Franchisors: The Good, the Bad and the Ugly

Determining whether you are dealing with a 'good' franchisor with a potentially successful franchise system, or a poor franchisor who will abuse the franchisor/franchisee relationship for their own enrichment, can be difficult. Here FDS Northern Consultant Tony Urwin offers his top tips for identifying the good, from the bad and the ugly

Franchise ownership offers many advantages, but it also has its limitations. Franchisors have tremendous authority over their franchisees, which are never fully independent. Good franchisors use their powers to keep franchisees - and the system as a whole - on the path toward growth. Poor franchisors abuse the relationship for their own enrichment.

Franchises generally have very low failure rates. They allow an individual to start a proven business with little guesswork, and come with invaluable training and ongoing support.

Franchisees join a network of peers who are readily available to share ideas, gauge progress, and provide additional support. Franchisees benefit from their franchisor's national and regional advertising efforts, as well as from its purchasing power.

The price, however, is freedom. Franchisees are bound by their franchisor's methods and system of operations, and are obliged to pay royalties and other fees and levies. Franchisors place constraints on what can be sold, serviced, and charged, and can place additional pressures in terms of closing the business, breaching the contract, or making other independent decisions.

The business practices of a franchisor determine the extent to which these limitations are felt. Use the following criteria to ensure that your experience is positive.

Buying a franchise can cost up to 40 per cent more than starting an independent venture. The added cost buys you proven business methods, an established brand, training, support and more. However, if the franchise opportunity you are investigating costs 40 per cent more than similar franchise concepts, investigate further. Serious price discrepancies should be explained by markedly better offerings, training, and support. If the premium isn't justified, the high entry fee may just be the beginning.

Knowledge Transfer
Your knowledge of a particular franchisor's business and industry is likely to be limited. A good franchisor has a lot of guidance on offer, not only to introduce you to the business but to help you develop the necessary skills and understanding. A good franchisor has a plan to help you duplicate their business and instruct you in its operation that inspires confidence.

The Opportunity
A good franchisor recognises that its long-term success depends on the success of its franchisees. It wants franchisees to make money, and its fees and levies don't prevent them from doing so. The franchise opportunity should provide a good return on investment, and reward hard work with healthy profits. Talk to a number of franchisees who have been in business for a year, two years, three years, and five (if possible).

Are they making money? Are they struggling under the weight of their fees? Have they recouped the price of their investment? How long did it take?

Ongoing support is an important benefit of franchise ownership. When it is absent or unreliable, the limitations can chafe. A good franchisor will have franchise support staff that are consistently reachable during regular working hours (at the very least).

There should be a dedicated support number and an e-mail address to which queries can be sent. Response times should be short, and the support staff should be helpful. Existing franchisees can attest to the truth of a franchisor's assertions on this topic. The best franchisors offer coaching as well as troubleshooting.

The franchisor controls the brand under which you will operate, but who controls the franchisor? Be extremely wary of a one-person show. The franchisor should have a management team that consists of no less than a managing director, a marketing expert, a sales expert, a finance expert, a franchise support expert, and ideally, a multimedia/web expert and a research & development expert. The brand may be out of your control, but you are the winner when it is under expert stewardship.

Most franchisors levy a marketing fee, which is sometimes called a marketing fund 'contribution.' A good franchisor uses the money to actively and effectively promote the brand. Examine the quality of the franchisor's website and enquire about its current promotional activities. If it is not marketing itself in the face of mounting competition, you have the right to ask why not.

Fair Dealing
The franchise agreement both defines and enshrines the relationship between franchisor and franchisee. Before signing on the dotted line, have the contract reviewed by an independent lawyer who has experience drafting franchise agreements (litigation lawyers rarely have the experience required).

The contract should reasonably balance the interests of both parties. If it doesn't, don't sign it.

These criteria are a starting point to determine whether you are dealing with a good franchisor and a potentially successful franchise system. If the franchisor is a Full or Associate member of the British Franchise Association (bfa), your task has been greatly simplified. The bfa works to uphold the reputation of the franchise industry by allowing only reputable and responsible franchisors to join its ranks. In so doing, it helps potential franchisees to - in the association's words - 'recognise the good, the bad, and the ugly for what they are.'

To become an Associate or Full Member of the bfa, a franchisor must demonstrate (1) that its product(s) or service(s) are 'not only saleable, but saleable at a profit that will support a franchised network'; (2) that it 'has the means to transfer its know-how to a new operator at arm's length'; (3) that it is committed to respecting a code of ethics governing its advertising, recruitment and contractual practices; and (4) that it will, 'in advance of any lasting contractual agreement, disclose without ambiguity to prospective franchisees the information on their business which is material to the franchise agreement.'

Full members have gone further, demonstrating a proven trading and franchising record. The bfa's stringent requirements for viability, franchiseability, ethical practice and disclosure provide potential franchisees with an exceptional form of quality control.

If you have picked up this magazine, you are aware of the many benefits of franchise ownership and are looking for the right opportunity. Use the guidelines outlined above or simply look for the bfa seal to ensure that the franchise you choose wears well, and doesn't pinch.