Also, this contribution of the prospective franchisee — being there — doesn’t excuse the cooperation of the status quo to produce regulatory policy that helps the franchisors to obscure and hide the actual risk of the investment, in terms of possible survivability and profits, from the new buyers of the franchise.

I think Susan Kezios likened this to buying an automobile without being assured by the seller that it had a running motor and a mileage guarantee, or something like this. This kind of disclosure is not in keeping with the standards of the Commercial Code that governs business transactions in this country.

Franchisees get special treatment under the law and are premeditated sacrifices to provide resources for the franchisors to stimulate the economy. This policy is rationalized as serving the “greater good” and those who apologize or protect this ugly and immoral public policy use the crock of “due diligence” to preserve their innocence and deny their complicity with the scheme.

There is no franchise success fairy, as you say, but there is the bad witch of FTC regulation who helps to trick prospective franchise buyers into buying high risk franchises from franchisors who are legitimized and provided with credibility because of the FTC Rule and the FDD –that then protects the franchisors from fraud charges in arbitration and the courts.

Obviously, since starting a small business, franchised or otherwise, is extremely risky as evidenced by startup failure rate statistics, those franchiSORS, who are themselves small businesses in the startup phase, do have a better chance of longer survival because they don’t share in the failure of the physical units operated by their franchisees and do have somewhat better odds of startup survival as franchised chain operations, especially if they can churn and turn and pump and dump. I’m sure this fact doesn’t escape the regulators.

Again, could franchising survive if the unit performance statistics of the system were mandated by government to be disclosed by the sellers of franchises to the buyers of franchises before closing the sale?

If your answer is NO, what does this mean?

Carol

Prospective franchisees need to realize that starting a business – any business – has risks. With a franchise you get established procedures, a cool logo, a staff of people who are paid to be nice to you and a neato decoder ring, but you are still starting a business. There’s no franchise success fairy, and the buck stops with your own self.

When Deborah acted on appearances and oral representations and the defective disclosure document, she was falsely induced to contract.

You fault her because she seemed to know almost immediately that things were not working out as promised. Deborah knew that CB had been in business for years and she thought that CB was selling a viable business opportunity. How could she have known that the Cafe Concept wasn’t EVER a success when her Item 20 painted an untrue picture of the CB? Deborah thought, like others who failed with the CB Cafe Concept, that she was buying a turn key operation and a proven plan.

I believe, of course, that it is public policy under the FTC Rule to never arbitrate fraudulent inducement to contract. Fraudulent inducement to contract is only produced when the FTC Rule or the UFOC/FDD is violated —-and then ONLY the State has the standing to sue or to negotiate a rescission, and there is no right of action under the state statutes for the injured franchisees, whether they accept or reject the rescission.

This is why it will be interesting to see whether or not the 6th Circuit Court of Appeals reversal will do anything good for Deborah if they again try to approach the Court with their original claims —if there is no settlement, that is!

Carol

I don’t disagree with that one bit. The fact that Cuppy’s Coffee has been allowed to get away with what certainly appears to me to be a classic ponzi scheme is mind boggling. No gov’t agency has stepped forward, still, and the so-called non-profit advocates show up with their hands out. To me, these are scams within outright scams and the taxpayers will end up footing the bill through the SBA.

The way that The UPS Store changed the rules of the game seems like a clearcut case of injustice for the MBE franchisees that converted. Quiznos horrific actions against the franchisees that stood up for their rights was pretty clearcut also.

The validity of these franchisees’ complaints against the Coffee Beanery is not so cut & dried, in my opinion. They wanted a coffee shop and they got one. They had the names and numbers of every cafe owner and could have learned a lot more if they had spent the necessary time with them, including the dates they opened, prior failures, etc. They seemingly made the major business decision of their lives – to open a coffee shop in Annapolis, MD – on an emotion and a whim. Speaking from what I see – and the questions I asked that have gone unanswered – it seems to me that they put ten times more effort into placing the blame elsewhere than they ever put into making their cafe work. THEY – and no one else – decided to open a cafe in Annapolis and no one put a gun to their head to switch to the cafe from the coffee shop. Their problem was that they didn’t put much thought into their initial decision, so it wasn’t hard to get them to change their minds.

Carol, I don’t disagree with what you say about the regulatory side of franchising being completely out of whack. I just disagree that this, in particular, is a clearcut case of injustice against a hapless franchise investor. At best, the blame here is shared: slick, even underhanded, franchise sales machine meets franchisees who want franchise success handed to them on a silver platter – or they’re gonna make sure there’ll be hell to pay.

One of the most surprising lessons I learned in the role of franchisor was the extraordinary lengths some people will go to to blame others for their own bad decisions. They will even make things worse for themselves as long as they don’t have to accept responsibility.

If, as you say, franchisors on the whole offer franchises that are successful for their franchisees, why do 85% exercise their option under the FTC Rule NOT disclose any “earnings” or unit performance statistics to new buyers after 30 years of regulation. The failure to disclose information that is MATERIAL to new buyers of franchises IS the FATAL FLAW of the FTC Rule.

We realize that franchisors want their franchisors to be successful, but even the best of franchisors will have failures, and it is obvious that regulation was promulgated to protect franchisors against their failed franchisees —-who wouldn’t be given the odds of failure/success in terms of the failure/success of other first owners of the franchise before the sale was finalized. Franchisors would be allowed to bring franchisee prospects to signature of the contract by not talking about risk or rewards in the FDD or the contract. The apprearance that “earnings claims” made outside of the contract are prosecuted by the regulators is false, of course. The FTC prosecutes only 6% of the complaints it gets on franchising.

Apparently, the “powers that be” did not want to find out at what success rate or failure rate, prospective franchisees would be turned off and not buy franchises. I would imagine the FTC hoped that the failure rate would stay under the radar, at 10% or less, and we wouldn’t have the mess in franchising that we have today.

You know, also, since franchisors are protected from fraudulent inducement under the FTC Rule that they have become very bold and they even have established case law in the courts that it is okay to “encroach” on your franchisees as long as you told them you were going to do this some place in the FDD and the contract.

I know that you want to believe that franchising ia a win-win-win relationship in which franchisor-franchisee-vendor work together toward mutual success —-but the nature of franchising in which the franchisor can survive with profits, even as a percentage of his franchisees don’t survive, invites opportunism. Always, the franchisor gets his profits as long as the franchisee is standing, even if the franchisee never makes a dime in profits and eventually fails and loses everything.

Eventually! the truth will out and it would be to franchising’s advantage to try to clean up the mess themselves but self-regulation hardly ever works, does it? When push comes to shove and you can “shove” failing franchisees out the back door into obscurity and silence and make a few bucks for yourself, this is what happens.

You are a good man, Sean, and you have worked on the bright side of franchising but the dark side is intruding into the bright side of franchising and it conflicts you, I know.

Thanks again! for not blocking my computer and allowing me to comment.

Carol

I’d argue that the nature of franchising is a win-win-win relationship in which franchisor-franchisee-vendor work together toward mutual success – And that the contentious examples of franchisors trying to sell themselves out of hot water are the aberrations.

All that you say is correct. But, it is the SURVIVAL of the franchiSOR that motivates the franchisor to sell NEW franchises to NEW buyers even as the franchised concept is getting into trouble and first owners are failing out of the system in large numbers. They sell and churn as possible to maintain visibility and gross sales of their systems.

The very nature of franchising, in which the franchisor earns his profits from the GROSS SALES of the sytem, dictates that the franchisor must always continue to sell more franchises out the front door to TRY to stay alive and well. Remember! all of the time the franchisee is working to TRY to get to break even, the franchisor is profiting from the gross sales produced by the franchisee.

Understand that franchisors will not practice moral capitalism if immoral regulation protects them from fraudulent practices in arbitration and the courts. As long as the franchisors are free to sell their franchises without disclosing TIMELY information to new buyers concerning the viability of the units in the system, they will continue to do this to protect themselves and to try to remain standing. Franchisees will continue to be sacrificed because MATERIAL information concerning the risk of the investment can be withheld from new buyers under the provisions of the FTC Rule and the State FDD’s.

As Robert Purvin of the AAFD told the FTC ten years ago, the FTC Rule was promulgated to protect franchisors from common law fraud charges in the state courts. The mess we see today in franchising is what happens when the definition of “fraud” is changed by government regulation, and the weaker party, the franchisee, is left hanging in the wind.

Carol

I too think it’s the latter- I firmly believe that the government is not the mechanism by which things get ‘fixed”. I think by and large their intrusive intervention is what acerbates most free market problems.
I don’t think the FTC is the place we need to look to fix the problem, unfortunately it requires what I like t call “moral capitalism” the example Sean gives about Aunt Annies closing shops that didn’t work was a great example.
For instance when Meal Assembly/Prep Kitchen Franchisors saw revenues drop off dramtically in 2006/2007 what did they do? Did they cut back on their efforts to sell more franchises? I will begrudingly give them the benefit of the doubt at the beginning of the blood bath that followed. But their continued response up until very recently was to point the finger at the store owners/franchisees for everything that has gone wrong.
They could have slowed or voluntarily stopped selling franchises when they saw the downturn start. Did they?
No, article after article and franchise after franchise website states what a hot and fast growing industry this is. The Meal Assembly/Prep experts stepped up press releases and bogus numbers to reporters to prop up the failing industry.
Even now the “experts” are perplexed about what is happening in the industry.
Had the franchisors only practiced moral capatalism and been morally responsible they would have done the “right” thing and stopped selling franchises and looked at ways to correct the problems networks were having. But the didn’t do that, they acted like the King in the Emperors New Clothes. They refused to acknowledge that there was a problem and just compounded it by selling more franchises(when they could) It got to the point that they threw their own vetting process out the window in 2007/2008 and would sell to anyone who had a check for the franchise fee-See the Super Suckers post here that talks about a store in small town Greene, Ohio that was opened for 6 MONTHS…a franchise that should have NEVER been sold for that location.
Until we have responsible people in the driver seats of these start-up franchises OR have some REAL guidelines imposed on individuals before they can even franchise a concept then we will continue to have horror stories like the UPS store, Meal Assembly/Prep business, Curves, Butterflies the list goes on….
We need enforcement of guidelines and some real serious self policing of AAFFD or another non-profit/profit organization that looks out for the Franchisee via liasons with governmental agency.
We have an estimated 800-1000 families adversely affected by the mass failure of the Meal Assembly industry.
If you just took 85% of those 800-1000 at an average SBA loan of $250,000 in loans you come up with TENS of MILLIONS of dollars in loans that have gone into default.
THAT is outrageous, and it continues because not ONE Meal Assembly Franchisor has stopped selling franchises-in fact it seems like they have kicked up their effort to sell more franchises before the money is shut off to them.
They churn stores that have already failed once.
It’s outrageous
Just my two cents for what it’s worth.

Franchisors are free to make misrepresentations outside of the franchise agreement and the FDD, as long as they disclaim all of their representations in the FDD and the actual boilerplate contract that protects franchisors in arbitration and the courts.

The franchise industry is regulated to protect the franchiSORS from their franchisees who fail and to permit franchisors to hide material risk factors from new buyers who are “tricked” into buying franchises that only “look” successful but may have no record at all of success and profits. The name of the game is to protect and hold up the franchisor and the franchisees who survive and the failures, under public policy, cannot be made “WHOLE” because this could bring entire franchise systems down.

The Coffee Beanery Case is a good example of the intent of the FTC Rule and public policy concerning the regulation of franchising in our economy.

How can franchisees access the State little FTC statutes if public policy dictates that state negotiations for rescissions END the right of the franchisee to address the courts under the little FTC Statute? If there is an actual violation of the FDD, don’t the regulators have to step in to protect the public! Catch 22.

This was the message of the Coffee Beanery Arbitrator who felt very comfortable in her decision because she knew this was state and federal regulatory policy?

What does the Appeals Court Decision really mean in terms of relief to franchisees? DW was in the Maryland District Court to begin with and Michael Webster of BizOp pointed out that the federal judge should have known that the evidence before the court indicated fraudulent inducement to contract and and couldn’t be arbitrated, and this judge, in the beginning, could have saved everyone a lot of time and money!

Did the District Court Judge in Maryland know that federal regulatory policy would kick in after the rescission was negotiated by the State of Maryland, and that DW would not be back in his court?

What is the purpose of the little FTC Statutes?