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Franchise confidential; The dark underbelly of the industry.

Updated: May 16, 2023


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As there are a much larger number of franchisees than franchisors in the UK it is not surprising that over half of our clients are franchisees. This has given us the opportunity to detect similarities in the problems that franchisees face when things go wrong. These similarities are not specific to any particular sector or area of business in which a franchise may operate.

They provide a valuable insight into the typical profile of the most vulnerable group of franchisees. Also, some of the common characteristics of bad franchisors and the methods that they use.


There is little or no data about the total annual number of franchisee failures because franchisors in the UK are not required by law to inform prospective franchisees about their failure rate. Not surprisingly, franchisors who have a high failure rate don’t volunteer this information and do their best to conceal it. NatWest publish an annual survey that shows that franchised businesses enjoy a very high success rate. This is undoubtedly true, but the under-reporting of franchisee failures distorts the figures. The truth is that well-run franchises do indeed have an extremely high success rate, but badly run and unethical franchises have a shockingly high failure rate. This creates a situation in which a few truly terrible franchisors can exploit the positive image of the franchising industry to recruit vulnerable franchisees, many of whom are doomed to fail.


The most vulnerable franchisees are those with little or no business experience and limited financial resources. They operate as sole traders or limited company start-ups and tend to invest in low-tech, distribution or service industry franchises with a low entry cost. Many are seeking a less pressured lifestyle of self-employment, far removed from a corporate environment. Sadly, if they choose a bad franchise, an above average number are likely to have problems.


Bad franchisors exploit this vulnerability by making exaggerated or sometimes even fraudulent statements when recruiting new franchisees. A prime example of this are the financial projections that are used in the recruitment process. These should obviously be the actual averages for new starters, year one, year two and so on but, as always, the devil is in the detail. Bad franchisors often cherry pick the sales figures of the best performing branches and exclude poor performers or those who have gone out of business. The inflated projections will probably be described as the average of the franchisees, but that will almost certainly only be the existing franchisees. What about the failures? A true average would include those franchisees who failed to reach the second and subsequent years and show their contribution to the average in the subsequent years as zero. That would reduce the average and if the failure rate was high it would decimate it. A bad franchisor will cleverly word a descriptive caveat to mislead a prospect and conceal a high failure rate. Their continuing objective being to generate as large an income stream as possible from recruitment payments.


Bad franchisors, who’s primary focus is recruitment will have little regard for the success of their franchisees. A common early warning sign will be that instead of, or as well as, charging a monthly fee they levy a set minimum payment. This means that even if the franchisee does no business at all the franchisor will still get paid. It must be said that there are a few good franchisors who charge a set monthly fee instead of a percentage but there are not many.


Bad franchisors provide little or no support and neglect to keep the franchise relevant to business and industry changes. They often neglect to update the operations manual.

Bad franchisors often receive secret kickbacks from the suppliers of goods and services to the franchisees which further impairs the profitability of the franchisees. If the franchisees are required to contribute a set monthly amount into a fund for advertising an unscrupulous franchisor can easily divert some of it to be used for recruitment advertising that provides no benefit for the franchisees.


It is a sad fact of life that it is easy to become detached from the reality of dealing regularly with something nasty, distasteful or unpleasant. So it is with a franchisor who has to regularly deal with failing franchisees. It is not long before the true reasons for the demise of the franchisee; misleading promotional materials, inadequate working capital and a lack of support, are replaced in the mind of the franchisor by insufficient effort by the franchisee and their failure to follow the business model. The franchisee, demoralised and weighed down with the burden of a failing business, is easy prey for an unscrupulous franchisor. Many are forced to pay a penalty to exit the franchise as well as suffer the loss of their investment, their livelihood and their dream of a better future.


Franchising is generally a wonderful way to operate in business for franchisors and franchisees alike but, regrettably, there are a few truly terrible franchises. These continue in business because the franchising industry laws in the UK are inadequate.


 


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