National franchisor sales teams: Creating the Illusion of Respectability

August 19, 2009

GoodHousekeepingSealWhat do all these associations have in common with the Good Housekeeping Seal of Approval?

They are organizations controlled by franchisors that promote the sale of franchises into national jurisdictions.

  • That is all they do: sell.
  • There is no quality, at all, in what they do.

They also have, at best, voluntary Codes of Ethics which are almost never enforced.

In fact, some of the worst predatory franchise systems I have ever known, are long-standing members. It pays for them to join to bolster their credibility.

  • Do not be fooled: these members are NOT  a measure of investor worthiness.

In many cases, predators use this Mask of Respectability to disarm unwary potential franchise investors.

  • World Franchise Council: Enhancing the global Franchise Community Take a look.
  • International Franchise Association
  • Canadian Franchise Association
  • Franchise Council of Australia
  • Franchise Association of New Zealand
  • China Chain Store & Franchise Association
  • The Franchise Association of Southern Africa
  • British Franchise Association

As usual, I am always very pleased to debate any representatives from these organizations.

Or anyone from their financial institutions which buttress this facade.

WorldFranCouncillogoInternationalFranchiseAssociationCanadianFranchiseAssociationFranchiseCouncilofAustraliaFranchiseAssociationofNewZealandChinaChainStore&FranchiseAssociation

FranchiseAssociaitonofSouthernAfricaBritishFranchiseAsscoation


Pizza franchise sold on internet for $181 NZ

February 21, 2009

fanzQ: How much is a used “high quality” franchise worth these days in New Zealand?

A: $181.00

Franchisees operate their businesses thinking that they will recoup their investment when they sell. Many operators accumulate big losses in the hope of hitting the jackpot when they sell.

  1. It almost always never happens.
  2. Your money is sunk in the business and you will never get it back
  3. Every franchise should pay it’s way and then some or be exited, immediately.

Case in point: $181 restaurant bill? I’ll take the works. Ms. Theresa Cowan placed an internet bid and won:

…an online auction for a 60-seater former Spagalimis pizza restaurant in Christchurch’s Northlands Shopping Centre for a bid of $181.

1. But surely the franchisor is concerned about the value of his businesses being worth almost nothing? Well:… not that you’d notice.

Spagalimis director Andrew Cooper said that despite the mall branch having a $400,000 fit-out four years ago, he was happy with the $181. We would have given it away really,” he said.

Mr. Cooper is just happy the franchisor is off the hook for the lease obligations as a franchisee subleases from the franchisor. No word about the bank’s security on the equipment or leasehold improvements: probably not able to squeeze any more cash from the exiting franchisee, anyway.

  • But still: assets worth $400,000 dropping to $0 in 4 years? What kind of bozos did the lending valuations? HINT: Close friends of the lender and franchisor.

2. Spagalimis Italian Pizzeria proudly lists themselves as:

  • a member of the Franchise Association of New Zealand, FANZ,
  • having a total of 5 NZ outlets (5 worldwide),
  • and requiring investments “from $250,000″.

They even have a section called: Franchisee Comments that quotes Jerome Britt, Colombo Street Spagalimis as saying: ‘ Great brand, fantastic systems’

3. FANZ says this on their website:

Franchising is a respectable and highly successful business format, both internationally and here in New Zealand. Franchising is the safest way to buy a business.

I wonder what the former franchisee that got $0 for his $400,000 investment thinks about franchising in New Zealand? Or Mr. Britt when he sees the market for the sale of his business drive to zero.


Green Acres fraud triggers Kiwi franchise review?

August 19, 2008

This is an interesting article by Nevil Gibson in The National Business Review: Franchisers face prospect of regulation.

Nevil Gibson starts of with:

The Green Acres franchising scam, in which dozens of new migrants from China and India were bilked of millions of dollars, has sparked a government clampdown on the sector.

Commerce Minister Dalziel [picture] is quoted as saying:

“I was actively involved in meeting with franchisees at the beginning of the year who had been caught up in what is an alleged fraud and still subject to investigation by the relevant authorities including the Franchise Association of New Zealand (FANZ).

As a bit of a reminder to viewers:

In May, the NBR reported the Green Acres Group – the country’s largest franchiser – had recovered from the $4 million fraud, which involved an individual selling a home ironing franchise to several hundred investors for more than $20,000 each.

The media reason given is Green Acres but the Discussion Paper cites a total of 3 reasons:

  1. information imbalance [assuming more of the same pre-sale disclosure information will help],
  2. cost of any remedy [keep litigation but make mediation mandatory], and
  3. reputation damage that interferes with the franchise industry’s ability to sell, sell, sell.

Curious how the wrong that seems to get the most attention is the negative publicity drag on the head office as opposed to the $4-million cash lost to the recent immigrants.

Time will tell if this proposed regulation turns out to another McLaw: the illusion of franchise investor protection. A cynical interpretation makes this spin designed to get past the next election.

  • One great suggestion is a requirement for every franchise system to join the FANZ and be held accountable to its Franchising Code of Practice [download pdf].
  • Mandatory legal advice would be a real step forward, too. [A Certificate of Independent Legal Advice from both spouses to make a franchise agreement enforceable.]

These standards would apply to all members of the FANZ community [lawyers, accountants, consultants, salespeople] and not just to the franchisors. Right?

It would be a shame to have salespeople or consultants not being responsible for their advice let alone the professionals [franchise lawyers and accountants] who have an existing statutory duty of care to provide prudent advice.

It would seem a shame to maintain the fraud incubator where a Blue Chip v2.0 can flourish [ie. defrocked professional uses franchising as a mask and liability shield that causes thousands of the most vulnerable to lose their homes].

The standard when evaluating public official actions is, if I recall correctly:

  • knew or
  • could have been reasonably been expected to know.

New Zealand announces a franchise regulation review at a sales expo

August 18, 2008

The national Labour government of Helen Clark announced on August 15th that:

The Ministry of Economic Development is conducting a review of franchising regulation to explore whether there are any widespread problems in the franchising sector which may require franchise specific regulation.

The announcement, via the Ministry of Economic Development, can be seen here or the Discussion Paper can be downloaded here [Review of Franchising Regulation in New Zealand, pdf]

  • There have certainly been enough high profile franchise nightmares and spectacular fraud investigations to justify this action: Blue Chip, Green Acres, Green Power. And, usually, only the most severe ever surface into the national media [tip of the iceberg].

Further coverage was provided by the Franchise New Zealand trade magazine in an article named: Government Wants Feedback on Franchise Regulation.

Interestingly, the Commerce Minister Lianne Dalziel made the government’s annoucement at a franchise sales show. You can see her entire speech here and please find below Minister Dalziel’s concluding remarks to her franchisor marketing and franchise banker audience:

Can I conclude by congratulating all of you for participating in this Expo and can I thank the Franchise Association for its advocacy for a sector that is a vital part of the New Zealand economy. Can I acknowledge the sponsorship of Westpac – these events don’t happen without sponsors – and can I congratulate those of you who have been chosen as the ‘show stoppers’ for going the extra mile.

It is important, at certain times, to remind those in authority that they serve citizens’ interests as well as corporate interests.

  • I would encourage franchise investors and those affected by no franchise industry oversight [such as Blue Chip] to voice their opinions to their elected officials, current government, media outlets and financial institutions.

Big Franchising

July 18, 2008

Most small business investors define franchising in an inaccurate and childlike way.

Everyone knows McDonald’s and that it has made many franchisees millionaires.

McDonald’s is a franchise and so all businesses that are franchised must be a success. Maybe the relationship is not 100% causal but it’s a close relationship. Right?

Wrong!!

We Deceive Ourselves: We notice the flashy new sub sandwich shop or the prestigious dog poop scooping service trucks. We always wanted to go out on our own but didn’t want to risk too much. Franchising is pre-sold as a less risky alternative.

We think we might like to look into buying a franchise and this one seems pretty good, so far. Unconsciously we have started down the road in remembering information that would support a yes decision but also ignoring any negative data [confirmation bias].

Humans tend to over-rely on the physical, on what you can see, hear and touch. That evolutionary predisposition has worked well for thousands of years but in a complex, commercial setting spanning international corporations, our “lizard brain” is not too well equipped to deliver a good decision.

WHAT IS BIG FRANCHISING?

Little franchising is what you can see [the branches, leaves of the tree]. Big Franchising is what you can see plus the invisible organizations that feed and nourish the organism [the roots].

  • As the son of a farmer’s daughter, lawn care operator and retired agronomist, I know that 90% of the weight of a plant is underground. The power and danger of franchising is hidden.

Relationship: the first factual error that the power dynamics are simple; that they are limited between the franchisor and the franchisee. The unwary pre-sale or unaware ex-franchisee believe that it is fairly simple David and Goliath story and that this individual franchisor is either a “good guy” or a “bad guy“.

Nothing could be further from the truth.

Public Policy: the true face of Big Franchising is revealed when you watch closely what happens when a law is proposed. Most of the aligned interests prefer the shadows and only come into the light when their favoured positions are threatened.

Big Franchising: Expert specialists

Definition: an informal understanding between legally independent corporations and organizations that serves their mutual commercial, power and political interests.

Members & Role

1. Product franchisors: The Big 3 [Auto, Grocery & Oil] but also very large corporate concerns such as Coca-Cola. Massive, aggressive and willing to get on the phone and bully any politician into the middle of next week.

2. Business-format franchisors: The Blue Chippers [McDonald's, getting fewer and fewer]. Largely co-ordinated through the national peak trade association [ie. AU National Franchise Association, Kiwi Franchise Association of New Zealand, Canadian Franchise Association or the U.S. International Franchise Association. or their subservient members and the other [usually] 80 to 85% of franchisors who do not belong to the national franchisor association. These are public apologists and training centres for franchisor opportunism.

3. Franchise Bar: The very few large international law firms that have a very lucrative franchise specialty and other boutique practices. A useless law to investors [McLaw} is a great law for The Bar because of the irrelevant, but seriously misleading disclosure documents that need to be written. This is a very protective group of extremely sensitive businesspeople who happen to discuss law in their spare time.

Any lawyer hoping to join the club better play by the rules. Rule Number 1 is serve Big Franchising who arranges to pay 95% of all legal fees. You can usually find the majority of the Franchise bar in the national franchisor association’s membership lists. [Australia, New Zealand, Canada]

Franchisee clients are thought of as a means to pay the rent until you can do some serious billing to the franchisors. When I was in high school, certain girls were considered practice girl friends. I believe I don’t have to go into too much detail here. The high school male and the struggling franchisee lawyer have the same thing in mind.

Each country has a King Rat franchisor lawyer. His job is to discipline the Big Franchising members and instill fear in dissenting opinions. I could name the U.S., Canadian and Oz/Kiwi guys but I promised my wife, no more lawsuits.

4. International peak association: the World Franchise Council is an information sharing project for Big Franchising. It provides training in keeping each nation’s public asleep to the true nature of franchising [higher risk, rent not own business, churning, on and on]. It keeps all their members aware of the defenses available to thie members: The “How-to” of defeating all franchise investors’ claims.

Responds to Oz’s public understanding is a babe in the woods when compared to the U.S. and Canada. The U.K. are still in Big Franchising’s womb, largely because of a very docile business media.

5. Financial Institutions: franchising is extremely lucrative for lenders and financial service providers. National programs are set up that kick back millions of franchisees’ dollars every year to franchisors. Lenders often will disregard the law when they fake their lender’s due diligence duties. They often engage in a cluster of behaviors I have defined as Predatory franchise lending. [Australia, New Zealand, Canada]

6. Product suppliers: franchised businesses are higher margin customers. The franchisor negotiates their kickbacks and the franchisee is forced to pay the inflated price. This is really an undisclosed add-on franchisee fee [often, at least, doubling what you thought you would be paying]. Here is an example: A franchisee paying more for shipping [franchisor] than he did for rent [no head lease].

7. Salespeople: these charming individuals call themeelves consultants, business brokers or researchers. Some even hide behind their PhDs. They steer you to those systems who pay them for for their ability to invoke your trust. Don’t be fooled: Almost 100% of the time, they don’t get paid until you say yes and only from the franchise system that they get paid a commission from. They may charge you a few thousand bucks to find the “right fit” but the real dough will flow when the trap snaps shut [sign the franchise agreement or loan papers]. [Australia, New Zealand, Canada]

8. Media: this is the more subtle one. Experienced journalists know all the sordid details of franchising and have known them for many years. Editors do not publish stories that interfere with the commercial interests of their bosses which are in the same Big Franchising club. Occasionally, stories are published but they are simple open-and-shut cases that would never give the public an idea that the problems are systemic [affecting all parts] rather than individualistic [blame the victim]. The lies the media tell are told in silence.

9. Politicians/Regulators: politics is the brokering of competing interests. Big Franchising represents some of the world’s biggest corporations.

Politicians and regulators know their career is short and corporations’ memories are long. The practice of law has almost entirely been taken over with corporate interests. The widespread use of compulsory private law contract provisions [arbitration and mediation] hides the industry’s abuse.

Franchisees are unorganized mom-and-pop shops, mostly. People that think that even national inquiries will discover the truth and then the truth will will result in a good law [reflects reality] are hopelessly naive about how power works.

10. Miscellaneous: this category includes academics, especially [with some notable Oz exceptions] those pesky consulting fee-dependent business administration professors, Trustees in Bankruptcy, equipment and business appraisers, mediators, arbitrators, non-franchise bar law firms, financial services ombudsmen [apologists for predatory lending practices], national privacy commissioners, law societies [very attentive listeners to large law firms' economic concerns].

Summary: There exists a complex web of invisible but very real relationships that created, supports and aggressively defends the franchise industry’s dominant power structure [status quo].

  • All things being equal: You may be profitable or achieve your financial goals.
  • But, all things are not equal in franchising, are they?

Ignorance of your potential adversary’s power and influence is no excuse. At least for those with ears to hear.


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