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Ethical Franchising – Tips for Spotting the Good, the Bad and the Fraudulent…

Recent news items have raised red flags about the franchise industry and adherence to “ethical franchising” – the commitment a franchisor makes to deliver everything promised in the UFOC and Franchise Agreement, and to engage in legal and transparent business practices.

With several successful, high-profile franchises currently embroiled in lawsuits about their operations and labor practices, it’s natural for prospective franchisees to question whether a franchisor practices ethical franchising.

How do you know if the franchisor can be trusted and engages in ethical franchising – living up to its commitment to each individual franchisee, and operating in full compliance with applicable laws?

This is where your due diligence plays a critical role. First and foremost, the UFOC should describe the franchisor’s legal status and any litigation history, including past and pending cases. It is essential that your lawyer research any lawsuits involving the franchisor, and explain how the legal ramifications could impinge on your ability to run a successful business.

The Franchise Research Institute (FRI) offers an excellent resource for prospective franchisees. For a modest fee, you can buy a customized survey (http://www.fransurvey.com/) that the FRI has prepared based on feedback from at least 70 percent of the franchisees of a franchised brand. You get firsthand information about the franchisor from those actually working in the trenches.

If the Institute can’t get a full 70 percent response, then it will not award the brand with a FranSurvey SEAL. This Seal is only granted to those franchisors with documented proof of commitment and assistance to its franchisees. You’ll find many franchisors from diverse industries and with different investment levels, such as Two Men and A Truck, Express Personnel Services, and Camp Bow Wow, endorsed with the Seal.

Another sign of credibility is membership in professional trade associations. These professional associations typically have a code of ethics that members promise to uphold. The International Franchise Association (IFA) is probably the most well-known in the industry, though franchisors may also belong to associations representing their particular business sector.

The IFA is committed to promoting ethical franchising and business practices; and has a specific Code of Ethics, to which IFA members must adhere. This Code includes an Ombudsman component, which is third-party conflict mediation for disputes arising between a franchisor and franchisee.

Good standing with the IFA is general indicator of ethical franchising. You’ll find many franchises from different industries belong to the IFA, including Sign-a-Rama, Rapid Refill Ink, Pillar to Post, MonitorClosely.com, Liberty Tax Service, Cuppy’s Coffee and many more…. the list goes on.

There are other indicators of ethical franchising – or lack of it – that you should check. The UFOC and Franchise Agreement should clearly detail the dispute resolution process. Make sure you have a complete understanding of this component, and if you have any doubts or questions, get answers!

Keep in mind that the franchisor is prohibited from making any guarantees about sales or potential income, so be wary if any promises about earnings are made. It is illegal and totally unreliable. And walk away from any franchisor who pressures you to sign before you have had sufficient time to review the UFOC and Franchise Agreement with your lawyer and accountant.

And, last but not least, remember -- if something sounds too good to be true, it’s probably just a lot of bunk. Don’t buy it!

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