction.

“No one can guarantee success, least of all a franchisor, but no franchisee who is not thoroughly prepared in his or her own mind and wholly committed to the cause will succeed no matter how good the franchisor. Conversely, the franchisee who has entered the relationship with the right attitude may succeed even if the franchisor is below average.”

Not staying the course
Mendelsohn points out that there have been many cases in practice where franchisees have given up because they found the going hard (they were told it would be); lost their nerve because the business was taking time to be established and losses were arising (as projected in their business plan); or changed their mind and expected the franchisor to bail them out (without any promises or suggestions having been made that there would be a bail out).

There are also those who have taken up a franchise and found that the franchise was not what they thought it would be, yet their complaints were about matters which could have been ascertained by any proper objective enquiry and investigation.

“There are also some cases where the franchise is inadequately piloted and badly structured,” he continues. “That can also be discovered prior to entering into a contract, although it can be made difficult by a so-called ‘franchisor’, who deliberately sets out to mislead and deceive.

“Often those who embark upon deceptive practices will use the name ‘franchise’ wrongly to describe what they offer in order to attract interest in what is a spurious business opportunity,” warns Mendelsohn.

Prospective franchisees also need to make business decisions before entering into a franchise proposition. They should thoroughly investigate the business sector. Is it new? Will it last? Is it in decline? Is it proven as a viable business with a future?

Turning to franchisors, Mendelsohn says, “Some are excellent, some are good, some are average, some are below average, and some are downright awful. It is no different from any other walk of life.

“Too many businesses try to adopt franchising methods without properly investigating how this now well-developed business technique might be best applied in their business, and all too often on the basis of so-called professional advice, which in reality is no such thing.”

He lists as the most common reasons why franchisors fail as inadequate pilot testing, a poorly structured system, under-capitalisation, poor selection of initial franchisees, and the fact that the franchisor is a poor businessman who does not run his own business properly.

“Really sound franchises sell themselves by the excellence of the signs of success,” says Mendelsohn. “Any franchisor who does the ‘hard sell’ job on a prospective franchisee must be viewed with considerable caution.”

British Franchise Association (BFA)
Explaining the objectives of the BFA, he says, “The association hopes that by maintaining its standards of membership that it will acquire a cachet which is so powerful that no franchisor will, after it is established, find it comfortable to exist without being a member.”

He adds that the disciplinary procedure the BFA imposes on its members, coupled with the promotion of, and publicity given to, the basic standards which it expects is the major influence it can bring to bear on its members and indirectly its non-members.

European Franchise Federation code
Reviewing each of the provisions in the European Franchise Federation code of ethics, which the BFA has adopted, Mendelsohn recognises that the one which is likely to provoke most debate is that calling for the parties to exercise fairness in their dealings with each other.

“There will be many widely, strongly held and conflicting views of what is ‘fairness’ and it is likely that this issue will cause many problems. As a franchisor gets stronger and more independent, the more likely it is that what was once considered by it to be fair may subsequently be considered to be a millstone around its neck.

“Fairness is so subjective that what one person considers unfair may well, with equal conviction, be considered fair by another. It should be noted that as in the guiding principles, the code imposes an obligation not only on the franchisor to be fair in its dealings with the franchisee, but also on the franchisee to demonstrate fairness in its dealings with the franchisor.

“This means that the franchisee should not be trying to cheat or behave irresponsibly, but make a positive contribution to the relationship.”

As an example of the need for fairness, Mendelsohn quotes a situation that can arise very early in the relationship. He says that however good the pre-contractual selection process, the training of the franchisee may show that it is not suited to the business. In such a case, it is best if the relationship is then brought to an end. It would not be unethical for the franchisor to recover the direct costs incurred in dealing with the franchisee up to that point in time. The franchisor should not seek to penalise the franchisee in such a case by seeking additional compensation for whatever purpose.