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Franchisors love rankings. Visit any well-known franchisor’s website, and you are bound to see a laundry list of rankings purporting to provide third-party validation of the franchisor’s superiority in its niche, if not in the franchise industry as a whole. Similarly, a Google search for “franchise rankings” provides links to web pages and articles with titles like: Top 100 Global Franchises 2018 Franchise 500 Ranking Top 100 Franchises – Rankings of Global Franchises 2018 Rankings of the Best Franchises America’s Best and Worst Franchises to Buy Top 50 Franchises in the World Top 100 Franchises of 2018 As a prospective franchisee, how much stock, if any, should you put in a particular opportunity’s ranking as a “top franchise”? Understanding Franchise Rankings When considering what value to place on a ranking, it is always important to consider the source. As a general rule, legitimate media outlets (such as Forbes.com and Entrepreneur.com) will be more reliable than websites that exist solely to sell advertising (often for their own “top-ranked” franchise opportunities). A site that seeks to have some legitimacy behind its rankings should disclose the source of its data and its methodology as well. For example, in compiling its list of “America’s Best and Worst Franchises to Buy,” Forbes.com relied on five years’ worth of statistical data compiled by FRANdata examining system sustainability, system demand, value for investment, franchisor support and franchisor stability. On the other hand, the Forbes.com list also relies on data that are a minimum of two years old, […]

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Although scams exist in virtually all industries, in today’s world, franchising is arguably one of the exceptions. If you understand the basics of the franchise model, and if you do your due diligence before paying an initial franchise fee, the truth of the matter is that you should be able to spot and avoid any scams pretty easily. For this reason, franchise scams have largely gone by the wayside, and those that still exist barely resemble legitimate franchise opportunities. Of course, this does not mean that your success as a franchisee is guaranteed. There is a big difference between a scam and an unprofitable franchise. Franchisees fail, and even entire franchise systems can go off of the rails, but most franchisees who lose their investments will need to sue for reasons other than being sold on a fraudulent scam. Making Informed Decisions as a Prospective Franchisee Buying a franchise is a complex investment, and it needs to be treated accordingly. This starts with understanding franchisors’ disclosure obligations. Under the Federal Trade Commission (FTC) Franchise Rule, all franchisors are required to you with a Franchise Disclosure Document (FDD), “14 calendar-days before you sign a binding agreement with, or make a payment to, the franchisor or an affiliate in connection with the proposed franchise sale.” If you are being asked to sign an agreement or pay money and you have not been provided with an FDD, then you are not being offered a legitimate franchise. But, once again, in today’s world this […]

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Blue MauMau recently published an article entitled, “Shattering the Myth: The Franchise Industry Is Heavily Regulated?!?” It is a click-worthy headline, no doubt, but what about its implications: Is franchise regulation really a myth? The “Myth” of Franchise Regulation The article goes on to state some indisputable, and relevant, facts about franchise regulation. For example, while the franchise industry falls within the oversight of the Federal Trade Commission (FTC), the FTC does not actually review franchisors’ Franchise Disclosure Documents (FDDs). Additionally, although the FTC’s enforcement efforts targeting franchisors are minimal, the FTC’s Franchise Rule does not provide franchisees with a private right of action. In the words of the article’s author, Keith Miller, “Who would consider a filled-out document, which is actually not reviewed by any regulatory agency, to be a heavily regulated document?” The article also goes on to note that there is no federal franchise “relationship” law, and less than half of all states have these laws in place. However, the article omits any reference to state franchise “disclosure” laws, of which there are several, and many of which do require review of franchisors’ FDDs. There are some other issues with the article as well. For example, the article asks rhetorically, “[W]hy do the vast majority of franchise agreements require the franchisee sign it as an individual and not as a business?” While this is not directly relevant to the issue of regulation, it is also not entirely accurate. Legitimate franchisors today universally allow franchisees to form business […]

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If you are thinking about buying a franchise, you probably have at least some idea of what to look for in a franchise opportunity: Brand recognition, system stability, reasonable fees, happy franchisees – these are all key characteristics of a successful franchise system (of course, as a franchisee, your success is never guaranteed). But, do you also know what not to look for? Are you aware of the types of red flags that would (or, at least, should) send most prospective franchisees in search of a different opportunity? If not, this recent article on Blue MauMau is worth a read. These are the Hallmarks of a Toxic Franchise System The article highlights the recent downturn of the Dickey’s BBQ franchise system. According to Blue MauMau: “In fiscal year 2017, [the franchisor] opened 88 Dickey’s franchised outlets, but [73] ceased operations, according to its FDD.” “But[,] 2018 made 2017 look good. In the latest year, the brand opened 72 new franchised units, but had 89 terminations and 24 ceased operations, for a net store loss of 41 units.” With 562 franchised units at the start of the year, these 2018 figures represent a reduction in size of more than seven percent; and, adding in transfers, the total “churn” (the number of franchisees leaving the system) was an “alarming” 28 percent. “Many [franchisees] said they were unprofitable, and should close, but had to weigh the decision of whether they would lose more money staying open or being sued for 5 years of […]

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Nationwide, 21 states and Washington D.C. have laws in place that govern the franchise disclosure process, the franchise relationship or both. Due to the heavily one-sided nature of franchising, these laws are designed to protect franchisees by helping ensure that they receive accurate information, and that they have at least some opportunity to protect their investment if things do not go as planned. The states that have franchise laws are: Arkansas California Connecticut Delaware Hawaii Idaho Illinois Indiana Iowa Kentucky Maryland Michigan Minnesota Mississippi Missouri Nebraska New Jersey Tennessee Virginia Washington Wisconsin If your state has a franchise law, the implications for your franchise will depend on the type of law (disclosure, relationship or both) and the scope of its provisions. Franchise laws vary widely from state to state, and some provide significantly more protection than others. Examples of State Franchise Law Provisions 1. Franchise Disclosure Requirements (and Consequences) In states with franchise disclosure laws (i.e. California, Illinois and Maryland), franchisors must meet certain requirements in addition to those imposed under the Federal Trade Commission’s (FTC) Franchise Rule (the FTC Franchise Rule establishes the nationwide standard for the 23-item Franchise Disclosure Document (FDD)). One of the most-common provisions in these laws is an extension of the “cooling off” period before a franchisee can be asked to sign a franchise agreement. Potential remedies for disclosure violations under state franchise laws can include an option to terminate the franchise; although, the circumstances in which this option is available are usually pretty limited. […]

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It finally happened. You’ve decided that enough is enough, and you are ready for the nightmare of franchise ownership to be over. Your hopes have been dashed. Your expectations have gone unfulfilled, and your franchisor has gone silent as you have struggled to keep up with your monthly expenses. Unfortunately, this is an all-too-common reality for franchisees in all types of franchise system. Despite the industry-published statistics on franchisee success and the promises your franchisor made before you signed your franchise agreement, building a profitable franchise is not easy. A significant percentage of franchisees close before the initial terms of their franchise agreements expire, and these “failures” are often due to the fact that franchisors fail to uphold their end of the bargain. So, you are ready to get out. What do you need to know? What You Need to Know about Terminating Your Franchise 1. Franchise Agreements are Long-Term, Legally-Binding Contracts For most fed-up franchisees, the initial prognosis is not good. A franchise agreement’s initial term is both a minimum and a maximum, which means that (i) you are bound until the agreement expires, and (ii) when your agreement expires, it is largely up to your franchisor whether you get to renew. How many months (or years) are left in your franchise agreement’s term? If you are close, you may be able to find a way to wait it out; or, you may be able to use this as leverage in termination negotiations with your franchisor. But, until you […]

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When buying a franchise, you need to make a number of important decisions. One of these decisions is: Should you buy into a well-established franchise system; or, should you get in on the ground floor of an up-and-coming franchised brand? Both options offer potential benefits. While buying into a well-known franchise can offer instant brand recognition, buying into a new franchise system can reduce the risk of territorial encroachment and intra-brand competition.  Established franchisors offer experience, while new franchisors may offer fresh ideas and a more-contemporary approach to doing business. Should You Buy into an Up-and-Coming Franchise? But, both options come with potential drawbacks as well. Here are five risks associated with choosing a new franchise system: 1. Lack of Franchising Experience Franchising is a unique business model, and not everyone who succeeds in building a retail brand will be successful operating as a franchisor. When you are relying on a franchisor for guidance and operational support, it can be challenging to work with executives and personnel who are not experienced in managing a franchise system. 2. Lack of Brand Recognition In most cases, one of the primary benefits of buying a franchise is to benefit from the franchisor’s brand recognition. Instead of promoting a new brand that no one has ever heard of, you get to benefit instantly from the goodwill that the franchisor has cultivated over years of consistent marketing and providing quality service to its clients or customers. But, if you will be the first franchisee in […]

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“Green” franchises became mainstream a handful of years ago, and their popularly has held steady ever since. From commercial cleaning and pressure washing franchises to franchises that install synthetic turf systems and home efficiency technologies, if you want to start a business that is eco-friendly, there is probably a franchise opportunity that will appeal to you. But, as with all franchise opportunities, when purchasing a “green” franchise, it is important to perform your due diligence. This means talking to the franchisor, talking to current and former franchisees, and hiring a franchise lawyer to review the Franchise Disclosure Document (FDD) and franchise agreement. In addition to the legal concerns that apply to franchise opportunities generally, here are some “green”-specific considerations to keep in mind: 1. Substantiation of “Green” Advertising Claims When “green” businesses started popping up with increasing frequency, so did references to the concept of “greenwashing.” This term refers to businesses spinning, misrepresenting, or selectively publishing information in order to make themselves appear “greener” than they really were. Significant cases of greenwashing can constitute false advertising, which is a form of consumer fraud As a franchisee, you will likely use advertising materials that have been prepared by your franchisor. But, this does not necessarily mean that you are immune from liability for false advertising. Your franchisor should be able to readily substantiate its claims of environmental friendliness; and, if it can’t, your best option may be to consider a different franchise opportunity. 2. Mandatory Suppliers For product-based franchises, the commitment […]

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As a prospective franchisee, reviewing the terms of a franchisor’s Franchise Disclosure Document (FDD) is a critical early step in the due diligence process. When reviewing the FDD, it is important to review all of the 23 “Items” – not just the ones dealing with fees and the estimated initial investment. Among the more “legal” sections of the FDD that prospective franchisees frequently overlook is Item 3: Litigation. But, whether the franchisor provides a “negative disclosure” or details multiple ongoing pending lawsuits, Item 3 can often provide valuable insights into the risks of choosing a particular franchise opportunity. Potential Takeaways from the Item 3 of the FDD 1. An Item 3 “Negative Disclosure” If a franchisor does not have any litigation history that is subject to disclosure under the Federal Trade Commission’s (FTC) Franchise Rule, it must simply state in Item 3, “No litigation is required to be disclosed in this disclosure document.” While this is generally what you want to see as a prospective franchisee, it is important to note that not all types of lawsuits are subject to disclosure in Item 3 under the FTC Franchise Rule. For example, lawsuits that do not need to be disclosed in Item 3 include: Criminal actions that do not involve allegations of fraud; violations of franchise, antitrust or securities laws, or other “comparable allegations;” Civil lawsuits that are considered “ordinary routine litigation incidental to the business;” and, Bankruptcy proceedings subject to disclosure in Item 4. 2. Litigation Against Franchisees Under the […]

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“Take it or leave it.” While hearing a franchise salesperson utter these words is less common than it used to be, high-pressure tactics remain a central component of the sales process in many franchise systems. Although buying a franchise is a unique and high-risk investment, franchisors use traditional methods to sell franchises, and their salespeople get paid on a commission basis. This means that they have a financial incentive to close as many sales as possible, and the last thing they want is for their commission to get held up due to franchise agreement negotiations. As a result, franchise salespeople will often imply that there is no room for negotiation in the franchise agreement. They may say things like, “Our franchisor doesn’t agree to changes,” or “We already offer better terms than any of our competitors.” Regardless of whether or not these statements are true (which is another matter entirely), the simple fact of the matter is that all franchisees have the right to make informed decisions and protect their investments. In fact, most good franchisors will not only be willing to negotiate reasonable modifications, but they will even expect quality franchise candidates to request changes to their standard terms. The reason for this is simple: Franchisors know that their agreements are heavily one-sided. They know that franchisees who accept their standard terms are taking a huge risk, and they know that they need to be reasonable in order to attract top talent. Key Risks of Signing a Franchise Agreement […]

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