Just another victim of franchise fraud

[eequals]

If anyone is talking to the DTI or similar then how about this for a suggestion about a change in the law?

Given that every franchise deal is predicated on the assurance that their's is an excellent opportunity for the franchisor to make large sums of money out of it, there should be legislation to require a break clause in force for say up to one year. In that time the franchisor could close the contract and receive their money back in full, subject of course to the company recovering any outstanding property or goods. The argument in support of this is simple. The 'excellence' of the franchise means that a client who is not doing well means in turn that the franchise company is doing less well than it it could be. Commercial logic therefore dictates that they should be only too happy to go along with this. If they are telling the truth it ought to follow that such a course of action would help to make them more profitable. Those who objected to this could only be those who are lying about their 'excellence.'

This would require some form of regulation by the DTI in respect of liquidity ratios and the like to make sure that these companies are in a position to honour their commitments to franchisors who wish to exit but then that of course is exactly what the DTI is for.

Joe

[Carol Cross]

The problem is that "franchise fraud" is not legally defined under the law. Is it fraud to sell a franchise when over 10%, 20%, or 40% of the first owners of the franchise fail to thrive within the first year or two? At what point is it not successful for the franchisor?-- who doesn't share the failure with the failed franchisees but does share in the success of those who survive, and who even gets the benefit of the assets of those who fail when these assets are sold-transferred in a fire sale to a second-generation franchisee who may make it to breakeven because of reduced overhead and debt, and who will continue to pay royalties to the franchisor on the gross sales of the business.

Is franchise fraud committed when the franchisor sells new franchises and indicates in the hard sell that there will be profits in the investment (outside of the actual contract) knowing that a high percentage of the startup franchisees won't succeed based on historical performance statistics in their possession?

Unfortunately, as a franchisee, you are not a partner, you are not an employee, you are merely a contracted resource for the franchisor who by way of the adhesory contract really owns you and your gross sales both in success and in failure. Franchisors NEVER promise success or profits within the standard and boilerplare contracts that are signed by the new buyers and are protected by the contract terms in the courts from failed first-owner franchisees who finance and build the physical units that wear the brand name when these first-owners fail to thrive.

It is impossible to track the actual failure rate of first owners of franchises because many first -owner failures don't show up on public records because when they give their businesses away to get out from under the debt of the long-term lease that is personally guaranteed, they continue to pay on their startup debt that is personally guaranteed to avoid default and baniruoptcy and to avoid surrender of the collateral posted for the loan. They don't show up on default lists that the banks and lenders use.

Yes! the law should be changed to mandate that the franchisors themselves, and not past and present franchisee references, disclose or make available the UNIT financial performance statistics in their possession to new buyers of their franchises. Franchisors should be required under law to give some PROOF of the success of their franchise UNITS to new buyers. But such disclosure would reveal churning and pumping and dumping of units as well as low unit profitability or no unit profitability in systems.

Yes, the law should be changed to make franchisors share some of the risk with the franchisees and to provide a fair exit strategy for those franchisees who do not thrive when they have exhausted the estimated startup costs of the franchisor.

The franchisors and the other special interests, the lenders and the banks, the developers and the landlords and the elected government officials would fight such laws because this could inhibit the sale of franchises somewhat and could adversely affect the economy. Governments depend on franchising to bring economies out of recession. When jobs are in short supply, the franchise opportunity appears to be a good solution to both a job and profits, as well, and those with the resources to buy a franchise are willing to invest in themselves. The trouble is that they are not informed of the actual risk involved in any real sense and the SELLER of the franchise takes unfair advantage of the need of the buyer for a job and income.

Remember that the concept of "franchising" wherein the franchisor is able to avoid the expense and risk of building and operating the physical business units that produce and grow SYSTEM gross sales upon which he profits is also a means of the franchisor beating the brutal statistics of failure of ALL "startup" small businesses, independent or franchised, in all world economies. ( Do a Google Search of Startup Failure Rates -The Real Numbers, written by Scott Shane, Western Reserve University, Cleveland, Ohio)

The capture of the cheap labor and the cheap "venture" capital of prospective franchisees has no doubt increased franchising activity in all world economies and this capture to this extent would not be possible if the true "failure rate" of first owners of franchises were disclosed to new buyers of franchises. It is not surprising, therefore, that the failure rate of franchise investments for first owners has not been a matter for research and that this risk factor is not disclosed to new buyers of franchises.

Would or could franchising survive if the unit performance statistics of systems were mandated to be disclosed to new buyers under the law?

[Cher Borradale]

Just so everyone understands the size of the problems being experienced everywhere, "Blue Mau Mau" in the US is an informative site and in Australia while most sites have been forced down there is still "Bakers Delight Lies".

[cheri]

I feel for you guys - nearly got into a franchise to do smart repairs on vehicles and when we were discussing which area we would have "sole" rights to they were already covered by someone in the next town!! Luckily we didn't spend our money!
Anyone considering Franchises - please be CAREFUL!!!!

Cheri

[Carol Cross]

Yes! Most franchisors are trying to get away from "granting" territories and many do, by way of their contracts, encroach on their own franchisees in an effort to saturate and capture market share and grow system sales.

Let the Buyer Beware ---- Your franchisor CAN make money all of the time you are struggling to grow your business because the franchisor takes his profits on your gross sales and not on your profits. There may never be any profits for franchisees but the system still perpetuates itself and can grow, even on the back of failures, if the assets of the failures can be acquired to continue to serve the franchisor under new ownership.

Churning and encroaching franchisors often do very well for themselves.

[ventra]

What constitues franchise (fraud) misrepresentation?

Would, for example:

3 franchisee "buy" in at the same time. Each pay same amount to Franchisor. Each have had to sign a PG, otherwise no franchise agreement,(This should have rang alarm bells).

Each franchisees invests in growth at different levels.

1 is sole trader doing nothing but franchise
2 is "couple" doing small "complementory" business also.
3 is Co. that has invested in telesales and fieldsales team.

there are no other known franchisee's.

Not one of the 3 has managed to cover costs, sales have not met the guides given by franchisor.

Franchise 3 has made appointments for Franchisor Sales Director, that did not convert.

Each franchisee has operated for 6 months.

Thoughts from all would be welcome.

Best Regards

Bill

[Carol Cross]

Bill! I am not a franchise attorney. Just the wife and mother of two who were victims of a franchisor. In my research, I find that franchising is conducted pretty much the same way all over the world/

From my point of view, once you sign a franchise contract, you probably have no recourse for any of the misrepresentations made outside of the contract. Franchise law tends to protect franchisors under the sanctity of "contract law" ----that is, if it isn't in the contract and you acknowledged that you were not expecting anything that wasn't promisted in the contract, this is the end of things.

Franchises are marketed, with the approval of governments and the special interests who gain from franchising, as having very little actual risk and this is where so many franchisees find out the hard way that franchising is very risky ----especially when they have signed personal guarantees that can destroy them in failure of the franchise to thrive.

I wish you luck, Bill, and remember that you are not alone. This is going on all over the world.

Your Yankee cousin.

Carol

[ventra]

Hi Guys

Further to my earlier post.....

The plot thickens.............

The Franchisor has now been in contact with one of the franchisee clients demanding that he pays the franchisor for services supplied and that the client should contact the Franchisee for a refund of fees paid previously.

Is this right, can he do this?

This service was provided prior to the Franchisee ceasing to carryout business.

Thanks in advance!

Bill