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Franchise Myth Five: Franchising Promises a “Proven Franchise Business System”

Part Six of a Nine Part Series Exposing Franchising Myths. This is a myth I hear from prospective franchises all the time, and it’s one of the most compelling reasons why an individual decides to buy a franchise. Franchisors aren’t just selling their name and logo to prospective franchisees – they’re selling their operating manual, which many claim is a “proven business system”. What is a proven franchise business system? I still haven’t figured this one out.  A lot of franchisees leap to the conclusion that a proven business system means that a franchisor has spent countless years developing an ironclad recipe for success, which they then pass on to franchisees. This system is “proven”, because the franchisor has apparently worked out all the bugs and knows exactly what a franchisee needs to do to be successful, from construction, purchasing and cost controls to advertising and what shade to paint the walls. Not so fast! Franchising as a concept does not promise proven performance; rather, buying a franchise from a proven performer is a script for success.  Another important thing to keep in mind is that “proven success” today does not guarantee proven success tomorrow. The world is constantly changing, along with consumer tastes, competition and technology. What works today might not work tomorrow and will almost certainly not work precisely the same way in ten years. The real franchising myth here is the notion or suggestion that a “proven franchise business system” even exists. The best franchisors are constantly updating and evolving their operating manuals, marketing and branding in order to keep up with the evolving dynamics of their industry.  The best franchise brands have a developed track record for staying ahead of the curve, keeping fresh and adapting to changing customer needs and appetites.  Again, let’s take a quick test.  Thirty years ago what business did McDonald’s focus on? If you said hamburgers, shakes and fries you would be right on.  And what does McDonald’s marketing plan look like today?  Hmm, the lead product now seems to be McCafe’!  McDonald’s has never stood the test of time by standing still.  Truly, its ‘proven system’ is to continually evolve, modernize and change! Moreover,...

Please Support SB 610 and AB 1141, Small Business Investment Protection ACT 2013

I signed a petition to The California State House, The California State Senate, and Governor Jerry Brown which says: "Please Support SB 610 and AB 1141, Small Business Investment Protection ACT 2013" Will you sign this petition? Click here: http://signon.org/sign/support-sb-610-ab1141?source=s.icn.em.cp&r_by=7684277 The American Association of Franchisees and Dealers (AAFD) is pleased to co-sponsor Senate Bill SB610, which will help insure good faith and fair dealing in franchise relationships in California. Modern franchise relationships are most always governed by one-sided ‘take it or leave it’ adhesion contracts that elicit substantial monetary investment from franchise owners, but severely limit a franchisees rights in the franchise relationship.  Creating a statutory affirmative duty of good faith in franchise relationships will inhibit the enforcement of one-sided franchise agreements in an abusive manner.  Long term, the best opportunity to create a level playing field in franchise relationships is too encourage effective franchisee associations with sufficient leverage to negotiate franchise agreements and relationships that respect the legitimate interests of both franchisors and franchisees.  The two prongs of Senate Bill 610, and the included remedies for violations, will provide significant safeguards against abuse in franchise relationships. Please use the included link to add your name to the petition in support of SB 610 and AB 1141.  Please forward this post to all franchisees, especially California based franchisees, you...

Franchise Myth Four: The Franchisee Gains a Valuable Asset in the Trade Name and Trademarks of the Typical Franchise

Part Five of a Nine Part Series Exposing Franchising Myths. Let’s play a little game. Head on over to my friends at BlueMauMau.org, and review their alphabetized directory of franchises. HERE is the link. Take a few minutes to browse and then ask yourself how many companies you recognize. When you’re done, come back over to this article. We’ll still be here. Done? So, how’d you do? The Blue MauMau directory includes hundreds of available franchises. What percentage did you instantly recognize? Most likely the answer was very few.  Of those names you did recognize, how many are well known for the excellent quality of their products and services, their great customer service, and their fun and enjoyable locations? Your list just got smaller didn’t it? The conventional wisdom – marketed extensively by franchisors – that when you buy a franchise you are investing in a ‘proven’ brand is perhaps the most prevalent myth in franchising.   Franchisees begin to believe that they just need to open their doors, and excited customers will come streaming in. Well, if the franchise happens to be named McDonalds, Jiffy Lube, Ford or Marriott that might be the case. If your brand is among the hundreds of franchises that you didn’t recognize on Blue MauMau, then there must be some other compelling justification for your investment. The truth is only a small fraction of top tier franchises have valuable branding. There are about 3,000 franchise systems operating in the United States, and the majority are unknown to most Americans. But there is a corollary to the myth of an established brand. I call it the myth of the proven system, which contends that there is no such thing as a proven system!  Any business model – franchise or otherwise – that fails to evolve and stay fresh is likely doomed to extinction.  Indeed, my best advice is to seek a franchisor that has an excellent record for staying fresh and modern.  We’ll explore this ‘corollary myth’ in our next blog in this series. So what can one do to overcome the ‘all franchises are created equal’ myth?  Here are some practical tips: If your goal is to invest in...

Franchise Fairness Legislation Advances in California

On Tuesday, April 16, 2013, the California Senate Judiciary Committee approved proposed fair franchising legislation authored by State Senator Hannah-Beth Jackson and sponsored by the AAFD. Senate Bill SB610 will impose an affirmative and enforceable duty of good faith and fair dealing between franchisors and franchisees. If passed, California law will require that franchisors act fairly and in good faith when enforcing one-sided franchise agreements. When franchisors act unfairly with respect to the sale, renewal, transfer or termination of a franchise, franchisees can sue to recover damages and attorney’s fees caused and/or incurred by the unfair treatment, and treble damages where circumstances warrant. Equally important, the bill would amend the California Franchise Relationship Law to prohibit franchisors from inhibiting franchisees from joining and participating in franchisee associations. The AAFD supports this legislation, and AAFD Chairman, Robert Purvin, testified before the Senate Committee on in support of the bill. The entire hearing, including Mr. Purvin’s testimony is being podcast by Bluemaumau.org. The AAFD has offered amendments to further strengthen the bill—seeking to give franchisee associations the ability bring legal actions to protect franchisee rights under the bill. For more information about SB 610, contact us. We are pleased to accept letters of support and monetary donations targeted to support this legislation and other AAFD legislative...

California Bar Proposes Regulatory Amendments Regarding Negotiated Franchise Agreements.

The AAFD Has Endorsed the State Bar’s Recommendations. April, 2013. The California State Bar, on the recommendation of the Franchise Law Subcommittee, has recommended that the California Department of Corporations amend its regulations to make it easier for franchisors to negotiate the terms of franchise agreements in California. Unlike the Federal Trade Commission Rule and all other states that regulate the sale of franchises, California has long required franchisors to disclose information about contract terms they may have negotiated with specific franchisees (who may have unique circumstances or value).  The California requirement has frequently chilled the willingness of franchisors to negotiate with prospective California franchisees. The proposed revisions to California’s regulations would remove the need for franchisors to disclose negotiated franchise agreements, but requires franchisors to disclose to prospective franchisees whether such negotiations may occur and to keep records of negotiated agreements. The AAFD has long urged California to remove its restrictions, which have consistently inhibited negotiated franchise agreements in California.  The AAFD fully supports this proposed regulatory amendment and commends the California Bar and the Franchise Law Committee for this effort. AAFD Chair, Robert Purvin, serves on the Franchise Law Subcommittee, and has voted in favor of the Bar’s recommendations.  Although the Department has not yet acted on this proposal, it is expected that the proposal will be well received.  This is a significant improvement for franchisees and franchisors in California....

AAFD Co-Sponsors Proposed California Fair Franchising Legislation.

 AAFD’s Robert Purvin to Testify Before the California Senate Judiciary Committee on April 16. The American Association of Franchisees and Dealers (AAFD) has signed on as a co-sponsor of California Senate Bill SB610, fair franchising legislation pending in the California legislature.  AAFD Chairman, Robert Purvin, has been asked to testify in support of the bill at upcoming Senate Judiciary Committee hearings scheduled for Tuesday, April 16. SB610, introduced by Senator Hannah-Beth Jackson (D-Dist 19), would create an affirmative duty of good faith and fair dealing in franchise relationships and reinforce the right of franchisees to join and participate in franchisee associations.  The bill also provides franchisees the right to sue if they believe their franchisor has not acted in good faith with regard to franchise sales, renewals, transfers and terminations. Although the AAFD was not involved with drafting SB 610, the association has supported the legislation and announced its endorsement of the bill in late March.  This week Mr. Purvin was invited to testify on behalf of the proponents of the bill, and the AAFD agreed to sign on as a co-sponsor of the bill with Senator Jackson. The AAFD has issued the following statement in support of the bill: “Modern franchise relationships are most always governed by one-sided ‘take it or leave it’ adhesion contracts that require a significant financial investment from franchise owners but severely limit a franchisee’s rights in the franchise relationship.  Creating a statutory affirmative duty of good faith in franchise relationships will inhibit the enforcement of one-sided franchise agreements in an abusive manner.  Long term, the best opportunity to create a level playing field in franchise relationships is too encourage effective franchisee associations with sufficient leverage to negotiate franchise agreements and relationships that respect the legitimate interests of both franchisors and franchisees. The two prongs of Senate Bill 610 and the included remedies for violations will provide significant safeguards against abuse in franchise relationships.” The AAFD has also suggested amendments to the bill designed to extend the ability of franchisee associations to act on behalf of their members to enforce the protections provided in the legislation. The bill is opposed by the International Franchise Association and other associations that...

Franchise Myth Three: Franchisees Own Their Own Franchised Businesses

Part Four of a Nine Part Series Exposing Franchising Myths. Many franchisees consider themselves to be business owners.  A franchisee might hire and manage employees, sign the lease on a store or restaurant, handle customers, keep the books and take home profits at the end of each month. However, the modern franchise owner often lacks a critical element to business ownership—an equity ‘ownership’ in the business.  Most modern franchise agreements state the franchisee is an “independent contractor,” but ‘independence’ ends with the lip service recitation. To begin with, franchisees are (rightly) required to strictly adhere to the franchisor’s operating system.   Although following system standards is counter to ‘independent’ judgment, this limitation is expected and justified in franchising—after all, you likely invested in a brand because you believe in it.  But beyond the expected adherence to the franchisor’s system, other serious forfeitures of equity rights are much harder to justify and accept: Most important, franchise agreements universally claim that all goodwill of the business belongs to the franchisor, even though it is the franchisee’s capital and sweat equity that contributes mightily to the business value. Modern agreements increasingly provide that all customer information and the right to communicate with customers belong solely to the franchisor.  Franchisees should be recognized to have at least a shared interest in the customer relationships that are developed through personal efforts. Franchisee renewal and transfer rights are severely limited in most franchise agreements. Without a reasonable right to renew or sell the business, what do you truly own? At the end of the typical franchise term, the franchisee forfeits the right to continue in business and agrees to not compete with the former franchisor for a period of years.  These provisions usually apply even if the franchise has simply expired with both parties fully performing all duties to the end of the term.  The post expiration right to remain in business is a fundamental element of business ownership. Increasingly, franchisors even retain the right to pull funds from the franchisee’s bank account, and franchisees often lack control over their own funding accounts. Although franchisees expect to follow franchise system standards, that doesn’t mean franchisees should have no contribution to the...

AAFD Endorses Fair Franchising Legislation Introduced In California

The AAFD Joins Coalition of Franchisee Associations in Support of California Senate Bill 610 and Assembly Bill 1141. SAN DIEGO, APRIL 2013 – The American Association of Franchisees & Dealers (AAFD), a non-profit trade association that represents the interests of franchisees and independent dealers, announced today its support for two pieces of franchising fairness legislation recently introduced in the California State Senate and State Assembly. Assembly Bill 1141, introduced by Assemblyman Brian Dahle (R-Dist. 1), defines several common abuses in franchising as unfair business practices with respect to a franchisee’s right to renew, terminate and transfer a franchised business. The bill also establishes a statutory duty of good faith and fair dealing between franchisors and franchisees and would strengthen the right of franchisees to join and support franchisee associations. Senate Bill 610, introduced by State Senator Hannah-Beth Jackson (D-District 19), is less ambitious than AB 1141 but would also create a statutory duty of good faith and fair dealing as well as increase the protection of the right of franchisees to join and support franchisee associations. “Both pieces of legislation look to have bipartisan support, so 2013 might be the best opportunity for meaningful franchise reform in years,” said Robert Purvin, Chairman of the AAFD and author of The Franchise Fraud: How to Protect Yourself Before and After You Invest. “The AAFD supports both bills and considers them significant steps toward creating a level playing field in franchising.” The AAFD is joining a coalition of franchisee associations in its support of AB 1141 and SB 610, including the Asian American Hotel Owners Association (AAHOA), the Coalition of Franchisee Associations (CFA), and the National Coalition of 7-Eleven Dealers, among others. The committee hearings for both bills are slated for mid-April, though the exact date has yet to be announced. The AAFD is actively encouraging all California franchisees to fax and email letters of support for both bills to their state representatives, and especially to Judiciary Committee Members in both houses: Senate Judiciary Committee contacts:  http://sjud.senate.ca.gov/ Assembly Judiciary Committee contacts:  http://ajud.assembly.ca.gov/membersstaff All franchisees near Sacramento are encouraged to attend the hearings as scheduled and demonstrate support for the bills. The date of the hearings will be announced...

Franchise Myth Two: Franchisees Are in Business for Themselves but Supported by Their Franchisors

Part Three of a Nine Part Series Exposing Franchising Myths. Many prospective franchise owners are attracted to the concept of buying a franchise because they believe it combines the freedom of owning a business with the safety of a benevolent guiding hand. Franchisors cultivate this concept.  The catch phrase of the International Franchise Association is “In business for yourself, but not by yourself!” But beware. Many franchisees complain that they are renting rather than owning their business.  Often your franchisor is less of a benefactor and more like a creditor – or a competitor. When the promise of franchising is delivered, the franchisee has equity ownership in the business and receives significant support from the franchise system, including: • Strong brand recognition • A well-defined and tested operating system and marketing plan • Franchisor inspired purchasing and marketing synergies for mutual benefit • A mentoring program that comes from the franchisor and from other franchisees Sadly, too often these support benefits are not realized; sometimes the franchisor is seen to be gouging rather than driving franchisee values. A franchise agreement is usually a relationship of voluntary indentured servitude whereby the franchisee agrees to operate according to the franchisor’s system, must buy from designated suppliers, and possibly must charge designated prices regardless of franchisee profit margins.  Most franchise agreements are ripe with the potential for abuse, and care must be taken to assure the franchisees’ legitimate business goals are being met. In almost every modern franchise agreement franchisor rights are well protected, and franchisee rights are fairly non-existent.  Unfortunately, courts have routinely upheld one-sided franchise agreements and have consistently ruled that franchisors owe no special duties to system franchisees. Franchise systems, especially the successful ones, are always evolving, so a set and stagnant operating system is not necessarily a good sign. Many franchise systems – even those offering a great product or service – lack a clue on how to clone their business or provide leadership for their franchise owners.  This is perhaps the easiest deficit to identify when searching for a franchise AND ALSO the easiest deficit to rectify when existing franchisees join together to promote a collaborative effort to develop systems and marketing...

Franchise Myth One: Franchising Is a Safe Investment

Part Two of a Nine Part Series Exposing Franchising Myths. Perhaps the most common and pervasive franchise myth is that franchising per se is a safe investment. Fed by a steady diet of industry hyperbole, the conventional wisdom that feeds this myth contends that when you buy a franchise you are investing in a proven brand and an established business system that will virtually guarantee business success. In truth, investing in a well-regarded brand that has a well-developed business and operating plan, can be a wise investment.  The myth is that all franchises are created equal. The franchise success myth is often expressed as a once widely heralded (and quite misleading) claim that 95% of all franchise businesses are successful after five years in business.  Although research has uniformly debunked such success rate claims, this success rate statistic is again and again trotted out by individual franchisors and industry trade groups. In fact, over the past twenty-five years, study after study has found that franchises and independently-owned businesses typically have similar failure rates. The ‘all franchises are successful’ myth is especially dangerous, because it may instill unrealistic expectations for both existing and prospective franchise buyers, providing a false sense of security as they invest their life’s savings and their future in a franchised business without appreciating the attendant risks of all business ownership.  Existing franchise owners have an even greater need for vigilance and hard work to achieve the success of their brand.  A collaborative franchise system, where the franchisees and franchisor work consistently to keep competitive and to improve profitability, is the best model to deliver the promise of franchising. Why is this particular myth so pervasive? It’s because the franchise industry’s definition of success is merely that your store remains open!  This is most likely not your definition of success! Your definition (and your bank’s definition) is that your business is generating sufficient revenues to pay your business bills, provide you with fair compensation, and a profit on your investment! At the end of the month after all the vendors have been paid, all the inventory and supply costs deducted and a check sent off to cover the franchising fee, is there...

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