What are the most dangerous myths in franchising?
UnhappyFranchisee.Com asked America’s top franchisee attorneys for their thoughts.
Read the results thus far, and check in as we add more responses.
Add your own thoughts in the comment box below.
What do you think are the most damaging myths in franchising?
What makes them so dangerous?
Add a comment below.
|Attorney Cary Ichter||MYTH: That the Federal Trade Commission is policing franchising (Cary Ichter)I think the most dangerous and detrimental myth about franchising is the myth and misperception by franchisees that the FTC is going to do anything to enforce its rules with respect to disclosure. The myth is reinforced by the official looking language that franchisors put in the front of the FDDs indicating that the disclosures are made pursuant to the FTC Rule and suggesting that if there is some false or misleading data in the FDD the FTC will do something about it. Franchisees undoubtedly believe that the Rule affords them some level or protection. That is little more than wishful thinking. And given that franchisees have no private right of action to enforce the Rule—something that is inexplicably stupid—franchisors have little reason not to fudge on the facts, if not completely lie, in FDD disclosures.
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|Attorney Stan Dub||MYTH: The franchisor always has its franchisees’ best interests at heart. (Stan Dub)There’s a tendency to assume that franchisors recognize their long term interests are allied with franchisees’, and always act accordingly. However there are many conflicts built into the relationship, such as commissions on purchases, and royalties being paid on franchisee sales rather than profits, and franchise officials may have incentives to maximize their short term results (for example, incentive compensation plans) that may sometimes factor into franchisor actions. Also, depending on the level of franchise maturity, there may be policies put into place to encourage rapid growth at the expense of existing franchisees, or (in a fully mature system that is no longer growing much ) to milk the existing pool of franchisees to yield more franchisor profits.
MYTH: Franchise founders know best how to grow their businesses, and can’t really learn much from franchisee ideas. (Stan Dub)
It’s a sad reality that many newer businesses that have achieved some success are headed by owner/executives with giant egos. (This is true, in my experience, regardless of whether they are franchises.) I haven’t made a scientific study, and I can’t say whether this would describe 75% of such people or only perhaps 25%. In either case, a significant number of franchises are run by people who believe they walk on water, and who are not open to ideas of others. They see franchisees as people who came to their concept knowing nothing, and whose ideas are therefore tainted by the limited focus on policies that will improve their own personal results, not necessarily the broader franchise interests. When confronted by a franchisee with his/her own strong ideas they can get defensive and adopt a “my way or the highway” approach.
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|Attorney Dan Davis||MYTH: Franchised businesses have higher success rates than independent businessesOne of the most dangerous myths in the franchise industry is that a franchised business has a better chance of success than its independent counterpart simply by virtue of being a franchise. In fact, several studies suggest franchise success rates are, at best, only marginally better than the success rates of independent businesses. Furthermore, success rates vary widely by industry and geographic region. Remember, you will have an up-front capital outlay in the form of the initial franchise fee, recurring royalty and advertising fees likely totaling 9% of your gross revenue every month, and guaranteed on-going expenses to comply with changes in system standards. Some franchise systems offer an excellent return on this investment. Others may not. Ensure the trademark actually has goodwill attached to it. This is the principal asset you are purchasing. How likely is it that trademark has value in the marketplace if you’ve never heard of it before? Ask to see the Operating Manual before signing the franchise agreement. Does the franchisor actually have any expertise with respect to their business system? Finally, consult a professional to evaluate any earnings claims. Is there a reliable track record of franchisee financial success?
The simple fact is that being a franchisee, by itself, is no guarantee of success. Do your due diligence.
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|Attorney Robert Purvin||MYTH: A franchise is a safe investment, just because it’s a franchisePerhaps 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… If you believe that all franchise opportunities are safe, you are much more likely to make a poor decision that could cost you everything.
|Attorney Jeff Haff||MYTH: Most franchisors have well-established systems that provide proprietary methods
The biggest myth in franchising is created by the glossy brochures that franchisors use as sales materials. The brochures generally indicate that the franchisor has a well established franchise system that features proprietary methods and that the franchisor will provide significant services to the franchisee. Generally, one look at the franchise agreement will tell an attorney that the promises made to the franchisee in the brochures are nowhere to be found in the franchise agreement.
Most franchisors truly have no “secret sauce” or truly “proprietary methods” and they generally have no contractual obligation to provide services.
WHAT DO YOU THINK ARE THE MOST DAMAGING MYTHS IN FRANCHISING? WHAT MAKES THEM SO DANGEROUS? SHARE A COMMENT BELOW.
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