9,509,657 Reasons to Read Disclosure Documents Before Investing
October 24, 2007 by Sean Kelly
Filed under Business
(FranchisePick.Com) If you were perusing their impressive website, attending one of their regional seminars, or reading about their founders (a former executive vice president and the current CEO of Quiznos Sub) in Entrepreneur magazine, you’d see lots of reasons to invest in this fitness franchise.
Learning the reality behind the franchise marketing often takes a little more digging, and tips from insiders. On a recent post, a FranchisePick.Com commenter directed us to this paragraph in the 43 page Uniform Franchise Offering Circular (UFOC) of the 1-2-3 Fit Franchise:
A commenter named 123 Fit Owner left this message on a recent post on the well-marketed 1-2-3 Fit franchise:
Go to this website: http://134.186.208.228/caleasi/PDFDocs/004826305.PDF
Go to the bottom of page 2 where it shows that they are 10 million in debt and dont hold much hope for the franchise. You still happy?
There are only 6 stores that have over 400 members and I know the bottom 2 arent making any money. And I seriously doubt if you are one of them. 123 fit franchise is on their way out. You need at least 400 paying primary members at $49 a month to be making any kind of money. Just because they have 414 members does not mean they are making money. It seems to be 2/3 paying members and 1/3 add ons. Clubs monthly costs are running from $10,000 to $15,000 depending what your rent is plus nnns, then equipment lease payment, gas & electric, phone, DSL, insurance, music, music system lease, royalties, advertising, Go figure software lease, e merchants fees, Merchant warehouse fees. Lets see have I left anything out? We both know if you are making anything, its very little. DO YOUR HOMEWORK PEOPLE. And hire a lawyer and let them research it for you. A good franchise lawyer. Most of the franchise lawyers already know what a loser this 123 fit franchise is. It will save you alot of money.
Another statement indicates that the franchisor seems comfortable running up its own debt, but is less tolerant of franchisees who may find themselves in over their heads:
Should you be skeptical of statements made by anonymous commenters? Absolutely! You should independently verify everything told to you by everyone… the franchise company, their representatives, franchisees, franchise blogs (even FranchisePick.Com) and magazines, even their legal documents.
But do some real digging before investing. Scour the blogs. Pay and hire experts to provide recommendations. Then take responsibility for your success, knowing that you made your franchise decision with both eyes open.
HAVE AN OPINION? LEAVE A COMMENT!
Direct FranchisePick.Com editorial inquiries, bequests and story ideas to our FP World HQ: info[at]ideafarm.net.
__________________________________________
FREE WHITEPAPER: What’s the best way for companies to respond to online criticism and attacks? A Harvard report with multiple recent case studies compiled and is available for free download.
I talked to the 123 Fit dude {Area Dev.} in Cleve. last year, I believe. I think he mentioned that the dude who started it was a Quizno’s exec.
True?
Busy word processor this week, huh?
Joel
Sean,
BTW…Interestingly enough, I just posted
{This morning} “The Top 5 items in a UFOC” on my blog-The Franchise King Blog.
Average minds think alike.
Joel Libava
Cleveland’s Franchise Guru
Sounds like 123 Fit is a first cousin to Butterfly Life. We don’t know at this point if BUTTERFLY LIFE is in debt, but there has been a complaint filed with the Dept. of Corp. in Ca. and with the FTC for misrepresentation and fraudulent enducement. An investigation is in progress. We formed a chapter of the AAFD – American Association of Franchises and Dealers who have been in existence for 15 years (www.aafd.org) to unit all those franchisees who felt alone in their endeavors to recover their losses or receive support that was promised from BFL…… as they handed over their hard earned money! The AAFD has been extremely helpful and I suggest you contact them asap. Our chapter is definitely prepared for litigation if this is not mediated quickly. Three years ago the same attempt was made, but many were bullied into backing off with false promises, and now many of those same franchisees realize they were only stall tactics. I hope everyone heeds your advise. The only way to successful mediation is for everyone to stand together! Good luck to all.
Jeez Sean, you want the prospective marks to READ financial documents!! What sort of insane taskmaster are you. Next, you will be asking them to read the UFOC without moving their lips -merely as a test of course.
Joel: According to the UFOC, 123 CEO Brooksy Smith was a Quiznos VP. CFO John Galvin and COO John Fitchett were both Quiznos Execs. Seems Quiznos Rick Schaden is a cofounder and a coowner of 123 Fit, according to press accounts, though I didn’t see him in the UFOC.
Linda: I don’t know about BL debt. Rumor had it that Butterfly Life sold more than 20 Area Developer agreements at $250K each… The again, $5M doesn’t go as far as it used to…
Michael: Read the docs? I know, I’m living in a fantasy world. Years ago I recall a statistic of how many prospects had read the docs before signing up (low %). Do you know of any such recent stats?
Is CA getting more forceful about disclosing warnings like this (the massive debt) and the iSold It pronouncement that the concept’s unproven, or are these rare exceptions?
FRs could stand some reading tips too, judging from the Barista’s coffee fiasco:
http://www.franchisepick.com/want-to-franchise-your-business-do-your-homework-first/
and http://www.bizop.ca/blog2/franchise/ftc_stops_coffee_shop_franchis.html
Michael, and Sean,
It gets even WORSE….
I know folks that are about to sign franchise agreements that have not even talked to 1 or 2 franchisees!
Joel Libava
Joel; It is odd that all these people going into sales don’t want to talk with anyone.
Sean: What you are seeing is wider acknowledgment clauses in the franchise agreements, trying to ward off the possible lawsuit from franchisees who didn’t read or comprehend.
Sean: What you are seeing is wider acknowledgment clauses in the franchise agreements, trying to ward off the possible lawsuit from franchisees who didn’t read or comprehend.
So what I thought may have been regulatory pressure to create more informed decisions (The system’s working!) is really just franchisors covering their ass-ets for when the franchisees fail (These FRs get better and better at this!)
Once again, you have shredded the fragile win-win franchise dreamworld I keep trying to maintain.
It is the Quiznos of fitness. Same people right? They just took Quiznos UFOC and put 123 fit in there. Sean I have a guestion for you. You say you know many zors out there that want you to succeed? Name a few. I have been surfing the internet and have seen stories that prove there are countless other zors that are bad. A wise lawyer I talked to last week says most are bad. But you say most are good. Please give some input on this. At this point I would never advise anyone to buy a franchise.
Barb said: Sean I have a question for you. You say you know many zors out there that want you to succeed? Name a few. I have been surfing the internet and have seen stories that prove there are countless other zors that are bad. A wise lawyer I talked to last week says most are bad. But you say most are good. Please give some input on this.
In my opinion, there are two distinct arenas of franchising. The one you are looking at is the world of Entrepreneur magazine-advertising, be-your-own-boss, mortgage your house, gain financial freedom, buy a job, no experience necessary side of franchising. I’m sure that’s also what your lawyer is referring to.
Much, if not most, of franchising is done on a different level. McDonald’s, Burger King, KFC, Applebees franchisees may have disagreements with the franchisor, but they are (for the most part) well-capitalized, experienced businesspeople and corporations with their own attorneys, accountants & lenders. The largest have hundreds of units and sales exceeding $100 million. The same is true for hotel chains, auto dealerships, and others.
When I was Director of Marketing of Auntie Anne’s there was nothing we wouldn’t do to help a struggling franchisee. I travelled to MI 2-3 times to help a franchisee with a bad location, worked with mall management to do special promotions, brought a satellite cart at no charge, put promotions for them in every vacant store window, helped them get rent relief and eventually a new space. All without charge. We regularly gave franchisees the A locations and kept the C and D. Companies like McAlister’s, Great Harvest Bread, FastSigns, and many others understand that successful franchisees make successful franchise companies. The overwhelming majority of franchise units are owned by multiple unit operators.
There are certainly plenty of scammers and con artists in franchising, but not as many as those in less regulated arenas, such as business opportunities, MLM, etc.
The problems with franchising are not all the doing of the franchisors, however. It takes two to tango. How many franchisees who appear here did their detailed due diligence AFTER they bought their franchise and were struggling, but not before? How many would eagerly invest $200K for an unproven business concept & FR with no experience, but wouldn’t think of paying a couple thousand dollars to an experienced franchise attorney to review their documents? Or interviewing more than a few franchisees. Or working for 6 months in a store before risking their life savings? Or even READING the disclosure documents?
That doesn’t excuse dishonest franchisors, but people need to realize that the government is not going to protect them from bad – even fraudulent – business opportunities. All one has to do is watch late night TV commercials where everything from abs machines, to miracle diets, to get rich quick schemes to faith healing for donations is allowed to feed freely on the public.
Sean;
The real problem is not with prospective franchisees: but rather with franchisors who rent out their tools without the slightest bit of due diligence on their franchisees.
It seems always that franchise attorneys and advisors and pundits understand that the majority of franchisees don’t read the UFOC/FDD, but when the franchisee fails, they always pin the blame on the prospective franchisee who is too cheap to pay thousands of dollars to an EXPERT for help in the due diligence process —–help, of course, that the prospective franchisee doesn’t understand that he/she needs when trying to do due diligence on the artifice of Item 20 of the FDD.
These experts must know, however, on some level, that a majority of prospective franchisees don’t understand the “game” that is being played and don’t understand that what they think they have seen in the sales process and the UFOC/FDD is not always what they are likely to get.
The majority of prospective unsophisticated franchisees are in a state of mind at the time of purchase that is the result of a concentrated and premeditated Public Information Campaign in support of federal regulatory policy to present franchising as relatively RISK free because the franchisee is buying a “proven” plan from a “proven” franchisor, whether a new franchisor or a long-established franchisor of many units.
Why would franchisees put their personal assets at risk and sign long-term adhesory contracts with franchisors and landlords that represents hundreds of thousands of dollars of debt and put their personal assets at risk with personal guarantees unless they BELIEVED that the franchise purchase was relatively risk free and that they would earn profits and success in their investment?
While the experts and the pundits stress the DANGER of not doing due diligence and “shame” those who haven’t when they complain of failure, they do little to educate the public about the legal “trap” of the UFOC/FDD and the adhesory franchise agreement that comes in a “package” and that protects franchisors from claims from failing franchisees or failed franchisees of fraudulent inducement/fraudulent concealment of material facts in arbitration and in the courts AFTER the buyer franchisee has signed the boilerplate franchise agreement.
Only a few attorneys like Richard Solomon of Franchise Remedies explain that the franchise agreement can be a License to Lie, Cheat, and Steal in the hands of predatory franchisors who operate with immunity under the law as long as they have the signed agreement with the Integration and Acknowledgment clauses to present to the courts. Franchisors are NOT subject to truth in advertising laws and are allowed to hype and sell with immunity under the law with their Press Releases and their Websites as long as they make NO misrepresentations of success or earnings in the FDD or outside of the FDD that the franchisee can prove he/she has “relied” upon.
The experts in franchising do little to explain to the prospective franchisees before the purchase that the Regulator, the FTC, and the State, and the SBA Franchise Registry and the franchisors themselves all DISCLAIM that they are endorsing the franchise that is being sold to the public as being viable and valuable. Advisors and attorneys don’t explain to the prospective franchisees that if you fail, there is generally NO recourse in arbitration and in the courts and that you could lose everything because of your personal guarantees.
The FATAL FLAW of the FTC Rule is the failure of government to require franchisors to disclose, or make available, the unit performance statistics of their systems to new buyers of the franchises.
This fatal flaw brings franchisees to invest UNKNOWINGLY in high-risk and unviable franchise offerings and this is not worthy of “free market” capitalism that co-exists in democratic free Republics.
Carol Cross – I couldn’t have said it better. You’re words are extremely powerful and well said and hit home with the Butterfly Life franchisees, many of whom have been forced to close their doors exactly for the reasons you stated. I was an original franchisee four years ago who believed I did my due deligence. We were advised that they had the PROVEN plan and the PROVEN experience…after all, they ran the Linda Evans clubs (privately owned) and 24HrFitness. Wish I had an attorney like Richard Solomon who spells it out without a lot of legaleze. Two months after we opened, we realized that BFL only cared about the money…never doing THEIR due deligence regarding the ability of the franchisee to have the sufficient finances and background as stated in their franchise agreement. Clubs that continued to close mean’t more money in their pocket since they would re-sell them over and over with no one knowing the unit performance statistics. (it is impossible to gather and decipher that info from the CALEASI website) Immediately after closing Linda Evans (a women’s health club) doors…literally in the face of their clients, they opened Butterfly Life as a franchise. 450 members of Linda Evans filed a criminal suit with the DA in Orange County, Ca., against Mark Golob and Mark Mastrov to recoup their membership fees. It took a year, but Golob and Mastrov (of 24HrFitness) paid up. Now the franchisees are facing the same problems….this time with Mark Golob and Tom Gergley. It’s unfortunate that the franchise agreement protects the franchisor and leaves the franchisee out in the cold. Most of us did our due deligence, but didn’t realize that most of their words were lies used to induce sales. Of course, since these were VERBAL inducements and NOT in the franchise agreement, they are completely protected. This lack of ethics, integrity and professionalism in the corporate world has got to change. Our group has filed a class action arbitration and a counter arbitration against BFL in January. All they have done is use stall tactics to try and break us financially. I truly believe this is the MO for MOST franchisors. And asking for three arbitrators in the franchise agreement is just another way of fending off a lawsuit since they know most franchisees can’t afford the legal fees. We have also filed a complaint with the Department of Corporations in Ca. Many people have advised us that the DOC are just bureaucrats who side with the corporations……that’s where their bread is buttered. So far, the DOC is investigating our allegations and was suppose to have a response from them by June 16th (still nothing, and that’s after an extension) We believe there is strength in numbers and have come together to continue our pursuit against Golob and Gergley until restitution is obtained. Mediation was attempted several times through the American Association of Franchisees and Dealers to no avail. We’ll be happy if we can get them shut down in California where they are incorporated. Our fight will continue and thanks to the blogs, we can get the word out there and hopefully protect anyone else from falling prey to these vultures. We sense that they will be moving out of this country due to the negative publicity and selling overseas. We know they have started in India, Japan and Canada. Those poor people! I may steal some of your well-put words when I re-open my correspondence with the Governor’s office. Carol, are you a franchisee or counsel? You seem very intuned to this ongoing fight with the FTC. Many of us have communicated with them to change their rules regarding unit performance statistics. I understand from our attorney, the FTC moves veeeeerrrrrryyyyy sloooooooowwwwly. Stay tuned!!!!
Thanks “Fool me Once” for your kind words that encourage me. I have been blocked from posting on Blue Mau Mau and Franchise Pundit but hope I survive with Sean Kelly on Franchise Pick. I have always hoped that franchisees and prospective buyers would read what I write and find out the truth for themselves.
I hope you will be successful in your efforts to fight the “beast” of franchising that needs to be tamed. Because the FTC Rule actually acts like a blank check for franchisors to trick and con franchisees to grow THEIR profits with immunity and impunity under the law, they do use the contract to lie, cheat, and steal, as they are so inclined.
My family was involved in a failure of The UPS Store franchise and I have spent months researching the “how” and “why” of the pain of failure to thrive in this franchise for us and for so many others who were deceived by appearances and especially the appearance that there was some government oversight of franchising.
When you look at Item 20 of the UFOC with the knowledge that the only way you can do your due diligence as to survivability and profitability is by interviewing franchisees, you understand that the government’s failure to mandate unit performance statisrics is long-standing public policy to subsidize the franchisors. If franchisors make no representations in the FDD or the Contract, they have to spin outside of the contract to sell the franchise and not get caught —-and then they are home free in the courts when you sign the binding contract. “The Art of the Deal and the Art of the Steal.”
Please read The FTC’s Franchise rule: Twenty-three Years after the Promulgation —the testimony to the Subcommittee on Commerce, Trade, and Consumer Protection, June 25th, 2002, of Ms. Susan P. Kezios, President of the American Franchisee Association which is available on a Google Search. Thank God for Google Search and Google, the University of the People and the FOIA, etc.. that does preserve and provide information that protects our democracy.
Ms. Kezios is an attorney and she points out how the FTC Rule misleads prospective franchisees in her strong statement to the Committee. (you could provide this in your letter to your Governor.) Since she and Robert Purvin of the AAFD, another attorney, and author of the book, Franchise Fraud, also made public comments to the FTC on these same matters in 1997 and the FTC ignored them, we can understand that the FTC doesn’t just move slowly on behalf of franchisees but the FTC doesn’t move at all to protect prospective franchisees before or after the contract is signed.
Thanks again! Keep me posted.
Carol