How can a franchisee deceive you?

Before launching a franchise network, it is worth understanding how partners can deceive you. Let's look at three situations that occur most often. Artyom Garden, partner of the Sovet Legal Group, gives recommendations on what to look for and how not to step on a rake when getting into franchising.

Situation No. 1. Theft of know-how and conducting competing activities

By purchasing a franchise, a partner gets access to all internal processes of the business. He receives all the data that constitutes the company's know-how. Know-how or production secret — This is all information that has commercial value for the company: description of business processes, documentation forms, technical features and innovative methods of doing business.

For the acquisition of a ready-made business model, the entrepreneur undertakes to pay a monthly royalty to the franchisor. Many partners first agree to this obligation, and after six months or a year they try to avoid payments. To do this, franchisees open their own establishments secretly from the franchisor — which, as a rule, is prohibited by the terms of the franchise agreement.

To ensure fair cooperation between the franchisor and the partner, the franchise agreement must include a non-compete clause. According to it, the franchisee cannot conduct business in a certain area during the term of the agreement and after its termination.

How do such actions of the franchisee affect the franchisor

From a business development point of view — loss of income. Instead of another franchise point from which the management company would make a profit, the partner opened his own business based on the acquired know-how. This means that the franchisor is left without profit and with a new competitor in the form of a partner. From the point of view of developing partnerships — It’s always unpleasant when a competitor steals ideas and makes money thanks to your unique solutions. And especially when this competitor — the partner you trusted.

How to protect yourself as a franchisor

To protect your business as much as possible, you need to correctly draw up a franchise agreement. Include a non-competition clause in the contract and provide for liability for its violation. Please note that the condition must also apply for a certain period after termination of the contract.

Situation No. 2. Failure to comply with franchisor standards

The franchise owner can simultaneously collaborate with dozens of different partners, each of whom can manage either one or thirty business locations. Some approach the business in good faith and comply with the chain’s operating standards: they ensure that employees communicate politely with guests, purchase certain raw materials and maintain a high level of service. However, there are those who neglect generally accepted regulations. Due to insufficient control, employees are rude, skimp on consumables and do not meet the level of the entire franchise. At the same time, franchisees often hush up violations before the management company in order to avoid conflicts and unnecessary liability.

How do such actions of the franchisee affect the franchisor

Poor performance of one point tarnishes the reputation of the entire network, which can lead to the spread of negative reviews about the brand on the Internet and the outflow of customers from all enterprises. The general consequence of poor performance of duties on the part of the franchisee — loss of brand reputation and decline in the financial performance of the franchise.

How to protect yourself as a franchisor

To avoid non-compliance with standards, the management company needs to monitor the work of partners. To do this you can:

• Select a department within the management company that will accompany the franchisee during the process and after the launch. This department must know all the nuances of opening and developing a business in order to monitor compliance with standards and record deviations.
• Arrange inspections of points through a “mystery shopper”. Based on the information received, it is worth negotiating with your partner to find out what the violations are associated with and how he can correct it.
• Study reviews of franchise points on social networks and see what guests of a particular establishment are complaining about.
• Conduct tests among franchisees and employees on knowledge of company regulations. The main thing here — do not go too far and do not arrange similar checks in the Unified State Exam format when you are afraid to make a mistake.

Situation No. 3. Hiding real financial indicators

There are franchisees who steal know-how and open competing businesses in order to avoid paying royalties. But there are also those who are quite ready to share profits, but try to do it to the minimum.

Control of the financial performance of network enterprises is carried out using a unified accounting system, where all payment transactions, revenue and profit for the month/quarter/year and any other period are recorded. As a rule, the amount of royalties also depends on the volume of revenue — the higher the revenue, the greater the amount will have to be transferred to the management company. In most franchises, royalties are calculated as a percentage of revenue rather than a specific monthly amount.

In order to pay less royalties, some franchisees make attempts not to reflect the actual amounts. For example, they ask for payment in cash or by transfer to a card, but do not put the order through the system and do not issue a receipt. Most people, in principle, do not ask for checks and do not pay attention to them, so this method of deceiving the franchisor is more than simple and accessible.

How do such actions of the franchisee affect the franchisor

The most important risk that a franchisor may face — loss of profit and decrease in franchise profitability. Having revealed the deception, the franchisor will most likely part with the partner, losing one or more points in its network. This will lead to financial losses and, most likely, reputational ones.

How to protect yourself as a franchisor

Let's return to the issue of controlling the operation of the franchise. So that the franchisee does not have the temptation and chance to deceive you, install a video surveillance camera in front of the cash register. With their help, you can track how employees accept payments and whether checks are always issued.

Another way — Place a notice at the checkout for visitors: “If you have not received a receipt, the order will be at our expense.” This will motivate guests to wait for the check, and employees — hand him over.

Any business always carries risks, and franchising — not an exception. It is important to understand that when scaling a business using a franchise model, you will periodically encounter unscrupulous franchisees. To protect your business, you need to carefully approach the design and management of relationships: correctly draw up an agreement, stop violations, support and control the franchisee after the start and throughout the entire cooperation.