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

Posted on Date: Mar 26, 2013

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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 plans.

Perhaps the most egregious breach of a franchisor’s support obligation is the abuse of the franchisor’s ability to designate and control suppliers to negatively impact the franchise owners’ profit margins.  Franchisors who fail to take advantage of group purchasing synergies are frequent.  While this is disappointing, the act of intentionally gaming the supply chain to earn rebates and other revenues is a much graver betrayal of trust at the franchisee’s expense and should be a crime.

What it comes down to is this: franchisors usually have no obligation to protect franchisee profit margins or to even provide meaningful support to their franchisees. That’s why it’s so important for franchisees to band together to promote their common needs and interests.  Prospective franchise owners must vigilantly insist that their rights and interests are respected and that their franchisor is committed to good faith and fair dealing in the delivery and performance of the franchise system!

I can’t emphasize enough how important it is for prospective franchise owners to pay attention to both the contract and the franchise culture of your chosen franchise system.  Only sign with a franchisor who has a strong record of treating its franchisees right, but understand that only your franchise agreement can protect you from changes in the culture (if the system is sold, retains new management, or has a change of heart!).

Franchisees are extremely vulnerable to the whims of their franchisors.   Thus, my mantra is to choose a franchise system with a strong and effective franchisee association that has established negotiating leverage to protect franchisee interests in both the contract and the culture.

If you’re looking for some top quality franchisors that voluntarily adhere to higher standards of franchisee treatment, then learn more about the AAFD’s Fair Franchising Seal and AAFD accredited franchisors.

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The content in this blog post is based recommendations and guidance provided and expanded in The Franchise Fraud: How To Protect Yourself Before And After You Invest written by Robert Purvin. The Franchise Fraud is available for purchase in print and for the Kindle on Amazon.

 

 

 

One comment

  1. avatar
    Franchise India /

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