| Licensing, Technology Transfers, |
The immediately preceding tutorial, FRANCHISE ENTERPRISE INSIGHTS: MYTHS AND REALITIES, published on this website, concerning new franchises and how practically no one understands how to 'read' the operative documents to find the hidden truths, has brought a howl of angry feedback from the franchise industry.
Most of it has been simply epithetical, either calling me awful names or simply asking rhetorically why I am so angry and so negative.
Calling me names is fine with me. At least it informs me that I am not speaking to a blank wall and no one is listening or hearing.
It is my belief that most of this negative feedback is misplaced, and I think it is important that I respond to it in a constructive manner.
First, it is true that most new franchise offerings are misdescribed and misrepresented. They simply do not have the attributes that they claim to have. Illustratively, name recognition is not available if the name has never been used in the geographic market where the franchisee is doing the spadework to make the first effort in his market. That cannot be disputed. There can be no reputation if the business was not previously operated in the market where the franchisee is to open and operate his franchised business. That the business may have established some degree of positive repute where it has operated -- in other geographic areas -- does not always mean that the reputation will 'have legs' to travel into other markets. It may sometimes be a question of regionality and it may be simply that the new business in the new market really has no assurance of making a good start for any number of other very valid reasons. Therefore, the risk profile in the new and untried market is higher that the risk profile where the reputation has already been established. How to deal with this issue in selling new franchise opportunities so that you avoid misrepresentation about name recognition requires insights beyond mere salesmanship. It can be done truthfully without losing positive selling capability.
Similarly, it is not really possible to truthfully tout buying power as a reason to buy the franchise if there is not yet established buying power because the chain isn't large enough, or because the chain's 'presence' is so dispersed and scattered that buying power cannot be obtained in markets due to sparsity of locations open and operating there, or because the franchisor does not intend to pass along the savings that could possibly be produced from established buying power. My point is that buying power is not meaningfully available to any franchise investor unless it exists in his geographic area and he will see the savings translated to his bottom line. Telling the franchise investor that buying power is a reason to invest when he won't see the benefit of it is simply untrue. No argument can be made that a new franchise, or any franchise for that matter, should be able to sell non-existent buying power.
There is nothing wrong in telling people that the best way to select a site is to simply hire a commercial leasing agent in your market to represent you in finding a good location and negotiating a good lease. That's how practically everyone who succeeds does it. Pretending that you as the franchisor have specialized knowledge about site location and lease negotiation that no one else has in a market in which you have not had even one store open and operating is simply not defensible. Even if you have stores open in a market, but simply used commercial leasing agents as I recommend you do, there is no secret or 'special' advantage that you provide to facilitate positive site selection. Moreover, since the right way to go about it can be truthfully said without hurting sales of new franchises, there is really no reason to make false or inflated claims about capabilities that you don't have.
If you say in your disclosure documents that you do not give out earnings claim information, but your salespeople do so, or have other franchisees do it for them, what jury will have trouble believing that you are a fraud? If you do make earnings claims in your UFOC disclosure documents, but the tax returns for the businesses used in making the earnings claims show different profitability than the earnings claims, who will believe that you didn't deliberately rig the information? This ain't rocket science here. It's just plain old logic that is very compelling when presented in court. And these documents will have to be produced in any dispute resolution proceeding. If the situation is bad, your dispute resolution results will be bad. Sometimes you win by default. Sometimes your adversary runs out of money to sue you. Sometimes your adversary isn't represented by competent counsel. But you can't count on that, can you? There are too many good franchise trial lawyers around for you to be able to bet safely on a freak victory.
Franchise investment opportunities that are nothing but dealership deals for reselling a product or product line are especially pernicious. The reason for this is that businesses that are simply resellers, or resellers with some value added service capabilities, have been around for decades and do not have the overlay of franchise relationship carrying costs associated with the normal profile of financial operating expenses. Having to pay franchise relationship carrying expenses in addition to the other normal expenses associated with being a simple reseller or servicing reseller is a major signal for the prospect of failure and litigation. Usually, the franchisee, upon entering into the business, finds that the products are for sale in normal commercial channels for much less that he has to charge in order to make a profit. What is astounding is how naïve franchise investors are about this most obvious of deceptions. In one outrageous instance, the franchisee finds out only after he opens what he has to pay for the product and what he has to charge for it to come out in the black. Asked why such information wasn't insisted upon before signing the franchise contract, the franchisor's response was that the information is a 'trade secret' that will be disclosed only after you buy the franchise. The lawyers that those franchisees hired for the litigation are much more astute than the lawyers who vetted the franchise investment for them when they were deciding to buy the franchise.
Issue by issue, point by point, my only thesis is that if you can't sell the franchise by telling the truth about it, then either you aren't quite ready to franchise this business or it has attributes that make franchising it unlikely to be a success.
Since there are ways to tell the truth about a new franchise opportunity and still generate sales of franchises, why not do so?
Sellers of franchises who do have good investment vehicles to sell ought to be more outraged than anyone else about what is going on. After all, every sale that is taken by a company that has misrepresented the opportunity is a sale that will not be made by a company that really has a worthwhile investment vehicle. Bad deals are taking sales away from good companies. You can't change that by pretending that there aren't bad deals being sold by misrepresentation or by insisting that claiming to subscribe to some 'code of ethics' will solve the problem. All you have to do is join the IFA and you can claim that you operate under their 'Code of Ethics'. Whether you do or not is another matter.
Part of the problem is that people think that requests from retail customers of the business for information about the opportunity to start that business for themselves as franchisees is the touchstone to franchisability. It isn't. But that doesn't stop franchise 'consultants' from telling business owners that such requests are the early signs of a business that 'has legs'. Too many other factors must be present for it to really 'have legs'. Companies that only make a living if a business owner decides to begin franchising the business will always tell him that the business is franchisable. They do not tell prospects that their business is not franchisable or that it is too early in the development of the business to franchise and a few more years of successful business replication would facilitate franchising in a successful mode. The misrepresentation process frequently starts by misrepresentations being made to business owners about their business being ready to begin franchising. To this they frequently add that they already have 'affiliations' with lawyers to do the legal work, saving the new franchisor who decides to work with them a lot of money in not having to hire his own counsel. The truth is that the 'affiliated' lawyer is always some low level bozo who will sign his/her name to any template disclosure documents without asking questions or doing any due diligence. The lawyers know that the first time they question any representation, the business will move elsewhere. The 'consultants' (who are just looking for more franchises to sell) provide marketing and sales materials that say things about the franchise opportunity that simply are gross overstatements. In this way the whole franchising process becomes poisoned. Franchise consultants don't stick around after the sale. They just move on to another sale. Their only expectation of revenue comes form closing sales, not from worrying about subsequent operations. You could argue that failed franchisees make sales closings unlikely, but the fact of the matter is that the 'consultants' will sell what they can and move on to the next opportunity. You, the new franchisor, get left holding that bag.
Business owners thinking of franchising their businesses need to be more skeptical of the 'consultant' who makes nothing unless a decision is made to start franchising now. Moreover, lawyers who only know how to 'read' contracts and fill out disclosure forms rarely are in a position to do the due diligence or help with the due diligence that must be done before the decision is made to start franchising now. If the prospective new franchisor seeks out lawyers who can critically analyze the 'Do I or Don't I' issues, bad results can be avoided.
One fact is beyond dispute. If you sell franchises to people who do not succeed financially, you will not profit from it. Litigators will profit from it. The young franchise company cannot make it through multi unit failure and the resulting litigation. When the franchisees' lawyers go through your files and depose your people in a competent manner, the differences between what you said to people to sell your franchises and what the truth of the matter really is will be found and will be presented effectively to the court, the jury or the arbitrators. If that exercise rarely occurs because failure is not produced by expectations that are not practically achievable, success prospects are enhanced. It's a bit harder to do it right, but the result justifies the expense, the effort and, sometimes, the wait until you are really ready.
You can't hide behind the advice you get and avoid responsibility for 'bad' paperwork and 'bad' marketing and sales methods just because you listened to 'advisors' and 'consultants'. The incompetent do not become competent by calling themselves consultants. And people of low ethical values, who have little compunction about stretching truths to the breaking point to make sales, will not ever be a shield against future liability and franchisee failure.
I fully appreciate the benefits of franchising. I am as aware as anyone of the many franchisees who have made wonderful successes in their franchise investments. I am also aware of the others, those who ended in bankruptcy and in court. I am also very aware of the start-up franchising companies that have not succeeded because hype was the basis of the franchising decision rather than critical analysis. The guy who asks you the really hard questions, who challenges every assumption and provides you a chance to take the hard looks to see in a better light whether those assumptions are as reliable as you hope they are, is doing you a favor. Cheerleading is not a substitute for professionalism. If you can't handle the tough questions, that in itself is a wonderful indicator that you are not ready to start franchising your business.
THINK ABOUT IT!
Copyright 1997 - 2010 || Richard A. Solomon
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