The BizOp News

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In my litigation practice, I routinely hear very sad, sobering and terrible stories from people who have bought into the Franchise Fraud.

Let me be clear, I think franchising when done properly can be a terrific method of distribution which rewards the franchisor and franchisee.

But prospective franchisees often believe in dangerous myths.

A franchise portal like Bizymoms perpetuates these lies about franchising.

Consider these misrepresentations.

Some of the most important advantages of owning a franchise include:

Training - Almost all franchise companies provide you with the necessary training you need to become successful. In fact larger franchises often offer more than what is required even. Your success is the success of the franchisor since the royalty fees you pay him is his share of the income. As such he is willing to do whatever it takes to ensure your success.
Brand Awareness - If you start up your own business it will probably take years or even decades for you to build a well recognized brand that provides a competitive advantage over your competitors. Brand awareness is so powerful. It has the potential to make or break a business because consumers generally buy things that they are familiar with and work with companies they know and trust.
Purchasing Power - This is a result of economies of scale enjoyed by the franchises. Most franchise companies are capable of purchasing their goods, products, and supplies at bargain rates since they buy in bulk. In fact these savings are passed over to individual franchise units so that they have a competitive advantage in the marketplace with respect to price.
Proven Business Plan - Through years of experience franchisors know what works and what doesn't. They will teach you their formula for success. In fact they come across many franchisees like you to whom they support to build their businesses. Therefore people say the success of the model is already proven.
Advertising - In addition to an established brand, most franchise companies support their franchisees with both local and national advertising and promotions to help drive sales. They may obviously require you to contribute towards a fund reserved for promotional campaigns but the benefits of such a nationwide publicity campaign easily outweighs the costs you incur. Further who can say that you will not benefit from the promotional activities of the other local franchisees. However these sorts of benefits are unique for franchising.
Support - In addition to the initial training many franchise companies provide ongoing support for their franchisees. This typically includes ongoing training, system upgrades, product enhancements, administrative support as well as question and answer support systems through dedicated representatives within the organization.

This list is dangerous nonsense, obscuring what in fact the relationship is.

Training: The required training is set out in the franchisor's disclosure document. The franchisor makes money from gross sales, whether the franchisee makes a profit or not. There is no legal requirement on the quality of training, and new systems often have incomplete or minimal training. The franchisor might care about your business success, but if you fail the location will be resold.

Brand Awareness: There is no legal requirment that the franchisor's brand have even trademark protection, let alone be a brand in the public's mind. You have to review the franchisor's disclosure document to see what amount of money is being used to build national advertising. Small systems of less than 500 units generally are not competitive with respect to brand advertising.

Purchasing Power: There is no legal requirement that the franchisor either share the rebates or use the rebates to expand the advertising system. Most franchise systems have language in their contract that allows them to keep all the rebates from vendors, and don't have to account for their value to the the franchisees.

Proven Business Plan: This is again just nonsense. Franchisors are not legally required to have anything other than a franchise disclosure document. If they had a valid proven business plan, they wouldn't need your capital. They would expand by owing company stores which are more profitable than franchise stores. Franchisors expand because you are sharing the risk that their business model works. You have to understand those risks.

Advertising: Advertising should be thought of as using other people's money, that the franchisor has a responsibility to use the advertising money in a completely transparent manner, and not say for the advertising of franchises for sale. Sadly, many franchise systems lack this accountability, and you have to pay careful attention to the disclosure document.

Support: The vast majority of franchise systems provide support entirely on a discretionary basis.

The trust about franchising is there for people. The only requirement is that they be able to read and understand, with help if necessary, a franchise disclosure document.

Misleading Advertising Law

6 Dangerous Myths about Franchising

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