3 Ways to Exit

December 1, 2008

mcdexitnowThere are only 3 ways you leave your franchise:

  1. bankruptcy,
  2. selling it (another investor or franchisor) and
  3. independence.

1. Bankruptcy: Your business and personal bankruptcy (plus your partner, if he/she co-signs for a loan) is something everyone wants to avoid. That’s too bad but that is another topic.

2. Sticking the Next Guy: Through most of the life of their franchise, franchisees are smoking dope when it comes to valuing their business: They cling to the faintest hope that they can get out  with anthing like a positive ROI.

  • This is the only value of your business: What the franchisor decides you deserve. It is a total unilateral decision. (Note to Weasels: Expect to be betrayed.)

You’ll walk away with a stack of debt. Normally, you’ll get 10 to 15% of your total investment and that is gravy given to get you to sign the confidentiality agreement.

3. Independence: This is a much underused option but for some very flimsy reasons.

(a) Franchisees believe their franchisor and lawyer (hello?) that the franchise agreement is some kind of sacred text. It isn’t. And it never was. Economics and making money ALWAYS trumps legalese.

(b) Each franchisee percieves their trademark system is unique. They become experts in its history, the going and comings of their “enemies”; they become full-time amateur psychologists or cultural anthropologists. Yes, all they say is true but that is a serious distraction to the legitimate business goal of making the pig of your operating business fly (ie. start returning a profit for your investment). Anyone seen laziness, immaturity and greed in non-franchised or not-for-profit agencies?

(c) The belief that “Outsiders” could not possibly understand our problems. It is natural to focus on the source of pain and let yourself get tricked into thinking that you are alone in your grief.  Isolating people is a very powerful way to control them. To deal rationally with your challenges, you need to clear your mind of irrational fears. You have them but you must master them or nothing gets done.

(d) Most lawyers are biased because 95% of the legal fees within the industry are paid for or controlled by franchisors. This tends to distort the accuracy of information coming thorough. Believe me, most franchise law experts would NEVER suggest independence as a realistic alternative. They are much too busy posturing to write those threatening letters for their franchisor clients.

I went independent with my own lawn care franchise in 1998 and have helped several trademark systems do the same.

  • Economic Interest: Individual and groups of Canadian franchisees pay me to work with them to pursue alternate business strategies. Business research (focusing on analyzing franchisees’ cost of goods) is a necessity to understand your hidden franchise fees.
  • Many times legal action is never needed. Sometimes it is. I know what to look for it a litigator and what questions to ask as a franchisee-led group effort unfolds.
  • It always starts with one person calling me at 1-705-737-4635.

Franchise systems with 10 to 40 outlets are my speciality.


What happens when the franchisor goes south?

August 18, 2008

There are a lot of foolish ideas about what happens when franchisor goes insolvent or bankrupt [by design or accidentally]. While I am not a bankruptcy expert nor am I a lawyer, I have seen the devastation that corporate maneuvering can cause.

It’s usually a shitty situation.

As an excellent explanation of one example, please see Blue MauMau’s Bankruptcy Experts Are Wary of Bennigan’s IP Transfers article.

Paul Steinberg’s comments are right on, too.

Issue:

  1. Did Company X own certain assets?
  2. Did Company X file bankruptcy?
  3. Did Company X transfer assets to Company Y immediately prior to filing for bankruptcy protection?

As Profs. Williams and Zinman note, if so then there may be a problem.

What I can absolutely, positively, 100%-of-the-time guarantee you is:

  • it is an expensive and time-consuming exercise to prove that a franchisor has cherry-picked [in Canada, we call it boot-strapping a corporation] assets.

They might know, you might know, the Court might know but there is a HUGE difference between knowing or suspecting and getting someone to do something about it.

Without an independent franchisee association [helped by a tough lawyer] acting aggressively at the first sign of trouble, franchisees are usually never even considered a party to the proceedings.

  • When your house is on fire, it is often the wrong time to race out to buy property insurance.

In Praise of Bankruptcy protection

June 29, 2008

My 2001 personal and corporate bankruptcy was substantially pre-ordained the moment I signed the franchise agreement in 1998.

It was wishful thinking that I could be profitable as a Mom-and-Pop operator when I got hooked up with, what turned out to be (see hindsight bias) a system that didn’t have a proven business model. I kept putting more and more time and money in (sunk costs) believing I could turn the corner.

Michael Kernaghan of the Weed Man was right: I didn’t have enough money to grow the business quickly enough to be sustainable.

Once in the soup, I created an internal fallacy or illusion. It was fueled in part with my increasing attachment to the money I had lost (loss aversion) which is usually 2 times as powerful as the desire for a comparable economic gain (prospect theory).

It was very difficult to square this failure with the frequent successes I had had in my life up to the at time (cognitive dissonance). And the franchisor could always be counted on to counsel perseverance and asking relatives for more money.

  • Very Large Note: I had no flipping clue (at the time) that I was in a very real way acting in a delusional way. I thought I was being perfectly rational. I had did not know I had Drunk the Kool-Aid so badly. (Most other cult members don’t think so, either.

Whether a system is predatory or incompetent, it does not matter: The investor will lose it all, in all likelihood. The only difference will be the style you exit with.

Bankruptcy

Of the tens of thousands of dollars I have spent on professional advice, the most useful franchise expenditure was with my Bankruptcy Trustee.

He once mentioned that the average indebtedness of a client was $25,000.

My former franchisor realized less than seven per cent (7%) of their claim on my business’s disposal. That was no surprise to a 1,800 franchisee multi-brand international corporations.

Observations

  1. I believed I could turn early losses around by working harder and investing more. I was wrong (see pride). Perversely enough, the harder you work, the more you become attached to being a franchisee. It works like a Boy Scout knot that tightens as you struggle with it.
  2. I went 3 to 4 years too long. They call it “protection” under federal law for a very good reason. I was over-optimistic.
  3. Bankruptcy was the best business decision possible.
  4. The manner in which I bailed was important to me (no credit card debt, only the likely suspects got burned).
  5. My spouse never signed anythingever. (Everyone notice this?)
  6. My retirement savings were with a life insurance company which, for me, proved to be beyond the reach of bankruptcy law. (Talk to your financial advisor about protecting yourself before investigating anything.)
  7. Going independent delayed the inevitable and it allowed me to acquire the start of my franchising education.
  8. Financial counselling before I actually declared bankruptcy (ie advice in helping to decide) from a Trustee in Bankruptcy was the 2nd best money I ever spent.
  9. Bankruptcy’s stigma (acting through the human emotion of shame) kept me going. I thought that if I was going down, I may as well learn as much as I could about franchising as I went.
  10. Industry insiders told me stuff that they never imagined I would using in 10 years. Everyone cuts a deal, signs a gag order and exits feeling it was mostly their fault.
  11. I got hooked on learning how this trap is laid, especially the psychology that makes a franchisee seem to so comprehensively collaborate in their own imprisonment (thought reform).

Credit counselling is a part of the process of being a first-time bankrupt. It went pretty smoothly for me.

When my counsellor said, “What lessons have you learned, Les?” and I replied: “Don’t buy another franchise?“, the questions stopped.


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