What is the Science of arresting intelligence long enough to get money from it?

SexyCopAdvertising.

Professor Leacock‘s full quote:

Advertising can best be described as the science of arresting the human intelligence long enough to get money from it.

Franchising is just like that.

The primary stage of arrested intelligence (entrepreneurial wishful thinking) is call pre-sale due diligence.

Due diligence, DD was created as a concept to serve the sellers, NOT the buyers of franchisors.  Perfect, “110%” awesome research can NOT provide reasonable protection against post-sale franchisor opportunism.

DD cannot stop a totally sweetheart franchisor from turning into the worst predator, unilaterally and selectively after the contract is signed.

DD never could and it never will.

DD was created to give a plausible excuse why 1,000s of hard-working, honest investors have lost their life savings. It is maintains the ” confidence” in the game, cools out the mark and confuses and distracts people. When the siht hits the fan…the victim is blamed and most importantly, their shame (stigma, spoiled identity, self-loathing) silences their potential dissent.

Dr. Donald L. Nathanson (The Name of the Game is Shame) provides a nice treatment of a very powerful affect: shame. His Compass of Shame, I find very interesting. He defines 4 patterns of reaction:

  1. withdrawal,
  2. avoidance,
  3. attack others or
  4. attack self.

Note how certain ones of these strategies are encouraged to be used over at Blue MauMau and Franchise-Chat.com. People are ridiculed our shouted-down, banned, shouted, censored or made to be felt stupid. Even to the point of lecturing rape victim advocacy groups on their ignorance of asinine legal processes.

Just like they know the distracting qualities of such a lovely image, above.

Confusion, distraction, sleight of hand…not very difficult to disable critical thinking, is it?

9 Responses to What is the Science of arresting intelligence long enough to get money from it?

  1. Carol Cross says:

    I agree, Les Stewart. “DD was created to give a plausible excuse why 1,000’s of honest investors have lost their life savings.” I agree, also, that no amount of presale DD can protect franchisees against the opportunism and exploitation made possible under the boilerplate franchise agreement in which the franchisor promises almost nothing in return for the rental of the brand name. but realizes profits with little risk once the long-term indenturing contract is signed. in success and even in the failure of the indentured franchisees whose assets are churned to serve the franchise system.

    But, what other excuse does government have for their failure to effectivedly regulate franchising because of their desire to subsidize franchising? Obviously, the powers to be determined that historical performance statistics that could and should be provided by the franchisors would inhibit franchising. And, if the true risk wasn’t going to be disclosed, those franchisees who failed would feel that they were fraudulently induced by misrepresentastions and would want to sue for fraud.

    Obviously, the regulation of franchising is all about protecting franchisors and those franchisees who are standing at breakeven or above in the franchise system because this is rationalized as serving the greatest good. However, the failures, who haven’t been provided material unit performance statistics in the presasle process could bring entire franchise systems down if they could prove fraudulent inducement/concealment in the presale process to the courts and to the arbitrators.

    The sham of the FTC Rule and the FDD’s that require franchisee pre-sale due diligence to be accomplished with an inteview of past and present franchisees of the system is a clever artifice that enables franchisors to obscure the material risk of the investment from the new buyer and NOT to make any promises of success or profits in the written franchise ddisclosure document or the written contract.

    This sham of the FTC Rule, of course, obcures unit failure and unprofitability and protects franchisors from franchisee claims of fraudulent inducement in the sales process — and wasn’t this the intent of the federal regulation of franchising in the US in the late 1970’s according to Robert Purvin, Susan Kezios, and many others?

    Probably the constructive fraud of the government disclosure document wrapped around the unilateral contract has enabled the post-sale exploitation of franchisees and “the powers to be” want no real changes in franchise law that would prevent contractual exploitation of franchisees by franchisors.

    What else can the govt. and those who profit from franchising do when franchisees fail but blame the victims for not doing effective due diligence on ineffective disclosure. What else do they have to defend the lie of regulation?

  2. Les, who has ever said that proper due diligence will solve all of the franchising problems? Nobody. You are arguing against a straw man.

    Due diligence is designed to weed out unattractive propositions.

    Whether what is left is worthwhile or whether you go it alone is always on the table.

    Nice picture, though.

  3. Les Stewart says:

    Ah, come on Michael,

    You know that for me there is only one dominant investing issue: franchisor opportunism unilaterally decreasing ROI.

    Yes, DD will discount the most flagrant opportunistically-prone bogeymen. No surprise skimming off the egregious floaters.

    No, DD cannot predict nor control a “good franchisor” from going “bad” (unexpected increase in opportunistic behavior) in a 1,001 ways.

    We both know that opportunism is not a black/white, 100%/0%, separate all the good-from-the-bad, proposition. All franchisors have the potential to exercise overreaching: franchisees have very few defences post-signing (sunk costs).

    100% of franchisors reserve their predatory right via contracts; some % exercise that right within a specific timeframe, over certain investors

    Until there is a better defence (IndFAs may help but they are an unreliable remedy), DD/disclosure regimes simply give a false sense of investing security.

    Les

  4. Nobody can predict the future with any certainty. Management of public companies have a myriad of ways of rewarding themselves at the expense of the stockholders, and I wouldn’t use that as my reason for not investing in a public company.

    Due diligence, especially done in a group, can weed out bad contracts and poor performers.

    If the entire market for franchisees turned away from predatory contracts, then either franchising would disappear or the contracts would have to be revised.

  5. Les Stewart says:

    Michael,

    My goodness! Where do I begin?

    So you’re recommending mom-and-pops sink their life savings into an investment that they cannot project with any degree of certainty future cash flows (ie. ROI)? ?

    To equate a franchise investment (eg. high % life savings, idiosyncratic sunk costs, gag orders, waiver of legal rights, liquidated assets, access to justice, multiple credence good providers, tied buying provisions,…) with the next-to-zero exit costs of a stock investment: my, my, my.

    I have all the confidence in the world that business format franchising will adapt to a more informed investing public by voluntarily limiting their overreaching. And if they don’t: well let the market hasten the collapse of this empire built on misinformation.

    Until these changes take place, I guess franchising is unsafe at any brand.

    Les

  6. Les, as you know from my writings, I have always advised that the first step is to evaluate the franchise option from two points of view: a) being independent, and b) taking a lower paying job and investing the capital.

    Both the independent and franchise route are fraught with deep uncertainty – and ought not to be taken without a clear floor to the downside. Something a good attorney could negotiate for them.

    You are over optimistic about your ability to exit bad stock investments with a zero cost: talk to the Madoff victims about their zero cost.

    Some franchisor systems are unsafe at any speed: but not all cars were Corvairs.

  7. Carol Cross says:

    Yes! but only franchise investments are licensed by governments to be sold without the material risk factors of failure of first-owners of the franchise and profitability on a unit basis being disclosed by the franchisor, the seller of the franchise, who always profits from the sale of the franchise, no matter how long the franchisee stays in business.

    I agree with Les Stewart! Framchising is unsafe at any brand because all franchisors always reserve the right under contract to exploit their franchisees, as necessary, to ensure their own survival in the marketplace. Franchisors understand they have been given the right under the law to do this because regulation has been promulgated to preserve the franchisors and franchisees are merely premeditated expendable resources in the competition between franchisors. This is rationalized as being good for the economy and good for the consumer, if not so good for franchisees who invest more than they should not knowing the risks of the investmen t.

    I agree also that the franchise empire was built on misinformation and the knowledge that those who would fail would generally be silenced in failure, as premeditated by the long-term malicious franchise agreements. These malicious contracts treat failue to thrive as abandonment of the franchise under often “unclear” franchise terms that impose a penalty for “abandonment” and termination, and that ensure that the franchisors or their agents can acquire the tangible and intangible assets of the business in forced “fire sales” to continue in the service of the franchise system.

    Those who would survive within franchise systems appear to stand with the franchisors before the courts and arbitrators, as premeditated by the regulators who would rationalize that the greatest good is realized by the survival of the systems. Churning and encroachment are legalized under contract and protected by case law.

    Apparently, the misinformation in franchising is considered necessary because if the real risks and rewards of purchasing a franchise were disclosed by the seller of the franchise, the franchisor, who will always profit from the sale, franchising would be inhibited and there would be less saturation of concepts and less competition between franchisors of the same concepts. The pool of cheap venture capital and cheap labor must not dry up!

    Not all cars were Corvairs and not all franchises are lousy investments but if franchises are primarily safe and good investments, why don’t franchisors make “earnings claims?” — Obviously, because they don’t have to and because they are protected from fraud in the sales process if they demand profits from the franchisee over a long term, even if there are no profits for the franchisees, and promise nothing in return, in writing, concerning success and profits in the FDD and the Franchise Agreement.

    How are franchisees induced to sign such lousy contracts? Is this a case of “good faith” confronting “bad faith” and trickery? Isn’t the old due diligence premise just another artifice to cover the initial deceit and trickery involved in franchise sales and enabled by the status quo of franchise law and regulation?

  8. Carol, you have a simple solution – don’t invest in franchises.

    Ok, but unfortunately the problem is more complicated. How do I decide between: a) an independent business, b) a franchise or c) taking a lower paying job and investing the capital saved.

    This is a serious problem, and it is not solved by saying “never purchase a franchise”.

  9. Carol Cross says:

    But Michael! I am not saying — don’t invest in franchises. I am advocating not to invest in franchisors who will not disclose the true value of the franchise by disclosing historical financial performance statistics on the unit basis to the new buyer. And, Les is saying, I believe, that even if the franchise has good value in the beginning, over the years of the long-term contract, this can change because of the opportunism and exploitation that is enabled in the average unilateral and unbargained franchise agreement.

    I understand that the problem is complicated and especially for government who wants to encourage investment in the economy and the production of jobs, etc. but the lie of the FTC Rule is hard to stomach.
    The “fraud insurance” provided by the FTC Rule that has no private right of action encourages intentional torts and fraud against franchisees.

    Are you saying, Michael, that the end does justify the means and that true disclosue would inhibit or destroy franchising? If a prospective franchisee must decide between and independent business and a franchise, shouldn’t this franchisee enjoy full disclosure of the risks, as known to the franchisor, who will own him and his assets under the terms of the unilateral and unbargained contract?

    Apparently, franchising can’t stand full disclosure of the risks because full disclosure would make it difficult to indenture franchisees in longterm contracts wherein there may never be any profits for the franchisees but always profits for the franchisors who don’t bear the expense of building and operating the physical units that produce the gross sales upon which the franchisors profit.

    Obviously, franchising is here to stay but maybe it will stay in a different form when more prospective franchisees understand that the risk and rewards have been misrepresented under cover of government regulation and that 50% or more of all first-generation franchisees will probably not survive beyond five years and only 29% of them will survive to ten years.

    I agree we have a serious problem. Where are people going to work? Where are the jobs of the 21st Century that will provide wages that will support the dreams of the people?

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