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Franchising Needs Better Government Regulation

Discussion of legislation and political advocacy regarding franchising.

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Buzz Off Item 20 Ranter

All the franchisees on that top ten list above must have sold product at a loss and made it up on volume.

You sir are a supreme idiot. 

The Truth Shall Set You Free!

TIF

Paul

You are a genious. Thanks for all you do for all of us newby's on BMM. Are you really an attorney and a Subway Franchisee? Do you help us newby's review our franchisee contracts. The attorney I talked to last week wanted $1,500.00 just to review it! I thought most of the agreements were pretty much the same. I like Submarina and I like their system. The franchisees say they are happys. #1500.00 to read a contract seems crazy. Thanks again.

I Agree but AAFD faces political realities

I agree that the AAFD, if it were powerful and wealthy enough, could be an influence for more equal treatment of the franchisees under law and they have already demonstrated their desire to do this through their critique and rating of franchise agreements and other steps as indicated by Robert Purvin. Mr. Purvin certainly did his best to expose fraud in the franchise industry and I'm sure that legislators read now and then when they aren't raising money or going to cocktail parties.

There are the realities, however, of getting that $100 out of all in the huge pool of available franchisees and so many franchisees do not join the AAFD for many reasons.

Those who are on the way don't want to cough up the $100 as they are financially stressed; those who are breaking even and hoping to do better don't see why they should; those who are profiting see no need for change.

Normally, the franchisees form some kind of representative group within the franchise network. This is very dangerous for those franchisees who displease the boss franchisor and sometimes means they are threatened with the loss of their business or humiliating cures, and audits, etc... the strong voices of the franchise associatins are not that strong and are more conciliatory to facilitate negotiation to SAVE their businesses.

Franchisees do not want to sue their franchisor, they want to be successful and protect their brand store in which they have made 100% of the investment. They want to save the day for themselves.

I am new to all of this myself but it has been said on this site, I believe, that the AAFD doesn't support relationship laws in the States and, if this is true, I am beginning to wonder what their rationale is and I guess I am free to write to Mr. Purvin and ask him.

It may be that they do not think that the state relationship statutes will effectively change the status quo. I really don't know. We still get their publication which is very good. I'm not sure we ever joined because we were too busy trying not to fail and we did support the Brown Board and then finally the BSA when we realized that there was no solution other than litigation.

But I know, and you must know, that once public policy has been established and it has been the status quo for such a long time, it is extremely difficult, if almost impossible, to change public policy without some kind of epihnany such as was beautifully expressed in The Franchise Rose Line and The Road Most Traveled Blog.

We have to hope that Les Stewart's Franchise Fool Site will educate the public both here and in Canada as to the "nature" of franchising that permits and legalizes the exploitation of middle class Americans and Canadians to provide capital for development of our economies. I believe that the failure rate of franchising is hidden by agreement in both countries under disclosure laws because they know the rate is high and that it would inhibit investment in the economies if the actual and real rate of failure were visible to the public.
But, I think they are wrong! There would still be investment in franchising if the failure rate were disclosed to the public ---and our government would have clean hands!

There are lots of Dale's out there who stand smug and secure in their knowledge that we will finally get tired and give Blue Mau Mau back to the promoters of the status quo!

Ugly reality is hidden in the language of the contract

But 20-year-ZEE, if franchisors will not disclose the odds for success or failure, as is KNOWN to them, they certainly aren't going to talk about the ugly realities of failure. This would be a "Negative" and you know that negatives are not talked about in the sales process. Also, I think you know that most ZEES approach the contract in good faith and don't even think about things going wrong and assume that there ZOR is dealing with them in good faith. A big mistake!

All the attorneys who post on this site indicate that you can't get killer due diligence from a general attorney, and you need a specialist to help you with due diligence on the investment, etc.. and, of course, the due diligence with the specialist is expensive. This, of course, discourages deep due diligence with specialists and many prospective ZEES buy franchises based on the visibility of the brand in their view and in the UFOC and believe that the franchise agreement is a boilerplate contract as disclosed in the UFOC and why should they pay for due diligence if the contract can't be negotiated anyway. They reason and believe that all of the other franchisees in the standing franchise network signed the same agreement with the franchisor and this visibility is translated to viability in the eyes of the potential franchisee. It would be interesting to know how many franchisees will sign franchise agreements in the future without the services of an attorney because of the Internet.

Additionally, the ZORS expertly word and manipulate the wording in the franchise agreements to disguise the hard and mean consequences of failure and this is a kind of constructive fraud in itself that complements the constructive fraud of offering the disclsure document and the contract as a package.

Thank you for sticking to the truth!

Re: The Dwyer Group Named Among Best Companies to Work for in Te

they maybe one of he best places to work for but its all at the expense of he franchisees. its unfortunate that their success does not reflect to the franchises they sell. Their franchise failure rate is phenomenal and they make sure that information does not get out.

Barbara Jorgensen's picture

It's only been a less than a month!!

I am not a negative person. I beleive in the power of positive thinking. In our case all the positive thinking and working with our customers didn't change the fact that our working capital was eaten up by the build out. I would of done a better job at negotiating with the landlord. I am all for people to be a sucess. I'm going through the process of loss. Why do the zors not explain the process of due diligence. If I were a zor I would. Because I know I wouldn't have anything to hide. It just seemed one bad thing happened after another. Doesn't everyone want to be happy? As soon as we get this monkey off our back we will settle in and be happy. I am on a mission to inform new zee's what this franchise world is about. The UFOC and due diligence. Most of all I have to inform them they are not buying their own business. It's the Zor's business.

Legal Crucifixion

For franchisees is a sure thing. Unless all franchisees get it together and realize that there is noise and strength in numbers.

Posting is great, but until we gather and realize the power we have against the abuse that is suffered everyday "WHATS THE POINT"

As far as including The Coffee Beanery in this, please don't count R&D out. the fat lady has not sung yet.

Which is a good example of this post, R&D are not yet down for the count.

If by some miracle R&D would prevail, that does nothing for those who choose to give up

Even Failed ZEES have happy days

Yes, we had happy days when we were dealing with the customers and anticipating that we would someday break even and get a pay check and those profits, etc..!

We enjoyed our contacts with the customers and hiring youg, good kids to work for us, and to know that they were getting pay checks from us that would help them.

But, as the months passed and grew into years and as we tried everything to try to bring in more sales, we realized, finally, that we had to face reality and get out.

It was only after the failure and the dealing with the hard and mean and dishonest (but legal?) tactics of the ZOR that I started to research franchising. Our ZOR has a famous and well respected brand name and I just couldn't believe that their ugly behavior toward us was part of American Business.

What I believe to be absolutely true has not made me happy. The truth is sometimes brutal but must be faced. Those who will not face it or talk about or debate my truth by countering it with their truth about all of my misconceptions are just protecting their innocence, perhaps.

Decent people have to try to protect their innocence because the malice that is enabled by ineffective regulation is truly something that decent people can't live with. Instead, they have to deny it while warning with books and essays and comments about due diligence and fraud and posts ---And, perhaps they, like the others, believe that the lack of effective regulation does serve the greater good.

No Solution to DD problem is Good Solution for ZORS

Obviously, Paul! The fact that there has been NO solution to the lack of or easy access to killer due diligence by millions of franchisees, this has been good for the franchise industry that grows to greater importance in our economy every day.

What is your solution?

No Solution to DD problem is Good Solution for ZORS

Obviously, Paul! The fact that there has been NO solution to the lack of or easy access to killer due diligence by millions of franchisees, this has been good for the franchise industry that grows to greater importance in our economy every day.

What is your solution?

Bob Frankman's picture

Flawed Model, Sweeping Statements

"It is the millions of individual little business men.. who produce the great profits for those higher in the chain." - Guest 

Your statements are a little too sweeping and not necessarily true. The big guys do not necessarily have a lower chain of owners - unless you are referring to managers as little business men.

Right Troll! The ZEES are the LOSERS --Not Winners!

But it is not just the zors and the lawyers who win. The local, state, and federal governments support regulatory policy that stimulates the economy and new development in the economy. This provides taxes and revenue for government and jobs in the economy.

ZEES provide cheap labor and cheap "venture" capital for the franchisors who have no investment in the physical units that wear their brand name. The government has an interest in holding up the franchisors.

Because it is only the franchisee who loses if the unit goes on to serve the franchisor, the government apparently believes that franchisees can be used to hold up the franchisors who feed the local economies, etc... and government revenues, etc..

The FTC rationalizes that their ineffective regulation is for the "greater good."

Australian Activism --The Power of the Press to Confuse

We congratulate the Australian activists who are trying to bring the predatory "secrets" of franchising to the attention of the people and to the government.

We can see how the franchisors in Australia use the same argument that is used in the United States and Canada, where there is regulation, and in other countries where there is no regulation, to confuse the legislatures by suggesting that any regulation of franchising is an attack on SMALL BUSINESS men and women.

Certainly, some franchisors are small business men but! franchisees, because of the binding and exploitive contracts, are merely resources controlled by contract that are used to run the small businesses of the franchisors and to permit them to churn and grow their brand names on the resources of the franchisees.

It appears that so many of the business reporters don't understand the problem and do not help to educate the public. Only public indignation puts pressure on governments to protect the weaker party in franchising, who has generally been tricked into signing a harsh and unfair contract because of the appearance of success of the franchise in the economy and the lack of disclosure of any actual performance statistice concerning the individual unit owners of the franchise.

When franchisors respond to good faith investors who invest their lives and their savings in a franchise, franchisors premeditate bad faith contracts in which they can control and exploit the franchisee in success and acquire the failing franchisees assets in failure.

The evils of churning and turning and pumping and dumping may have to be exposed by a more informed business Press.

But Failing Franchisees DO Contribute to the Economy

Try to understand that the failing franchisee does contribute to the economy all of the time he is trying to break even, and even afterwards, IF his assets go on to serve the franchisor under new ownership.
Franchisees for the most part are invisible in failure. You are continuing to service the economy when you continue to service the debt you incurred to finance the failed business. Never an ill wind that blows that doesn't blow3 someone some good, or something like that.
Because of the NATURE of the franchise MODEL, often the franchisee is the only one to lose. Ir is the FRANCHISOR's Network of stores, etc.. that feeds the economy and that serves "the greater good" ---that is the rationalization for hiding the risk of the investment from the potential franchisee in the UFOC.

Were you friends with the janitor in high school Item 20 Stooge

I think I remember you? 

The Truth Shall Set You Free!

TIF

Fairness Arbitration Act---How will it help franchisees?

I assume the above is from D or R from Coffee Beanery and that you are hoping that this Bill will somehow clean up franchising in some way that will prevent others from going through what you have gone through.

I hope this is true. But, can you tell us what this fairness in Arbitration Act Bill will do for the franchisee. Will this mean, if theis Bill is passed into law, that franchisees could determine whether or not they wanted to go to court or arbitrate? Would franchisees have a choice and would the State Franchise Laws then be available to franchisees? Would franchisees then NOT be forced to arbitrate their contracts under franchise agreements and have access to the courts?

How will this bill work with Rescission, which is a tool of the State, when there are violations of the UFOC or the Rule that are considered either substantive or technical by the State AG's and Administrative personnel? Would franchisees then be able to accept rescissions and go directly to court if rhe rescissions didn't make them whole? Wouldn't a State Rescission be proof in itself that franchisees had been damaged and would juries be permitted to decide the extent of the damage? Would this then promote settlements out of the courts?

If franchisees continue to believe that the government UFOC's that accompany the written franchise agreements are not negotiable and if franchisees sign these franchise agreements that indicate that they have been told there are no guarantees of success and thus 100% risk of losing their investments, how will this help franchisees in the courts? That is, if there is no settlement, will franchisors still be protected by the franchise agreement in the courts?

Won't it still come down to "justifiable reliance" in the courts? Won't the UFOC and the franchise agreement continue to protect the franchisors who will continue to be permitted to sell their franchised concepts with no past performance history on which franchisees can conduct due diligence and at very high failure rates that are obscured from the public?

If you had understood the past history of the performance of the Coffee Beanery Cafe Units, would you have invested three quarters of a million dollars in a proven failure? Would the court then permit a jury to decide whether or not you relied on the UFOC and the ommissions and misrepresentations in the UFOC and to claim this is why you were misled into investing in a flawed business plan that damaged you?

Or, would the court indicate that under the law of contracts you agreed when you signed the contract that you did not rely on the UFOC; that you invested at 100% risk of failure; and that you were only justified in reliance on that which was clearly spelled out within the four corners of the contract to which you put your signature?

I think you really do not clearly understand that the UFOC and the signed franchise agreement together are a calculated means to protect the franchisors from claims of fraudulent inducement and not a means to divulge the risk or to protect franchisees from risky investments.

The FTC broke faith with you and me and thousands of other franchisees when they compromised with the IFA back in the late 70's to allow franchisors to sell their franchised conscepts withnout clearly disclosing the material risk of the investment as demonstrated by the success or failure of their first-generation franchisees (first owners) who would provide the capital and the labor to build the physical units thnt wear brand names.

It is federal policy to stand up the franchisors, even at the expense of franchisees, because it is the franchise networks who feed the economy asnd the fires of development in American communities.

Franchisees are KNOWN and CALCULATED sacrifices to the concept of the "greater good" and the status quo of the law protects the greater good. Predator franchisors are enabled by the state of the law to sacrifice first-generation franchisees as a management tool to build visibility and viability of their networks. If this were a moral and ethical free market practice, the past performance statistics in UFOC's would work to prevent bad franchisors from selling their product to the public and we would not have "high risk" franchises residing on the SBA Franchise Registry.

I have to disagree with your comment that the laws are okay and that they just have to be enforced. I think the UFOC needs to be improved upon and that Item 20 needs to clearly reveal the successes and failures of the transferors to enable prospective franchisees to perform effective and efficient due diligence. I think the FTC has to get out of bed with the IFA and protect the American Consumers of franchises and that franchise disclosre should be corrected to provide franchisees with the same degreee of protection that is provided by the SEC to unsophisticasted investors in securities.

Bull Scat ---FTC and SEC not in same line of work--For Sure!

You got that right, Nick Bibby. Of course, Richard Solomon is exactly right but both you and Richard know that many prospective franchisees view the long-winded UFOC as required government disclosure and protection, etc. for the franchisee. The government does say "TO PROTECT YOU....."

Those prospects who are buying into very visible franchises in our country often do not pay for expensive due diligence because the visibility together with the UFOC that they believe underlies a NON-negotiable contract lulls them into a false sense of security.

You and Richard know this and the FTC and the IFA know this and yet the DEAL of Item 20 continues and big networks are allowed to hide failures in the UFOC's and to sell unviable and flawed franchise opportunities to the public and maintain their "TOP" ratings in Entrepreneur.

The red herring of the UFOC diverts the attention of the buyer from the actual performance statistics of the franchise offering (that are not required to be disclosed under law) that might or might not be revealed by Item 20 references and the binding franchise agreements protect the thieves 100% in the courts --because they disclaim everything.

The FTC should get out of bed with the IFA and regulate franchising at least as well as securities are regulated by the SEC. The FTC Rule breaks faith with the American public and the FTC does not accomplish the purpose of the rule and permits franchisors to sell unviable products to the public.

RichardSolomon's picture

What is happening now is not putting up a fight.

If you think that the fleeced Zees are fighting by doing what they are now doing, you don't understand militancy.

Holding white wine/whine and cheese parties and crying out for fairness is about the same level of militancy as was put up by women when they failed to get the ERA ratified.

Militancy is what the black people did to get the Federal laws enacted that began to permit and even mandate a lessening of discrimination in this country.

I remember seeing on TV what they did for their rights. There is no comparison. --

Richard Solomon, FranchiseRemedies.com,  has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Dale Cantone and SBA Franchise Registry --Rescission

Apparently, as long as a franchisor is on the SBA Franchise Registry, no matter how great the failure rate of first-generation franchisees may be, the State and Federal Government policy will work NOT to endanger that franchisor when DLA Piper represents the franchisor. DLA Piper and a few other large law firms together with the IFA and the FTC have developed the policy surrounding franchising.

This may be because if Coffee Beanery franchisees, D&R and the other franchisee, were offered both Rescission and a Private Right of Action in Maryland, it could have destroyed the CB network because this would have set a precedent for actions in other states where CB violated the UFOC and who have a private right of action for franchisees under State Statutes.

The status quo and federal policy developed by the rule and the law surrounding franchising is to ensure the survival of the franchisor who feeds the economy, even when franchisees fail. In my opinion, it is obvious that there is cooperation by the government, the FTC, the IFA, and the business media to obscure the very high risk of investment and the low ROI in franchised business opportunities.

If, of course, Coffee Beanery had been required to disclose the failure rate of the Cafe Concept under law, nobody would invest in this concept. It is, apparently, because the failure or the success rate of the first-generation franchisees, who provide the capital and the labor to build the physical units, is not required to be disclosed under law, and in the UFOC, that Maryland allowed CB to ammend their UFOC and to continue to sell franchises in Maryland. Is CB compliant with the Maryland UFOC today and is CB still on the SBA Franchise Registry and qualified for a "quickie" loan and a Patriot Express Loan to VETS, Active Duty, Reserve and National Guard, or their families? Quiznos, The UPS Store, CSC, Sona and others with very high failure rates of first-generation franchisees are on The SBA Franchise Registry.

Apparently, no matter how small the success rate or no matter how high the failure of the franchised concept may be, as long as the franchisor is compliant with disclosure under the Federal Rule and the State UFOC, they are allowed to sell their concept to innocents. You can understand that the ALE (Alternative Law Enforcement Program) is another effort to protect franchisors from network destruction because of violations of the Rule or the State UFOC.

The government and the franchisors cover themselves legally with the FA's and the UFOC's that tell franchisees there is risk and no guarantee of success and provide prospective franchisees with Item 20 references that are supposed to be the means for Zees to conduct due diligence to assess the risk. The real and actual risk that is demonstrated by the failure/success of first-generation franchisees in the Network is obscured in the Item 20 columns, and not required to be disclosed by the franchisor under law to either the prospective franchisees or the regulators. Inexperienced investors translate the transfers as being successful sales of the franchise.

The SBA Default List on franchise loans is not a public document easily available to prospective franchisees. Any damages that franchisees may suffer due to purchasing a very high-risk franchise can be found as proximate to their not doing due diligence with the Item 20 information and the damages are therefore not proximate to the flawed busines plan with the high failure rate of first-generation franchisees. Franchisees invest after being told in the FA and the UFOC that there is RISK and no GUARANTEES and it is the franchisees failure to do their due diligence on Item 20 that permits arbiters and judges to find that their damages are not proximate to any failure of the franchisor to comply with the terms of the binding contract and the UFOC.

If this were an ethical and moral free-market capitalistic practice, the actual failue rate or success rate of first-generation franchisees would have to be clearly disclosed by the franchisors under the law as material to the risk. The FTC was given the mandate by Congress to develop a Rule that would permit the prospective franchisees to assess the risk. Apparently, the IFA convinced the FTC that they needed the DEAL of Item 20 Transfer Columns to continue the sale of franchises to stimulate the economy and to give government deniability as to the real failure rate of first-generation franchisees.

If ZORS had to disclose the failure rate of their first-genertion franchisees under law, we wouldn't have the thousands and thousands of franchisees investing in franchise networks with very high rates of failure of first-generation franchisees and market forces would work only to support those franchisors with good franchises with viable business concepts and low rates of failure of first-generation franchisees. Franchisees would risk their houses and their 401's and their 403's while KNOWING the true odds, the true risk of their success or failure with the "proven" franchised concept.

This is ugly policy and a status quo that can only be investigated and changed by The Congress of the United States who could require the FTC to require the franchisors to indicate the reasons for the termination and the transfers in the UFOC's through amendment of the Rule. Or, as our PhD has suggested, the ZORS could indicate the purchase price and the sale price by store number, etc...and this would provide a true picture of the risk of the investment and the possibility of a return on the investment.

Item 20 Ranter still can't name even 5 good franchise concepts!

He offers nothing new just the same tired old theme once again that Item 20 is the root of all evil in franchising. The Item 20 Ranter hates franchising and franchisors it is that simple. 

The Truth Shall Set You Free!

TIF

The Sound of Silence

Like many men who have experienced the trauma of r**e, they said for years they hid their ordeals behind a wall of silence.

Like women who have been r**d, men undergo similar emotions of anger, shame, denial or disbelief. Yet because of the way men are socially conditioned, they have additional reasons for their silence, say r**e counselors.

"Most men are taught that they cannot be victims and do not expect to be victims," said Kay Honey Knapp, the director of the Safer Society, a national r**e prevention center based in Orwell, Vt. "Therefore, they have a deep reluctance to deal with it."

- How Shame and Fear Take a Toll on Men Who Are R**ed, Andi Rierden, The New York Times, July 4, 1993

Les Stewart

Barbara Jorgensen's picture

I agree!!!

The more people hear about this the laws will change. Look what happened in Australia. The press love Victim stories. Oprah got rich on these type of people going on television as victims. I know people are getting more informed. I get sick just mentioning the word franchisor. (If you are good I apologize.) I will not stop until justice is prevailed. It is wrong to misrepresent material facts. (Lies!!) Sooner or later the lier gets caught.

Your elected officials won't...

...do anything. You're better off travelling to the franchisor's flagship store, finding six homeless people, give them a six-pack of beer each and a sign saying the flagship store uses spider eggs in their bread dough, drop them off at the front of the store to picket, call Channel 4 News with the latest, then sit back and watch the fireworks begin. Rinse and repeat every couple months.

I get it now!. Franchisees are Franchisor's Collateral

Franchisees have to be tricked and sucked into long term contracts because this is the only way the franchisisors can survive and grow their networks and maximize their profits "if three fourths of all businesses fail in the first year. Of the remaining less than half make it through the second year."

Fist owner franchisees are the source of cheap labor and capital to build their physical empires and to perpetuate their brand presence in the communities of the nation,

FRAN-PONZI Scheme of the 20th and 21st Century and underwritten by the FTC.

Everyone should want contracts to be enforceable and reliable

I know I do. 

The Truth Shall Set You Free!

TIF

JD Nonsense ---He likes the status quo

Just nonsense, JD. The store ID Numbers, only, could be used. Don't tell me that you believe that the franchisors don't keep track of their stores by numbers and don't know the purchase price and the selling price of these stores.

You confirm by your posts that the Item 20 references of EX-ZEES aren't an effective means of doing due diligence on the risk of the investment and are really, together with the FA's, just an artifice to protect the ZORS from any suits concerning false inducement to contract while hiding the statistical risk of success or failure from franchisee investors. There is really no effective means of doing due diligence on the risk with the UFOC even if you interviewed each and every ex-franchisee who transferred and who terminated. The UFOC protects the ZORS by transferring all of the legal responsibility for determining the risk to the ZEES who cannot then prove in arbitration or in the courts that their damages are proximate to the hiding of the risk by the ZORS.

Franchisees DON'T have any recourse or recovery rights for the incomplete or inaccurate disclolsure of important information under the law because the UFOC doesn't require the ZORS to make complete disclosure in the UFOC's of the risk of success or failure as reflected by the success or failure of first-generation franchisees. The franchisors are never guilty of criminal behavior.

This is a travesty of justice and disgusting public policy. Are you a fascist, JD, and this is why you defend the right of the big interests to steal from the naive and inexperienced franchise investors to "prove" their so-called "proven plans." The ten and fifteen year contracts and the personal guarantees on leases are a premeditated and malicious contemplation by the ZOR of cheaply acquiring the assets of franchisees in failure, and for silencing ZEES who fade away into obscurity or bankruptcy.

Are you sure you aren't a paid agent of those who want to prevent new purchasers of franchises from knowing the true and actual statistical risk of success or failure as reflected by the SUCCESS or FAILURE of first generation franchisees?

Under SEC rules, these statistics would have to be disclosed.

Why aren't you and TIF out here recommending the Dwyer Group Franchises as an example of highly successful vehicles for investment for our veterans under the Patriot Express Loan Initiative. You have the opportunity to disprove all of my statements but you always want to indicate to the readers that it would be impossible for franchisors to disclose the failure and success rate of their first-generation franchisees.

This worries me!

Does it meant that...

FTC regulates franchises as well as the SEC regulates stock offerings?

Bob Frankman's picture

FTC Is The SEC of Franchising?

Cool. So I can get me a copy of audited financials through the FTC's equivalent of the SEC's EDGAR, right? Show me the link to the filings. I want to start downloading hundreds to track profits by industry.

I'm hungry for information. HUNGRY...

Hey Item 20 Ranter! How about your top Five Franchise Favorites!

We are dying to know which five franchise concepts you think are worthy of prospective franchisees' consideration.

Are you finally going to man up or are you going to let everyone continue to think that you are full of contempt, bias and prejudice for ALL of franchising?

The Truth shall set your free!

TIF

RichardSolomon's picture

DUE DILIGENCE

The FTC does not license anyone to do anything. That's for openers.

Within the last year or so there has been practically a revolution in the available quality of professional due diligence.

If franchise investors do not avail themselves of it, whose fault is that?

If you can risk upwards of a half million dollars and don't get competent DD today, you're just plain stupid. I can't correct the past. But I and others like me can damn well make the future better for people with good sense.--

Richard Solomon, FranchiseRemedies.com,  has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

you know

I was going to make a post about the actual topic, but since it's already gone the 'government regulation' route, I've decided that I'll pass. 

thanks again ranter for taking another topic down the path of 'government regulation' and ruining what might actually an important topic to some on this board..

Barbara Jorgensen's picture

Yes life is about choices but:

When people purposely lie, steal and cheat who is at fault? It is my understanding misrepresentation is inducing someone to sign when it was a lie. I can think of at least several direct questions I asked. Their answers were out and out lies. Yes life is about choices but it doesn't give the sales rep of the zor or the zor permission to lie to your face. Once you are trapped and you have discovered everything was a lie. S--- hits the fan. We were robbed because so many of their disclosures were nothing but lies. What do we say to franchise sells people? First they painted a pretty picture of the franchise. second I have to assume they are a lier a cheat and a thief. Therefore wait for a year. I have to do killer due diligence which means I have to hire a franchise attorney and talk to my CPA. Plus I need to do due diligence on them and the CEO. Frankly this would be the smarter way to approach buying a franchise. Yet the normal individual who doesn't lie steal and cheat doesn't think like that. I think that way now to protect myself, I am sad to say. They make their money on selling franchises not making them successful. Our country would be a better place to live if these crooks are thrown in prison and there are laws to protect the innocent that are not out to hurt people.

Item 20 Ranter are you out yout mind?

This comment has been moved here.

Coffee Beanery Injustice

Good for Deborah and Richard and Harry Rifkin for their courage in taking on this great injustice that is routine in franchising but not open to public view. Richard and Deborah are just lucky that they have an attorney with the guts to keep pushing this matter. An attorney with principles is a beautiful sight to behold. Against great odds, he is going to take on the status quo and try to expose the injustice and the fraud to the higher courts.

Every year, the corporate interests remove the rights of average Americans to the justice promised under the Constitution. The Coffee Beanery Case illustrates the injustice that is triggered bvy ineffective regulation that licenses the franchisors to sell inferior and unviable franchises to the public as long as they are compliant with the Rule and the UFOC.

One would think that the purpose of Regulation of franchising would be to disclose the risk and to prevent potential franchisees from buying high risk franchises, but apparently the purpose of Regulation of Franchising and the Rule is to protect the franchisors and to permit them to sell their "proven" franchises at any degree of risk to innocent middle class Americans who invest their good faith and their lives and money in franchises. The Coffee Beanery case certainly indicates the truth of this statement.

Let's hope that the 6th Court of Appeals will take a good look at this case. Let's hope that the judicial committees in the Congress and the Senate will do their duty and prevent mandated arbitration clauses in franchise agreements. Why should an arbitrator have more power than a judge? Isn't private justice a tool of those who will exploit at will to maximize profits and to silence their victims.

Maybe this will stop some of the rape of franchisees that has been made possible by ugly and immoral regulatory policy, mandated arbitration, and the constructive fraud of a binding boilerplate contract that appears unnegotiable because of government mandated disclosure of the elements of the boilerplate contract.

The franchise opportunity from hell was followed by the rescission from hell but Harry's only access to the court will be won on his ability to show the court the possible fraud and conflict of interest brought into the arbitration.

Let's hope Richard Solomon, our resident attorney, is wrong and that the higher Court will stand for justice and use their discretion to take a good look at this case. When the law and process is used to design malicious legal traps for innocents, the courts should be concerned and step in.

Thanks to Janet Sparks for telling us on Blue Mau Mau what we would not know if she wasn't doing the job that reporters should do --i.e. protect our freedoms. Let's hope the main media pick up on this story and educate the American people about franchising.

Franchisees are not Entrepreneurs or Small Business Men

Understand that a franchisee is merely a resource for the Entrepreneur, the franchisor, who proves his plan through trial and error on the flesh of first-owners of the franchise, As long as these assets remain in the system and can be used by second generation franchisees, etc. in the service of earning royalties for the franchisor on the gross sales, the franchisor can beat the odds that four out of five businesses fail in the first five years. It is the franchisors who stimulate and feed the economy in terms of jobs and taxes, etc..

When you consider the malice of these long-term franchise agreements and the malicious trap that is set in contemplation of the failure of the franchisees as predicted by economic experts, it really makes you sick.

If it is really true that four out of five businesses fail within the first five years, the only way franchisors can stand is to get out from under the risk and expense of physical ownership of a franchise and let the franchisee absorb the risk while they churn visibility and maximize their profits.

It is the nature of the beast and franchisees are premeditated sacrifices to a good economy under federal regulatory policy. The truth hurts.

Coffee Beanery Injustice --Arbitration

Janet! I responded to your article and thank you for this information and for staying on top of this.

Unfortunately, my response to your article was moved to Government Regulation and Political Activism because any criticism of government gets moved there.

Please look in Forum ares Government Regulation and Political Activism Blue Mau Mau for my response to your article. I know that you must get the facts out to the public with the hope that they look at the big picture and will not be offended by my criticism of regulation and our government.

Paul Steinberg's picture

Franchise lawyers

DD writes: That lawyer should of advised us to go to a franchise lawyer.

In fairness, I must say that I have dealt with many attorneys who were involved in their first franchise-related transaction and those attorneys did take the time to educate themselves and do a good job. I have also dealt with a few attorneys who have done so many franchise transactions that they don't pay attention to what they are doing anymore, and don't keep up with changes in contract and ADR law, let alone franchise-specific law.

And I would also note that many prospects don't want to hear bad news (from their lawyer, CPA, banker, or spouse). As I always say, the job of professional advisors is to tell you all the horrible things that can go wrong and how to minimize the risks. You don't go to those advisors expecting Tony Robbins, any more than you go to Tony Robbins expecting discourse on the dangers of walking on hot coals. As Solomon's rabbi says, to everything there is a season...

Dale Cantone ---CB and Stretch Grow ------Policy! Maryland

You can see by reading the Rescission and Consent Decree, etc.. that it is the same kind of rescission that was offered to CB franchisees, EXCEPT that THIS RESCISSION made Stretch Grow indicate that the Rescission was only an Administrative Action and that the franchisee did not give up their rights to a private action under Maryland Law. This Rescission, again, would not make those who set up new stores for Stretch Grow whole because they would merely get the franchise fee and the inventory, etc... as damages, and not the return of the money for the tangible assets and buildouts, etc.. that were necessary to set up the franchise.

They would, of course, like the CB franchisees, be free when accepting a Rescission to de-identify from the franchisor and to control their own tangible assets, maybe? depending on their ability to maintain their lease. They could terminate without being asked for liquidated damages under rescission. The costs of de-identification are bourne by the franchise and even with the Rescission, most franchisees could and would be thrown into bankruptcy because the Rescission would not protect them from their creditors. I'm sure, under Rescission, they can compete with their assets if this is feasible, and they can save themselves from bankruptcy.

When franchisees reject a rescission, they are returned to their original position under contract with the franchisor, and forced into arbitration.

In my opinion, The franchisor for Stretch Grow knew of course that if the franchisees didn't accept the Rescission that the arbitration terms in the contract, the binding Franchise Agreement, would then become controlling and that the violations of the UFOC, that the State indicated could be cured by going to school, would or could be found NOT to be proximate to any additional damages beyond what was offered in rescission, because the franchisees didn't due diligence and the ZOR has not violated any of the terms of the Franchise Agreement. The State of Maryland doesn't care that Stretch Grow may be an unviable concept and only cares that this franchisor be compliant with MD's UFOC and the federal rule. If franchisees buy failing of failed franchise concepts, it it their responsibility and not the responsibility of the state because the state has given ZEES the information on which to conduct their due diligence.

It is kind of a legal trap. If, after arbitrations, where the arbiter has ruled that the Franchisor hasn't violated substantive law or provisions of the franchise agreement that are proximate to the ZEES damages, how will franchisees financially support litigation under the State Franchise Laws? And, how will they do with the court when both a federal arbiter and a federal judge have already ruled against them? Will attorneys take the State Case on contingency with the hope that they can convince a jury, under the rule of caselaw/contract law, that their clients were damaged because of fraud? I think that it is federal/state policy that there be only one bite out of the apple and that a second bite is very doubtful.

We hope the CB Mess and Dale Cantone, when brought to the attention of the Senate Judiciary Committee, will spur the Senate Judiciary Committee to do their duty under the Constitution of the US and work to see that franchising is regulated as well as securities are regulated by the SEC, and that franchisees are given the equal protection of our laws.

The original sin of permitting franchisors to obscure the failure rate of first-generation franchisees in the transfer columns of the UFOC's may have a price? The truth is hard to contain!

THE WORD YOU SPREAD CRAPOLA

You'are not spreading the word, you are spreading crapola.

If you were serious about helping existing and future franchisees you'd conduct yourself in a different light. You'd have meaningful dialogue. You'd be able to register here at Bluemaumau.

You have simply failed in business. You are simply unable to accept personal responsibility for your failure. You need someone to blame! The cause of your failure, YOUR CAUSTIC ATTITUDE!

Is Z-Rube the general of the moron army?

I think it can be none other!

Purpose of Regulation ---SEC and FTC

The difference is that the FTC, who regulates franchising, has produced a rule and State UFOC's that together with the franchise agreement (the binding contract) makes it almost impossible for franchisees to recover from disclosure fraud.

The franchise agreements, that the prospective franchisees believe are NOT negotiable because of the government UFOC, contain terms and disclaimers that permit the franchisors to defeat fraudulent inducement and "reliance" claims. Even if the court admits evidence of reliance, the franchisee may lose because the franchisor indicates that the franchisee's reliance wasn't justifiable because the terms of the contract that was signed by the franchisee erased reliance on anything said or done outside of the contract and therefore there was no justifiable reliance. (There are discussions on Blue Mau Mau concerning reliance and causation and the high bar to prove fraud on another thread)

The little FTC Acts that provide a private right of action for violations of the UFOC's may just be window dressing that provides incentives for franchisors to cooperate in rescissions and/or to reach settlements with their franchisees. As long as the franchise agreements together with the UFOC's provide almost airtight protection for franchisors to sell "proven" plans that may be proven to work only 20% of the time, franchisees will be sacrificial lambs. Federal arbiters will not deal with fraudulent disclosure to hide risk or flawed and unviable franchises and concern themselves only with the terms of rhe contract signed by both parties, as demonstrated in the Coffee Beanery Case in Maryland.

The original sin is that the UFOC's permit and enable franchisors to sell franchises with very high failure rates of first generation frnchisees that are obscured from the view of new prospective franchisees and the government, as well.

If franchises were regulated as well as securities are regulated by the FTC, the statistics concerning the experience, i.e. the success or failure of first generation franchisees would have to be disclosed under law. Market forces would then prevent franchisors from selling unviable franchises with high failure rates to the public. Prospective franchisees would then be informed of the true risk of the investment. Government would be honoring the principle in contract law of informed consent.

FranSynergy's picture

Frankman, Attorneys, Risk, Kroc

Why thanks Bob...I was begining to think I had nothing to say which one could agree with.  Last week I'm talking to our legal team at Lanier, Ford, Shaver & Payne and at one point I said, "If I did only what you guys say I should do, I would not even get out of bed in the mornings."  To which they quickly snapped, "We've been meaning to discuss this with you, we Do Not recommend that you get out of bed."

To which I reminded them that Ray Kroc once said, "If you're not a risk taker, you should get the hell out of business."  and if I get out of business you lose a client....so show me how to make the risk managable!

Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising!

Are these zees deaf, dumb and blind

Do they not know how to read plain english?

Are they not willing to pay for professional assistance.

Are you typing your posts from a secure facility for mentally challenged?

Paul Steinberg's picture

Role of f'zee lawyer

Both of the first 2 statements are not true in the context of representation of small businesses, including most franchisees.

The role of an attorney is to attempt to quantify risk factors, their likelihood of occurrence, potential damage, and mitigation strategy. It is the role of the client to apply his or her business judgment and risk-tolerance level to the analysis. Ultimately the decision is up to the business owner.

Your attorney is not God, nor is he your Momma: a good attorney does not say "NO" except on rare occasions, such as when a client seeks the attorney's assistance to commit a crime. Indeed, most people with good attorneys will tell you they get frustrated because their attorney will not say "yes" or "no", and that is normally how life goes...shades of grey and options each with their own set of risk and reward.

Lawyers have to pay the bills too, and it is easier to keep the client happy than to rain on the client's parade and have the client go down the street to another lawyer who is only too happy to whisper sweet nothings in their ear while collecting a fee. Some have discussed previously on this site the alleged disparity in the quality of legal work between attorneys at large firms (such as usually advise zors) and small firms (such as usually advise zees). I would suggest that much of the distinction in outcome is not so much a function of the quality of the legal advice as it is a function of differences in client reaction to a sober analysis of risk and how that affects the legal counsel given in the first place.

As to being a "fish between two cats": I have never seen this situation where the contraparty was a zor. It does occur when one zee is selling to another zee. I have had cases where a zee has (for example) gone ahead with a purchase despite not having a bulk sale clearance or a landlord estoppel. In such cases, I will give the client a Memorandum to sign indicating that the client understands the risk factors and wishes to proceed.

Many of those quick to disparage risk-averse lawyers will be just as quick to file a malpractice suit if things turn bad.

As a resident of Alabama, FranSynergy might see that prospective zees are rather like Farragut at Ft. Morgan . But Farragut was not reckless; he quickly assessed his options (all of them risky) and took decisive action. Your lawyer should be a trusted advisor. But he is not there to make your decisions for you.

Barbara Jorgensen's picture

Carman

How do you come up with this? I am impressed.

Carman has Do Diligence's endorsement

What more could Carman ask.

UK Debate on Franchising --May 22, 2007 --Bank due diligence!

In this debate in the UK, Minister Hodges indicates that the banks have a duty of due diligence and it would have to be determined if they were in any way at fault, etc.. for the failure of the franchisees that brought the subject of franchise regulation to the attention of the government by way of elected officials.

Maybe Mr. Blue Mau Mau find both of these debates and critique them for the Blue Mau Mau readership.

We understand in this country that the SBA furnishes the default rate on loans to the banks and lenders to enable them to manage their risk on franchise loans. However, because those units that can be bought under $300,000 are so often financed by home equity loans, etc.. and other savings, the true failure rate of the franchised business plan is not known to the SBA/bank lenders or prospective franchisees.

Do the banks who make home equity loans for business investment have any responsibility for due diligence on behalf of protecting their customers and their stockholders?

RichardSolomon's picture

"To Protect You"

One of the best government jokes is "I'm from the IRS and I'm here to help you." Humor has to have an element of truth in it to be really funny. The truth that makes "To Protect You" funny is that what the FTC does to help you, if not accompanied by really killer due diligence on your part, is worth about as much as the FEMA instructions on how to prepare for a hurricane. 

Compare the government's hurricane preparedness directions to Muldoon's

http://www.seamusmuldoon.com/hurricane_emergency_plan.htm

Richard Solomon
www.FranchiseRemedies.com

Franchise lawyers

I agree, Paul! But, the FTC knows that potential franchisees in the $100,000 to $500,000 franchise range who are looking for a job and income, etc.. do NOT look for negatives and that they will not generally pay an attorney to look for negatives or to read the UFOC if this means $1500 or $2,000 MORE that they have to pay out to get started in this "business of their own." As you and Richard Solomon have said, the average attorney is between a rock and a hard place and has to eat. If the client just wants him to read the contract and this is all the client is willing to pay for, does the attorney have any legal duty beyond just reading the contract and pointing out the meaning of some of the terms?

The FTC knows this and even says "If possible, show" to an accountant or an advisor. It is this use of the "nature of the human being" by the FTC to bring the uninformed and naive ZEE to sign the malicious contract of adhesion that I find so undemocratic and immoral.

I read your "Beguiling Heresy" often and I know that you have stars in heaven. I am reading Gangs of America now by Nace and this is helping me with my education on how the law has been caputured by the huge corporations who use their civil rights and personhood to remove the rights of individuals in society and to undermine democratic principles.

Barbara Jorgensen's picture

My opinion

Reading- Yes we know how to read. Many people do not know what a franchise lawyer is. Believe it or not. Talked to many zees who didn't know.

As far as due diligence only good zors insist on their zees doing killer due diligence. Buying a franchise involves months of investicating.

The third deserves no comment. It shows what an arse you are.

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