7 franchise myths exposed

Franchising is often a misunderstood area for the uninitiated.

Potential new franchisees are often naïve about what to expect from a franchise and the rules governing franchising as a whole.

Here, we examine some of those misconceived myths and lay them to rest.

Myth 1: The franchise agreement must be signed immediately upon expiration of the 14 day disclosure period

This is untrue.  

The disclosure period is a mechanism by which a franchisee is “slowed down”.  This encourages the franchisee to properly consider the franchise offering. There is however, no requirement for the franchisee to sign straight away.  

In truth, the franchisee should take their time and use that time to speak to their family, speak to other franchisees within the system, seek legal, business and accounting advice and assess the suitability of the franchise.

The franchisee can sign the franchise agreement any time after the 14 day disclosure period expires.

Myth 2: The franchisee will be guaranteed a certain income

This may be true.

Some franchise systems do guarantee a certain income for franchisees.

Franchisees should check the fine print.  These clauses are often drafted so that a franchisee must meet a number of very specific criteria.  In some instances it can be difficult, if not impossible, to meet those criteria meaning a franchisee may not receive the guaranteed income.

For instance, the franchisee the franchisee may be required to travel many hundreds of kilometres to meet marketing or work requirements to qualify for the guarantee.  It is very important to carefully scrutinise the wording of these clauses.

The franchisee needs to be satisfied that it will be capable of meeting the criteria.  If the franchisee is concerned then the franchisee should undertake negotiations before entering into the franchise agreement.

If the franchise agreement does not contain an income guarantee then the franchisee will not be guaranteed a certain income.  

Myth 3: The business will be successful because it is a franchise

This is untrue.

Whilst business studies show that franchised businesses do tend to be more successful than stand alone businesses, there is no guarantee of success.

Franchisees can become starstruck by the branding, the household name and the slick sales campaign.  None of this will guarantee success though.

In many cases the franchisee’s success will depend upon the dedication of the franchisee working within the business.  Although the assistance, training, support and marketing of the franchisor also often has a great impact upon the success of the franchisee’s business.

There are no guarantees in business and, just like any business, a franchise comes with an element of risk, some of which is controllable and some which is not.

Myth 4: The franchisor will do all of the marketing

Mostly this is untrue.

Generally speaking, a franchisor will undertake some marketing but will expect the franchisee to undertake marketing in the same vein as any small business owner would.

Marketing is generally undertaken on 2 levels.  The first is at a head office level which tends to be more of a “whole system” approach.  The second, is the marketing undertaken by the franchisee, which will be more focussed on the franchisee’s business and within the franchisee’s local area.  This often includes becoming involved in the local community and targeting customers within that community.

In most franchise systems marketing will be undertaken by both the franchisor and the franchisee.

Myth 5: The franchisee can make all of the decisions about the business

This is untrue.

One of the strengths in franchising is the system and uniformity.  This is one of the reasons people are attracted to franchising in the first place.  Amongst other things they are acquiring the “know how” to run the business.

So, whilst the franchisee does own the business, they must follow the system and the rules of the franchise.

If a potential franchisee is more of a “trail blazer”, as opposed to somebody who can follow the rules, then franchising is probably not for them.

Franchisees must follow the franchise system and abide by the rules.

Myth 6: The franchisee can stop payments to the franchisor if the business is not going well.

This is untrue.

The franchisee is usually contractually bound to continue to make payments under the franchise agreement regardless of the performance of the franchised business.

In much the same way as a tenant under a lease must still pay the landlord, even if the business is not going well, so to must the franchisee.

If a franchisee is paying royalties on a percentage of turnover basis then the required payments will reduce if the turnover reduces.

Myth 7: At the end of the franchise the franchisee can continue to operate the business

This is generally untrue.

Most franchise agreements will include a restraint of trade which will operate after the franchise agreement comes to an end.

Franchisees should seek legal advice though as many factors will impact upon the enforceability of these restraints including but not limited to the drafting of the provision, the fairness of the restraint, the experience of the franchisee prior to entering into the franchise agreement and so on.