The Coffee Beanery Franchise Woes Reported in Forbes Article
Michigan-based coffee franchise company The Coffee Beanery continues to draw fire, as well as negative publicity from a number of publications and news sources. This time it’s a Forbes story, titled A Cautionary Tale For New Franchisees.
According to the article:
One couple, Deborah Williams and Richard Welshans, sunk $1.6 million into an Annapolis, Md., café they opened back in January 2004. They allege that Coffee Beanery–now with 131 locations in the U.S. and 25 overseas–duped them into buying into a failed business concept. The couple says their store has never turned a profit, and they are now fighting to recoup their losses in arbitration. (The Coffee Beanery declined repeated Forbes.com requests for comment.)
The Welshans claim they were victims of what amounts to bait-and-switch tactics. They started their search for a franchise when Rick lost his job as a sales rep for chemical maker Rohm & Haas. They surfed the Internet for coffee shop franchises and ended up at the The Coffee Beanery. While they were interested in the traditional The Coffee Beanery coffee-based concept, they were “sold” into opening a newer, inadequately tested Cafe concept.
At headquarters the couple met with Rick Greenbaum, head of franchise development. Greenbaum told them Coffee Beanery was moving away from its smaller coffee bar, coffee cart and kiosk-style models and was focusing more on a new franchise concept called the “café store.” These were bigger, more expensive and required franchisees to sell sandwiches, wraps and pastries in addition to coffee-related products.
When the couple balked at the price tag, Vice President of Development Kevin Shaw, they say, reassured them they could expect to clear $125,000 per year as café store franchisees. Impressed, the couple left Michigan with a signed agreement in hand; seven months later, they were open for business.
The couple complains that they started noticing that things weren’t quite right almost from the start.
For starters, Rick says, the mandated store design wasn’t conducive to crowds–everyone bunched up near the front so the store looked extra busy, deterring passersby. The two cash registers were a pain, too: They couldn’t be used at the same time, couldn’t ring up customized food orders and would repeatedly freeze and shut down, he says. On top of all that, he claims, the refrigerated display cases were defective; water would pool at the bottom, damaging the food.
Coffee Beanery’s financial condition is in similar soggy shape lately. For every franchise sold, the company receives an upfront $27,500 fee. (It also collects ongoing royalty payments.) But Coffee Beanery pulls in most of its revenues–roughly 63%–selling its equipment and products to franchisees, according to its latest UFOC for the fiscal year ended June 30, 2006. In that year, Coffee Beanery squeaked out just $24,295 on nearly $14 million in revenue. Meanwhile, cash flow from operations–arguably the most honest measure of a company’s health–had plummeted 78% since 2004. Starbucks, this isn’t.
Stories in Franchise Times and the FTC website have also been disturbing. It is especially troubling since the The Coffee Beanery has always seemed to be a well-respected franchise company and active industry member. I have met Kevin and Joanne Shaw on several occasions, and toured the The Coffee Beanery Home Office.
In fact, The Coffee Beanery founder Joanne Shaw currently serves on the board of directors of the International Franchise Association and in the year 2000 was the first woman to chair the 40- year-old Association. She is past president of the Specialty Coffee Association of America.
According to the company press kit, Shaw was named Entrepreneur of the Year in Michigan in 1991, and has been inducted as a lifetime member in the Entrepreneurial Institute. In 1995, Shaw became the first recipient of the Bonny LeVine Award, given by the International Franchise Association to an individual who has served as a mentor to women.
Hopefully, The Coffee Beanery can use their vast experience and resources to turn around this damaging situation, and to fix the allegedly flawed cafe concept before more damage is done.
For more information on the coffee franchise opportunities and news involving coffee franchising, visit the Franbest Coffee Franchise Blog.
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POSTED IN: COFFEE BEANERY, xBuyer Beware
28 opinions for The Coffee Beanery Franchise Woes Reported in Forbes Article
Les Stewart
Feb 22, 2007 at 3:14 pm
It has been my experience that as independent media discernment increases (ie. learns to recognize predatory from non-predatory franchisors, raises questions about the potential negative outcomes of franchising), the:
1. the assumed DIRECT relationship between Industry Association activity and Non-Predatory Activity…
2. is shown to be non-causal or, in fact, inversely related.
In Canada, many of the franchisors who choose to act in an opportunistic manner are the MOST ACTIVE in the national franchise association.
They are simply more sophisticated in using the perceived “Good Housekeeping Seal of Approval” in signing up the next franchisee investor.
welshan
Feb 24, 2007 at 5:05 pm
Les Stewart is right on target. In our arbitration Ms. Shaw during her testimony had to throw in that she was the first woman president of the IFA. Between the IFA and FTC every franchisor out there has a license to do what ever they please. I wish that the many franchises who have been scammed by a Franchisor who has “The Good House Keeping Seal of Approval”, would wise up and hold our regulators accountable for not enforcing the law. Then there is the AAA. The State of Maryland found that The Coffee Beanery violated The Franchise Disclosure Laws, and we still were forced into an arbitration. We are now awaiting to see if the arbitrator agrees with The State Of Maryland Secureties Division. This comes at an expense of about $100,000.00 There is something wrong when the judicial system punishes a citizen for asking for justice
Mike Yurick
Feb 26, 2007 at 6:06 am
Awards and High ranking positions ??? Apparently the Shaw Family has the entire Franchise industry fooled also.
As a former Coffee Beanery franchisee, I also suffered A similar fate as the Maryland couple did.
We have been trying for some time to bring attention to the fact that Coffee Beanery LTD. Has been selling/franchising their Cafe Concept stores for years, promoting them as “profitable” business ventures. Despite the fact that many, if not all, of the Coffee Beanery’s executives know that the Cafe concept boasts a nearly 100% failure rate.
All franchisors market their concepts as “Mutually Beneficial Relationships” to which the franchisee is supposed to benefit from the “years of experience and name recognition,” while the franchisor benefits by receiving a small margin (i.e., royalties) off each store without any major capital expense of their own.
In my opinion, the Coffee Beanery LTD has violated this Mutually Beneficial Relationship and has willfully and knowingly perpetrated an ongoing fraud on the public by selling this concept when they know that it dose not work.
We would like to see them stop selling this concept until they can make it work, using their own money. In the mean time I suggest a follow up story as to why Michigan’s Attorney General (Mike Cox) and the FTC have done nothing to protect the public from this predator Company.
For several years, many of us have been trying to draw the attention of Michigan’s Attorney General’s office and the FTC to our struggle, but have not been able to do so, even though numerous complaints have been filed. Michigan’s AG and the FTC have not fulfilled their duties to stop this company, they have just sat back and watched, as this company has cost it’s taxpaying Citizens over $16 million dollars in initial investment and possibly in excess of $40 Million dollars of long term debt.
So instead of paying taxes on profits we are now taking deductions on losses, you would think that we would see some action from these agencies based on this fact alone, maybe someday they will figure out that the government is also loosing Millions of dollars, and when that day comes, all I can say is “look out” crooked Franchisors.
Companies such as the Coffee Beanery are a disgrace to the franchise industry and should be exposed for who they are.
Lea
Jan 8, 2008 at 12:59 am
I worked at the Coffee Beanery near my town & we had NO problems with anything that was mentioned in the article. I think their problems were just that, THEIR problems. We did really good business at both locations, the cafe and smaller store.
Mike Yurick
Jan 8, 2008 at 7:49 am
Working at a Coffee Beanery and owning the franchise are two different things, I am afraid that the Welshan’s problems are not just “THEIR” problems it is easy to look in from the outside, and think that you know what is going on, but without intimate knowledge of the details you can only guess at what is going on, The facts are; that the problems the Welshan’s were having are across the board with the Coffee Beanery’s Cafe’ concept. and in my opinion, the “REAL” problem Lies with the franchisor who keeps promoting this failed concept to the general public as a “working concept”, they are lying to people to get them to invest in a concept that is most likely destined to failure, this is a perfect example of “predatory corporate greed”.
Our store had the “APPEARANCE OF SUCCESS” on the surface, everyone including our employees, thought we were making tons of money, based on the amount of customers that came through the door, but as with any business it’s just not that simple, labor costs were almost double what we were told they would be and “per ticket” purchases were lower then promised, the fact is, that the Coffee Beanery’s “made up” numbers that they used to sell you a franchise, had no historical basis in fact..
In our case, we were meeting and exceeding the sales expectations that were given to us by the Coffee Beanery, and according to the Coffee Beanery “experts” we should’ve been making about $120,000.00 per year at those sales levels, instead we had to keep dumping money into the store to keep it open.
Why keep it open? You may ask… I’ll tell you why. Because the Coffee Beanery won’t let you close as long as they know that you have money to dump into the store, and as in the case with the Welshan’s, they will only let you out when they have taken all that you’ve worked for your entire life, leaving people who once thought they were all set for retirement, to now, have to work through their retirement, or retire with nothing, not even a place to live.
In my opinion, this is not just “THEIR” problem, this is “EVERYONE’S” problem, because NOW left unchecked, this “PREDATOR COMPANY” is causing the financial demise of successful people, thus burdening taxpayers with maybe hundreds of people who instead of paying taxes on profits (ie: Funding Government), will now most likely have to rely on government assistance when they retire.
In closing consider this…The Welshan’s who most likely paid hefty dollars in taxes every year, for many years, before “hooking up” with the Coffee Beanery, will now most likely never pay taxes again, since they have little or no income and nearly a million dollars in tax write offs.
Deborah
Jan 8, 2008 at 9:09 am
If after going over this list, you still think that owning a Coffee Beanery Cafe is a money making business, consider calling any Cafe owner, they will be happy to sell
The Coffee Beanery has permission to continue selling a flawed concept. How many more people will have to suffer, before the FTC steps in and puts on the brakes?
Allen Hart: Allen filed bankruptcy
Tony Espisit: Tony had 2 cafe’s Tony filed bankruptcy
Ernesto Ramirez: Ernesto had 2 cafes in Pennyslvania, he has moved to Colorado
Clyde Simen: Clyde is an attorney and is embarrassed to have been scammed
Victor Vicando: Victor bought a café owned by corporate that was closed and they sold it to him knowing that it would close in a year or two
Tom Coledge: Tom is in California and owns Westco Rentals:
Laura Demming: Laura lives in Texas and is the one I told you about who had the Double Drive Thru
Steven Klaberg: Steven lives in Florida and owned one of the cafes sold to Espisito
Gary Bandringa: Gary lives in Florida, I have never been able to find him
John Andler: John lives in Michigan and I have not been able to find him
Sam and Sally Guirguis: Sam and Sally live in Chicago
John Hoover: John lives in Tennessee and is still trying to stay afloat
Allen Kerr: Allen lives in Arkansas and has lost his investment as well
Oliver Gardner: Oliver lives in Chicago and is trying to regain his loses.
Sharif Khwaja: Sharif lives in New York and went out of business in just 3 months
Bharat Patel:Sandeep is Bharat’s partner had a café in Florida
Jen Claude Bisson: Jen Claude had a café drive thru in Texas but lives in chicago, he closed his café this year
Lee and Amy Pierce: Lee and Amy live in New York and have the same UFOC that we have. The last I talked to them they were losing everything
Glenn Wilson: Glenn lives in Glen Rose Texas and was only open 3 years
Mike Kessinger: Lives in South Carolina and was only open for about a year
Gary Barnes: Gary lives in Kansas and was only in business for about a year
Stan Bellows: Stan filed bankruptcy after about a year. His café was in Missouri, he now lives in
Robert Griffiths: Robert is the other café owner in Maryland, he closed last year
Mike Yurik: Mike lives in Michigan and is the owner who Coffee Beanery disclosed Kevin Shaw as owning his café until it closed in 2005
Ray Gorgonfar: Ray lives in California and had 2 cafes. He is close to bankruptcy and may have filed
Trad Ronald and Robin Brisbin: Live in Michigan and just closed about a month ago. They are filing bankruptcy I don’t have a number but the café was in Silver Lake Village Michigan
The Center at Chennel: This café is in Arkansas is has been sol to this man: Randy Riva, he is in the process of trying to get rid of it.
Lloyd Blydenburgh: Williamsburg Va. Second owner and close to bankruptcy
Robert and Carlinda Boyd: Greenville Michigan. They are retired and have closed after a tremendous loss
Kay and Dongwan Hur: Kay is now back in Korea
Kendra Weasel: Dundee Michigan , drive thru She is trying to avoid bankruptcy
MarySue Shagena: Ferndale Michigan MarySue closed about 6 months ago and is a widow who lost all of her money
Malie Prost: Maile was in Arizona, she paid cash for café and sold it in February
Carl & Tamme Tannehill: Lexington Ky. Convention Center sold in January
Michael & Robert Dames: Cincinnati, Ohio filed bankruptcy. I talked to them:
Jay & Lee Jun: Oakton, Va. Filed bankruptcy, I don’t know where they are now.
Scott a. Tonkovich & Henery West: Shelby Township Michigan sold
Broadway at The Beach, S.C. Donald A. Iacobacci
Rehoboth Outlets, Delaware: Beverly & Ken Murray I do know that they filed bankruptcy
Steve Roman & Julie: Vestal Pkwy. New York they also filed bankruptcy
Sunny Isles Beach Florida
Rochester Café Michigan
6132 Autumn Court Pipersville Pa.
Bayside Mkt. Place, Florida
Royal Oak, Michigan
First Union center, Key West Fla.
Forbes Ave. Pittsburgh Pa.
Allen Kim: McLean Va
Nooruddin Kurji: Greenwich Ave. Ct.
Alan Schlessman: his café was in Denver International Airport
Ravitej Reddy: Walnut St. Café Pittsburgh Pa.
Birmingham Mi. Woodward Ave. Was a franchise prior to corporate
[name withheld]: [] had a café in Tempe Az.
James Madison University
George & Jacquel Brooks
Frank & Karen DeMarco South Carolina
Douglas B. Miller Georgia
Rodrigo Motta Aventura, Fla.
Hattie Daniels Georgia Hattie has filed bankruptcy
South Main Street, Ann Arbor , Michigan owned by Richard & Barbara Ann Popp who live in Ocoee, Fla
1101 South University, Ann Arbor Michigan this to was owned by Richard and Barbara Ann Popp
Pembroke Lakes Mall, Fla. M. Florentino & G. Goodrich
South Square Mall: Durham North Carolina Amy Kester
When you consider that according to the Maryland AG, The Coffee Beanery started franchising the Café Concept in 1997, this list is impressive.
CB Ventures, Inc.:Marketplace at Centerpoint
Heath Meeks: Trim Gym Jonesboro, Ar.
Paul Burton: Beach Place Ft. Lauderdale, Fla.
Mike Group: Cisterna Market Café Fort Smith, Ar. Just closed
Kenneth Barber: Bucktown Chicago Ill. Closed in less then one year
Kenneth Barber: Hazelcrest, Chicago, Ill. Closed in less then one year
Rick Barnette, Mark Newton, Seif Saeed and Steve Frymark: Grand Mall Grand Blanc Michigan tried to file a law suit but they had signed one of the Café Agreements
William J. Kassab: Haggerty Rd. Northville, Mi.
William Grace: Greenland New Hampshire Bill and his wife Grace are close to bankruptcy
Moses Doleh: The Avenue at Tower City Centre Cleveland Ohio open less then a year
Richard and Jim Knapp: Del Amo Fashion Center Torrence California
Rodrigo and Alessandra Motta: Loehmanns’s Fashion Island: Miami Fla.
Kent Gustafson: El Premier Centre Key West, Fla
Manhattan Ford 601 West 54th Street: new York, New York
John Kunkel: Union Center, Key West Fla.
Michael and Sarah Passoff: Tower Place at The Carew Tower Ohio
Bill Morrow and Roy VanDoorn: Pavilion Food Court Glen Allen, Virginia
Forbes Avenue: Pittsburgh , Pa.
Diane Kitts: Jerome Duncan Ford, Sterling Heights, Mi.
Max Hamamou: Mill Creek Mall, New Jersey
Moses Doleh: Great Northern Mall he is the man who owned The Avenue at Tower City Center he had 2 of them
Dan Margolis: 250 Granite Street Store # K104 Braintree, Massachusetts
This list does not include the Corporate Cafes. Like Mike Yurik said working in a Coffee Beanery and paying the bills for a Coffee Beanery are two different worlds.
You are better off making Lattes then buying the equipment to pay someone else to make them.
Marylou Wright
May 27, 2008 at 5:36 am
I too am an unsatisfied Franchisee Owner of “The Coffee Beanery”. These people are pathetic and care only about the 8% royalty that they auto-matically deduct from your checking account every month. We are also required to buy most of our product from them. Our freight itself is upwards of 14% of the merchandise cost. If you are considering this franchise, DON’T!!!! When we first became involved with them, they had corporate people who came to your store to help in whatever way they could. The Beanery has now discontinued this practice. You are on your own, and believe me it is not easy. I have requested a moratorium on the 8% commission that I pay each month on my gross income, to no avail. I have been a Beanery franchisee for 3+ years and have been dissatisfied for most of that time. It has been well over a year since anyone from the Coffee Beanery has been in my store. I am sure this is the same with others. What does this tell you. Run, don’t walk away from this franchisor.
Carol Cross
Jun 18, 2008 at 3:12 pm
I think the Coffee Beanery Case in Maryland demonstrates the FLAW in the FTC Rule and FTC Regulatory policy that permits franchisors to sell franchises at any degree of risk of failure or unprofitability to new buyers of the franchise and flaunt their immunity under the law.
Even when the State of Maryland negotiated a rescission with Coffee Beanery for substantive violations of the UFOC, the franchisees were ultimately sacrificed to Regulatory Policy in mandated arbitration of their complaints AFTER the rescission was negotiated with CB. The Wilshans didn’t accept the Rescission because the Rescission wouldn’t have saved them from bankruptcy and they thought they could arbitrate the matter and their complaints after the Rescission.
They found out the “hard way” that federal regulatory policy evidently trumps state laws and that there is NO private right of action for a viuolation of the Rule or the FDD in arbitration or in the courts.
Hopefully, the Appeals Court will take a hard look at this case and reverse this unjust Arbitration Award in which the bankrupted CB franchisees also were found to be liable for the costs of the arbitration of their complaints against the franchisor, Coffee Beanery, who was found by the Arbitrator not to be guilty of anything even in view of the Rescission and the Consent Decree negotiated by the State of Maryland.
Catch 22 and the FTC Rule.
Another Ex-Franchisee
Aug 18, 2008 at 11:51 am
What a joke. The new Coffee Beanery marketing logo “Coffee People Who Care”. Yup, Ms. Shaw and family care about themselves and their profits. They could care less baout anything else!!!
http://www.mlive.com/flintjournal/business/index.ssf/2008/07/coffee_beanery_crafts_new_care.html
Another Ex-Franchisee
Aug 18, 2008 at 11:52 am
Coffee People Who Care?
Yup, Ms. Shaw and family care about themselves only! They could care less about the franchisees. http://www.mlive.com/flintjournal/business/index.ssf/2008/07/coffee_beanery_crafts_new_care.html
Another Ex-Franchisee
Aug 18, 2008 at 11:58 am
Coffee People Who Care!
Another Ex-Franchisee
Aug 18, 2008 at 12:02 pm
The only thing that Joanne Shaw and her family care about is making money for themselves! She should be ashamed of the way she has treated so many franchisees and allowed them to go bankrupt while she and her family were making money! Shame on this fraudulent company!
Yet Another Ex-Franchisee
Aug 18, 2008 at 12:09 pm
I just read that this fraudulent company was recently sold and that Joanne would be staying on as CEO. God help them! At least her boys will be employed! LOL
Marylou Wright
Aug 18, 2008 at 12:44 pm
I heard that it was in the process of being sold, and that one of those “brillient” boys would not b e staying, that being Kevin. Heard they are keeping Kurt and JoAnne. Lots of those employed will be heading for the unemployment line, I would suspect. I can name a few that I would like to see this happen to.
Lea
Aug 19, 2008 at 10:37 am
Sorry, Mike, but you’re wrong. The Coffee Beanery here is great & does amazing business. Just because it doesn’t work in one place doesn’t mean it doesn’t work in another.
Carol Cross
Aug 19, 2008 at 12:00 pm
Lea demonstrates the “Ace” that the franchisor always has up his sleeve, because, she, of course, has a successful Coffee Beanery Business and she thinks that any criticism is harmful to her asset, and that any criticism or recovery by failed or failing franchisees is a threat to her business if it weakens her franchisor. And, this, of course, is true!
Obviously, regulation was promulgated with the view that it would protect franchisors and the successful franchisees in franchise systems, and protect franchisors in the courts and in arbitration from litigation by the unsuccessful franchisees who feel that they were defrauded in the process of buying thei franchises that have either failed or are unprofitable business operations.
But! the point is that franchisors are permitted, under regulation and the current status quo of the law to sell franchises that fail in great numbers for first-owners of the franchise and not disclose this failure of performance to new buyers of the franchise. They are enabled by regulatory policy to sell unviable and/or unprofitable franchises to the public as a means of perpetuating their existence and growth in the economy. Churning is permitted and encouraged by existing regulation.
The point is, as the franchisor’s proven plan become less viable in the economy for many reasons, including saturation and demand for product, franchisors react by selling more unviable franchises to more new buyers in an effort to perpetuate THEIR visibility and their profits. They churn and saturate to survive but they can hide the churn from new buyers of the franchise and the regulators who don’t look at the disclosure documents until there are complaints from franchisees.
The dark side of franchising is that NEW buyers of franchises are tricked by the package of the FDD and the franchise agreement itself into unknowingly buying franchises that have demonstrated very high failure rates of first-owner, i.e. first-generation franchisees and high churning activity that can be obscured from the view of the new buyers and from the regulators, as well.
The CB injustice in the Welshan’s case demonstrates federal regulatory policy that premeditates the sacrifice of franchisees to the perpetuation of the franchisor, even when the franchisor has violated the disclosure rules.
The current regulatory policy and the failure of the banks and the lenders to apply checks and balances and risk assessment to franchise loans has contributed to growing fraud in the sale of franchises —if fraud is defined as selling high risk and unprofitable franchises to the public while hiding the actual risk of the investment under cover of federal regulatory policy.
Franchisees weep while the FTC and the Congress sleep and fail to mandate that the franchisors, themselves, disclose unit performance statistics of their systems to new buyers of franchises.
If new buyers of the CB franchises, and if the Welshan’s, had known the true performance statistics of the Cafe concept sold to them, they would, of course, not have purchased the franchise. Yet, law and process has been used to protect the franchisor who sold them this failed concept to them and the FTC Rule protects the franchisor from any recourse from the Welshan’s because in effect, the FTC Rule deems that unit performance statistics in the possession of the franchisor are NOT material facts that have to be disclosed to new buyers of the franchise.
As Susan Kezios of the American Franchisee Association has indicated in public comments to the FTC and to the Congress. The failure of government to require franchisors to disclose historical unit performance statistics is the fatal flaw of the Rule and is misleading by omission. But, it appears that the “omission” is the intent of the Rule that mandates 22 items of disclosure but doesn’t mandate Item 19 disclosure of “earnings” by franchisors to the new buyers of their franchises.
Unfortunately, the FDD and the franchise agreement, the “package,” does, as necessary, give the franchisors a license to lie, cheat, and steal in order to perpetuate their systems that are considered vital to the local and national economies.
Does the end justify the means? Could franchising stand and grow in the economy to the great extent it has grown the past thirty years IF the unit performance statistics of systems had to be disclosed to new buyers of the franchises and to new buyers of the stock of franchisors who have gone public?
Ex-FRanchisee
Aug 19, 2008 at 12:48 pm
Lea stated that she worked at a CB. She probably doesn’t own it. We had many employees that still got paid! Our store seemed busy too! However, it never made money because of the cost associated with buying it, building it, and operating it. The help got paid. We did NOT…….
Ex-FRanchisee
Aug 19, 2008 at 12:54 pm
And for Lea’s benefit,
Coffee Beanery in Michigan made money, even if an individual store did not. They get royalties on sales, not profits! I would really like for Lea to state what affiliation she (or he) has with CB. Unless Lea pays the bills, Lea is not qualified to comment on the financial status of a particular store. Lots of customers does not mean lots of money if the business model is flawed. I challenge any CB cafe owners to prove otherwise.
Carol Cross
Aug 20, 2008 at 8:29 am
Yes! And, when franchisees sign ten-year contracts and long-term leases, they are trapped into as situation where they are always workiing to provide profits for the franchisor, even as they never make a dime in profits for themselves during the entire term of the contract.
Even if they eventually fail, all of the time franchisees are trying to reach break-even status, they are working for the franchisor, who takes profits off of the gross sales, even as the franchisee is failing to thrive and struggling to pay the bills for the business and service the debt that built the business.
Franchisees either have to try to sell their losing or break-even business, if they can, usually at a loss, or remain standing to service their debt, or lose everything.
In failure, they have to give their businesses away to get out from under the terms of the lease and the franchise agreement, that are personally guaranteed. Even then, they have to continue to service their startup debt for years to avoid default and bankruptcy and when the franchisor can get their assets and businesses for pennies, the failed franchisee continues to provide profits for the franchisor for many years to come.
Franchisees are indentured for the term of the franchise agreement and the long-term lease and this, of course, is the INTENT of the usual adhesory and malicious contracts that provide no reasonable exit solution for franchisees who don’t thrive.
I believe this is why most franchisors don’t disclose “earnings” in Item 19. Franchisors can obscure the fact that the franchised business doesn’t really produce profits for the franchisee and really just produces a low paying job with long hours and no benefits —-and, sometimes, not even that.
Many franchisees work for nothing just to keep standing and to keep trying to break even. All of the time they remain in business, they provide profits for the franchisor, and many feel ashamed that they were “taken” and don’t want to share this with prospective buyers of the franchise, or even with their friends. Because, franchisors don’t have to share their unit performance statistics with their franchisees, even the franchisees have no idea what percentage of stores in the system are profitable.
If franchisors were mandated to disclose the unit performance statistics in their possession to new buyers of franchises, this, of course, would reveal that the franchise wasn’t delivering profits for the franchisees and they wouldn’t be able to sell their franchises to the public and continue to perpetuate themselves.
Obviously, this is why prospective franchisees of some systems have to be “tricked” by appearances into signing long-term contracts that are malicious legal traps!
Obviously, this is why franchisors are not mandated to disclose “earnings” to new buyers, who then, unknowingly, buy into systems that produce no profits and long-term grief.
Brutal reality and truth! .
Ex-Franchisee
Aug 21, 2008 at 7:03 am
Well said Carol.
It was just disclosed yesterday that the court in Maryland vacated the arbitor”s decision in favor of Coffee Beanery. In that finding, it was determined that Kevin Shaw had never disclosed that he had been convicted of grand larceny. So much for the good clean family owned business. How sad.
Google “Coffee Beanery” under Google News
Carol Cross
Aug 21, 2008 at 10:50 am
What good news for the Wilsham’s and their attorney! How gratifying to know that perhaps our “system” does, sometimes, work for the weaker party in the contractually imbalanced relationship of the franchisor and the franchisee —-when the franchisees and their attorneys have the courage and the financial resources to address the higher courts.
I have just read the Decision of the 6th Circuit Court of Appeals on this matter and have hope that, ultimately, justice will prevail for the Wilsham’s and that this NEW case law will be an important means of making the little FTC acts a viable means of litigating fraudulent inducement to contract in a a private right of action in the State Courts.
As a lay person who likes to read the law, I am especially impressed by the plain language and reasoning of the 6th Court’s Decision that even non-attorneys can understand.
The Internet will make it possible for the “people” to look at and understand the “rule of law” that applies to their circumstances and attorneys and judges, and arbitrators, perhaps, will be held to higher standards in the interests of fairness and justness and equality before the law.
Thanks to Forbes.com and to Blue Mau Mau and to Franchise Pick and to Janet Sparks of The Franchise Times for their coverage of the Coffee Beanery injustice. I’m sure we will be hearing more about this in the future.
Ex
Aug 23, 2008 at 4:43 pm
STAY AWAY FROM CB, We have lost everything
and we tried for 5 years not 3 months, it is a flawerd concept, payroll double what they say
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gk2mom
Oct 8, 2008 at 4:54 am
Had any of these people had previous experience owning a business? Did they talk to and/or visit stores/current owners on their own? Not just corporate? Were they prepared to invest their (and many times their families) free time to make the company successful? As all small business owners must. Did they notice all of the coffee shops opening on every corner and realize that this was their competition? hmm….
carol cross
Oct 21, 2008 at 1:42 pm
First owners of franchises are very often first owners who have NO experience operating a small business, and this is why they select a franchise. The franchise is falsely represented often as a proven plan, a proven turn-key operation, that presents little risk. This, of course, is why franchising is so attractive to those looking for a job and income.
If franchisors had to disclose the material risk factor of the actual unit performance statistics of their systems, many prospective buyers of franchises would not buy franchises that demonstrated a high risk of failure or lack of profitability for the franchisees.
Obviously, this is why the FTC Rule doesn’t require disclosure of this material information by the Franchisor and offers up the confusing Artifice of Item 20 upon which new and inexperienced franchise prospects are supposed to do their due diligence.
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