It is inevitable that the vast majority of our clients are franchisees. This has allowed us to identify recurring issues that franchisees face when things go wrong. These challenges are not unique to any specific sector but shed light on the most vulnerable franchisee profiles, common traits of bad franchisors, and the unethical practices they employ.
The Lack of Transparency
There is no legal requirement for UK franchisors to disclose failure rates to prospective franchisees. Unsurprisingly, those with high failure rates often conceal this information. While surveys highlight the high success rate of franchised businesses, these figures are skewed by underreported failures. Well-run franchises do perform exceptionally well, but unethical and poorly run franchises suffer shockingly high failure rates. This creates a dangerous scenario where a few bad franchisors exploit the overall positive image of franchising to attract vulnerable franchisees, many of whom face inevitable failure.
The Vulnerable Franchisee
The most at-risk franchisees often have limited business experience and financial resources. They typically operate low-tech service or distribution franchises with low entry costs, seeking a less stressful lifestyle through self-employment. Unfortunately, when these individuals encounter a bad franchisor, the likelihood of failure increases significantly.
Exploitation Tactics by Bad Franchisors
Unethical franchisors often mislead prospective franchisees with exaggerated or fraudulent claims, particularly regarding financial projections. These projections may cherry-pick top-performing franchisees’ figures while omitting those who failed. A true average would account for failed franchisees, but bad franchisors cleverly word disclaimers to obscure this reality.
One infamous example is the now-defunct Let’s Eat, operated by MCS Tech Ltd. This franchise promised a food delivery business, modelled on the industry leader, with an initial investment of just £6,000 and projected earnings of an amazing £180,000 in the first year, rising to £1.4 million by the third year. Predictably, MCS Tech went into liquidation in 2023, leaving franchisees and creditors with losses exceeding £750,000.
Another health and wellbeing franchise promised earnings of £30,000 within three months of a £15,000 investment, despite the franchisor never posting an annual profit.
A children’s activity franchise is being offered with claims of profits in excess of £9,000 per month for an investment of just £5,000. Legal action often follows such cases, but the damage to franchisees is already done.
Misleading Endorsements
Membership in trade organizations like the British Franchise Association (BFA) or endorsements from banks can lend credibility to franchisors, but these are not foolproof. Some franchisors with questionable financial health or unethical practices still manage to secure endorsements or awards, often through conflicts of interest.
Warning Signs and Red Flags
Bad franchisors often focus on recruitment income rather than supporting franchisees. Early warning signs include:
• High upfront fees or minimum monthly payments, even if no business is conducted.
• Lack of operational support or updates to the business model.
• Hidden supplier kickbacks, further reducing franchisee profitability.
• Misuse of advertising funds for recruitment purposes rather than promoting the franchise network.
The Impact of Ownership Changes
Franchisees can also suffer following the sale of the franchisor’s business, especially when the buyer is a venture capitalist or multi-brand franchisor. New owners often enforce stricter performance measures, issue breach notices, and prioritize rapid returns on their investment, eroding franchisee morale and stability.
Prominent examples include a once-successful van-based franchise that filed for a Creditor’s Voluntary Arrangement within two years of being taken over by a multi-brand franchisor.
The Lack of Regulation
The UK franchising industry remains largely self-regulated, unlike the stricter systems in the US, Australia, and Canada. While the BFA works to uphold standards, its membership is voluntary and represents less than half of UK franchisors. Worse, alternative trade associations often exist solely to provide unscrupulous franchisors with a veneer of respectability.
The Reality of Franchising
Despite the horror stories, franchising still boasts higher success rates than independent businesses. The key is due diligence: prospective franchisees must conduct thorough checks, ask the right questions, and understand the risks.
If things go wrong, franchisees should know they are not powerless. There are often ways to hold franchisors accountable and avoid becoming another statistic in the franchising industry’s darker side.
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