Franchisees don’t do their homework and are too optimistic about risks according to a study.

Franchisees are unrealistically optimistic about risks of setting up their business, even after those risks have been disclosed to them, our research shows.

We tested this unrealistic optimism by surveying 205 current US franchisees from 26 brands. We chose the US because there is publicly accessible data about the identity of franchisees there (in Australia this does not exist). It’s this information US franchisors are required to provide that should alert intending franchisees to the risks of their agreement being terminated.

We asked individual US franchisees to answer the degree to which they are more or less likely to experience a certain risk than the “average” person operating a franchise in the same brand. This focused on the risk of the franchisor terminating their franchise agreement in two scenarios:

  1. Solely so the franchisor could sell their business to a new franchisee for higher franchise fees.
  2. So the franchisor could operate the successful unit themselves.

Our data revealed that for both scenarios, more than 80% of franchisees believed they weren’t likely to be affected, which is concerning considering the serious consequences to a franchisee of either event occurring.

Policy makers assume that the presence of disclosure laws mean franchisees will do their homework before committing to a particular franchise. Our research shows that these assumptions are wrong.

The risks of early termination of a franchise agreement

A franchise is a complex, expensive, purchase that will commit the franchisor and franchisee to a business relationship with each other for several years. The franchisor has usually sold many franchises, and signed many franchise agreements but buying a franchise is something a franchisee may do only once in their life.

To help franchisees avoid making such a significant decision on impulse, the law requires that franchisors provide a disclosure document replete with information. Although the contents vary from country to country, the disclosure requirement is widespread.

Disclosure laws are based on an assumption that franchisees are rational. They will read and understand the disclosed material, take professional advice on anything they do not understand and will not commit until they understand the risks and satisfy themselves as to how they will manage them.

US franchisees are alerted to the possibility that their franchisor might terminate their agreement in one of four ways. The franchisor has to summarise how it could terminate the agreement in a disclosure document by law.

This includes stating whether the franchisor has the right to terminate “at will”; meaning that the franchisor is not required to give the franchisee any opportunity to remedy defaults. The franchisor must disclose the annual number of franchisees terminated to date without compensation and must include the names and contact details of former franchisees whose agreements have been terminated by the franchisor.

Surely, equipped with all of this information, a prospective franchisee would realise that they too, could find their newly minted franchise agreement opportunistically terminated by their franchisor. Our research shows that most do not.

Optimism of franchisees

Franchisors do sometimes terminate franchisees’ agreements “at will”. A statistical analysis by Emerson of 342 US cases involving a franchise agreement terminated by the franchisor, shows in 49 cases the cause of termination is listed as being “at will”. Of these 49 cases, only 11 found in favour of the franchisee.

These results indicate that there is a real risk faced by franchisees that a franchisor will opportunistically terminate the franchise agreement. This information about US franchisees makes us wonder about Australian franchisees.

Franchisors in Australia provide pre-contract disclosure prescribed under the Competition and Consumer (Industry Codes—Franchising) Regulation of 2014. This includes information such as the identity and business experience of the franchisor.

It also discloses any litigation the franchisor is involved in, who the franchisor pays to introduce franchisees to the system, the number and business address details of up to 50 existing franchisees and key details of relevant master franchise agreements. It explains the status of intellectual property like registered trademarks that the franchisee will be allowed to use.

Under headings related to supply of goods or services to a franchisee, there is financial and logistical information that covers aspects like online sales. The franchsior’s policy and practice about sites or territories is explained.

Financial issues are disclosed, as are arrangements that will apply at the end of the term. The franchisor must provide a signed statement that it is solvent, although research shows that a small number of franchisors sign the disclosure statement confirming they are solvent when they are not.

All this information makes franchisees think the disclosure documents tell them all they need to. But, because there is no public database of franchise disclosure in Australia, franchisees can not compare their chosen franchisor with other brands.

And, as our US-based research shows, even a detailed pre-contract disclosure document that clearly outlines real risks may not convince franchisees that franchising can be risky.
Article appeared in – originally published in The Conversation – written by Jenny BUCHAN


By 1918, Charles M. Schwab was one of the richest men in the world.

Schwab was the president of the Bethlehem Steel Corporation, the largest shipbuilder and the second-largest steel producer in America at the time. The famous inventor Thomas Edison once referred to Schwab as the “master hustler.” He was constantly seeking an edge over the competition.

One day in 1918, in his quest to increase the efficiency of his team and discover better ways to get things done, Schwab arranged a meeting with a highly-respected productivity consultant named Ivy Lee.

Lee was a successful businessman in his own right and is widely remembered as a pioneer in the field of public relations. As the story goes, Schwab brought Lee into his office and said, “Show me a way to get more things done.”

“Give me 15 minutes with each of your executives,” Lee replied.

“How much will it cost me,” Schwab asked.

“Nothing,” Lee said. “Unless it works. After three months, you can send me a check for whatever you feel it’s worth to you.”

The Ivy Lee Method

During his 15 minutes with each executive, Lee explained his simple method for achieving peak productivity:

  1. At the end of each work day, write down the six most important things you need to accomplish tomorrow. Do not write down more than six tasks.
  2. Prioritize those six items in order of their true importance.
  3. When you arrive tomorrow, concentrate only on the first task. Work until the first task is finished before moving on to the second task.
  4. Approach the rest of your list in the same fashion. At the end of the day, move any unfinished items to a new list of six tasks for the following day.
  5. Repeat this process every working day.

The strategy sounded simple, but Schwab and his executive team at Bethlehem Steel gave it a try. After three months, Schwab was so delighted with the progress his company had made that he called Lee into his office and wrote him a check for $25,000.

A $25,000 check written in 1918 is the equivalent of a $400,000 check in 2015.

The Ivy Lee Method of prioritizing your to-do list seems stupidly simple. How could something this simple be worth so much?

What makes it so effective?

­Here’s what makes it so effective:

It’s simple enough to actually work. The primary critique of methods like this one is that they are too basic. They don’t account for all of the complexities and nuances of life. What happens if an emergency pops up? What about using the latest technology to our fullest advantage? In my experience, complexity is often a weakness because it makes it harder to get back on track. Yes, emergencies and unexpected distractions will arise. Ignore them as much as possible, deal with them when you must, and get back to your prioritized to-do list as soon as possible. Use simple rules to guide complex behavior.

It forces you to make tough decisions. I don’t believe there is anything magical about Lee’s number of six important tasks per day. It could just as easily be five tasks per day. However, I do think there is something magical about imposing limits upon yourself. I find that the single best thing to do when you have too many ideas (or when you’re overwhelmed by everything you need to get done) is to prune your ideas and trim away everything that isn’t absolutely necessary. Constraints can make you better. Lee’s method is similar to Warren Buffett’s 25-5 Rule, which requires you to focus on just 5 critical tasks and ignore everything else. Basically, if you commit to nothing, you’ll be distracted by everything.

It removes the friction of starting. The biggest hurdle to finishing most tasks is starting them. (Getting off the couch can be tough, but once you actually start running it is much easier to finish your workout.) Lee’s method forces you to decide on your first task the night before you go to work. This strategy has been incredibly useful for me: as a writer, I can waste three or four hours debating what I should write about on a given day. If I decide the night before, however, I can wake up and start writing immediately. It’s simple, but it works. In the beginning, getting started is just as important as succeeding at all.

It requires you to single-task. Modern society loves multi-tasking. The myth of multi-tasking is that being busy is synonymous with being better. The exact opposite is true. Having fewer priorities leads to better work. Study world-class experts in nearly any field—athletes, artists, scientists, teachers, CEOs—and you’ll discover one characteristic runs through all of them: focus. The reason is simple. You can’t be great at one task if you’re constantly dividing your time ten different ways. Mastery requires focus and consistency.

The bottom line? Do the most important thing first each day. It’s the only productivity trick you need.