If you are thinking of setting-up a franchise business, consider the below list of common avoidable mistakes we have seen prospective franchisors make.
Failing to select the correct advisors: There are lots of consultants and lawyers who say that they have experience advising prospective franchisors. The list of those who are reputable with established and proven reputations is actually relatively short. Consultants and lawyers who are ‘Affiliates’ with the British Franchise Association have had their experience assessed as part of their membership.
Failing to pilot test: Pilot testing is where a prospective franchisor provides their proposed franchise concept to a third party to run, as their first or pilot franchisee. That party could be, for example, an employee wanting to strike it out on their own or somebody wanting to get in on the ground floor of a new franchise concept. The aim is not only to generate financial data to help in the recruitment of franchisees, but also to address potential problems in replicating the business. Pilot testing seeks to prevent a franchise system failing before it has even started, and to demonstrate that the concept is proven to work.
Failing to have a properly prepared franchise agreement: Franchise agreements are not all the same. A badly drafted agreement could lead to operational difficulties and enforcement problems later.
Misrepresenting the franchise proposition: A franchise prospectus is often produced for the purpose of recruiting franchisees. Any financial data as to how profitable the franchise could be, should be accurate and verifiable, for example by reference to pilot testing. Ask an experienced franchise lawyer to review the document. There should not be an over reliance on legal disclaimers. Legal disclaimers cannot protect a franchisor from all misrepresentation claims. Prospective franchisees should be encouraged to seek their own legal and accountancy advice.
Failing to select the right prospective franchisees: Getting the right type of person, when it comes to mindset and experience, needs to be as important if not more important than finding someone with the financial resources to pay a franchise fee. Selecting the wrong type of person, can be an expensive mistake. Prospective franchisors should carefully vet a prospective franchisees’ background and experience. A franchise system which develops a reputation for failure, will find it difficult for its franchisees to obtain start-up loans from the retail banks.
Failing to select employees with franchising recruitment experience or properly train those without: Whoever is in-charge of franchisee recruitment should understand the potential consequencesof making false, inaccurate or misleading statements. If an employee is financially incentivised to recruitfranchisees, then there could be a temptation to overpromise. Ensure employees are on properlydrafted agreements to protect confidentiality and consider if a restrictive post-termination covenant isappropriate.
Failing to get the franchise agreement properly signed: Ensure the employee responsible understands the legal requirements relevant to the execution of the franchise agreement.
