Solomon on Modern Franchising

Richard Solomon on Blue MauMau: Competent Risk Assessment Through Killer Pre Investment Due Diligence.

Absolutely right on the money.

Richard’s statement of problem:

The hoards of potential investors with access to over $ 500,000, coming out of downsizing companies and merger resulting reductions of work forces, have brought sharp practitioners to the small business opportunities field. These phony franchise opportunities masquerade as real business prospects, using the same descriptors as the legitimate franchise opportunities.

Does he see Any Protection?:

That Rule [FTC Rule, or similar disclosure type scams] does not, however, provide any reliable investment protection. The reason for this is that when you have parted with your total initial investment of upwards of $ 350,000 or more, and are on the hook for a ten year lease and to repay a large SBA business loan, and have personally guaranteed the performance of the franchise agreement (as they all now require), and have agreed to pay upwards of $ 100,000 to the franchisor as liquidated damages if you fail (which they all now also require), you have no resources left to pay for expensive litigation when you realize you were defrauded and are just plain broke. You are looking at bankruptcy as your only avenue of escape.

Richard versus Les: I agree with 100% the diagnosis. We part company regarding post-signing franchisor opportunism.

The problem, for me, is after you sign, the franchisor reserves the unilateral rights to:

  1. turn into the most predatory S.O.B. operator imaginable [sign with Dr. Jeckyll who turns out to be Mr. Hyde].
  2. Force you to sell to him your very high volume and profitable store at 15% of its value.
  3. Or sells the whole system to a sleaze ball.
  4. Or goes bankrupt/insolvent [new squeeze, divorce, switch teams, boredom…who know/cares?: result is the same for investor].
  5. Or decides your store looks good on Son #1 or the moron brother-in-law.
  6. Or [screw u du jour: a hundred other ways of excercising their discretion in an opportunistic way].

Yes, Killer Due Diligence works if the franchisee:franchisor relationship were to stay the same over the first term of the contract. But it does not.

  • Pretending that the “good guys” will stay “good guys”, is too much of a leap of faith for me. I believe individuals are much more complicated that good or bad, black or white, evil/honest, etc.

I think the temptation to coerce more cash from a practically defenseless franchisee is too great for the vast majority of businesspeople.

I don’t think that franchisors are any more greedy than anyone else. I just think their situation [monopoly on supplies, renovations & equipment, $ from top not profits, etc.] gives them more opportunity to act selfishly than most business situations.

  • BTW: I have zero doubt that if the roles were reversed, the vast majority of franchisees would be just as nasty. [Sorry…franchisees have just the same human strengths and weaknesses as anyone else. Easy to be morally superior when you have never been seriously tempted.]

For now, For the subordinate party, I say: Franchising is Unsafe at any Brand.

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One Response to Solomon on Modern Franchising

  1. Carol Cross says:

    I agree that both the franchisor and the franchisee are vulnerable to being used in an industry where regulation has been promulgated by government to protect the franchisor to encourage and stimulate business activity. The franchisor is often the victim of the franchise developer who makes his money from helping the franchisor to franchise. The predatory developer of the franchise who advises the franchisor doesn’t really care whether or not the concept will make it in the economy as long as he is paid up front. Some of them even end up doing time for failing to pay their federal taxes.

    If you point is, Les! That, when “Push comes to Shove” we all vote for outselves, this is true. But this is why we have laws against fraud, etc.. isn’t it?

    If you will admit that the franchisee is just a resource of the franchisor to try to build a chain of businesses and that the chain of businesses feed the economy; i.e. the banks and the lenders, the landlords, the developers, the investors, and government revenues and job numbers, etc…and the American Bar Association, and the Canadian and Australian Bar Associations, etc… you will look at the truth.

    Sure! the franchisors can become victims themselves of the “self interest” of others and many of them fail and are sacrificed to the greater good. I’m sure many a failed ZOR would like to tell his story of how he was cheated by a franchise development corporation and how, he, the franchisor misunderstood how things would work. Franchisors wouldn’t be interested in franchising if they weren’t protected for “overseeding” and from fraud in the courts if things don’t work out for them.

    But! the original sin is the FAILURE of the FTC Rule to mandate any kind of financial performance statistics be disclosed by the franchisors to new buyers, to new startup franchisees. This blank check that encourages fraud is responsible for the 70% of new franchises that Richard Solomon says are nothing but “frauds” and permits “fraud” through churning by the mature franchisors who in recession LOOK like good and safe investments because they are visible in the economy. Mature franchisors churn and sell new franchises to try to expand in recessions to maintain their system sales numbers, if not to expand them

    It is for this reason that I agree with you, Les Stewart! Franchising is Unsafe at any Brand.

    Like

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