| By Jerry Chautin, SCORE counselor, Atlanta, GA; Manasota, FL; and Cyberchapter
We see franchised businesses popping up all over. Yet some of the most recognizable franchise brands are under attack in civil courts.
And one of the most prolific attackers is Robert Zarco, a lawyer with offices in Miami and West Palm Beach. He goes after sellers of franchises, called franchisors, wherever and whenever they mistreat his clients. Zarco told me, “the problem with franchising is perception of rewards are very different than reality.”
With so many franchises in the United States, you might think that these small business owners, called franchisees, are a happy lot. Not necessarily so, says Susan Kezios, president and founder of the American Franchisee Association, a trade association that represents franchisees nationwide. She tells us that many of her members are unhappy with the franchises they purchased and would have made different choices if they knew then what they know now.
Scrutinize the Franchise Agreement
Zarco’s law firm, Zarco, Einhorn & Salkowski, sued over 300 different franchisors internationally on behalf of unhappy franchisees. Zarco says abusive franchisors are using the franchise agreement “as a weapon rather than an operating guide.” They use minor technicalities to threaten withdrawal of the franchise unless franchisees comply with unrealistic demands.
“When you read the franchise agreement, the promises disappear and are often contradicted by the franchise agreement," warns Jeffrey Haff, with Haff & Associates, a Minneapolis-based law firm. He told me that franchise salesman are often given "free reign to say and promise whatever they want."
So what are the most common abuses by franchisors?
Zarco tells us heavy remodeling requirements, exceeding a realistic return on investment, is too often imposed by franchisors. “Franchisors don’t care because it’s easy to spend someone else’s money,” he said.
Watch for Encroachment
Another abuse mentioned by experts is selling competing franchises in protected territories. “Encroachment or selling more franchised units in protected geography held by an existing franchisee is a frequent abuse by franchisors,” says Nicholas Bibby, head of the Bibby Group, a franchise development company. “This issue is magnified when the [encroaching] unit is [franchisor] owned.”
Do the Research
Understanding that there are abuses by some franchisors should not deter you from buying a franchise if you’re willing to operate in a structured environment and want the benefits of a proven system. However extensive due diligence and professional advice is recommended.
The key to buying a franchise is getting into a business line that fits a person’s skill-set and interests” says Don Lapp who, with his wife Ronda, own and operate Express Personnel Services franchises in Bradenton and Sarasota, FL. He also develops and sells Express Personnel Services franchises in locations from Tampa Bay to Naples.
Make certain the franchisor has a proven track record of success going back at least five to ten years”, Lapp advises. “Franchising is an excellent opportunity for a person who has always wanted to own their own business, but does not wish to reinvent the wheel.”
Tips for Selecting a Franchise
So, your first step is choosing a proven franchise with a lengthy history of success.
The second step is being sure that the franchisor has a strong management team and ability to put you through an extensive training program. And, make sure the franchisor will provide the ongoing support you expect after initial training.
Thirdly, check out the franchisor’s financial capabilities. If they are expanding too fast or don’t have enough liquidity to withstand economic slowdowns, they may not be capable of helping you when you need them most.
Of course there are initial franchise fees and ongoing royalties to pay. Determine if the benefits they offer are worth this extra cost.
Zarco says, “Read the Uniform Franchise Offering Circular prepared by the franchisor.” The UFOC is a disclosure document mandated by the Federal Trade Commission and includes business failures, franchise agreement terminations and other negative information.
Zarco offers us a bit of fatherly advice, "Do what you like to do, not what you think will make you a lot of money."
Copyright Jerry Chautin 2003. Jerry Chautin, a volunteer SCORE business counselor, writes about business and real estate, answers questions and provides free counseling/mentoring.
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