Absolutely YES…..in fact, issues like happened with the Post Office Scandal are happening on a regular basis in the U.K. today. Individual’s livelihoods and in some cases lives continue to be ruined by ‘unscrupulous and dishonest franchises’. These are not my words but those of Sir Geoffrey Cox, MP and former Attorney General, who after reviewing case information presented to him, came to this conclusion. Let me explain how this is happening…
The relationship between the Post Office and its Sub Post-Masters is actually a Franchise that is governed by a Franchise Agreement just like the all the other franchises, many of which you will know – McDonalds, Subway, Costa Coffee, Shell, Domino’s, Green Thumb, Pandora….. etc.
The last franchise survey in the U.K. in 2018 estimated that there were approximately 20,000 franchisees operating approximately 50,000 units with a combined turnover of approximately £17bn. Based on these numbers you would reasonably think that franchising is a successful business model but this can be extremely deceiving because of a lack of transparency and regulation.
The Franchise Industry in the vast majority of developed countries is regulated but there is absolutely NO regulation of the Industry in the U.K. which is really ludicrous for an industry of its size. There are two Franchise Associations in the U.K. that operate a bit like ‘Clubs’ where you pay to be a member in return for their badge of approval but the reality is that they only look out for their paymasters which are the Franchisors. The BFA‘s own constitution sates that its purpose is ‘To promote, protect and further the interest of Franchisors’. Franchisees, like me, were given a false sense of security by signing up with a Franchisor that was a member of one of these associations.
Mr Bates Vs Post Office
It is a running joke in the Franchise Industry that Franchise Agreements are completely one sided, (see my earlier blog on ‘Are Franchise Agreements Ethical?‘) in favour of the Franchisor, just like the judge found in the case of Alan Bates and others Vs Post Office Ltd, when he concluded that many of the terms in the Franchise Agreement were ‘onerous’ and failed the test of ‘reasonableness’ which meant they could not be relied upon. The vast majority of the obligations in a franchise agreement are for the franchisee and in the case of failure or termination the vast majority, if not all, of the impact is on the franchisee. There is absolutely no sense of partnership or shared risk and reward that most Franchisors talk about in their marketing.
One of the most onerous terms that is now the favourite of Franchisors, including those registered with either of the two franchise associations, is the so called liquidated damages clause. This sets out what the franchisee would have to pay to the Franchisor in the case of termination or failure. In plain English this could require the franchisee to pay to the Franchisor the commissions and other revenues (e.g. advertising) that they would have earned from them if they had stayed until the end of the agreement along with the Franchisors’ marketing, legal etc. costs. So assuming franchisees are not able to sell their business, as if losing their business and all their investment in it was not bad enough, they will then be liable for the liquidated damages, the amount of which will depend on the length of term remaining in their Franchise Agreement, but which can run into hundreds of thousands of pounds and in some cases millions. These staggering costs must be paid even if the Franchisor has lined up another Franchisee to replace them the day after the agreement is terminated.
Franchisors use clauses like the liquidated damages clause to frighten franchisees into settling disputes and when the relationship is irrevocably broken, Franchisors will likely offer to reduce the £ damages in return for signing a Non Disclosure Agreement (NDA or gagging clause as it is more commonly known). The use of NDAs or gagging clauses (subject of a future blog) at various stages of the franchise relationship, including in the Franchise Agreement itself, is how Franchisors protect the perimeter of their business. Potential franchisees are none the wiser about the real state of the franchise business because there is little or no public information available about the Franchise and there is no obligation on Franchisors to disclose specific information to potential franchisees.
Another Important lesson the Post Office scandal has thought us is ‘the importance of culture and values in any Franchise organisation’ (see my earlier blog on this topic). I would go as far as saying that culture and values is one of the most important factors, if not the most Important factor, when joining a franchise, because if you end up in an organisation with values that don’t sit well with you (e.g. unethical selling), it could be a very long and painful 10-15 years, or however long the franchise is for. The challenge is trying to decipher what the real culture and values of a franchise are before signing the agreement.
It is because of issues like this and the impact these are having on people’s livelihoods, and in some cases lives, that regulation is required NOW in the U.K.. This is also what Sir Geoffrey Cox concluded in his review of the case information that was presented to him. Judge Jones in the case of Dwyer (UK Franchising) Limited v Fredbar Limited & Shaun Bartlett also concluded that franchising ‘should be subject to regulations’ and that there were ‘no specific laws governing the sale and purchase of a franchise’. Regulation does not have to be too onerous but it must be designed to protect the franchisee from ‘unscrupulous and dishonest franchises’. As an example, Franchisors would then be required to make public basic information like: the Franchise Agreement template, litigation history, all fees involved in the franchise, financial performance, franchisee turnover, franchisor’s financial statements, contracts, visibility of any franchisor commissions or kickbacks from suppliers etc.. Pretty basic stuff but completely lacking today. Being forced to disclose this information means that Franchisors can be held to account if false information is supplied. Any ethical Franchisor should welcome regulation as it shines a positive light on their franchises and isolates the unethical ones.
Signing a Franchise Agreement in the U.K. today is akin to getting married on your first date and signing a prenuptial agreement that gives complete control of your affairs to your new spouse (Franchisor). In fact, it is even worse than this because with a Franchise Agreement your ‘spouse’ also has the ability to leave the ‘relationship’ and replace themselves with someone of their own choosing that may have a completely different view about the direction of the business!
In summary, as well as quashing all of the wrongful convictions of the Sub Post-Masters and compensating them appropriately and quickly, the government also need to introduce regulation to ensure that franchisees have protection from ‘unscrupulous and dishonest franchises’.
It is worth making the point that there are many ethical franchises that make decent money for their franchisees but sadly it is always the few that ruin it for the many. Regulation is still a must because the risks involved are way too high and the potential consequences for franchisees catastrophic.
I would love to hear the thoughts of existing Franchisors on the topic of regulation. Do you support it? Would it be good for the industry? In your view, what are the downsides to regulation?
Please share this blog with other Franchisees as well as anyone you know that may be thinking of investing in a franchise and ask them to subscribe below for future blogs.
Details about the author and his experience of being a Franchisee can be found here. Just to be clear, the authors’ views expressed in this blog are exactly that….his views, based on his personal experiences, by connecting with many current and past franchisees of many different Franchisors and through his own market research.
See below for links to some of my earlier blogs;
- Are Franchise Agreements ‘Ethical’?
- Should I care how Franchisors make their money?
- Top Tips for Potential Franchisees
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The Perils of Franchising 