Oz Churning “Debate”

Jason Gehrke writes a weblog called Franchise tips and trends in http://www.smartcompany.com.au. His latest article, Churning: The dark side of franchising, is predictable.

I tried to submit a comment but was unable.

Here is what I would have submitted:

First the industry experts said “There is no churning.” Second, they say, “Well, yes, there is but…There’s just a few bad apples.” And, now, they add: Proving how bad a franchisor abuses their franchisees is difficult anyway (so why bother?).

Who are Australian small business investors going to believe: Franchise experts who keep changing their stories or returning foot soldiers from the franchise front? I have every confidence that people recognize BS when they see it.

1. Churning is a cluster of franchisor behaviors that results in financial catastrophe for the investor. These exercises of discretion within the incomplete contract are perfectly observable, auditable and quantifiable.

How often the abuse happens is irrelevant. Every franchisee knows what happens when you step out of line. Crucifixion was a very effective behavior modification technique.

2. There are no “good” systems or “bad” brands. The ability for franchisors to exercise their discretion in an abuse way (opportunism) arises from the very heart of the relationship. In franchising, the franchisee owns the majority of the store’s assets but the franchisor controls them. It is its great strength and its great source of abuse (it’s someone else’s money).

Attributing intentions (Oops sorry to cut your head off, there buddy. Does it ease your pain that I, admit, am an idiot?) means less than nothing. A family’s bankruptcy forms do not list someone else’s intentions.

3. To say that it is difficult to prove predatory business practices is a misrepresentation.

In Ontario, Canada, Gillian K. Hadfield presented a very simple rule to determine if a franchisor’s behavior was opportunistic: Would the decision in question have been made IF the franchisor HAD owned the franchisee’s assets THEMSELVES? If no, then the franchisor likely abused their dominant contract and economic position.

Example: Would the franchisor voluntarily pay the same price for the products that they FORCE their franchisees to buy from head office? Yes or no. Would they buy or shop around and get better value from another source of supplies? Is the contract being used to squeeze a hidden franchise tax from captured investors? Same thing with head leases, equipment purchases, renewals, etc.

Big Franchising wants everyone to stay asleep and they have a +30 years Oz history of saying anything to maintain their dominance. Get Smart.

Franchising is Unsafe at any Brand.

Les Stewart MBA
Midhurst Canada
lesstewart.wordpress.com

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5 Responses to Oz Churning “Debate”

  1. Carol Cross says:

    In the United States, where the FTC Rule/State Franchise Disclosure Document and the Adhesory Franchise Agreement are packaged together, the prospective buyer doesn’t get anything generally in the way of historical financial performance data of the units on which to make an educated decision about the franchise. The US FTC has determined that historical unit performance statistics are not MATERIAL to new buyers of franchises, and franchisee advocates indicate that this failure to mandate disclosure of historical financial performance is misleading by omission.

    The average franchise agreement is a malicious legal trap that sets the tone for the long-term relationship. Franchisees, because they are given no MATERIAL facts concerning unit performance upon which to assess the actual risk, invest in the franchise believing that the risk of the investment is small and that there will be profits and a job for the long term of the contract. New franchisees have no idea that they may NEVER make any PROFITS for the entire term of the contract, and that the average franchise investment with a finite term is often worth very little at the end of the contract term —That is, if the franchisor even lasts as long as the contract term.

    Franchising is Unsafe at any Brand!

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  2. Carol Cross says:

    Please read “Franchising fraud: the continuing need for reform” published by the American Business Law Journal, 01 Jan 03, and on the Internet in June of 2008, for a fair and balanced study of INDUCEMENT CONCERNS IN FRANCHISING and the FATAL FlAW of the FTC Rule that results in much pain and suffering for good faith franchisees.

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  3. Peter says:

    I have just read this piece. My wife belongs to a franchise whose practice appears to be – not to renew Franchise License, force the franchise to close and to contact the clients and tell them a new franchise is opening in their area. We are in Australia and there is little the government is prepared to do about franchisor conduct. “The market place shall regulate the business” is the response I received from a politician. this would require defining what the franchisor’s market place is.

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  4. Les Stewart says:

    Peter,

    I appreciate where you are coming from.

    Franchising is a technology that increases franchisee defenselessness. It is tempting to quit when an appeal to another authority figure is shot down. In my experience that is the rule and not the exception everywhere in the world.

    Franchising forces people to (1) continue to rely on themselves and their families (and then suffer needlessly) or to (2) reach out to others, to help them as much as you are helped.

    Yes franchisees are guilty of self-interest. Yes franchisees are easily spooked. And yes, franchisees easily turn on each other.

    All of these statements qualify franchisees in one category: being a human being. I assure you any franchisor if stripped of their authority, access to resources and soft bed would resemble also very quickly resemble a dog that’s been beaten too much.

    You may not be able to see it right now but it is the SITUATION or ENVIRONMENT that is causing the selfishness and pettiness. People act like prisoners (institutional men: see Shawshank Redemption, Stanford Prison experiment) when they’re in a prison.

    The first “break-out” is between a human’s ears in their refusal to degrade themselves by passing on their problems to the next sucker.

    I assure you the quick-fix will bite people in the ass over the years when they have to live with their conscience. I’ve seen it too many times when mental and physical health are traded for 30 pieces of silver.

    People with much greater wisdom than I have written extensively on these matters. We ignore these teachings at our very real peril.

    Les

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  5. Ray Borradale says:

    I would like to hear from Peter – ozfranchising@hotmail.com

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