Lesson # 5 From Hard Luck Franchisees: Restrictions on the Products and Services Sold

 The Classic Battle

A group of franchisees file a lawsuit contending the franchisor forces them to buy products and/or services at inflated prices while setting retail prices so low the franchisees cannot profit. The lawsuit also alleges that the franchisor omits or misrepresents key facts about its business operations when selling the franchise.

The franchisor, of course, denies the allegations and intends to vigorously defend the lawsuit.

The Issue

Many franchise agreements contain restrictions on the products and suppliers the franchisee may use. While this may seem reasonable in the beginning, (after all, you're buying a proven system, right?) many franchisees discover later they can get cheaper products and find better suppliers than they can using the franchisor's system.  The franchisees begin to question why they are paying for higher priced products along with paying royalties which eat into profits even more. When this happens franchisees tend to get upset and file lawsuits like the one described above.

If the franchisee agreement you are considering contains restrictions on products and suppliers be sure to consider those provisions very carefully. Be prepared to ask the tough questions of the franchisor when it comes to products and suppliers. Also, don't take for granted just because you are going with a franchise that you are getting the benefit of the franchisor's "bargaining power."

Above all, make sure to talk with as many current franchisees as possible regarding the products and services of the franchise and conduct your due diligence.

Working in a Franchise Before Buying Doesn't Make You a Chicken!

Nothing like a good article on franchising to bring me out of a blogging hiatus that I anticipated would last at least another week.  But thanks to the Small Business Trends site and franchise consultant Joel Libava, my rest is over.

The Franchise King posted on a Central Ohio restaurant franchise called Roosters that seeks experienced franchise operators rather than newbies that might not understand the industry.  Like Joel, I agree it's a good concept for a franchisor to target franchisees that have experience in the industry.  Experienced operators are much more likely to be successful.  We agree on that.  We actually couldn't agree more on that.

However, Joel doesn't carry that logic forward when it comes to working in a franchise before buying one.  Joel says he is often asked this common question:

“Joel, are there any franchise companies out there that will let me work with a local franchisee, to see if I like the business?” 

And being the laid back guy he is (now don't get me wrong, Joel is a well-intentioned guy who wrote a book on Franchise Research Steps), Joel responds with an emphatic "No!"  He doesn't recommend it because the franchisee won't get the full story.  After all, they don't have any "skin in the game, so how could they possibly understand what the franchise business owner is going through?  He more or less says that if you aren't willing to go "all in" from the outset perhaps you should take it as a sign that you shouldn't go into business for yourself.  (Unfortunately too few people will heed this advice in my experience and take it as a personal challenge to go forward).

So it's my view working in a franchise business BEFORE buying doesn't make you a chicken!  In fact, it may be the best due diligence any prospective franchisee could do.  It's the same reason why so many successful business owners were once employees of the business they ended up buying.  It's the same reason a successful franchise owner I know worked in retail for a year before buying a retail franchise.  She wanted the experience.  No, she NEEDED the experience before investing much of her life savings.    

Now, it's true that some prospective franchisees might not benefit from the experience.  Some prospective franchisees have no business ever owning a franchise or any other kind of business.  But to say all prospective franchisees shouldn't avail themselves of the opportunity to work in a franchise system seems a bit bold in my opinion.  As a franchisee and reader of this blog pointed out:

The most difficult information to obtain and verify is franchisee profitability.  The profitability of the franchisor and the franchisees is not always related.  Sometimes those selling franchises make money while the franchisees do not.  And it is not always due to lack of due diligence on the part of the franchisee.  It may be because of inaccurate information supplied by the seller or franchise support that was promised but never delivered.

Risk is inherent in any business venture.  You are taking a chance and a leap of faith.  But actually working in a franchise business before you buy may allow you to find out whether you want to stake your life savings on the opportunity.  Taking a chance with maximum information is not random chance but a calculated risk - and that could make all the difference.

photo on flickr by ™bluhousworker and original photo by TedSher


Franchise Due Diligence: Ask what they don't do well

One of my franchisee clients offered a very simple question that every prospective franchisee should ask of other franchisees when conducting due diligence:

What doesn't the franchisor do well?

He says this evoked the best responses from franchisees when he conducted his due diligence.  If you are considering a franchise be sure to talk to as many franchisees as possible.  Speaking to only a handful is not enough. 

For more information be sure to read this article on franchise due diligence resources.

Prospective Franchisees: Help us, Help You

When searching my feed reader last night I ran into this distressful thread on BlueMauMau.org, a pro-franchisee Web site.  In the comments below the initial post, franchise lawyer Richard Solomon says he is giving up on trying to help franchisees.  Richard says,

I'm about ready to climb down off the due diligence cross and go do something less stressful, like crisis management counseling. In crisis management, people really do want help and are willing to provide a budget for it.

I'll admit it.  There have been times where I have felt the same way as Richard when trying to assist franchisees in reviewing their franchise agreement and conducting due diligence.  There are times when a franchisee is going to do the deal come hell or high water.  But at this point I am not willing to stop trying to help these people. 

I think Richard's point is simple.  Isn't it unbelievable that people would be willing to invest their life savings in a franchise business but refuse to spend a little time and small expense to properly conduct due diligence?

The purpose of a franchise agreement and disclosure document review is not for the lawyer to talk the client out of their franchise business opportunity.  An appropriate review will help point out the legal and business risks and possible areas of negotiation.  After the review, the client must still  make their own decision about whether to proceed forward.  I have been told by more than one client that a review opened their eyes to help them better understand the franchise opportunity.  Some moved forward while others backed away from their deal.

I have been very fortunate to work with prospective franchisees that are serious about their due diligence.   Recently I had a prospective franchisee client that encountered all the classic warning signs from a franchisor.  I know this client felt disappointed the deal didn't go through but I was sure proud they were willing to walk away.  Only someone serious about their business would have done so.   

So don't give up Richard (and other franchisee lawyers).  It takes just one client to make you see this is all worthwhile and they definitely need our help.


Franchises: Four Things to Make You Go 'Hmm

If you are looking at a franchise opportunity perhaps you should beware if your prospective franchisor says the following:

  1. You don't need a lawyer to review the agreement. 
  2. I would prefer you don't talk with the other franchisees.  You should only talk with me.
  3. We won't negotiate any terms.
  4. Trust us, we can't (and won't) change the agreement but we won't really hold you to that provision anyway.

Like many people you may be considering an investment of your retirement savings in a franchise.  You owe it to yourself to do the best job possible investigating that franchise and performing the most due diligence possible.  That includes hiring franchisee counsel to review the franchise agreement and disclosure document and talking with as many franchisees as possible.  Some franchisors won't negotiate but many will consider your needs.  And never, I mean NEVER, believe the franchisor that tells you they won't hold you to the terms of their written agreement.  You can be assured that the franchisor's lawyer in any lawsuit will never acknowledge that statement was ever made and most franchise agreements are written so that any such statement could not be used as evidence anyway.

Trust your gut.  Don't believe the hype.  Be willing to walk.

photo on flickr by Picture Perfect Pose.

Looking for a Franchise? Be Sure to "Pick" the Right Resources

As regular readers of this blog know, I am engaged in a never ending search for blogs that present franchise opportunities in a fair and objective manner.  All too often franchise related sites are merely promotional pieces. 

FranchisePick is a site worth checking out.  Yes, there are some promotional pieces on the site.  But franchise marketing veteran, Sean Kelly, has done an excellent job of presenting worthwhile information on several franchises.   

For example, recent posts on 30 minute workout franchises are hard hitting and full of information.  The experiences shared on the site are invaluable for anyone who is interested in making an investment in a franchise.  Sean likes to have fun, including making fun of my name, but he is on a serious mission to expose unethical practices in the franchise industry and encourage best practices.

Sean has a number of other sites covering the franchise industry including FRANBEST, Franchisor Marketing, and Franchisee Marketing.  He is also the President of IdeaFarm which specializes in helping franchise companies achieve growth through brand development and innovative marketing techniques.

Thanks to Sean for reaching out to me and exposing me to his sites.


Franchisor Inside Scoop

Upon my return from vacation I ran across a site called The Franchise Pundit.  I have been looking a long time for Web sites that give balanced information on franchises rather than just reciting promotional materials.  The Franchise Pundit appears to be such a site. 

If you are conducting due diligence on a franchise you may want to investigate the site.  In a short time I discovered several articles providing practical information on several franchises.  Be sure to check out the franchisor list to see if there are any articles on your franchise of interest. 

If you know of any other sites that provide fair and balanced information on franchises please let me know.