What Future Franchisees and Franchisors Need to Know about the Term "Proven Franchise System"
If you are researching the benefits of franchising, buying a franchise or starting a franchise, chances are that you have come across articles and promotional materials discussing the benefits of a "proven franchise system". That is, prospective franchisees are advised that if they become a franchisee of a particular franchise they will benefit from a "proven system". While this vague term is used often and claimed by almost all franchisors, not every franchisor possesses legitimate systems and not every franchise system is "proven".
So, what is a "proven franchise system"? While this question is subject to a broad range of interpretation, the following is some fundamental information about "systems" and "franchise systems" that must be considered by prospective franchisees and franchisors:
- "Systems" - are simply the procedures and tasks undertaken by business owners and managers in connection with the day-to-day operations of a business. Every aspect of a business including, advertising, financial controls, production of goods, employee management and customer service can all be boiled down to a set of procedures and "systems". Not every business is successful and not every "system" is effective or beneficial.
- Franchise Systems - are the procedures and tasks itemized and detailed by a franchisor (typically disclosed and detailed in the franchisor's operations manual) in connection with the operation of a franchised business. A franchisors business systems typically include tasks and procedures focused on (a) Marketing, (b) Customer Service, (c) Employee Training, (d) Production of products and (e) Methods for delivering services.
- Proven Franchise Systems - Are the "franchise systems" that have been "previously" implemented (presumably by the franchisor and other franchisees) and have been demonstrated to result in successful and profitable operations of the franchised business.
Considerations for Prospective Franchisees:
Effective and legitimate "systems" are critical for the successful operation of a franchised business. Don't just assume that a franchisor's "systems" are "proven" or "effective". Ask the franchisor's representatives detailed questions about what makes their "systems" unique, effective and profitable and recognize that the "proven" nature of a start-up franchisor's "systems, in most cases, may be extremely limited.
Considerations for Prospective Franchisors:
Successful franchise systems depend on successful franchisees. The mere act of preparing franchise disclosure documents and registering disclosure documents does not create a franchise. Strong franchises require thought out and tested business "systems" and procedures that have been tested and proven successful. During the start-up franchising stage controlled growth (with limited franchise sales) may be necessary to will permit the necessary monitoring and refinement of your business systems.
Excellent comments! Why aren't franchisors required to engage in "controlled growth" instead of predatory "churning" and "encroachment" of their franchisees to grow market share?
Additionally, isn't it federal regulatory policy as effected by the FTC Rule to permit franchisors to sell their franchises without disclosing ANY historical UNIT performance statistics of the system to new buyers.
This permits franchisors to engage in uncontrolled growth and the premeditated sacrifice of "founding" franchisees who bear the expense of building the physical units for the franchisors.
The FTC KNOWS that franchises are sold as if they were "proven" and appears to abet the exploitive franchisors when the FTC Rule requires no disclosure by the franchisor whatsoever as to unit profitability or success/failure statistics of the "founding" franchisees of the system.
The franchisor may have a "proven system" that was achieved through large scale encroachment and compounded churning of franchisees over a long period of time.