John Tozzi writes an interesting article on business opportunities for BusinessWeek Online.
The Internet is littered with offers for home-based business opportunities that promise big profits for easy work. But many of these offers, which range from envelope stuffing to medical billing, are really scams that prey on people’s aspirations to work for themselves.
Michael Webster (bizop.ca) is quoted as saying:
While some home-based business scams target vulnerable people such as the unemployed, experts say anyone can be taken in by the right pitch. “The techniques are no different in kind from the ordinary marketing techniques that normal sales people use. They’re just selling nothing,” says Michael Webster, a Toronto lawyer and the author of a blog on business opportunity fraud. “Anybody can be a mark on any given different day. Even I could be.”
This is very generous of Michael.
This article [and don't forget the slide show] highlights that scammers are not without skill or charm that can hoodwink even an especially knowledgable professional, including a wary trial attorney.
- Only about 5% of fraud victims ever report their loss.
Let’s not forget that Richard Solomon, a 45 year U.S. franchise veteran, believes that the large majority of new franchise offerings are just selling nothing [impossible to determine + from - RE: advertising mask + sham business].
Tags: BusinessWeek, http://bizop.ca, John Tozzi, Michael Webster
August 5, 2008 at 11:05 am
Scammers come in all sizes and kinds and often wear suits of respectability and charm that disarm their “marks” who generally are making a good faith investment with a “partner” who they believe can’t succeed unless they succeed. Please note that the scammers have no problem in getting their FDD’s and are licensed to lie, cheat, and steal as they are so inclined. Please note that there are scammers on the SBA Franchise Registry.
The SALE of franchises is a scam in itself because franchisors are permitted under regulation to hype and HARD SELL by appearances and oral statements and Press Releases and Internet Sites and printed advertisements and then disclaim everything in the “package” of the FDD and the boilerplate franchise agreement. This package, of course, misleads new buyers into a false sense of security because they think there is some government oversight of franchising.
While it is against the law in the US to make “earnings claims” outside of contract, I’m sure the FTC knows that this is a joke and that franchisors make constructive earnings claims all of the time but just aren’t caught by the FTC or the State regulators. And, if franchisors use their option not to make any earnings claim in Item 19 of the FDD and Item 20 (and most don’t make earnings claims) this permits them to obscure failures of franchisees in the transfer columns and to avoid disclosure or any representations in the FDD by using past and current franchisees as references for due diligence. When they get the signature of the buyer on the franchise agreement, they are “home free” in the courts and in many instances (who knows how many?) the franchisees are indentured in long-term one-sided contracts from which there is no escape and no profits. Or, in failure, the contracts act to squeeze the failed franchisees into submission to sell their assets for nothing to get out from under the long term of the lease that is personally guaranteed to avoid bankruptcy. Or, in bankruptcy, the franchisor can acquire the assets cheaply by making a small offer for the hard assets.
Franchisors don’t have to produce any proof of viability or survivability in terms of unit performance statistics of their systems. They really own the gross sales of their franchisees and as the sellers, they should be required under law to disclose MATERIAL unit performance statistics to new buyers of their “proven” franchise offerings.
Disclosure of unit financial performance statistics as MATERIAL to new buyers of franchises would prevent a lot of the scams that are going on in franchising today. But the FTC has declared “open season” on the Internet for the hunt for prospective franchisees who will be out there looking for jobs and income and who will invest in franchises thinking there will be a job and profits with little risk.
Of course, it would be hard to convince business men to franchise their businesses if they didn’t know they had the protection from “fraud” up front. This is one of the points that I’m sure closes the deal for those who make their living developing franchise concepts for franchisors. Government knows that it is the franchisors who feed the economy and the special interests and franchisees are merely resources for the franchisors. It is franchisors who can beat the hard statistics of startup failure of new businesses, especially if they are allowed to churn and turn with immunity under the law.
What we need here is the definition of a “legitimate” business somewhere in the FTC Rule or the FDD by way of disclosure of unit performance statistics of the system by the owner of the system. Again, I agree with Susan Kezios of the American Franchisee Association. The failure tof the FTC/Congress to require disclosure of unit performance statistics is misleading by omission and is unfair to all prospective buyers of franchises.
January 3, 2009 at 2:29 pm
PS —Apparently, because the “powers that be” determined that Mom and Pop would be treated by the courts as “sophisticated” investors who would incorporate themselvles to do business with their franchisor, this contrived “loophole” apparently makes it “legal” for the franchisors to withhold MATERIAL risk information, in the form of unit financial performance statistics, from new buyers of retail franchises. (My opinion and impression, of course, and protected under the First Amendment of the Constitution)
Perhaps! Only when the investors in the franchisors’ paper empires demand more transparency and a look at the unit performance statistics will pressure be brought to bear to fully disclose the risks to new buyers of franchises.
June 12, 2009 at 12:49 pm
Please read the excellent “library” paper published by the American Business Law Journal, 01 Jan 2003, and on the Internet in mid 2008, entitled “Franchising Fraud: the continuing need for reform.”
This dissertation is an excellent overview of the “Inducement” and Regulatory deficiencies that exists today in franchise regulation on the state and federal level.
September 4, 2009 at 7:36 pm
Carol are you even real or is it all bullshit? And if it is shame on you!!
October 4, 2009 at 1:48 pm
It is the government (the DOC/FTC/Congress )”bullshit” that poster above should condemn!
Ten years after the promulgation of The Franchise Rule the protects franchisors from common law fraud under the guise of protecting franchisees, the Department of Commerce stopped gathering statistics on Franchising that was growing rapidly in our economy!
Why?