Big Franchising

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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2 Responses to Big Franchising

  1. Carol Cross says:

    “Big Franchising” and the big conspiracy in the status quo in the world to hide the risk of franchising from unsophisticated buyers who are tricked into believing that franchising is a “proven” and much less risky way to own a business of one’s own has been very successful for all of the special interests and the powers that be who greatly profit from the industry of franchising. The “proof of the pudding” is seen in the growth of franchising in the USA and in World economies.

    Self-employment through the use of a franchise is a form of self-delusion, as indicated by Les Stewart, that is generally and most often highly unsuccessful short term and long term for the Mom and Pop retail franchisee, the one-unit franchise owner. But! the illusion of success presented by the status quo who benefit from franchising feeds the self-delusion of the prospective retail franchise buyer who is looking most often for a solution to producing a good job for himself/herself and income. The self-delusion of the prospective retail store franchisee is encouraged by the lack of good jobs for middle and upper class citizens and this is why franchising grows in times of recession in economies.

    Most prospective and targeted franchisee prospects are “ripe for the pickin” so to speak. They are eager to play the game with the big boys and share the profits that are promised by appearances and promises made outside of the formal contracts. Naive prospects sign boilerplate contracts believing this is the only way they can access the profits and play the game with the big boys on the block. They may have played “Monopoly” but the new game called “Legal” or “I gotcha” isn’t yet on the market and they find out the hard way that they have no idea how the game is played.

    It just goes to prove that the power of appearances and rhetoric and advertising will get the franchisor and the other special interests everywhere they want to go — if it is legal, of course, and franchisors are protected from fraud in the courts —and if there is no great “show and tell” activity in public by those who fail out of their franchised businesses. Franchisors understand, of course, that government has a stake in franchising, as well, and that it is public policy to protect franchisors against franchisees who fail. Franchisors understnd that their predatory instincts will not be constrained under the law.

    Confidentiality agreements and gag orders are legal and enforceable when contracting parties agree to the terms, that are presented with incentives that they can’t refuse because they represent their best interests of the parties to the contract. Thirty years of the FTC Franchise Rule together with an understanding of human nature by “the powers that be” invites the belief that there can be another thirty years of growth in franchising as long as franchisees can be unknowingly preserved and sacrificed as resources for the growth of franchisors in world economies. (Les Stewart and I and many others would like to prevent this great growth o franchising that is based in great part on appropriation by the franchisor of the cheap labor and the cheap venture capital of unsophisticated one-uinit franchise buyers who are tricked with the help of their governments into signing contracts that are malicious legal traps.)

    How has retail franchising been sustained and why has it grown in the world if it isn’t really generaly successful for both the new franchisors and most of the prospective franchisees?

    Is it because both the franchisee and the franchisor want to believe, as Les Stewart indicates, that they could be the next McDonald’s and the next millionaires on the scene if they can successfully franchise their businesses.

    But! don’t most new franchisors, the entrepreneurs, really understand that the risk of their survival in the markeplace for as long as ten years is highly unlikely due to the government known brutal failure statistics of startup of businesses in local economies. (See Startup Failure Rates by Professor Scott Shane in a Google Search) Aren’t the long term contracts demanded by mature and new franchisors just a premeditated malicious means of nailing down their advantage over the franchisees who will be indentured by the terms and the long term of the boilerplate contracts, in success and in failure, at least as long as the franchisor remains in business?

    While the new franchisor may sometimes beat these government known failure statistics for a time because he is transfering the risk of failure of physical units to the franchisee and can often churn the assets of any failure into the system, the franchisor eventually, if he can’t grow fast enough and big enough to gain and retain market share, will also fail. But the franchisor may have the cushion of bankruptcy for the corporation, and generally the franchisor’s personal assets will be protected, etc…under the corporate veil if he has enough capital to look attractivee to the bank or the lender who will earn interest on the loan to the franchisor.

    Franchisors couldn’t, of course, borrow the money to start franchising their businesses unless the banks and lenders understood that the franchisees could and would be used as resources to grow the chain businesses, and that the failed franchisees (with SBA Loans or Home Equity Loans, etc. and their PERSONAL GUARANTEES that are used to facilitate the rapid growth)would have recouse in the courts. The franchisees act as collateral for the loan the bank gives to the franchisor.

    The franchisors, themselves, can’t get government guaranteed loans for small business startups because franchising is a legalized pyramid sales scheme and legalized pyrasmid sales schemes are not eligible for guaranteed government loans to help small business men to stimulate local economies.

    But, understandably, the new franchisor, therefore, has to be presented with incentive under public policy to take the risk and bear the expense of franchising his business. The act of franchising, therefore, together with regulation must greatly reduce the risk of the franchisor while providing the opportunity to maximize profits. The incentive to franchise for the franchisor must be the opportunity for rapid growth of the system and system sales and profits while at the same time reducing the risk of building and operating the system units that will produce the system gross sales. The incentive, therefore, must slso be the guarantee by government that franchisors can legally and rapidly grow their systems by advertising and hyping and selling the product, the franchise, at any degree of risk of failure or production of profits for the franchisee, as long as the franchisor and his contract is compliant with government regulations and existing law that will then protect the franchisor from charges of fraud from any failed franchisees in the courts. If franchisors could generally be found guilty of fraudulent inducement or fraudulent concealment in the courts because of misrepresenting the risk or concealing the risk, this would be counterproductive to the goal of the banks and the lenders and the legal establishment and the government of encouraging franchisors to stimulate local economies.

    Obviously, it would be hard to sell franchises to the public if they were properly informed about known high risks of failure and/or NO, or low profits, involved in the union of their labor and capital with the corporate brand franchisor who owns the franchisee and his gross sales under the terms of the contract, in success or failure or breakeven status. The franchisee under public policy for the “greater good” is a calculated sacrifice to the greater good. Government is apparently afraid to find out whether or not franchising would or could survive if the true risk in terms of unit financial performance statistics were disclosed to new buyers of franchises.

    When governments regulate franchising without requiring franchisors, themselves, to disclose UNIT financial performance statistics to new buyers who join their systems, they do license the franchisor to lie, cheat, and steal, as the franchisor is so inclined. They must, of course, hope that franchisors won’t use regulation and the law to lie, cheat, and steal but, of course, they aren’t surprised when they do, are they?

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  2. […] Big Franchising is very punitive to those that raise uncomfortable questions. […]

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