There is no safe way to start a business. A good franchise however offers more security than starting a new business from scratch. It should offer a tried and tested business plan, using an established brand and using the principal’s expertise and experience to help establish the new entrepreneur.

However, comanies which offer franchises for sale (franchisors) are not all as reputable as might be expected. In fact some business owners that are doing poorly at their business may see franchising as a way to improve their fortunes and make some money. By using some clever marketing they can make their business look attractive and sell the right to establish branches (or franchises) around the region or further afield.

I undertook a forensic accounting investigation into a franchise for car valeting recently where a businessman had failed in previous car valeting company and was attempting to start again. For £17,500 and a percentage of ongoing income, some 5%, a person was supposed to be up and running with at least his first 30 clients ready and waiting for his services. Unfortunately after waiting around 3 months for training, then realising that the franchise fee did not include a fully fitted sign written vehicle – but only a down payment on one – there were only a handful of customers waiting. The customers, all with £20 money off vouchers, only wanted the basic £30 service – not the £200 full valet.

As a forensic accountant I always interview the victims in a scam to find out the full background – to see if it is a fraud or just sharp business practice. In this case it seemed that the person setting up the franchise had lost all interest when his previous business folded and had no enthusiasm for his new venture. Therfore he was unable to give the full support that the new franchisees needed.

Fortunately there were only three recruits, and all now have learned the business fully and are in the process of establishing thriving trades. The franchise company was closed down by the authorities (Companies Investigation Branch) and hopefully the message can be conveyed to prospective franchisees considering a similar venture:

  • Check out the history of the franchise company – see if it is a long established provider or is it a fly by night fraudster.
  • Is the franchisor a member of the Franchise Association (USA or UK or wherever the company is trading).
  • Are you able to choose a number of franchisees to visit and discuss the business with or are you simply steered towards a flagship operation? You need to speak to as many recruits as possible – better if they have been with the franchise company for some time.
  • Do all the due dilligence you would do setting up a non franchise business – for example do your own business plan and do not rely on one given to you.
  • Use a solicitor who specialises in franchise law.

Although there are many frauds and scams in the franchise world, generally it is a more secure way of starting a business. Just do your homework first!

Mark Jenner

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