Some decades ago, while attending the National Franchise Expo in Washington DC, your correspondent was enjoying dinner one evening with a group of friends. With the party was a senior member of staff of the Canadian Franchise Association who made a comment that has endured in the memory ever since. “Franchising is a rocky road, full of broken hearts.”
Fast forward to Leicester Crown Court in December when Nazir Abdul Rashid Daud was found guilty of fraudulently selling franchise licences to operate Payrolls Direct. The prosecution was the result of an investigation by Leicestershire County Council Trading Standards Service which had received statements from 18 victims. A co-defendant, Anthony Raybould, of Bournemouth was also found guilty. Raybould was initially a franchisee but soon became a convincing recruiter who encouraged franchisees to part with up to £10,000 to join and cloud-based system and management service fees of 20%. The fraud came to light when franchisees discovered that the system was virtually non-existent.
If Daud had been just a little bit cleverer, he would have had a computer system where his franchisees could log in. That wouldn’t have transformed Payrolls Direct into a proper franchise, but it would have enabled him to keep up the pretence and when the franchisees wanted to leave, make them pay all the monthly fees and sign non-disclosure agreements.
This is all very interesting but what is the relevance to an industry that contributes north of £17bn to the UK economy and provides employment for over 600,000 people? It is relevant because, as of mid-February, Payrolls Direct was still featured on four of the leading franchise recruitment portals on the first page of Google. It is relevant because in our unregulated industry there exist trade organisations that provide their members with a veil of respectability but who don’t bother to check their credentials. It is relevant because less than a year ago at a national franchise exhibition. a convicted, time-served-in-jail, fraudster was able to gain credibility by presenting two lectures on the virtues of his brand and franchising in general, His consultancy has since gone bust.
The reason why this woeful situation continues is because the UK lacks the high level of regulation that exists in the US, and slightly less so in Australia and Canada. Here the industry is self-regulated, and we all know what happens when people are allowed to mark their own homework.
The BFA does its best to keep up standards; but participation is voluntary, and it represents less than half of the business format franchisors in the UK. The BFA’s “Code of Ethical Conduct” states that franchisors should provide prospective franchisees with a full list of branches. Superficially, that would appear to be OK, but it does not state that the list should include any who have failed. In bad franchises the list of failures would soon build up and after a few years outnumber those currently trading. That would seriously impede recruitment, but it would greatly increase confidence in franchising.
Other ‘trade associations’ exist for franchisors who cannot meet BFA standards of membership, or who have been kicked out. These provide little more than a logo for the bottom of the franchisor’s website that suggests respectability. All too often this is simply window dressing. We know of one truly dreadful franchise that has recently announced that it has been nominated for an award from one of these ‘trade associations. The reality is that one of the people who run the association is the solicitor of the franchisor! This is a blatant conflict of interests but it is perfectly legal.
It is not surprising that bad franchises have high failure rates. As a result, they become proficient at exiting the failed franchisees. This often involves intimidating the franchisee with a huge exit bill and then agreeing to reduce it in exchange for a a signed non-disclosure agreement.
In spite of all these horror stories and inadequate regulation, franchised businesses still have a much higher success rate than independent ones. For prospective franchisees, the key to making the right choice and avoiding those that are doomed to fail, is to conduct a ‘health check’ of the franchise. This will identify problem areas and provide a list of the right questions to asak before joining. Later, if things are not working out as you were told they would, it is still possible to avoid being another broken-hearted statistic. Don’t be intimidated, there are usually measures that can be taken to hold the franchisor accountable.