Why ‘Responsible Franchising’ is More Than Just a Buzzword

The term “responsible franchising” has become a buzzword in the industry recently, but what exactly does it mean? How can a franchise brand be irresponsible? What are the ethical practices that franchisors and franchisees need to follow if they want to be successful?

“The term I keep coming back to in responsible franchising is transparency,” said Mainland* CEO Nick Powills. “Without it, the odds of success for both the franchisee and franchisor deteriorate.”

In a recent discussion on the FranX podcast, Powills, along with Internicola Law* Firm Founding Partner Charles Internicola, Raintree* CEO Brent Dowling and Franchise Performance Group CEO Joe Mathews, delved into the evolving concept of responsible franchising, emphasizing the importance of ethical practices when fostering long-term success.

Mathews, who recently authored a book on the topic titled “The Ultimate Guide to Responsible Franchising”, emphasized the foundational principles of responsible franchising.

“Franchising is not a legal contract — it's a social contract,” Mathews said. “The franchisor should do everything within reason to make the franchisee's goals and aspirations a reality. Franchising should be about predictably profitable units and airtight, trusting relationships between franchisors and franchisees. If a franchisor is not successful and franchisees are not successful, who's at the cause? It's about being responsible and acknowledging where improvements need to be made.”

The panelists stressed the need for clear communication from day one. This includes properly vetting franchise candidates during the onboarding process and continuing to offer ongoing support long after the business is open. 

Dowling also pointed out the necessity of industry-wide data to measure success accurately, suggesting that the lack of such data hampers the industry's ability to self-regulate effectively. “In the buyer process, skepticism is at an all-time high,” Dowling said. “People want real, unfiltered content, not polished sales pitches.”

Overall, responsible franchising goes beyond legal compliance — it involves a commitment to ethical practices, transparent communication and robust support systems. Luckily, the panelists agreed, this is becoming more and more common within the franchise space. 

“There's tremendous ethics and success happening in the industry,” said Internicola. “Franchisors, advisors and legal counsel are all part of an ecosystem pushing positive changes and building sustainable systems.”

By focusing on these principles, the franchising industry can foster sustainable growth and ensure that both franchisors and franchisees thrive together. 

“At the end of the day, those that are going to win are the ones who use their brain, heart and gut to figure out what is right and what is wrong,” Powills said. “Those are your three most important tools to try to figure out what is right and what is wrong. And if you use those, then I think anybody can win in franchising.”

A summarized transcript of the interview has been included below. It has been edited for clarity, content and style:

Nick Powills: Responsible franchising. Over the last 12 months, this has become a buzz term in franchising. It should symbolize something good. The topic we need to get into today is, what actually is this? Some people want to be a voice of responsible franchising, but the argument is that they're not being responsible. They're selling a ton of franchises but not making their franchisees successful, all for the opportunity to exit quickly. So, there's a counter-narrative. Joe, give us the state of what you see and tell us about your book.

Joe Mathews: First of all, I'm all about responsible franchising, but my caveat is, whatever that means, right? Nobody's really given it a definition. So, I decided to define it. A two-billion-dollar publisher called me and asked if I wanted to write a book on franchising. They don't call guys like me. I had been toying with the idea of writing a book on responsible franchising, so I did it. I wrote a 75,000-word treaty on responsible franchising: what it is, how to identify it if you're a buyer, and how to invest responsibly to ensure success, mitigate risk, and maximize reward.

When I think about responsible franchising, the first definition is philosophical. The franchisor exists to make franchisees successful, period. Franchisees exist to add more value to the customer than they're extracting in price. So, franchisors have to add more value than they extract in royalties, or it's a bad deal. Franchisees have to add more value than they extract in price. We call that the value chain. If those are intact, everything works. The only other way I would define responsible franchising is mastering two businesses: the consumer-facing model and the business of franchising.

What's franchising? We defined it as recruiting, training, developing and leading a team of entrepreneurs to build a brand. What's missing is the product or service, which is covered in the consumer-facing model. If you're in the business of franchising mastery, it comes down to two metrics: franchises must be predictably profitable, and there must be an airtight trusting relationship. So, it's about unit-level economics and the franchisee-franchisor relationship.

Brent Dowling: I like it. Joe, you mentioned starting with the definition, and I love that. What's missing from the conversation is data. How do you fix what you can't or won't measure? As this movement takes more force, there's a good opportunity to look at what we're measuring and how. Some argue it's too much work to measure success across 3,000-plus FDDs in 80 industries, but maybe it's time we do that work and get the data.

Mathews: Just from doing it for 40 years, there is a net promoter score related to franchisors. We call it the golden question: asking franchisees, knowing what you know now, would you make the same decision again? My data supports that anything under 80% is a turnaround brand waiting to happen. Greg Nathan from Franchise Relationships Institute puts it at 77%. If I don't hear a definitive yes from 80%, it means something's wrong. Not 100% of people will be happy 100% of the time. Entrepreneurs are constructively dissatisfied. On the unit-level economics side, it should be relative. Franchises have an expectation of what they want to earn, and they either do or they don't.

Dowling: The data you're referring to requires internal franchisee management. How do we use that as an industry to compare against others?

Mathews: Franchise Business Review (FBR) asks that question and many more. That tool is decent for measuring the quality of support and gives comparative analysis inside and outside the industry.

Charles Internicola: What's great about this conversation is it focuses on the negative space: what isn't responsible franchising? In what context are you bringing it up? There's initial franchise development, becoming a franchisor, franchise sales, franchisee support. The premise of a baseline definition, Joe, which is the value chain, is crucial. If franchisors don't align with that, there'll be problems. Overly aggressive franchisors, attorneys and developers aren't looking at unit economics and net promoter scores. This conversation is adding substance to what responsibility is.

Powills: I want to unpack three things from what you talked about. One is, what are we saying to the candidate, and what's the definition of responsible? If a candidate comes through a broker network and is told how it works, the franchisor will pay the broker a percentage of the franchise fee. Starting with what is responsible back to the candidate is important. We should say no to people who don't belong in franchising. Two, I agree with Joe: if 80% have to say yes, absolutely, this met my expectations, or else it's a turnaround brand. Responsible franchising is getting the indicator of dissatisfaction and correcting it before you become a turnaround brand. The third thing is the investment. Did I set the expectation right on cost and earnings? Am I setting the expectation on time and money? Transparency is key. If a brand is not responsible for franchising but claims to be, the poor candidate won't know the difference and will buy into a bad brand.

Mathews: Are ethics and responsibility the same thing, or are they different? I'd say they're the same in this conversation. There's no ethics without transcendent principles, like “Thou shalt not steal.” Who gets to say? Is it a handshake or a social contract, or are some things just right and wrong? Even atheists don't go around killing people. The average human being isn't situationally ethical; they live by transcendent principles. We need to define those and incorporate them into franchising. Franchising is a social contract, not just a legal one. The franchisor should do everything within reason to make the franchisee's goals a reality. The franchisee should build brand value and add more value than they extract in price. That's what franchising is about, and you can't harness that in a franchise agreement. This conversation is very helpful.

Internicola: Those ethics come down to good business. If expectations align, everything is more ethical. The industry has tremendous ethics and success. Sometimes a brand doesn't succeed because the business didn't succeed, not because they weren't responsible. It's a great conversation, but I want to make sure when people talk about responsible franchising, it's in context. Why are we saying responsible, and what is and isn't responsible?

Mathews: One definition of responsible is being at the cause, being the author at the cause. If a franchisor isn't successful, who's at the cause? Not to blame, but to understand. If a franchisor says there are too many external forces, that's like declining to be at the cause, which is irresponsible.

Powills: The word responsible franchising has variations. Are you promoting, advertising and marketing your franchise transparently? Are you educating the buyer? That's part one. Now that the franchisee has signed on, are you giving them the tools for success? That's part two. Did you set up your brand to have exit value at the end? On the front end, are we selling franchises responsibly? If we, as experts, didn't know what franchising was before we entered, the buyer has no idea. If there's trickery, the odds of success deteriorate. Franchisors are conditioned to sell franchises as proof of business success. Instead, let's open franchises that scale because it equals more money. Explain everything to the buyer ethically, and they can decide if it makes sense. There's a miss in the forefront, and nobody is setting principles for responsible franchising.

Mathews: I started my business 22 years ago teaching franchise sales, but we called it franchisee recruitment because it's not a sales role; it's talent acquisition. It's helping good entrepreneurs find good brands. At conferences now, it's all sales speak, closing deals, typical salesmanship, not matching people to opportunities. We've abandoned franchise recruitment. We give it lip service and hire salespeople. We say we don't award franchises to everybody, but that's a takeaway, not reality. The front end could be more transparent. We mystery shop franchises, and out of 200 franchise salespeople, not one effectively interviewed us.

Powills: Brent, you've taken a different approach on sales since you've been doing this. You're on transparency, let's recruit in franchisees. Does it piss you off when some of this garbage or nonsense happens?

Dowling: I don't get angry. It's interesting. I get worried for the folks doing it, especially new franchisors. There's a great question up now on mandatory licensing for brokers. Probably, yeah, that's a good idea. Also, for anyone in franchise sales, like real estate agents and national and state licensing, maybe it's time for that. We're seeing evidence that we might be moving in that direction. Folks who don't know are irresponsibly franchising and selling because of a lack of knowledge. They don't know they can't put “make a million bucks in 30 days” on their website. They don't know that's against the law. Some do, but most don't. So, how do we start self-regulating? Is it more awareness, or is it national, state mandatory monitoring, and licenses, training, procedures, and protocols? Ultimately, it doesn't make me angry, but it shows there's a need for this conversation. I think responsible franchising is being positioned negatively, with accusations rather than seeing it as an opportunity. If we all pay attention and raise all boats together, define it, and bring each other up rather than point fingers at FSOs or brokers, it would be helpful.

Powills: There's an opportunity to pick failed franchisees, good people, and ask them what we should have done differently. How could we have protected their decision? I agree, Brent, this should be positive. Some brands are vocal on LinkedIn, but not really ethical. It needs to turn towards brands that pause growth to help franchisees be successful. That's responsible franchising, and those brands should be celebrated. Charles, address this comment: doesn't responsible ethical franchising begin with what a franchisor puts in the FDD and franchise agreements?

Internicola: Two comments, and then I'll get to Kim’s. I see franchisors working hard, worried about compliance, doing what they're supposed to legally, taking every step and measure. We have daily calls about switching suppliers, same product, lower price, better quality. There's responsible franchising. I find it interesting how the phrasing comes into play. Part of that responsibility is responsible franchisors, legal counsel, franchise sales organizations, and advisors. There's a whole ecosystem. I hope this doesn't become a marketing tool to criticize X and differentiate Group Y. To Kim's point, it does start with the FDD. We have an ecosystem there. I talk about responsibility not only to franchisees but also to emerging franchisors. They spent life savings, took out SBA loans to franchise their business, and weren't ready. It wasn't done the right way, or maybe shouldn't have been. At that beginning stage, yes. Developing the FDD, I have a different philosophy. It goes to visibility in Item 19. One of my biggest concerns is how that data is representative. If you're dealing with a legacy business operating in broad territories with a lot of operational efficiency, how do you translate that for a franchise buyer who's one of the first pioneering franchisees? I wouldn't be overly critical of lawyers, but there's a ton of nonsense that has to be disclosed in the FDD, all these crazy disclaimers. For the FDD, a lot of thought needs to go into the territory structures and Item 19, not just what can be reported, but what creates the right expectations for buyers.

Powills: What percentage of the FDDs, when you've taken them over from another law firm, do you say, wow, this is great?

Internicola: There are some great law firms out there. There are usually two issues that come up. One, a brand where the Item 19 isn't at its full potential in terms of communicating more data for sales and a deeper dive into analytics that's good for sales and transparency. Then there are other Item 19s where I would advise a client not to report a KPI because translating it from corporate to a franchisee isn't accurate, and just disclaiming it isn't right. The majority of the FDDs, you see the gap.

Powills: We're not really talking about responsible franchising; best practices haven't been established and agreed upon. If you start with the FDD, if best practices were established and agreed upon, the reason you're switching law firms is because you don't like the person, not issues with the franchise structure. We're missing best practices as an industry, causing confusion on responsible franchising. Again, it depends on who and why someone's raising irresponsible franchising, right?

Mathews: There are indicators in the FDD that you're doing business with an irresponsible franchisor. For instance, if the franchisor reserves the right to compete with the franchisee within their own territory under another brand or the same brand, how do I mitigate that risk? It's impossible. Those clauses make me crazy. Then there's mitigated damages. If the franchisee closes, lawsuits start over mitigated damages to the brand. The franchisee hasn't lost enough; it's the kick-them-when-they're-down clause. That's unethical and irresponsible franchising in black and white in the FDD. That's my opinion. I'd like you to comment.

Internicola: Joe, I love those points. Clauses that say we reserve rights for certain territory rights or a statutory disclaimer that says you won't receive an exclusive territory. The examples you bring up about the ability to establish under a different brand, I agree they shouldn't be there. I wouldn't say it's irresponsible to have them. I'll share my world and fears. Number one, they're triggered by statutory disclaimers. If I have a retail shop and you're going to have a boutique, but I'm reserving rights as to e-commerce, it triggers disclosures. At the franchisor level, the regulations say, advise if you reserve the right. Can you do something under a different brand name? We'll do that because we don't fully understand the implication down the line. My big fear is a plaintiff's lawyer comes knocking on the door. We've done nothing wrong, but we're a growing brand, have money, look like a target. Whether we're right or wrong, we get hit with regulations and are left defenseless. We didn't do anything wrong. The system ironically hurts franchise buyers by over-disclosing. I don't disagree; I hate those provisions. Franchisors hate them too.

Dowling: Jesse made a comment before suggesting these principles should be more specific to the realm of the company or person's role. Sales, FSOs, brokers, ops—all different focuses. In legal, what's missing is that brands and some attorneys are not breaking the law but are doing things in FDDs. For example, portraying revenue and profit levels in Item 19 without showing it's a mature business. The ability to earn what's promoted isn't the same, but there's no one dictating those rules. There's no link to the marketing and sales team to ensure responsible communication. If there's a guideline for what attorneys should and shouldn't do, that helps. It's dependent on your role in franchising and what you can do to be responsible.

Powills: Charles, you work with awesome brands. You have a founder who is a visionary, who wants the best for their franchisees, cares passionately, will jump on a plane to help them, but they don't grow. They're saying, I'm doing things responsibly, but it's not helping. How does that narrative shift so they continue to do right and the good guy wins?

Internicola: That's why I'm not a fan of responsible franchising as a topic. It should be inherent. Our clients are slow-growth companies in the first five years, but in seven years, they become the 1% of the 1%. They build their system and grow responsibly. Brent, there are successful FSOs viewed as selling a lot or selling fast. I'm not commenting on that. What I see is their focus on support and what things look like five years from now. When you have a good ecosystem, a rising tide lifts everyone. We have realistic conversations. Our brands work hard and will win. Irresponsible franchising, aggressively selling when you shouldn't, will detonate a system bomb in three years. We revised our strategy, working with a broker group. After 12 months, we have eight leads, and it was responsible. Wins are there. Irresponsible franchising comes from a short-term view. Mistakes happen with short-term thinking.

Dowling: Nick, to your point, the brand that's struggling and doing everything right should focus less on frontend polish in marketing and sales. Focus on core tenets of responsible franchising: driving unit-level economics and building relationships. It's a long-tail game that will win. Buyer skepticism is high; people look for things that don't seem right. Ten years ago, we had polished videos and websites. Now, buyers want real, unfiltered content. Solid economics, a solid story, transparency, and enough content is the winning recipe. This is great news for new brands focused on the right things without spending on polish. Responsible franchising is a win-win.

Internicola: To Brent's point, when brands put themselves out there and focus on real things, it forces them to improve. Talking about unit economics gets ingrained in the franchisor's culture. It should be an obsession to make franchisees successful. Despite the negativity, the industry is abundantly responsible. Some elements won't align, but I don't want this to be a buzzword. If you're advocating for something, show examples.

Powills: This is like the replay in sports. It's not negative. Equipping buyers and franchisees with tools to understand what's right and wrong is crucial. Conversations like this encourage better practices. Charles, you work with tremendous brands. Slow growth is fine. Don't play the jealousy game. Just because a brand claims to have sold 5,000 units on LinkedIn doesn't mean you need that for success. Your franchisees will tell the PE firm they're happy, which goes back to Joe's first point.

Mathews: I like where this conversation is going. Charles, it'll be a buzzword for a while, right? If you take a longer look, what's the real problem in franchising? The community has never done for the franchisor what franchisors do for franchisees. There's no franchisor model like a franchise model. What we're starting to do is recognize problems and work on solutions. There are career franchise professionals now. The next generation will turn these terms into a franchisor model that we can agree on. We're recognizing the problems and next come the solutions.

Powills: Joe, you're in an interesting spot. A lot of negative accusations about irresponsible franchising have focused on FSOs and consultant networks. What's your opinion?

Mathews: I'm in the FSO world. I have a digital agency, and I'm all in on franchising. PE is changing the game. Private equity thought they were buying a consumer-facing model. They didn't know how to do due diligence on a franchisor. The next generation of value-added PE grounded brand founders or franchising experts as operating partners. They didn't have the IP, just opinions. Now, with platform players and centralized services, franchisor platforms are driven by PE wanting long-term sustainable models with recurring revenue. Happy and profitable franchisees are the only way to get that. PE is accelerating that. The negative is more get-rich-quick stuff on the franchisor side. I understood franchising was a long-term play. Now, there's short, fast money talk among brand ownership. PE wants to buy right, build right, sell right, and that means a well-run company. The mischief comes from wanting the elevator to the top without doing the work.

Powills: I agree. Franchising is like an airplane. It takes off, gets you to the finish line, and everyone gets off. Whether you're in first class, exit row, or the middle seat, a good franchise brand should get you there. Different franchisees will have different experiences, but the objective is the same: get them to exit with more wealth for their family.

Internicola: Franchisors need protection too. I had a call two days ago: “We franchised three years ago, rebooting everything, FDD ready, unit economics not there, want to sell five deals a year.” I gave candid advice, and they politely thanked me, but they'll never call again. Someone will offer them a solution to sell five units a year, probably involving irresponsible tactics. I see this all the time. Some franchisors don't understand compliance or sales difficulties. When someone asks if I'll help them sell franchises, I say no, we'll put you on a pathway, and your first deals need to be organic. They don't understand and go to a competitor who says they'll start selling, starting a chain of irresponsibility.

Mathews: The cottage industry of packagers or attorneys setting people up as franchisors, I've never heard. There's only about 15,000 people buying a franchise a year. About 80% of the deal flow goes to unit brands of 100 or more. There are about 3,000 brands going after 3,000 deals. There's a supply-demand disequilibrium. I've been calling for a market correction for 10 years. I wrote a white paper predicting a huge market correction, but it never happened because 250 to 350 new franchisors come on each year, and 250 to 350 exit. The market never corrects. The disequilibrium stems from a desperation to do deals and monetize the $150,000 to $250,000 spent to set up as a franchisor. It all comes down to greed.

Internicola: Real conversations happen. I spoke to a development company that said there aren't a lot of bagel franchises, and I almost lost my mind. Bagels are on my list of businesses you should almost never franchise. That's the analysis, and it pulls in irresponsibility. At least on a micro level, that's the component of irresponsibility being pulled in by development that shouldn't happen.

Powills: Let me put Colleen's comment back on here. Responsibility needs to hit everybody. I had a house issue with a contractor and hired an attorney who took $30,000 before removing himself because he was friends with the guy I was suing. Eventually, I got an attorney who got the deal done. This applies to Brent's division, Joe's division, legal, marketing, and PR. We should all try to be a little better. If everybody did better, this wouldn't be a topic.

Internicola: If you're claiming your organization certifies brokers or something, what does that certification mean, and what's the responsibility there?

Dowling: There's an appetite for more accreditation, licensing and governance of anyone in franchise development. I think that's good. We need more data. The last credible data source on franchising success was from 1994, and it's time to update that.

Internicola: Let's not throw the baby out with the bathwater. There's tremendous success in franchising. Broker organizations, advisors, developers, law firms, FSOs are pushing the envelope positively, building teams, and creating systems and discipline. Companies doing it right honor the value chain and maintain expectations. Good conversation, but there's a lot of positives that predate this.

Powills: I agree, Charles. This is not to say there haven't been awesome things done in franchising. It's about disrupting what's been done and doing better. My advice to franchisees and franchisors: there is a lot of garbage in franchising. Suppliers will take money franchising your business without checking viability. People in franchise sales will take your money. Franchisees will dupe you. At the end of the day, those that are going to win use their brain, heart, and gut to figure out what is right and wrong. If you use that, then I think anybody can win in franchising.

Watch the full interview here.