Educate or Legislate....Major Choices in Store for Franchising Howard Bassuk Franchising has faced many challenges in its history. It has weathered most of these challenges remarkably well. As the nineties draw to a close, there are once again a series of choices that will have dramatic impact on the future of franchising. Amongst the most important, is whether to increase legislative oversight of the industry by passing new, and ostensibly better, laws to govern how franchising works. There can be little argument that laws can always be improved. In my opinion, some of the laws governing the industry desperately need to be improved. The question revolves around which ones, and what other options do we have that might make even more sense? To some people, government is already too intrusive, and oftentimes ineffectual. I will admit that on more than one occasion, I have been stunned to see people try to lump every possible scenario into one set of rules and laws. I often find myself wondering how many of these people have ever actually started and successfully grown a business. So much of what sounds good in theory, can turn out to be a nightmare! For example, I think everyone would agree that a franchisor has an obligation to do as good a job at building his/her system as possible. The franchisor should be serious, competent, ethical, fair, forward looking, etc. However, can you put a legal standard to what that means? Does a young franchisor still looking for its first franchisee have the financial, human or practical resources of an older franchisor that has 100 or perhaps even 1000 or more franchises? Should both be expected to provide the same level of support, research, innovation, marketing know how, etc.? Anyone who has started and grown a business knows that the answer to that is a resounding NO! It is impossible for a young company to do all the things that a larger one can do. Every entrepreneur knows how many needs his/her business has, and how limited the resources are to solve all these needs. The biggest question many investors face is in determining the right time to enter a franchise system. Buyers must calculate and determine a balance between opportunity for growth in a younger system, and the availability of support to achieve that growth, in a more mature one. Is that balance best struck when a franchisor has 1 unit, 5 units, 10 units, 50 units, 100 units, 500 units, or more? There simply isn’t “one right answer”. Different investors come to different conclusions. Every franchisor must sell its first franchise to someone, or there cannot be a second. Some investors like “ground floor opportunities” and buy early. Others like old established systems that have proven their mettle over time. Is one right, and the other wrong? No. They merely reflect different points of view. With that in mind, is there some way to write a law that could possibly define what a franchisor’s required competence and/or resources need to be at every single level of that franchisor’s growth cycle? Some say yes. I say no. Laws should not be designed to micro-manage our lives and our business choices. They should be there to set broad and fair guidelines that all parties must follow and to prevent gross injustices. After that, let market forces govern whether individual businesses succeed or fail. Am I saying that there shouldn’t be laws? No, of course I’m not. In fact, there are some areas of franchising that need much improved laws. Some current rules are woefully inadequate in protecting the rights of one side or the other. But, too often, in an effort to clarify and improve, we forget the human genius for practical and reasonable thought. We try to over legislate, and over regulate every little thing, and every possible nuance. In the end, we can wind up worse off than when we started. Sometimes, “less is more”. Many people feel that it is possible to live a wonderful, spiritual, and virtuous life be merely obeying the Ten Commandments. Think about that for a minute. I believe there are under 200 words in all of the Ten Commandments combined. Compare that to what I believe are over 2 million words in our US tax codes! Each year it seems we add more words! Can anyone be expected to know them all, and use them wisely? Recently I saw a TV news magazine where tax information for a specific couple was sent to over 20 professional tax preparers. Not one of these preparers came up with the “correct amount” of taxes owed! Does anyone think that the reason for that is that there is not enough tax law already? Everyone in and around franchising, knows that it is an imperfect industry. It has many wonderful success stories, and unfortunately, a significant number of horror stories as well. The success stories speak for themselves, and are, more than anything, the reason that franchising has continued to grow year after year. However, the horror stories are just as real. By horror stories, I don’t mean the kind of stories that occur when people who are careful and thorough, still wind up making a bad choice, and their businesses don’t work. That can, does, and will continue to happen to people. Business is simply never going to be totally risk free. Many of these “horror” stories occurred not because there were not adequate laws to protect the buyer, but because the buyer’s did not adequately use the already existing laws wisely, completely and intelligently! Many of these people failed to take advantage of their ability to do personal research to fully understand the many business choices that the franchise industry offered. They failed to use the system that already existed. Tragically, instead of an outcry for educating the buyer as to how to use the system wisely, the cries are for more laws! I believe that there is an enormous and insidious danger that exists in the false comfort that people can get when they think laws and regulations can shield them from failure, or from the need for them to make good personal choices. I have seen many franchise prospects who became bitter franchisees when they learned that they, and the business they selected were not compatible with each other! What then is the solution? I believe the answer lies, not with a great deal more legislation, but rather with a great deal more education. Legislation tries to apply one set of rules, or one standard to a very diverse group of companies. A “one size fits all” approach to business is simply not a practical solution to the diverse conditions, needs, resources and sizes of the thousands of franchisors and prospective franchisees that exist in today’s market. The sad truth is that there is nothing anyone can do to make franchising or any business methodology, foolproof. The question is, how to make it as safe as possible. As a practical matter, every business is somewhat unique. Since each of us is also unique, the “dance” that we must do to acquire the right business involves us matching our skills with a business that will likely flourish for someone possessing those skills. Many times, prospects that I see, have not taken stock of what their personal skills are. They haven’t defined their personal goals, and they haven’t looked at a group of diversely structured business choices to see where those skill sets are best utilized, and those goals most easily attained. Adding new laws will not correct this problem. Failure to define, failure to inspect, and failure to analyze choices is the biggest culprit that I have seen. I believe that the entire franchise community has some blame to shoulder here. Even today, I have seen franchisors who are surprised that we at Franchise Network (FranNet) typically recommend that our clients look at several businesses before the prospect even considers settling on any particular one. Some franchisors are surprised when we tell our clients to seek out not just the successful franchisees in any given system, but the unsuccessful ones as well. We suggest that if the great majority of franchisees in the system are not happy, then it probably is not worth our prospect's consideration, and while this can change over time, it must always be looked at on a current basis. However, there will always be a range of performance. Knowing who a prospective franchisee is most like in terms of that range, should significantly help that prospect make a good choice. After all, if a prospective franchisee is like the successful franchisees in a particular system, he or she is more likely to be successful than if the prospect is like the unsuccessful franchisees. And by educating prospects to look at the most current information on every franchise system they are considering, the prospect can learn if the system is continuing to make strides in the right direction, or has stalled, stumbled, or even crashed. Additional laws are not needed to allow prospective franchisees to do this! And clearly the pressure for continued growth and excellence that is created by an informed buyer, should go a long way towards making franchisors continue to strive for excellence. Some franchisors have become scared to acknowledge that not all of their franchisees do equally well. I believe this is a terrible mistake. Just as it is true that no single individual does equally well in every job, no business is equally good for all prospects. By educating a prospect as to what is required in a particular system, the franchisor should ultimately wind up with a better team of franchisees. And a system that has the “right players” should have more success stories as well. This is the ultimate win-win scenario. Clearly, laws are needed and valuable tools as they relate to broad business issues. Full disclosure by way of a Uniform Franchise Offering Circular, makes all the sense in the world to me. It is a valuable tool in helping buyers learn the facts about any business that they are considering investing in. If a franchisor’s offering circular is not as “buyer friendly” as other franchisor’s circulars, then that franchisor has put itself in an uncompetitive position. The assumption here, of course, is that a buyer would know the different choices available. Once again, education, not legislation is the key. People go into business for many different reasons. Investors have very different skills, goals, educations, and finances. Some are willing to take a larger amount of risk to get into a “ground floor” opportunity, while others want the biggest, most established business that still has some availability. To try to set up one set of standards that requires a franchisor to do things in only one way limits the vibrancy and diversity of an investor’s options. So, instead of trying to do more legislatively, I would suggest that the industry spend more time, money and energy on educating the prospective investor about how to learn and investigate the options that are available to them to select amongst. In my organization, Franchise Network, (FranNet) we have many choices of franchises. Some are large, some small. Some are very well known, others virtually unknown. Some have proven track records that span decades, while others have just begun to franchise their opportunity. Each is different. We encourage prospects to see different types and kinds of choices that exist. We encourage them to do intense, personal, first person, due diligence into any opportunity that they think is structurally and strategically suited to help them to achieve their goals and dreams. Some make good choices, and sadly, some do not. The fact is that there is some risk to owning a business, just as there is potential for reward. People have a right to choose the opportunity that they feel is best suited to them, but, before they do that, they should know about the many choices that exist for them and, about how to do the research into those choices so that they can make an informed decision. A well educated buyer has a higher likelihood of making a good decision, and therefore the franchisor will have a higher likelihood of having a successful franchisee. Can franchising, as an industry do a better job of educating the public? I think it can, and it must. The key for us is to understand that no law, no matter how good, will protect us from our failure to use that law to protect ourselves, and to help us make more informed choices.