The Playbook of an ‘Unscrupulous and Dishonest Franchise’

I have just received yet another tearful call from a Franchisee that is about to lose everything and who shared their story how they ended up in the position they did. It is a story I have heard from countless other Franchisees whose lives have been ruined by ‘Unscrupulous and dishonest franchises’ (Sir Geoffrey Cox). This is the playbook that these ‘Thugs in Suits’ (Sir Alan Bates) follow;

  • Sucked into a franchise with hyperbolic headlines and claims that make you feel that failure is not a possibility and that no previous Franchisee has failed. Examples include: “Genuine win-win, Proven £250k personal income potential by helping the planet”, “Build a £1.5m business – No construction knowledge required”, “Achieve the freedom you’ve always dreamed of” and my favourite ‘proven business model’.
  • Requirement to sign first of many NDAs and to disclose all of your assets before you have even seen anything about the franchise
  • ‘Selected’ Franchisee financials shared with prospective Franchisee under NDA with no ability to prove their accuracy
  • Confirmation that potential Franchisee has existing assets that can be used as collateral with both the banks and the Franchisor
  • Leverage Franchisor relationship with bank to get 80-100% loan for investment in the franchise with prospective Franchisee and their spouse as co-guarantors
  • Requirement that both themselves and their spouse / partner sign the Franchise Agreement in order that all of their assets are ‘on the block’ in case of needing early exit or Franchisee failure 
  • Persuaded to sign a completely one sided Franchise Agreement on pretext that the Franchisor has never previously enforced any of the onerous conditions
  • Franchise Agreement advertised as meeting the minimum mandatory requirements of the BFA to be a so called ‘ethical’ agreement but does not contain any of the non-mandatory clauses, such as transparency with pricing of products and services, but also includes additional clauses such as the EVIL Liquidated Damages clause that is completely unethical
  • Agreement also includes an ‘entire agreement clause’ which is designed to limit the Franchisees ability to claim misrepresentation for false disclosure prior to signing the agreement
  • Soon after starting up, reality dawns and the promised returns are just not there and the Franchisee struggles to compete in the marketplace, partly because of the inflated prices the Franchisor is charging its Franchisees for its products and services, in addition to the commission payments. 
  • Because of the lower than expected turnover (don’t even mention the word profit!), working capital becomes a problem and the Franchisor tells the Franchisee that they need to find additional funds to inject into the business
  • The Franchisee struggles along, working >100 hours a week, not sleeping very well and earning nothing in return. Their relationship with their partner, family and friends begins to suffer 
  • They’re told that they are the only Franchisee failing and they are then ‘isolated’ from the rest of the franchise network. Have we heard this tactic before? High profile examples include the Post Office Scandal and the recent case being taken by the Vodafone Franchisees (link here to Fairer Franchise website).
  • Eventually after battling on and trying everything, the Franchisee decides that it just can’t continue and makes the incredibly tough decision to cut their losses and somehow get out of the agreement….
  • ….that is until they realise that the Franchise Agreement they signed with their so called ‘partner’ contains the EVIL liquidated damages clause that means they are liable for all of the commissions and fees that they would have paid to the Franchisor if they had met the agreed turnover targets (not profit) for the remainder of their agreement which could be 10 to 15 or even 20 years.
  • So they try and negotiate their way out but the Franchisor digs their heels in knowing full well what assets they have (after all…this IS their BUSINESS MODEL) and they will offer a reduction on the total amount owing in return for signing an incredibly onerous NDA that means they can’t even tell their own mother anything about their experience
  • The Franchisee considers their options including taking their own case against the Franchisor for false representation but after consulting lawyers they decide that it is not worth it because of the time, costs, risks and stress involved in a case like this. In the end they either pay up or decide to go bankrupt losing all of their investment along with any assets they and their partner own, including their house, and they have to start all over again….
  • The NDA means that no-one gets to hear about what really went on and the shiny image of the Franchisor is kept intact
  • The Franchisor then sells the franchise area to the next unsuspecting Franchisee using one of the many excuses they have to disguise the real reason for them leaving
  • And so the cycle begins again…

This playbook along with the behaviours exhibited have many of the same hallmarks of the ‘Thugs in suits’ at the Post Office which we now know to be the greatest miscarriage of justice in British history.

I have heard on very good authority (& seen the evidence!) of one U.K. Franchisor, along with their lawyers, reviewing (or gloating) their ‘league table’ of how much Liquidated Damages they will ‘screw’ each Franchisee for, at their monthly management meetings. Are these the actions of an ‘ethical’ Franchisor and for that matter ethical lawyers? The people running these businesses need to be found out and removed and anyone that works in an organisation that operates like this is complicit and should be ashamed of themselves. 

The only way I believe that we can begin to tear up playbooks like this is by introducing regulations, as exist in most developed countries, whereby Franchisors are legally obliged to disclose specified information in advance of anyone signing a Franchise Agreement and where there are consequences for fraudulent disclosure.  There are many other changes I would like to see happen not least the banning of EVIL liquidated damages clauses but also the introduction of a ‘cooling off period’ of many months, as exists with many contracts, where the Franchisee has the ability to cancel their agreement.

For more details about completely one sided Franchise Agreements, please read my blog on ‘Are Franchise Agreements Ethical?’ 

I share this playbook of an ‘unscrupulous and dishonest franchise’ because I would like anyone thinking of putting all their assets on the line by signing a Franchise Agreement to be fully aware of the risks involved and to understand some of the legal clauses and behaviours they need to look out for during their due diligence. Have a read of my previous blog called ‘Due Diligence….Ignore it at your peril’ where you will find a simple 5 step process along with sample Due Diligence questions that you can adapt for your own situation. (link here).

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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;

#theperilsoffranchising, #franchise, #franchisor, #franchisee, #franchising, #franchiseagreement, #BFA, #britishfranchiseassociation, #qfa, #qualityfranchiseassociation, #departmentforbusinessandtrade

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