The Franchisee Handbook by Mark Siebert

Author:Mark Siebert
Language: eng
Format: epub
Publisher: Entrepreneur Press
Published: 2018-03-13T16:00:00+00:00

The Franchise Agreement

One of the required disclosures in the FDD is a copy of any contract you may sign, including the franchise agreement. While the disclosure rules require the FDD to be drafted in plain English, there is no such rule regarding the contract.

While the franchise agreement may give you some insight into the relationship not found in the FDD, unless you are an attorney (and probably even if you are), you need to be sure your attorney reads this document and advises you as to your rights and obligations prior to signing it.

And make no mistake, the contract is not stacked in your favor. Partly because of current franchising law and partly out of necessity, franchise contracts are often presented on a take-it-or-leave-it basis to buyers who have never purchased a business before and who often do not know the right questions to ask.

As a management consultant who helps franchisors structure the business terms in these contracts, I can tell you firsthand that franchisees and franchisors do not enjoy a level playing field. Every franchise contract I have ever seen is stacked strongly in favor of the franchisor.

Never Trust a Statistic

You’ve heard the old saying “There are three kinds of lies: lies, damned lies, and statistics.” Not only is it true, but perhaps nowhere can the results be more damaging than in franchising.

One of the most common statistical lies is the citation of franchising “industry” statistics. Statistics that reference the success rate of franchisees in general as a means of implying that your chances of success are similar can be a major source of confusion. Twenty years ago, it was not uncommon to read something like this: “According to the U.S. Department of Commerce, nine out of ten new businesses will fail in their first ten years. But only 4 percent of franchisees go out of business in any given year.”

Read that quickly, and you might think, Hey, this franchising sounds like a sure thing. Which is, of course, exactly what the franchisor wants you to think. But let’s look at the statement more closely.

First of all, a close reading reveals it is comparing two different statistics. Whenever this happens, beware! If 4 percent of franchisees go out of business in any given year, how many go out of business in 10 years? Depending on how you do the math, it would be somewhere between 33.5 percent and 40 percent.

So franchisees would have a success rate of 60 percent or better, right? Wrong! Because we are also comparing two different statistical groups—new businesses vs. all franchisees, including those that have been in business for years and presumably have a lower failure rate. Look closely to see if a statistic is comparing apples and oranges!

But even if the same groups were being compared, the most insidious statistic is the one that is hidden the best. This is the problem found in grouping franchisees into an “industry.” Franchising is a means of expanding a business, not an industry. While franchisees may

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