Franchising: Trap for the Trusting by Harold Brown

April 8, 2011

Written in 1969; franchisor opportunism has become worse.

Inside cover:

This book is designed to inform the public and the legal profession of the egregious imbalance that exists in the franchise relationship and to suggest various forms of redress by means of litigation and legislation. By discussing (and printing) the contents of the usually secret franchising contract in complete detail, the author makes the reader thoroughly familiar with such inimical and routine restrictions as the covenant not to compete, the informer clause, supplier kickbacks, the “bad boy” clause, the “yellow  dog” clause, arbitrary termination, the suspension clause, and many other forms of contractual coercion, both stated and implied.

For too long the law has permitted franchisors to invoke “quality control” and “sanctity of contract” to ruthlessly enforce their unjust agreements…

Until definitive franchising legislation is passed, FRANCHISING: TRAP FOR THE TRUSTING can show the reader how to avoid the pitfalls of the standard franchising agreements or provide his attorney with a blueprint for seeking relief through existing statutes and case law. Arguments and citations from the franchise related fields of fraud, equity, securities regulation, Anti-trust, and labor relations are included.

Still Unsafe at any Brand.

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A Trap for the Trusting: A hopelessly romantic view of franchising

December 8, 2008

humpbackanglerfish“A Trap for the Trusting”

Harold Brown, Boston, USA-based lawyer, coined this not-famous enough phrase in describing franchising well over 40 years ago.

  • Sad to report, it’s gotten much worse. The table manners appear better but the rot goes deeper.

The reason is that there is a veneer of respectability that was missing in those raw, cowboy days. It is more treacherous being a franchisee than when Brown was alive and practicing law.

Analysis: There are two ways to win at any competition:

  • One is to raise your game [internal] and
  • Two is to to lower your opponent’s competence [external].

G.K. Chesterton put it well:

It is perfectly obvious that in any decent occupation (such as bricklaying or writing books) there are only two ways (in any special sense) of succeeding.

One is by doing very good work, the other is by cheating.

  • The franchise industry has consistently chosen to cheat.

The architects of that game is the franchise bar and, specifically, the Alpha Male franchisor lawyer [aka Tin Pot Tyrant].

  • These credence good providers cheat principally by managing the illusion that franchisees have only one route to resolving disputes [lawsuit].
  • and that they stand more than 0% chance to win in 100% of lawsuits and
  • Any, anywhere the law is fine enough to catch blatant fraud.
  • Of course, there are some temporary “wins” by franchisees but that is useful in maintaining false hope.

In nature, luring someone to their death is a well-studied strategy. It works really, really well.

Aggressive mimicry is:

…a form of mimicry where predators, parasites or parasitoids share similar signals with a harmless model, allowing them to avoid being correctly identified by their prey or host. In its broadest sense, it involves any type of exploitation,…

A “harmless model” is an experienced regional commercial lawyer. A mimicking predator is listed on the national franchisor trade association’s web site.

The Greatest Lies are Told in Silence: the deceived animal (franchisee) is unaware [before AND after] that there is a trap (although observers know full well) and is steered into believing that the Big Bad Wolf franchisor huffed and puffed their life savings away.

Many aggressive mimics use the promise of nourishment as a way of attracting prey. Though apparent to observers, the irony of falling prey when trying to capture its own is certainly lost on the deceived animal. Wikipedia

The Humpback anglerfish uses a modified dorsal spine as a bioluminescent ‘fishing rod’ to capture prey.

“My. What big teeth you have, Grandma.”


Which smart Tim Hortons franchisees will choose to prosper under the new 3G Capital regime?

January 8, 2015

Unlike TDL, franchising has accurately been known as a Trap for the Trusting.

running businessman

 

With the proper use of research, information sharing, technology, and consulting, even a few operators can act to defend and even help themselves in a new regime.

But they need training and ultra-high levels of confidentiality.

  • A few, smart, willing-to-learn and -adapt operators will survive, grow, and prosper.

Others will choose to live in the past.

Originally posted on LesStewartConsulting.caConcernedTimHortonsFranchisees.ca and Canadian Alliance of Franchise Operators website (CDNafo.ca).


The franchise bar works to reduce legal claims for franchisors

September 22, 2011

The 2nd Trap for the Trusting is sprung in the “franchisees'” attorney office.

Perfectly good franchisee claims are misdirected, thwarted and sabotaged if they raise disturbing questions.

Remember the hazards of credence good providers?

  • There is a defense against that defense.

[Monty Python, Meaning of Life]


Harold Brown, franchising activist

April 15, 2011

From the back inside cover:

Mr. Brown chose to write this book rather than a treatise because he felt strongly that what is needed to be said about franchising should not be obscured in scholarly terms. He is an activist with extensive trial experience in Anti-trust, tax, equity, labor, corporate and administrative proceedings, minority stakeholder derivative suits, mortgages, conveyances, wills, and trusts. In this age of specialists, he prefers to be known as a general practitioner.

Harold Brown graduated from Yale in 1936, magna cum laude in economics and three years later received his LL.B. from Harvard with honors in administrative law. In Washington, he served on the National War Labor Board and today is senior partner of Brown and Legihton in Boston. He was principally responsible for the passage of the Massachusetts “long-arm” statute and, as a member of the Civil Procedure Committee of the Boston Bar Association, has been working on a revision of the procedural code to be based on the Federal Rules of Civil Procedure. Mr. Brown participates regularly in legal workshops and is a frequent contributor to professional journals and periodicals.

Brown, Harold, Franchising: Trap for the Trusting, Little, Brown and Company, 1969.


Franchisee associations: House versus field negroes

May 15, 2009

Organizing a franchisee association is fraught with peril.mousetrapIt can be just another cynical trap for the trusting.

There are three types of groups of franchisees:

  1. unorganized (no groups).
  2. franchisee advisory boards (an obvious lapdog) and
  3. independent franchise associations, IndFA.

Most people think that any type of IndFA is preferable to #1 or #2.

  • They’re wrong.
  • They’re wrong.
  • They’re wrong

The worst type of franchisee organization is an IndFA that gives the appearance of independence but is, in fact, serves their executives’ personal or their advisors’ needs. These I call house negro IndFAs. It’s called deceit and betrayal.

  • They auction off their access to information to the highest bidder: the franchisor.

It should come as no surprise that the IndFA’s legal counsel is the role that becomes the most compromised (credence good cheaters). They make much more money and status from leaking information than they ever do representing franchisees or charging an executive. They can’t help themselves: they could not earn a living playing it straight.

Listen to J.K Galbraith:

People need to think of themselves as unmanaged, independent and free, if they are to be controlled with maximum success.

House negro IndFAs are there not to solve problems, but to create obstacles to real change. They are charming, they whisper compromises and they will use a leader’s ambition to turn his or her head. They are stuffed with talking heads mouthing words that seem worthwhile but are designed to trick you.

I am a field negro and I only associate with other field negroes: individually and in groups.

I get paid for giving advice, not for making promises that will never come true. I promise nothing except confidentiality, friendship and a chance to live with dignity. I have no “black box” of association management services. There are no advertisements here or on WikiFranchise.org because commercial interests always favour the dominant economic power, directly or indirectly. I do not make ” a very good living”. I do not auction off access to information to the highest bidder. I always make sure the ownership and control of all data is in the franchisees’ hands (not just mine). I do not “manage” franchisees: I work specific projects on behalf of them. The lessons franchisees learn organizing themselves, stays with franchisees.

I am not the most charming person in franchising but because of how I operate, I may be the loneliest.

I don’t bait traps for franchisees: I spring ’em.


SureSlim says: We are not a cult & +80% of our operators did not tank in 2008

March 1, 2009

sureslimnz

They must have just been unlucky in choosing their franchisees, then?

However, running a New Zealand SureSlim franchise seems to be a one-way ticket to losing your life savings and your home

A great article from New Zealand’s Sunday Star Times and Garry Sheeran called Big losers in SureSlim row head to court:

Failed SureSlim franchise owners are lining up to take legal action against the franchisor in New Zealand after 17 of the 21 SureSlim diet clinics here closed their doors last year.

SureSlim NZ says those businesses failed because people had cut discretionary spending on attempts to slim as the recession began to bite.

But franchisee business owners, themselves under fire from clients who paid money for diet regimes and now feel left in the lurch, say the SureSlim franchise model is the cause of their woes.

Here are some classic death rattles (sounds made just before death) of a failing franchise system:

  1. lost homes for franchisees but profits to lenders (lending due diligence?),
  2. churning: rapid re-sale of franchises (Fee1 gift to franchisor, sells to F2, etc.)
  3. can’t afford legal action to get money back or prove fraud,
  4. the business model is broken; sales free-fall (ie. 80% sales drop in 2008),
  5. 29% royalty and ad fund cost (unusual in that it is out-in-the-open; most charges are buried in mandatory products from the franchisor and their suppliers) ,
  6. franchisor slashes co-op advertising to during recession,
  7. independent accounting points toward “hugely questionable” franchisor actions,
  8. new president spewing excuses du jour RE: blaming the franchisees (bad lot with +80% tanking in one year: fire the s.o.b.s that accepted their applications!), and
  9. tip-of-the-iceberg litigation history in an older market (at least Oz has a toothless franchise law to plead).

The only bright spot is the honesty of a Sydney, Australia lawyer named Mark McDonald. He hits the nail-on-the-head for thousands of franchisees caught in franchising’s Trap for the Trusting:

“Most poor bastards caught in the SureSlim net can’t anyway because they have totally done their arse. And we discourage people from throwing good money after bad.”

Throwing good money after bad. An apt description of taking legal action against any franchisor in many countries.

  • I wonder how SureSlim is doing in other countries?

More garbage info in = better decisions?

July 12, 2008

A good article from the Mr Video situation that illustrates many of the basic problems in franchising, worldwide.

Australia and New Zealand investors and media have really picked up on the industry’s propaganda in the last 12 months or so. As I have increased my knowledge about franchising, the more I want to wash my hands.

Slindile Khanyile reports from South Africa in the Business Report article: Information is franchisees’ best friend in agreement with franchisors.

More is always better?: Partially true in theory but is absolutely misleading in franchise practice. It’s called baffling them with bullshit so the contract is seldom even looked at.

In FranchiseLand, things are often much more complex and counter-intuitive than a “rookie” small business investor would believe. Sheep are useful for both a fine woolen sweater or the barbecue

I would suggest that South Africa’s franchisor-only trade association has some explaining to do. BTW: whenever you see the words “franchising consultant” together, translate that into a commissioned salesperson. You’ll be right 95% of the time.

I took this article into the Information Sharing Project and these are the keywords I extracted:

  • 100 per cent of settlements have gag orders,
  • Access to justice is not available,
  • Apologists,
  • Cannon fodder,
  • Can’t afford to sue,
  • Churning (serial reselling),
  • Complaint letter to franchisors trade association,
  • Designed to fail as franchise investment,
  • Disclosure laws: 10 per cent solution,
  • Disclosure laws: false sense of security,
  • Financial failure of first franchisee a material fact to the second,
  • Franchise laws protect franchisors, not franchisees,
  • Franchise agreements are so complex, they are breached the moment they’re signed
  • Franchise agreements create a License to Lie, Cheat & Steal,
  • Franchise agreements: Masterpieces of deceptive wording and artful omission,
  • Franchisee repudiates loan,
  • Franchisee-on-franchisee opportunism,
  • Franchisor association not trusted by franchisees,
  • Franchisor association not trusted by professional journalists,
  • Franchisors want the minimum regulation they can get away with,
  • Gillian K. Hadfield
  • I own the assets but the franchisor controls them,
  • Incompetent or predatory: for the small business investor, the outcome is the same,
  • Loan repudiation,
  • McLaw: toothless legislation designed to protect the dominant parties,
  • Mediation: information gathering that aids the destruction of valid legal claims,
  • More one-sided information leads to greater deceit,
  • Must sell business (eventually) through franchisor,
  • No franchisor support,
  • Only 3 ways out: resell (next loser), independence (be sued) or abandon (bankruptcy),
  • Opportunism: contract creates powers which are used to strip investor value during relationship,
  • Opportunism: self-interest with deceit,
  • Opportunism Test: If asset ownership were reversed, would decision likely change?,
  • Stores shuttered,
  • System designed to fail for franchisees,
  • Sunk costs: franchisee’s trapped capital keeps them chained to treadmill,
  • Short-term profits to franchisor much higher with cannon fodder investors,
  • Shocked, I tell you: just shocked,
  • Unproven business model,
  • Unsophisticated buyers,

Want to gamble? You better know when you sit down with businesspeople who the chump or the fool is. If you don’t have superior relevant information and power, look for the victim in the mirror.

You may believe you are getting into a sort of a partnership with a franchisor. It is much, much more. You may not care but, believe me, if you ever have to disagree with your franchisor, these parties will create every barrier imaginable to your pathetic attempts at justice.

Usual Suspects

  1. your specific franchisor (good, evil, whenever…),
  2. a national trade association that defends the rights of the best franchisors to behave [if they see fit] as the most predatory [see FASA],
  3. an international network of these apologists & spin doctors (see next logo),
  4. the biggest law firms in the country who are paid 95% by the franchisors to destroy little guys like you [franchise bar],
  5. banks and lenders who love loan pushing, Predatory franchise lending,
  6. franchise consultants/sales agents [only paid when someone says yes],
  7. politicians whose jobs depend on giving the powerful what they want and
  8. monopoly suppliers.

If you don’t understand these issues, you are incompetent to evaluate a franchise offering in any country.

  • You are, however, fully qualified to sign a contract that gives others the right to Lie, Cheat and Steal from you.
  • And you should not be surprised when they, in fact, do so.

Harold Brown, Esq. didn’t call franchising a Trap for the Trusting for nothing.


VetFran: Polishing a Turd

July 8, 2008

This colourful phrase was explained to me by my franchise lawyer as such:

When an attorney has a loser of a case, his job to put it’s best foot forward. Your job is to “polish a turd”.

All experienced judges, lawyers, even legal secretaries know it is a loser of a case but, hey, that’s the business side of running a law practice.

In this case, the VetFran program may be used to lure ex-military into a dead franchise industry. For the latest breathless media article see Veterans have edge in franchising effort.

While I have tremendous respect for the individuals within the military, I not believe success in the military will automatically translate into success within a dying industry. My experience and training would, in fact, predict the very opposite.

But prudence seldom gets in the way of selling franchises. Let VetFran speak for itself:

It is because the community of franchising wishes to honor those who have so bravely served our country that a special program called VetFran was created.

Okay…so this is primarily an humanitarian effort, is it?

So who are the players in this altruistic initiative?

  • 200 U.S. franchisors (discounts on franchise purchases),
  • International Franchise Association (U.S. franchise trade association),
  • U.S. Department of Veterans Affairs,
  • Veterans Corporation (?), and
  • U.S. Small Business Administration (Hurricane Katrina response).

Time will tell of course if this is just another way of Trapping the Trusting. Interim proof will be available if many deals fall apart when:

  • the ex-military spouses refuse to co-sign on any franchise debt or contract.

You’ve earned your meager pensions. Protect your own family as cope with navigating onto civvy street.

Don’t become trapped in SBA debts pedaled by an industry desperate to replace exiting sharecroppers.


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