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by Simon Lord,
last updated 29/07/2009

in this article:

April 2008 - With regulation in the air for franchising, is it time to regulate franchise consultants too?

The Green Acres ironing deception is affecting the whole franchise sector currently, with new allegations seemingly being made weekly. As I write, there is news of another apparent scam practised on immigrants under the guise of franchising. It seems that the very success of the franchise sector in this country has been turned against it by a few unscrupulous individuals.

The outcome is that the government has, for the first time, raised the prospect of regulation of the franchise sector. Despite the fact that there is no franchise legislation anywhere in the world that would prevent out-and-out fraud, the Franchise Association moved rapidly to support the idea on the basis that it is better to have useful and enlightened regulation proposed from within than something imposed from outside.

One interesting aspect that was originally discussed was regulation not just of franchisors but of advisors too. One suggestion was that advisors would have to prove their credentials before they could be registered as eligible to operate in franchising. In the case of lawyers and accountants, existing professional qualifications would probably be regarded as sufficient (although it must be noted that not all lawyers and accountants have the necessary knowledge of the specialist field of franchising). Business brokers, too, already have to pass external professional tests before they are allowed to operate. But the possible extension of qualification to other advisors such as franchise consultants is a new development and, I suggest, a very welcome one. Unfortunately, the idea now seems to have been dropped from Association thinking in favour of some form of non-compulsory education and a  professional qualification for interested parties.

The fact is that very few people are able to develop their own businesses properly as a franchise without outside assistance. Many try it, and many new franchises fail to get off the ground as a result. Even worse, some do get off the ground and actually appoint a few franchisees before they falter. Developing a franchise is a complex process that requires accurate planning in many areas: operational and support planning, fee and other revenue structures, territories, manuals and training processes to name but a few. You have to plan not just for now but for five years ahead when you will have 20 or 50 or 200 franchisees. Good franchise consultants have seen all this before and know a wide range of solutions. They are therefore worth their often sizeable fees.

Bad franchise consultants, on the other hand, do enormous harm. They encourage franchising by companies who are not ready or not suited. They try to make the structures they know fit every business they see. They do not analyse a franchisor's abilities and franchisees' needs before suggesting fees, basing them instead only upon ‘what the market will stand'. They produce generalised manuals based upon ‘cut and paste' techniques rather than in-depth understanding of what processes are actually involved. And then they charge $40,000 or more for work that is, to all intents and purposes, useless.

Sadly, such ‘consultants' do exist - not many of them, but they do. Some are just incompetent but others are frankly predatory. By choosing their victims carefully and keeping them well away from those with real franchise knowledge, they suck them in until it is too late. By the time the victims realise something is wrong and seek a second opinion, they have wasted the money needed to do a proper job.

The introduction of compulsory qualifications for franchise consultants would therefore be a big step forward both for businesses seeking to franchise and the individuals who buy franchises from them. Of course there are many practical obstacles to be overcome. Who sets the standards required to register? How will they be policed? What are the implications for companies who start franchising without using a consultant at all? What happens to qualified solicitors who give bad advice in areas in which they have no experience?

These are all issues that need to be thoroughly thought through before any such requirements are enshrined in law, but it is good that the problem is being considered as part of the overall review. Franchising is too good and too important to be damaged by the actions of a negligent or fraudulent few.

This article is amended from one first published in NZ Business, April 2008 



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