Like most Americans, we had respect for the famous brand name franchisors who are part of our daily lives. Prospective franchise buyers are seduced by the advertising of the big brand chains just as their customers, the general public, are seduced by advertising to buy and do business with the big brand franchise chains. I believe, personally, that the franchisor used the famous brand name and symbol as a SHILL to sell the franchise, the UPS Store, to prospective buyers. Today, the old and established chain franchisors can be just as dangerous as the new franchisors who are entering the market because they use “churning” as a management tool.

Franchisors are not subject to “truth in advertising” laws that protect consumers (franchisees are not considered consumers) in that they can hype and sell their franchises through the use of brokers and advisors and Press Releases, their Websites, written sales material, etc.. as long as they don’t make an “earnings claim” OUTSIDE of the contract or the FDD, or during the actual sales process? (not defined under law) But, of course, there is NO government oversight or budget for enforcement of this prohibition by the federal or the state regulators. While franchisors have the OPTION to make “earnings claims” WITHIN the contract, the great majority of franchisors, after 30 years, make no earnings claims in the UFOC/FDD/franchise agreeement because they don’t want to leave the safe harbor of their contract that protects them from claims of fraud in the courts. And, also, importantly, franchisors don’t see the benefit of making an “earnings claims” that might not act as as an inducement to new buyers to invest hundreds of thousands of dollars in the franchise and a long-term lease that is pesonally guanteed by the collateral of the personal assets, their home or their 401 or 403 or other retirement savings.

Like most Americans, we didn’t really understand franchising as a business model and didn’t really understand until too late that we wouldn’t in any sense be a part of our franchisor who would have no fiduciary responsibility for us and that we would be only a resource for our franchisor and his parent to enable the franchisor and the parent to compete in the marketplace and grow and maximize their profits while reducing the cost and risk of building and operating corporate physical units to wear the brand name.

You have to think of franchising as a business model that captures cheap labor and cheap venture capital of prospective franchise buyers (See Paul Steinberg’s “Beguiling Heresy”) that reduces corporate expense and risk and produces the rapid growth of chain stores and gross sales upon which franchisors can maximize profits —whether or not the franchiSEE is operating at a loss, at breakeven, or at a profit. Therein lies the difference. The franchisor does prosper even when the franchisee never earns a dime in profits –but the franchisee has to stand in place under a hard and punishing contract at breakeven or below to try to service his debt or lose everything. The franchisee loses his entire investment in failure but the franchisor doesn’t fail when he churns the failed unit to a new franchisee who continues to pay royalties on the gross sales of the unit.

Franchisees, of course, buy franchises because they believe and are encouraged to believe in the sales process that there will be a good job and profits for them, and that there is little risk in the purchase. They are encouraged to believe that the franchisor can’t succeed unless they succeed. Franchises are sold with great hype outside of contract about success and profits and with no talk about failure or risk —and the history of failure and/or unprofitability of startup franchisees who build and finance the physical units is not required to be disclosed in the UFOC/FDD under law to new buyers of the franchise.

The FTC Rule and the UFOC/FDD, the disclosure document, actualy, in effect, licenses the franchisors to sell their franchises to the public without disclosing “earnings” or any unit performance statistics in the possession of the proprietor of the branded businesses, the seller franchisor, to the new buyer, the franchisee. The UFOC/FDD actually acts as a red herring and diverts the attention of the buyer of the franchise from the fact that they have received NO MATERIAL information from the seller of the franchise concerning the unit performance history, past or present, in the FDD or the franchise agreement on which the buyer can assess the risks and rewards of the investment, itself. The prospective franchisee, once the contract is signed, has agreed under contract that he/she has purchased the franchise with no promises from the franchisor of success or failure. Prospective franchisees generally don’t read the FDD’s and sign these boilerplate and uniform contracts that fully protect the franchisors in the courts because they believe they are not negotiable and that this is the only way they can be “awarded” the franchise and enjoy the job and profits promised outside of the FDD and the contract.

The state UFOC/FDD doesn’t satisfy the purpose of the Rule, as stated by the FTC. The FTC Rule and the state FDD do not protect prospective franchisees from buying high-risk and unprofitable franchises because the risk and unprofitability can be obscured and hidden from view in the UFOC/FDD from both the prospective buyers and the government regulators —who don’t read the documents anyway unless there is a complaint. The UFOC/FDD together with the franchise agreement, the contract, does however protect the franchisor from claims by failed and failing franchisees of fraudulent inducement/fraudulent concealment in the courts.

Robert Purvin of the AAFD, who wrote the book “Franchise Fraud” indicated to the FTC in public comment #79 on the FTC Rule over ten years ago that this was the real purpose of the FTC Rule, i.e. to protect the franchisors. If it wasn’t the INTENT, it is certainly the EFFECT of regulation of franchising by the federal government in the late 70’s.

Most prospectivefranchisees don’t understand that franchising, as a business model, is inherently very exploitive, dangerous, and risky for franchisees but very successful and prosperous for franchisors who control and own the chain pyramids and their sales under harsh contracts. These contracts are securitized and sold in the financial markets and the courts uphold the written terms of the contracts. It is the franchisor systems, of course, that feed the local economies and government revenues and franchisees are merely a resource for the franchisors under the status quo of federal regulation and the law. The ineffective federal rule is rationalized as regulatory policy that serves the greater good. Failed franchisees are premeditated sacrifices to the stimulation of local economies and government revenues.

Actually, the federal government determined that they had to regulate franchising in the late 70’s when there WERE a lot of “fly-by-night” franchisors with little substance committing fraud on a daily basis and the victims were making a fuss in the Congress.

While the current regulatory policy, The FTC Franchise Rule, may prevent the “fly-by-night” franchisors with no substance from operating in the economy, the regulatory policy has enabled
so called legitimate franchisors to sell highly risky and unprofitable franchises to the public without disclosing the MATERIAL risk factor of failure and unprofitability of startup franchisees to new startup franchisees with immunity and impunity under the law as long as the franchisor is in compliance with The FTC Rule and the State FDD. This, of course, has enabled the practice of “churning” and “encroachment” that has destroyed so many innocent franchisees, and has emboldened new franchisors who can use franchisees to try to “prove” their unproven plans by overseeding in the market place.

I believe that the only solution to the problem is for the federal government to either stop regulating franchising or for the federal government to require the franchisors to disclose or make available the MATERIAL unit performance statistics of their systems or their proven prototype, in the case of new franchisors, to new buyers of the franchises.

Fighting windmills! I know!

Carol

Why don’t the good franchisors condemn the bad practices of selling unviable franchises and churning and turning and pumping and dumping franchises and franchisees? Is “churning” necessary to the durability of franchising as a business model and is this why there has been no public statement by the International Franchise Association or others in the Industry?

When franchisors run into trouble, they react by selling more franchises to new prospects and abet the sale of “discounted” units out the back door. While this permits them to survive, at least the Internet and sites like Franchise Pick and Franchise Pundit and the Business Press are putting pressure on the abusive franchisors who are cannibalizing their own franchisees to survive and compete for market share.

This didn’t just start yesterday but has been going on for years since the promulgation of franchise regulation. The difference, of course, today, is the Internet and Forbes and the WSJ and other business media who do make it more difficult for franchisors to “churn” out of view of the public and the regulators. Richard Gibson of the WSJ also wrote a fair and balanced story about the UPS Store troubles with turnover and unprofitability .

Obviously, franchising is not a partnership or a joint venture in which all parties take the risk. The risk of building and operating the physical unit to wear the brand name is bourne by the franchiSEE and the franchiSOR doesn’t necessarily fail when the franchisee fails —-and herein lies the difference. When the franchisor can survive even as a substantial number of startup franchisees fail, this is the scenario that encourages churning of startup franchisees.

While it is understood that there is a risk and that there will always be failures, isn’t the failure rate of startup franchisees a MATERIAL risk factor that should be disclosed to new startup franchises?

In the past few years, famous brand names have been hitting the headlines. Not just those that you mention but Quiznos, The UPS Store, Coffee Beanery, SonaMedSpa, I soldIt, Subway and others are accused of churning and abusive practices. Franchisors are moving away from granting territorial rights and are encroaching on their own franchisees to attain and retain market share and to always grow the gross sales of their systems.

I think that this will only change when the FTC makes the franchisors compete for the capital and labor of franchisees by making them disclose the unit performance statistics to new buyers of franchises. Right now! they aren’t doing this and the disclosure process actually enables churning of startup franchises who have invested their good faith and capital and labor in a franchise, and franchisors CAN CHURN out of view of the new buyer of the franchise and out of view of the regulators. The disclosure process enables the withholding of material risk information from new startup buyers of franchises.

It will always be “invest at your own risk” in the franchise agreement, the binding contract, but wouldn’t it be fair and moral free market capitalism to “invest at your own risk” when the true risk of the investment in terms of present and past UNIT performance statistics is disclosed by the seller of the franchise to the buyer of the franchise?

Carol

Here is the link, with goes through BMM,

http://www.bluemaumau.org/comment/63337/Cold_Stones_Troubles_Well_Known

Bottom line is that anyone who could read financial statement would have tossed this puppy into the waste basket.

With gas and food prices rising, as well as more people out of jobs than ever, it is much easier to head to Dairy Queen or the supermarket for ice cream if you want that treat. Cold Stone is a luxury. I bet that it is the cold stones at malls and such that are failing, not the ones at tourist destinations, where people are interested in treating themselves.

Just my thoughts on it.