Designing a win in franchising isn’t that hard.
This is not just outstanding peer-to-peer legal advice (which it is: both carrot and stick) but it’s also crucial information for all current Canadian franchise investors.
The benefit of collective franchisee action has never been more justified.
Sterns’ bottom-line advice to lawyers? (especially general attorneys):
The harsh reality is that some franchises have a failure rate as high as or even higher than non-franchised businesses. When the franchised business fails, the results are often catastrophic for the franchisee. The legal advice provided by the reviewing lawyer will come under close scrutiny, particularly if the franchisee misses the rescission window because it was unaware of its rights…
Lawyers should allocate sufficient time and charge a sufficient fee to permit a proper document review and reporting to the client. Otherwise, they should decline the retainer.
Lots of implications for the general and franchise Ontario bar.
But, hey, huge importance for the 40,000 ON investors in a current franchise relationships who are organized. Disclosure requirements are not just for the entering but whenever a material change happens to the relationship (ie. during, at renewal: any time a material or “significant” franchisor decision is made).
Did you get proper disclosure documents the last time your franchisor decided to change the rules in the middle of the game?
These are the business risks I assigned and that appear in the WikidFranchise entry:
- Arthur Wishart Act (Franchise Disclosure), 2000, Canada,
- Buying an existing outlet even riskier than from scratch,
- Courts extremely picky about shoddy disclosure practices,
- Disclosure documents are deficient,
- Disclosure document: one, bound and delivered at the same time,
- Disclosure document certificate,
- Disclosure document must disclose all material facts,
- Disclosure document must include third party contracts (suppliers),
- Disclosure documents never given,
- Disclosure documents not given within proper timeframe,
- Duty of care,
- Franchise law being ignored,
- Independent businesses survive longer than franchised ones,
- Independent businesses much higher profit than franchised ones,
- Lawyer alert: advise only prospects with adequate legal due diligence budgets or risk being sued,
- Lawyers being threatened with lawsuits for speaking out,
- Material facts were not disclosed,
- Outstanding advice,
- Professional negligence,
- Refuses to take client,
- Sue the lawyer,
- Unintentional or hidden franchises
This is an important article that I will visit again.
He has become obsessed with books of chivalry, and believes their every word to be true, despite the fact that many of the events in them are clearly impossible.
Quixano eventually appears to other people to have lost his mind from little sleep and food and because of so much reading. Wikipedia
Too much sanity may be madness. And maddest of all, to see life as it is and not as it should be!
Fortune leaves always some door open to come at a remedy.
For if he like a madman lived,
At least he like a wise one died.
- lower cost per unit delivered,
- frees up capital spending,
- avoids labour laws/costs,
- a compliant sunk cost-captured labour pool (day labourers?), etc.
But franchising your delivery system can be a double-edged sword: potentially, you lose all capacity to distribute your product in both the short- and long-term.
I’m not talking about any hostile franchisee action here.
Franchisors that too quickly dismantle their key business strategy (ie. the actual physical delivery of product to meet the end customers’ expectations) are leaving themselves extremely vulnerable.
- This danger is heightened the shorter the production/destruction cycle of the product is.
- Products with a very short life make a franchisor more vulnerable to delivery disruption because there is very little room for emergency delivery.
A wise franchisor executive should treat franchisees as the true experts they are in their fields: direct customer problem-solvers.
Professionals in thievery and business behave in a very similar manner.
Only a tiny percentage of thieves are recognized and view themselves as being professional: full time, rational and consistent planning.
The most prestigious of theft rackets is The Grift or Con games. The Grift requires cooperation among specialists.
The working group of professional thieves is known as a mob, troop, or outfit. The number of members in a mob is determined in part by the racket which is being hustled, in part by the angles which are being played, and in part by the circumstances and situations…Sometimes a large number of thieves work together in a loose organization in the more elaborate confidence games, using a common pay-off joint or big store (fake gambling club or brokerage office.) p. 27
For any group to function productively, certain rules need to be known and obeyed. This discipline is generally higher than in straight business because of the extralegal nature of some of their work.
The mob has many codes, rules, and understandings, most of which are so general that they apply to the whole profession as well as to a particular mob. p. 35
I understand (from books alone) that they are:
- gains are divided equally (although, different for different roles),
- all payouts must be paid from the net take (expenses [or nut] first deducted from gross take),
- all loans must be repaid from the group’s first fruits (rigidly enforced),
- everyone shares in the profit or loss (good or bad),
- the fall-dough (shared cash) is used to protect any member of the mob,
- each member must deal honestly with each other (burning someone is a almost unthinkable, lying is considered more serious than in straight business),
- if someone leaves the mob, he must ask to be taken back (type of social norm or professional consideration),
- a member of the mob is not responsible for things outside of his control (appreciation for the role of randomness and luck),
- a mob member should not cut in on another member’s area of responsibility (reflects negatively on the competence of the “helped” member), and
- it’s “the responsibility of every member of the mob to do everything possible to fix a case for any member of the mob if the pinch [arrest, exposure] occurred in connection with mob activities.” p. 38
In addition to their specialized skills, a professional thief must have a more general capability called larceny sense.
Larceny Sense: This term is applied to the thief just as the term “business sense” is applied to the business man. It is an ability to deal with unusual situations in the best possible manner and is acquired in the course of experience. Every thief with good larceny sense will try to figure out every eventuality in taking off a touch. Some thieves are considered to have no larceny sense, while others have plenty of it.
Quotations Source: The Professional Thief, Chapter 2: The Mob, The University of Chicago, 1937 [my emphasis]
Franchise marketing, for some systems, has evolved into a specialized, highly secretive applied fraud. Each trademark system has a number of 3 or 4 professionals working to sell and resell franchises that are designed to fail for the investor.
There is no boss per se within the group. Because the work is underground, there is little documentation available.
If there is a boss in the traditional sense, it would be the banker in head office who are within the small business lending division. These Franchise Bankers (one bank per franchise system) work very closely with the franchisor for their direct lending needs as well as setting up extremely lucrative service contracts for their franchisees (current accounts, merchant accounts, etc.).
In 2000, I interviewed Dan Farmer of the Royal Bank of Canada. He stated that franchise lending was “the most lucrative form of commercial lending there is”.
Roles & Functions
- mark (potential franchisee),
- sales agent (initial contact with mark, as the outsideman he steers marks to the mob’s preferred trademark; they are sometimes nominally independent, sometimes internal; also-known-as: consultants, franchise brokers),
- franchisor contact (initially charming, aura of success, kept at arm’s-length until the loan proceeds are advanced and removed from mark’s current account), and
- lender (specific bank official, specific bank branch: a high-risk, 24-hour turnaround on government guaranteed loans).
In their function as lenders, bank officers owe their borrowers a legal duty to perform lender’s due diligence. They are prohibited by law from creating debt instruments that they knew or should be reasonably be expected to know would be unsustainable or result in the borrower’s financial ruin. In Canada, the relevant statutes are the Bank Act and the Canada Small Business Financing Act and Regulations.
- Banks and bank officers are not being held accountable because these arrangements, although highly exploitable, provide substantial profits to the franchise bar, franchisors, etc. Canada has a well-known reputation for harbouring white-collar criminals.
- This, however, is very, very fertile litigation soil for outside law firms that can know what questions to ask.
That I am a 1/3 partner in only one active lawsuit, speaks not to the rarity of the fraud but to my restraint and patience for the cleanup to happen. In 2005, we had identified over 12 potential lawsuits involving just one franchise system, bank pairing.
Additional information on Predatory Franchise Lending and my recommendations to stop such abuse, can be found by in a paper I wrote to Industry Canada in 2005 called Franchising Opportunism: Deceit to secrsy confind. [Predatory Lending, IC Feb 2005]
He is someone of high political, economic and career influence who solves a professional thief’s problem for a fee.
Secrecy and deceit are required because of the extra-legal nature of some of the work.
People wonder why franchisors, franchise bankers, sales agents, the franchise bar, etc. can get away with [almost] bloody murder. A study of history of professional thievery can provide some hints:
The professional thief generally has a record in the Bureau of Identification as long as your arm, but after most of the cases “dismissed” or “no disposition” is entered. This is due to the thief’s ability to fix cases.
In order to send a thief to the penitentiary, it is necessary to have the co-operation of the victim, witnesses, police, bailiffs, clerks, grand jury, jury, prosecutor, judge, and perhaps others. A weak link in this chain can practically always be found, and any of the links can be broken if you have pressure enough. there is no one who cannot be influenced if you go at it right and have sufficient backing, financially and politically. p. 82
Professionals within franchising make more money by fixing problems (sabotaging valid claims) than they do by solving them (reducing opportunism). It’s that simple: Less money is deducted from the theft when you fix a case, even after paying The Fixer’s fee. It is very easy for a franchise legal expert to lie to complaining investor [Credence good cheaters]. The lawyer knows that he is not under any legal duty to tell the truth until a solicitor-client relationship is created. And the proof is in the pudding: In 10 years, I know of no franchisee-lead case that would be considered a success by the investors themselves.
The fixer acquires his position with professional thieves by service. He tries to maintain a batting average of one thousand. Not all of them can do this, but their record is so good that the thief feels secure if a regular fixer is on the case. [Blonger, the Denver fixer for confidence men, had the reputation of not having one man sent to prison in twenty years under his protection.] p. 88
Modern franchising runs on political and economic influence. Our Australian friends are simply the latest who have been wised to that reality. Again, from the past:
Fixing is a mixture of finance and politics. It is primarily a financial transaction, bought and paid for by everyone concerned. But it is made possible by politics and often involves political favors as well…For the thief, fixing is almost always a financial transaction…from the point of view of coppers, clerks, and bailiffs, fixing is primarily a financial transaction…The prosecutor and judge are probably handled with more finesse. p. 98-9
I have already used a tree as an analogy for Big Franchising (vast weight of organism is below ground: iceberg). Modern franchising has a visible and invisible nature (Overworld :: Underworld):
From the point of view of the fixer, also, this is a financial transaction. One fixer said to a thief: “Everything I get is bought and paid for, just as you pay me. No one gets any political or other favors.” The fixer can operate only if he has the consent and good will of those who are politically powerful. he may get a start on the basis of old friendships, but he can keep his position as fixer only if he kicks in. He must turn over to the political barons the larger part of what he gets from the thief, and his standing is determined by his reliability in dealing with them. p. 100
Thieves of nominally independent corporations (ie. franchisors, lenders, sales agents, legal, supply, etc.) would NEVER act with such arrogance if it were not for The Fixer’s protection racket. The weakest link is always the franchisee who 99% of the time goes away thinking they had a one-off bad luck with a cartoon-character type of franchisor thief. They are satisfied to receive 10% of their own money back and remain in silence via shame and contract. Professional franchising practitioners are, however, experienced and shrewd students of human nature.
No thief ever expects to have the bad luck to run into a case that cannot be fixed in some manner. This conclusion is not formed because of he thief’s conceit but because of his knowledge of the weaknesses and limitations of the average citizen and public official. p. 106
National franchisor associations act as a forum for coordinating Overground and Underground activities. The Fixer usually enjoys a very influential role such as Chief Counsel or Chairman of the franchisor controlled association. The Fixer is a lawyer because solicitor-client privilege harbours his clients’ extralegal activities. Politicians who are very often lawyers, know their political career is short and are not foolish enough to destroy their future legal earnings by crossing a mandarin partner of the some of the most influential and aggressive internationally-based, multi-line law firms.
It is sometimes believed that he fixer is the general boss of the thieves. This is an error. The function of the fixer is to get thieves out of trouble, not to control them. He often gives some advice to out-of-town professionals, after agreeing to take care of them. p. 107
The Fixer runs a monopoly on the most lucrative and industry-challenging cases [national, well-funded franchisees group or class-actions) while allowing the tactical fixing to happen to Tier 2 law firms who are seen as franchise experts within the franchise bar. The Fixer operates a protection racket that has the appearance of a law practice.
There is in every large city a regular fixer for professional thieves. He has no agents and does not solicit and seldom takes any case except that of a professional thief, just as they seldom go to anyone except him. The centralized and monopolistic system of fixing for professional thieves is found in practically all the large cities and many of the small ones. p. 87
Source: -- The Professional Thief, Chapter 4: The Fix, The University of Chicago, 1937 [my emphasis]
I am at a serious disadvantage when discussing the subterranean nature of franchising. I am not a member of that brotherhood and have only caught glimpses of behavior that has piqued my interests over the years.
- Professional thieves and modern franchise executives function in a similar way, in so much as they are primarily profit-making activities that need to manage risks and returns, under stealth.
They are highly energetic, charming, some exceptionally well-educated people who hold 2 conflicting ideas in their heads: They know they prey upon society but also want not to be an enemy of the state (which as profiting from crime, they surely are).
- This internal, unresolved conflict (cognitive dissonance) accounts for their bullying, arrogant, irritable, defensive and plain mean behavior. They can’t ever quite buy their acceptance into respectable society.
- possess highly migratory and portable special skills (especially persuasion, and communication),
- rely primarily on on-the-job training (often passed down from father to son, mentorship, tutelage),
- are highly congenial and supportive of other professional thieves (including competing trademarks, are compelled to warn and bail out even those they personally dislike),
- steal in a full time, planned and methodical manner,
- converse privately in a highly-specialized language (argot: legalese, mumbo-jumbo)
- achieve recognition for competence from other peers (who you know is important),
- operate in a very rigidly adhered to code of behavior, and [above all else]
8. particularly loathe anyone that (a) would inform “squeal,” or “squawk” and/or (b) has yet to lose their integrity.
In August I wrote a post called Why Australia will get a McLaw.
WA Today ran a story this week by Chalpat Sonti called Franchising inquiry slammed as golden opportunity missed.
Perth-based Narelle Walter, a former franchisee who claims that an induced breach of contract left her out of pocket by $5 million, said the committee did not go far enough:
“Franchise renewals have not been addressed properly and I am distressed that the apportion of good will has not been determined,” she said.
“Franchisors can misuse this loophole in the franchising code and the (Trade Practices Act) to steal the assets of small business investors (through a process known as “churning”, when the franchise is on-sold by the franchisor to someone else).”
Interesting that Ms. Walter draws specific reference to franchise bankers co-operating closely with franchisors:
There was still a big incentive for banks to support the franchisor in the churning process, because they would rewrite loans with an [newer] “unsuspecting” franchisee, she said.
These allegations echo others, especially MP Jo Gash in my September post called Collusion allegation: AUS bank and franchisor.
I wrote about the very cozy franchise banker :: franchisor relationship in a paper to Industry Canada in 2005 called Franchising Opportunism. It is also a good summary of how the Canadian and Australian franchise industry really works.
- Feel free to download a pdf copy of Franchising Opportunism right here.
With friends like these bankers, investors do not need any enemies.
You’re just finished your initial meeting with a franchise lawyer. You chose the baddest ass, most franchisee-friendly sob you could find. He was “kind” enough to give you 30 minutes of his time and you told him your whole story. The great man asked a few questions (actually a fair number about your net worth) but alas…unless you can rally another 9 other losers: Too bad, so sad; you’re shit out of luck.
Great bed side manner…regret to inform how weak the law is…best to put this all behind you (my most favouritest thought-terminating cliche).
You’ve just shot your mouth off to an industry insider that may very well use that information against your best interests. What?
I’ll explain with a real-life example.
1. Seven distributors walk into the most “pre-eminent” CDN franchisee lawyer’s office and tell him their story. His response: No case here go bankrupt. No if ands or buts: Do not pass Go…
2. The Group of Seven wants a second opinion. They call to me, I meet the group at their home and talk to a then-independent 2nd lawyer (just new into franchisiing but quite keen). We conclude: Excellent case. U.S. franchisor was too lazy to give disclosure documents after the Arthur Wishart Act (Franchise Disclosure) was passed in 2000. These are franchisees not distributors and therefore they can rescind their contract, dissolve their relationship and get their money back. Easy peasy.
- One set of case facts PLUS
- one Ontario law EQUALS
- 2 irreconcilably, diametrically opposed legal opinions?
How is this possible? Simple it has to do with duty and the timing of when a solicitor/client relationship is formed.
The legal system recognizes a multitude of special relationships in which one party is required to look after the best interests of the other in an exemplary manner. These relationships, which include solicitor/client, physician/patient, priest/parishioner, parent/child, partner/partner, director/corporation and principle/agent, are called fiduciary relationships.
Fiduciary relationships entail trust and confidence and require that fiduciaries act honestly, in good faith, and strictly in the best interests of the beneficiaries of such relationships.
Solicitor/client Relationship: This relationship ONLY starts when you formally enter into a contract for legal services. The signs are when you cut the cheque for a retainer, sign an agreement, etc.
Anything that you say to a lawyer before you are his client (when you or the relationship is consummated) does not have this legal protection (ie. the information you provide can, and in franchising is, be used against your interests).
This is how an internationally known franchise lawyer can give you knowingly false advice at the first meeting:
There is no legal duty for him to do so because the solicitor/client relationship has NOT been created yet (before contract for legal services started).
But why turn away work? The franchisees were steered away from defending themselves because there were (and still are) literally hundreds of franchise systems in Ontario that are ignoring the Wishart Act. These are called accidental or unintentional franchises (true franchisors who don’t want to bother with some stupid provincial law) .
The first lawyer knew that by exposing the Group of Seven’s franchisor in public (ie. in Superior Court) he would be very unpopular at the next franchisor-only national trade association golf tournament. (Please don’t tell anyone but this is why this organization [ie.] has an Ombudsman program [ie.]: To have you come in and be convinced you have no case. Skim off the biggest floaters. That’s why the banks are the biggest sponsors based on the theory that they have the most damaging facts to conceal, like, Predatory franchise lending.)
- It would be bad form for the franchise law expert to showing the other 32,000 Ontario lawyers (the unwashed masses: 99.9% of the province’s lawyers who are not in the cabal) where the juicy billable hours are.
- Let alone the risk of dozens of copy cat lawsuits against franchisors, banks, sales agents, lawyers, etc.
- And the inconvenient lawsuit against the franchisor’s lawyer for contempt of a provincial law that he is, as an Officer of the Cour, duty-bound to respect (should have dropped his masquerading client if they refused to self-identify accurately).
- This would not do when the franchise bar pays so lucratively when run as a credence good monopoly (see Winand Emons, Credence Goods: The Monopoly Case).
When you hear these words together: You should use an expert franchise lawyer…
…you should “reach for your gun“
(Hermann Goering’s advice when you hear the word culture).
Yes you should trust your lawyer. But you should qualify him or her first. Trust but verify is a very good idea.
Since being a lawyer means having to survive in business to practice another day, you should determine where the vast bulk of his future earnings are coming from (franchisee, franchisor or non-franchised commercial law).
- Based strictly on economics (95% of legal services paid for by franchisors and friends and credence good cheaters who are run as a monopoly), a franchise expert lawyer should be the last person a franchisee talks to.
I always say talk to a 60-year old regional commercial lawyer with his name on the building. Anyone else is more than likely to torpedo your perfectly watertight case.