Common Pitfalls of Start-up Franchising and How to Avoid Them

4. Training.

Prospective franchisees will often lack experience with the franchisor’s business, industry or concept.  Even with manuals in place, the absence of adequate initial training sufficient to impart all of the basic components of operating and managing the proposed franchise business will hamstring the franchisee from day one. Failure to train franchisees from the get-go results in their perpetuating and training on their own mistakes, an outcome which the purchase of a franchise is intended to prevent in the first place  More importantly, failure to properly train franchisees impedes execution at store level thereby sapping the concept of its early growth potential.  Every franchise has to budget and develop a training programme at the inception of the system complete with a training manual and a competent trainer to deliver it.   A charismatic chef who communicates by throwing kitchen utensils around should not qualify as a competent trainer.

5. Site Selection or  Real Estate.

Control over one’s real estate is a tremendous advantage to any franchisor whose business relies on customer visits.  One of the best ways to exercise that control is for the franchisor to take a head lease of its locations and then to sublease them to its franchisees.

However, the indiscriminate or inconsistent selection of sites, particularly during economic downturns, has been a significant source of start-up franchisor failures. The burden of even a few uneconomic locations, when added to previously marginal locations failing more or less at the same time, can bring the average start-up crashing down.  While there are numerous planning devices to protect against such outcomes, this planning has to anticipate the problem.  Experienced franchise counsel can assist in structuring the appropriate real estate and leasing vehicles for a particular system.

6. The Accidental Franchisor / Ignorance of the Law.

Since the enactment of franchise-specific laws in various provinces, a fair number of legal relationships, commonly referred to as dealerships, are now considered to be franchises by the relevant franchise statutes.  In many provinces, franchisors must provide a disclosure document prior to the grant or renewal of a franchise. Failing to do so allows a franchisee (in most cases) to  claim, pursuant to franchise legislation, both the return of their initial investment paid to the franchisor as well as all losses accumulated in connection with the business for a two year period from the date of the franchise grant.  If, for example, one’s business network consists of the sale or distribution of goods and services using the owner’s trademarks, and the owner makes a profit by selling goods, then experienced legal advice should be obtained, despite the fact that in other jurisdictions, such business structures might not be considered to be examples of franchising.

7. Running Afoul of Legal Requirements.

Since the enactment of franchise legislation, franchisors in the affected jurisdictions are required to produce a disclosure document in relation to the business opportunity being offered, which is similar to a securities-type prospectus.  Franchisors doing business in provinces with franchise legislation often fail to appreciate the risk of inadequate disclosure.  In the interests of false costs savings, these franchisors attempt to prepare a disclosure document internally, or based on price rather than professional expertise.  As with the accidental franchisor, the consequences can be devastating if the system has a couple of hiccups in its early stages of growth.

Risk Avoidance Tips.

While no business can avoid all risk, minimizing foreseeable risk is possible.  Retaining experienced consultants to help develop a successful franchise system, together with the engagement of experienced legal counsel to advise on legal structures and prepare documentation catered to a particular franchise concept, are measures that will go a long way towards reducing the foreseeable risk and personal liability that otherwise attaches to those who ignore the law.