- How to spot a Good Franchise from a Bad Franchise/
Although the following is a true story, names have been changed to protect professional confidentiality requirements.
A fellow, let’s call him Pete, approached one of our experts in his capacity as a leading franchise consultant and asked him to rubberstamp a franchise offer he was about to accept. He openly admitted that he would have signed up without asking any questions, had it not been for misgivings expressed by his wife. As it turned out, his wife’s concerns were well-founded and it was indeed fortunate that he sought professional advice.
The core business of the self-styled “franchise” was a service that is reasonably popular in the US but is virtually unknown in South Africa. The promoter of the “franchise” had developed the package locally. He readily admitted that he had not operated the business but claimed that his systems were superior to anything on the market. He also explained that to put the business on the map would require a high profile marketing drive. The high cost of such a drive makes a swift national launch a business imperative.
Moreover, the promoter told Pete that the systems and procedures he had developed are highly confidential and no details could be divulged unless Pete signed a binding franchise agreement first. Such a request is untenable but worse was to come! Before Pete would be permitted to even see the so-called franchise agreement, leave alone show it to an attorney, he would have to make a good-will payment of R50 000.
A few days later, Pete received an invoice for the requested amount plus VAT, although no VAT number was given. A note at the bottom of the invoice stated that “in the unlikely event that Pete should find the agreement unacceptable and decide not to proceed with the project, his money would be refunded.
However, “administrative expenses” incurred by the promoter would be deducted but no amount was specified.
Together with the invoice, Pete also received a “disclosure document” which was full of claims but contained no verifiable facts whatsoever. It did state, however, that in addition to the upfront fee, Pete would have to pay an ongoing “franchise fee” in the form of a fixed monthly amount of R3 500 which would increase by a set percentage each year.
A few days after receiving the invoice, Pete was admonished – via email – for dragging his heels by not having paid over the money. The promoter warned Pete that unless he effected payment within 48 hours, the initial fee would double; moreover, other interested parties would be considered for the territory he had been provisionally allocated.
On the strength of the facts available, it is clear that the promoter is far more interested in collecting fees than in ensuring the establishment of a network that enjoys long-term viability. The package is without merit, no franchise exists and negotiations should be terminated forthwith.
FASA has developed clear guidelines for the compilation of a disclosure document and these can be looked up on FASA’s website, www.fasa.co.za. Essentially, a disclosure document should contain comprehensive information on the opportunity including the franchisor’s history, full financial details, an explanation of onerous clauses contained in the franchise agreement and an auditor’s statement that the franchisor’s business is financially sound. It should also contain a list of existing franchisees and a copy of the franchise agreement.
FASA also stipulates a “cooling-off period”. This means that 14 days need to pass between the day a prospect receives the disclosure document and the day a binding agreement may be signed and/or any payments made to the franchisor.
Those franchisors who are interested in building long-term relationships go even further. The following is but one example of a franchisor’s pledge to prospective franchisees.
Once you are my franchisee, we will be partners in the business. To ensure the network’s success, I shall depend on you as much as you depend on me. Indeed, your success will be my success and your gain will be my gain! The balance of this disclosure document tells you what I expect from you; here is what you can expect from me:
Remember: Your success is my success so let’s join hands and do it together!