The second lead that my referral source sent me came into my office to meet me. He and his wife had traveled a long way and were vacationing nearby. Before we met in person, they sent me an e-mail with information on a franchise they were interested in. It was a franchise that was not in the Franchise Brokers Association’s Approved Franchise list.
They sent me the FDD of the franchise. That was all I needed; I began my research and read the FDD (a 200+ page document that is governed by the FTC, also known as a Franchise Disclosure Document). I used the one hour of complimentary legal services that our attorneys at the FBA provide all members’ clients.
In reviewing the information, we found out that the Franchisor’s name was not a valid trademark and in fact the trade name was owned by another company. This meant that any Franchisee that was in that system was operating under a name that violated U.S. Patent and Trademark Law. That could be detrimental to my client’s business.
Can you imagine buying a franchise for the brand name recognition then, after 7 years in the business, you are sued for operating under the name you bought from the franchise? Then you would be forced to change the name of your business and pay for all re-signage, penalties and other fees. What a mess that would put you in!
That’s not all. In doing the research we found that 35% of all Franchisees in the system had failed. That meant that my client had a 1 in 3 chance of not succeeding. Yes, a large part of the Franchisee’s success is their work effort and determination, however we need to make sure that the Franchisor knows exactly what to do to help willing Franchisees.
Next we found out that every Franchisee in the system was operating differently. They were not “following the system” as the Franchisor explained. The problem with that is that it is the Franchisor’s job to:
1) Make sure the system works
and
2) Make sure Franchisees are doing their best to stay on track with the system
The fact that all of the Franchisees were operating differently told us that the system wasn’t a system at all.
We also found out that this Franchisor had hundreds of franchise concepts under their belt. They were a company that simply sold franchises and didn’t necessarily have the experience of operating the types of businesses they were selling. After uncovering all of these things, we decided that the risk was far too great to go with this system. The franchise was by no means a bad franchise, it simply too risky for this client.
As the client walked in, I was prepared with this information. As you can see, very quickly they realized the importance of using a good franchise consultant. They were relieved and were ready to find something that was a better fit for their risk tolerance and financial goals.