Franchise Pick

6 opinions for There’s Truth Within the Franchise Spin. Here’s How to Find It.

• Franchise Due Diligence Tips
  Jun 4, 2008 at 9:22 am

  […] There’s Truth Within the Franchise Spin. Here’s How to Find It. […]

• Carol Cross
  Jun 17, 2008 at 9:25 am

  Of course, the franchise industry is FREE to SPIN because they are not required under federal regulatory policy to disclose “earnings” or any UNIT financial performance history to new buyers upon which NEW buyers can make educated decisions about the “profitability” and the “survivability” of their investment in the franchise.

  This subsidy of the franchise industry can only be overcome by “due diligence” with an expert who can get these “unit performance statistics” for the new buyers.

  Maybe ALL franchise buyers should be advised to write registered letters to the franchisor asking them for the unit performance statistics in their possession before they sign any checks or binding 10 or 20-year contracts.

  What do you think?

• sean
  Jun 17, 2008 at 1:14 pm

  Maybe ALL franchise buyers should be advised to write registered letters to the franchisor asking them for the unit performance statistics in their possession before they sign any checks or binding 10 or 20-year contracts. What do you think?

  No franchisor can provide you with any performance statistics other than what they’ve provided in the Item 19 Earnings claim. The majority of franchisors do not provide earnings claims, so you’d rule out most franchises. The fact that a franchisor doesn’t provide an earnings claim is not necessarily a red flag - They don’t for a variety of reasons. Many go with what their lawyers advise, and a good many lawyers have advised against them.
  Earnings claims are not necessarily always the great indications of performance that you need. Plus, relying on information provided by the company selling you the franchise should always be verified independently anyway.
  Even though the franchisors cannot freely disclose sales and earnings information, the franchisees can tell you anything they want. I think this is the process that prospects need to take the time with. Of course, no one is going to email you their financials because you called and asked. But if you approach a few franchisees respectfully and ask if they can be a resource for you, you can develop relationships that will yield all the insider information you can absorb. If everyone you contact is unfriendly and out for themselves, that tells you that this is not a community you want to join.
  Take the time to learn all you can about the system and the people within it. Take 6 months or a year and go work in one of the businesses. Like Carol says, this is a 10-20 year commitment. If you can’t find the time to investigate thoroughly, you better block out lots of time in the future to try to undo your mistake.

• Carol Cross
  Jun 18, 2008 at 9:17 am

  But Sean! The references in Item 20 are not an efficient means for new buyers of doing due diligence to determine profitability and survivability in terms of THEIR investment in the franchise. And, isn’t the recommendation to work 6 months to a year in the franchise an unrealistic solution for most prospective franchisees who are looking for a job and income?

  Have you and Michael Webster ever known anyone who worked six months in a franchised operation and then bought that franchise? Why don’t we hear from these people?

  Obviously, the franchisors, as the proprietors of the brand, have the past and present performance statistics of their units in their possession or they couldn’t conduct their businesses in an efficient manner and collect their royalties.

  The fact that the FTC has deemed earnings or any unit financial performance statistics NOT to be MATERIAL information that has to be disclosed to the new buyer of a franchise very clearly indicates that the FTC has been captured by those they pretend to regulate in the interests of prospective franchisees. As Susan Kezios of the American Franchise Association indicated, this failure to require that any unit performance statistics be disclosed is a FATAL FLAW of the FTC Rule and is misleading by ommission.

  Franchisors, in reality, are licensed by the FDD to sell unviable and unprofitable franchises to the public because they aren’t required to disclose unit performance statistics under regulatory policy or to indicate the reasons for terminations and transfers in the FDD, Item 20.

  Item 20 references work to pass off the legal obligation of the seller, to disclose MATERIAL information to the buyer, to the franchisee references.

  You, Sean, clearly indicated in a separate Post how Item 20 permits franchisos to obscure the failure rate of their franchises in the Transfer columns of the FDD and to “churn” out of view of new buyers and the regulators.

  You indicate that the franchisee references can tell you anything they want to but this is not necessarily true because most of the “transferee failures” are silenced by “confidentiality” agreements that they sign in order to get the permission of the franchisor to fire sale their franchised units.

  You know, of course, that these references have no LEGAL impact whatsoever and that prospective franchisees have no legal recourse when they act act upon the recommendations of the franchisees and buy the franchise, only to find out that the franchisee referencesmisrepresented facts to them.

  If the banks and the lenders are furnished default rates on loans on franchises and if the banks and lenders are now doing “due diligence” on the transfer columns of the FDD’s because of the sub-prime scandal in housing, why aren’t the prospective franchisees who put up their personal collateral for the franchise loans given the opportunity to access the same information before the loan is approved?

  Shouldn’t the SBA default list be open to the general public? Shouldn’t potential buyers of franchises be able to assess the odds of success or failure in terms of those who preceded them as startup franchisees of the Branded system?

  Isn’t the FTC Rule just a subsidy of the franchisors that protects them from lawsuits for fraudulent inducement to contract/fraudulent concealment of material facts? Doesn’t this subsidy actually increase “fraud” if fraud is defined as knowingly selling a flawed and unviable franchise to the public and knowingly concealing the flaws and unviability from the buyers of the franchises?

  What is the purpose of the FTC Rule?

• sean
  Jun 18, 2008 at 10:04 am

  Carol: I agree with all of your points related to disclosure and the info that should be available. I think as much information should be available to the franchise prospect as possible. I don’t see the point otherwise.
  What’s the purpose of the FTC Rule? Got me. I haven’t even figured out the purpose of the FTC.

  The Cuppy’s Coffee story, to me, highlights the absurdity of all of this. Morg Morgan and Cuppy’s Coffee created an “award-winning” disclosure document but blatantly sidestepped every disclosure law. They took $39,500 “deposits” and franchise fees from people they didn’t disclose and then wouldn’t give it back. They just kept the money. Didn’t even deny it.

  Look at the stories here and the franchisee accounts on Unhappy Franchisee. No one is there to help them. Not law enforcement. Not the FTC. Not state franchise “regulators” Not the SBA. Not the District Attorney. Not the FBI. Not the BBB, IFA, AAFD, no one… except private attornies who require the investment of more fees just to represent clients with the deck stacked against them anyway.

  The real scammers don’t care what the franchise rule says because nothing’s enforced, and there’s no one to enforce it. That’s probably why the AFA gave up and became a Yoga studio. Yoga is probably as effective a response to franchising’s problems as any.

  As to the contention that no one works at a place prior to buying the franchise, that’s a more involved discussion we should have separately.

  I contend that there are two completely separate “worlds” of franchising. The one discussed here, mostly, is the “Be your own boss” world of Mom & Pop franchising to first-time business owners who are laying it all on the line. They probably wouldn’t work the job - and think they couldn’t afford to. But after they’ve learned the lesson and lost their innocence… and learned what the Cuppy’s guys did… they would agree that they couldn’t afford NOT to do that kind of research.

  There’s another franchise world that doesn’t have quite as many problems, and is not discussed as much. That’s the one where experienced business owners are buying franchise concepts to implement. In the restaurant industry, it’s not rare at all for managers who have worked in the system to purchase a franchise they know well, from the inside. They get experience in the industry, then they leap. They are not so easily fooled.

• Carol Cross
  Jun 18, 2008 at 10:30 am

  All true, Sean, and you are “my good man” because you point out the dangers of franchising and how the current regulations, etc.. and status quo does not protect the prospective franchisee. You are not afraid to expose the bad ones and to point out that a “fair contract” on a “prone to fail” franchise can be misleading; ie.e. Cuppy’s.

  But even those who are experienced and educated and who want to eventually own multiple units of a franchise that they know can be profitable are put at risk by franchise regulation and agreements that ALLOW legal encroachment by the franchisor that increases SATURATION of concept sectors and substantial failure of startup franchisees who become part of a churning mechanism.

  Isn’t the fast service restaurant sector getting “saturated” and doesn’t the current regulation of franchising encourage the LACK of competition among franchisors to capture the labor and capital of franchisees which, in turn, results in “saturation” to retain and gain market share and the premeditated sacrifice of startup franchisees to the goal of nailing down market share for the franchisor.

  If potential franchisees could really assess the odds of success or failure, profitability and survivability, through access to unit performance statisitics, wouldn’t this result in competition to capture franchisees and clean up the fraud in franchising to everyone’s advantage?

  Obviously, The AFA and the AFFD were forced to compromise and accept the ugly status quo of the regulation of franchising to survive financially and both do their best to improve the position of the franchisees within the status quo.

  Who sponsors the http://www.franchisefraud.com website that quotes so much of Robert Purvin’s excellent book, “franchise fraud?”

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