• Expert Advice

Man’s trusting and often gullible nature is at the core of why prospective business people are often scammed by unscrupulous operators. Recent exposés by investigative programmes in the media of franchise scams offering get-rich-quick schemes and reports of shady franchisor operators show there are a whole lot of people out there who are corrupt enough to take advantage of others – and enough gullible people who will unwittingly fall for these schemes.

The Bottom Line

Rarely does a get-rich-quick-scheme work in franchising, perhaps because of its high profile and strong reputation and the relative ease with which it can be duplicated, is one of the business sectors that often falls prey to scammers.

Franchising vs Independent Business Statistics

Global statistics often claim, quite rightly so, that when purchasing a franchise, you are more likely to find greater success than going into business as an independent. Whereas independent businesses have more than an 80% chance of failure in the first five years, franchise failure is under 20%. However, the buyer must remember that there are always risks involved and that they can reduce them if proper homework is done.

Mention the word franchising and you will get a range of reactions from it being the “miracle cure” for all business ills to those who believe it to be “the greatest con of all time.”  According to franchise guru Eric Parker, of Franchising Plus, franchising’s reputation is on the line and ignorance of franchising opens people up to being taken for a ride.  “Franchising has great potential, nowhere more so than in South Africa,” says Eric “where entrepreneurship development and job creation are national imperatives. The realization of franchising’s potential depends not only on correct implementation by those setting up franchising but also by educating those buying into a franchise concept.”

Beware The Fly-By-Night, Get-Rich-Quick Operator

A number of charlatans have entered the industry over the years taking advantage of the uninformed person wishing to invest in a franchise. “Whilst many are fly-by-night operators who operate under the radar with a ‘here today, gone tomorrow’ modus operandi after scamming unsuspecting investors” says Eric Parker, “the more dangerous ones are the ones that intentionally and deliberately use every trick in the book to go about defrauding franchisees.”

Prospective franchisees need to be able to pick up the subtle signs that things are not as they seem. Beware of guaranteed promises of unreasonably high profits and question a franchisor with no pilot operation on the ground as this does not fit the franchise criteria of a ‘proven business system’. A long list of promised ongoing support initiatives without the franchisor infrastructure to match is also a red light. These franchisors are often eager to collect deposits before the proper interview and profile testing of franchisees is done. Incomplete or non-existent disclosure documents and franchisors not being able to supply comprehensive details on infrastructure, viability and benchmark turnovers of its stores should be avoided at all costs.

Franchisees need to investigate the franchise business that they are interested in very thoroughly. There are various factors potential franchisees should consider; for example:

• Whether the franchisor has committed itself to the principles of ethical franchising.
• Do its existing franchisees invest in additional outlets belonging to the same brand?
• Is the marketing effective?
• How are the right locations selected?
• Details regarding the training offered by the franchisor.
• Ongoing support and guidance especially if things go wrong.

Consumer Protection Act and Franchising

As a founding member of the Franchise Association of South Africa (FASA), Eric Parker recalls that even way back in 1979 when the association was formed, the primary aim was to instil ethical standards to what the early pioneers in franchising knew would be a runaway business success format. “We were able to tap into the codes of business conduct that first-world countries like the USA and Europe were adopting to self-regulate franchising and from the very beginning of franchising in South Africa, we sought to steer the sector along ethical business principles.”

Although FASA does not have legislative powers, it was instrumental in getting the Consumer Protection Act to include a section that applies to franchising. Its Code of Ethics has been gazetted by the government and plans are being formulated to have an ombudsman oversee the sector and offer some measure of legally enforceable recourse for both franchisors and franchisees and, of course, the consumer.

21 Tell-Tale Signs of “Fly-by-Night” Franchisors

1. Try hard to sell, telling you there is a queue of prospective franchisees and urging you to conclude the deal immediately.
2. Want money upfront or as much as possible as soon as possible without allowing you a two-week period for scrutiny and consultation.
3. Will try and collect deposits or upfront fee before conducting proper interviews and profile testing.
4. If the franchise is very cheap, it may not have long-term substance.
5. If the franchise has a heavy initial franchise fee or whose ongoing management fee is too low to support the service they should provide.
6. Trying to sell a passing fad without being market-tested.
7. Beware of businesses that offer you what seems to be a franchise but is often pyramid-type schemes.
8. Reluctance to supply information, especially with regards the franchise company history, details of directors, experience or financial disclosure.
9. Will have a weak, incomplete or non-existent franchise package.
10. Contracts that do not match promises, are inadequate, vague and lacking in detail or onerously complicated.
11. Not being able to supply comprehensive financial details on performance, i.e. turnover and viability of stores.
12. Will have no pilot operation.
13. Non-existent or untraceable franchisees.
14. Franchisees who are not happy with their franchisor, his business methods and who are not profitable.
15. Will never meet you at his offices – an indication he has no infrastructure.
16. Franchisors who run their franchise operations as a part-time business are often suspect.
17. Will give you the flexibility to do your own thing and select your own site.
18. Will have a limited training programme.
19. Offers non-existent or minimal backup.
20. Will not spend time checking your credentials.
21. Be extra careful buying a franchise from a business broker – they’re often only interested in the sale and not the business’s long-term success.

The adage, “if it sounds too good to be true – generally it is” should be top-of-mind when investigating franchise opportunities.