KnowThis Blog Postings
- Published on February 11, 2012
- Posted by Paul Christ
Tough Times for Franchising (Wall Street Journal)
So You Want In? How to Assess a Franchise Opportunity (Wall Street Journal)
In the retailing industry, franchise operations have long been perceived as a less risky road to retail success for both the franchise operator (a.k.a. franchiser) and the entrepreneur who purchases the right to operate a franchise (a.k.a. franchisee). As we note in our Retailing tutorial, a franchise arrangement offers significant advantages to both franchiser and franchisee. The biggest advantage for both groups is that the business can potentially be built more quickly with less out of pocket costs.
Additionally, many entrepreneurs believe that acquiring a franchise is a much more reliable way of entering retailing compared to starting a retail operation on their own. At least, that is what the franchise industry wants perspective entrepreneurs to believe. While franchises overall may offer slightly better odds than staring a retail store from scratch, the reality is that franchise failures do exist and can occur in large numbers.
As an example, the first Wall Street Journal story provides insight on what can happen when conflict arises in the franchiser-franchisee relationship. One of the chief areas of conflict is the legal arrangement binding franchisees to the franchiser’s way of doing business. As noted in the story , these documents can be quite restrictive on what the franchisee can do, including offering franchisees little say in how the franchise operates.
"Our franchise agreement is illusory," said Sherri Vertorano, an Edible Arrangements franchisee in Mooresville, N.C., who is part of the lawsuit. "It's like a living, breathing document that changes whenever the franchiser wants to create another revenue stream." Ms. Vertorano and about 200 other franchisees are also seeking to stop Edible Arrangements management from collecting 2% of gross sales on orders placed over the Internet, among other grievances, according to the complaint. That fee was implemented last month, the company said.
So what do entrepreneurs need to do to make sure they are making a smart franchise purchase decision? The second Wall Street Journal story provides good information on what potential franchisees should look for in a franchise opportunity, with particular emphasis on the need to read and understand franchise disclosure documents. However, as noted below, reading disclosure documents is often not easy and generally requires legal assistance.
One tip: California, Wisconsin and Minnesota have free national databases online that contain franchise disclosure documents for many, though not all, franchise systems. These documents are typically several hundred pages long and loaded with legal terminology and data. You may want both your accountant and attorney to help you make sense of it.
Why would a franchiser want to limit the input franchisees have in terms of operating the business?