Taking a franchise may be the best thing you ever do.

But on the other hand it could be the worst. And the trouble is that you probably won’t know which it is to be until after you have started to trade by which time it is likely to be too late.

Clearly some people do very well out of franchising. I heard four success stories at the “Franchisee Panel” organised by whichfranchise.com at the National Franchise Exhibition in Birmingham on 1 October 2011. The speakers were three young men (and one not so young man) from four different franchises who spoke with almost religious fervour about their businesses:

• Neil Mansell of Platinum Property Partners which describes itself as “an exclusive community of like-minded, successful and ethical property investors and entrepreneurs who are fast-tracking their path to financial freedom”;
  
• Steve Tarpey of Bluebird Care who was made redundant at the age of 53 after a career in the pharmaceutical industry;
  
• Stephen Hall of ComputerXplorers which introduces children to computing; and
  
• Chris Scott who holds several Subway franchises in South Wales.
  

They were all impressive – particularly Steve Tarpey who spent a long time looking for work after losing his job as sales director for a global company before moving into agency nursing and home care – and it was good to hear them. There are not too many successes in today’s economy and I wish them all the best of luck.

Touring the National Exhibition Centre yesterday it was hard to remember that there was a recession – sorry depression (on some measures the worst in the UK since the 1870s). Stand after stand promised a trouble free road to riches beyond the dreams of Croesus. My favourites were Felicity Hats a hat hire agency with the most delicious hats on its stand, The Cherry Tree offering equally tempting jams and chutneys, and somewhat less girly, Plug + Play Design of Godalming which fired off an email to me with information about their offering within minutes of my visiting their stand.

At one level this positivity is not misplaced. The retail banks seem to like franchising – partly because business format franchises are much more likely to succeed than other start-ups but also because they usually have plenty of collateral. Notwithstanding Vickers, Basel, Lehman Brothers and Greece the banks still seem to have loads of money to offer to franchisees even now. The first speaker of the day was Richard Holden, the head of franchising at Lloyds Banking Group, who gave some very good advice to anyone contemplating franchising including 30 key questions for intending franchisees to ask of prospective franchisors which I strongly recommend. Similar advice was available on the stands of the Royal Bank of Scotland and HSBC.

Having said all that I have seen what can go wrong with franchising. In the days before the “Access to Justice Act 1999” I got a lot of work from legally aided franchisees who were facing the loss of their homes or even bankruptcy because they had taken franchises that had not worked out for them. Usually there was only so much one could do for them because they were bound by agreements that the franchising expert John Pratt described yesterday with disarming candour as “the most one-sided agreement you are ever likely to see”. In the early days of my career I was able to blow apart many of those agreements citing Pronuptia de Paris GmbH v Schillgalis [1985] ECR 353 to bemused Queen Bench masters and district registrars (or district judges as we now call them) around the land because very few franchisors had notified their schemes to the Commission but then it became very much harder after the Commission adopted the franchising block exemption (Regulation 4087/88 of 30 Nov 1988). After that loophole was plugged it was occasionally possible to find other holes to poke in franchise agreements relying on the Unfair Contract Terms Act 1977 or rules of equity or common law but that required resources. After paragraph 1 (h) of Schedule 2 to the Orwellianly named Access to Justice Act 1999 removed business disputes from the scope of legal aid the only way distressed franchisees could be saved was by taking their cases pro bono or for grossly reduced fees which I occasionally did and, indeed, when the justice of the case so requires, continue to do.

“Go to bankers and solicitors who understand franchising” and “Make sure your franchisor or advisor is a member or affiliate of the British Franchise Association” were recurring themes throughout the conference and that is common sense. There was a lot of good advice on offer from solicitors like John Pratt whose “Franchisor’s Handbook” is almost as readable as a novel. The BFA does good work to set and uphold standards and offers mediation and arbitration schemes to resolve franchising disputes less expensively than litigation. But I am not sure that that is enough. One obvious difficulty is that all the great and the good in franchising seem to act for both sides and it is very difficult to run with the hares and hunt with the hounds. And it is all very cosy with body A recommending advisor B and vice versa though to a certain extent that is inevitable since franchising is a niche activity that requires specialization. What is really needed is a sort of trade union for franchisees or at least a franchisees’ advocacy group and that, of course, is probably never going to happen for all sorts of reasons.

So what advice can be given to prospective franchisees? The first thing I would say is be very, very careful and very, very sceptical. If a deal seems too good to be true then it probably is. The second is to plan for the possibility of failure as best you can. Failure can occur for all sorts of reasons and it may not necessarily be your fault. Attend all the seminars, read all the bumf, take all the advice on offer from the BFA, the banks and their recommended law firms and other professional advisors but plan an exit strategy in case everything goes pear shaped. It will probably cost you a lot of money in legal fees if you ever get into a dispute and even more if you want to buy yourself out of your franchise or start another business. If you have that kind of cash then there is no problem. If not, then think about taking out legal indemnity or other insurance. Just as a prenuptial agreement is very hard to contemplate when choosing your wedding dress so an exit strategy is hard to think about when £ signs are flashing in your eyes but just as couples fall out of love so franchisees and indeed franchisors can fail.

If you want to discuss any of the issues in this article or franchising in general call me on 080 862 0055 or get in touch through my contact form.