Opportunity Knocks and Liars’ Loans: required reading to understand modern franchising

September 1, 2012

John Lorinc wrote the book on franchising from a franchisee’s investor viewpoint.

I’m glad to see it is still available to buy online and is in many Canadian libraries.

The hidden banking side is revealed in Chapter 4, The 90% Solution: Franchise Economics, some of which I excerpted in a WikiFranchise.org post.

What did the business press have to say about Lorinc’s work?:

  1. National PostOpportunity Knocks: The Truth about Canada’s Franchise Industry, is an impressively researched look at the myriad of franchises that mushroomed across the country in the past decade. An award-winning magazine journalist, Lorinc has produced an engaging account that charts both the spectacular successes of some franchisers and the utter failure of some franchisees. How franchises seduce those with the most to lose, Jennifer Lanthier, November 2, 1997
  2. Globe and Mail: At its worst, Lorinc says, franchising is a haven for the unscrupulous who prey on the unwary – typically recent immigrants willing to labour long hours in dreary businesses, unaware that those operations have little chance of prospering – using them as pawns in a shadowy real estate game. Rather than reflecting an insatiable consumer demand, he inquires acidly, is it possible that all those new doughnut shops may reflect a quiet understanding between landlords and franchisors that the best way to fill fallow commercial property is to sell franchises to credulous investors? Franchise book of interest to anyone who pays taxes, Ann Finlayson, November 1, 1997

Finlayson strikes a cautionary note, specifically about the hinted at misuse of the Canada Small Business Financing programCSBFP:

Does all this matter to you? Yes, it does. In 1993, in the wake of vigorous complaints by small-business owners that Canadian banks were reluctant to finance them, Ottawa raised the ceiling on loans guaranteed by the Small Business Loans Administration to $250,000 and its guarantee rate from 85 per cent to 90 per cent, sparking a bank lending rush to franchisees and shifting the risk of franchise investments onto taxpayers’ (your) shoulders.

The Risk: Only a fraction of the Liars’ Loans are ever claimed by the banks, thereby grossly understating Industry Canada’s default statistics (Franchised v. Non-Franchised loan performance). The franchisee thinks he signed a government-backed loan but it never gets registered as such. As their bankruptcy, loss of life savings, marital and family breakdown escalate over the life of their 12 to 18 month franchise career, the franchisee NEVER looks to Box 9 of the CSBFP loan application form (Projected Sales ) as the source of their trouble; where the lie is put into the “Liars’ Loan”. The proceeds of these engineered-to-fail loans is split upfront by the franchise banker with the bank, banker, franchisor and sales agent. If questioned, the bank shreds the paperwork and waits for the lawsuit.

And, seriously, how many of these Immigrants as prey losers could or would ever sue a Schedule 1 chartered bank?

The Return: Smashing quarterly earnings goals, record profits, high turnover in the small business division of each of the banks, and making franchise lending the most lucrative form of commercial lending in Canada. Private gain/public loss enabled by a criminogenic environment, moral hazard, regulatory capture…

Lorinc carefully mentions the “windfall profits” in this arrangement of churning:

What’s more, some banks and franchisors have put the SBLA program [predecessor government guaranteed loan program] to questionable use during foreclosure actions against franchisees, says one former owner who has been through the process. When a bank calls a loan against a non-performing franchisee, the 90% guarantee effectively relieves the bank’s receiver from trying to get the best possible value while disposing of the owner’s assets. With most of the loan covered by the Canadian taxpayer, the assets – fixtures, kitchen equipment, inventory, etc. – can be sold quickly at a deep discount, possibly below market value. This allows the franchisor too step in and buy back the property at better-than-firesale prices, thus generating windfall profit when the store is later re-sold to another franchisee.

An important work that, depressingly, is as relevant in 2012 as it was in 1995.

______

Disclosure: My lol pecuniary interest here and here.


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]


Isn’t a resident 2nd opinion a waste of $ once you lawyer-up?

December 7, 2010

No: actually an independent business consultant is needed during legal action.

It is wise to avoid a franchise lawyer for at least a year (commercial, slander, etc. are fine). Lots of reasons but mostly groups need to mature and build trust before any professional can really help them. Leaders especially need a type of de-programming.

Franchisors understand one thing: power. In 2010, predators understand only actionable legal threats. There are therefore 2 stages: pre-first legal claim and post-first claim.

Pre-first Legal Claim: It takes 1 to 2 years and a one-time investment of $500,000 for a franchisee group to develop a susttainable independent franchisee association.

Only after that investment can you decide whether to sue your franchisor or not. No shortcuts: it takes time, experience and money. Most franchisees have never been in a group before and many choose to free ride on the dues paid by others. Frequently, only 10 to 15% of franchisees pay, while all of the benefits are distributed to 100% of the franchisees.

What happens most times is that the early professionals end up subsidizing the creation and early survival of the group. These are obligations or accounts receivable that consultants like me have accumulated over the years.

First Legal Claim: Once the legal card is played, the dynamics change. It has little to do with the honesty of the attorney: it’s just the way it is when their is such an imbalance of information between client and professional.

Every attorney is a credence good provider: their services are difficult to determine as far as quality and quantity are concerned.

Problem: The risk of low quality or excessive quantity of services is very real. Groups of franchisees are at the mercy of monop0ly legal service providers once the papers are filed (see The Price of Law: How the Market for Lawyers Distorts the Justice System).

The best solution is for the consultant to remain as a resident 2nd opinion during the life of the lawsuit.

What is fair compensation (accumulated A/R and ongoing services, who does what) should be determined in a transparent way before the writ flies. Not only is it fair to pay your obligations, it’ s being a long-term, shrewd businessperson.

Lawsuits should not be about franchisors paying out cents (now) and then clawing back $ (later).

The destruction of the independent franchisee association should not be an option on the table as settlement time happens. Its survival should not be acceptable under any terms.


Lawsuits are simply a sign that franchisees are maturing and choosing life

November 17, 2010

They’re learning to separate illusion from reality.

With proper protections in place, healthy people naturally choose reality (even when it hurts like hell) over fantasy, childish notions and denial.

It’s called being mentally healthy.

Other franchisees choose otherwise and get buried.

[Flavor Wire]


Want to Sue? Get an independent 2nd opinion

October 30, 2010

Wise in medicine. Critical in franchise law.

Independent consultants ensure their honesty from pre-trial evaluation (before 1st interview) to settlement.

Any CDN lawyer who can’t work with me is saying a lot about themselves.

Don’t trust in non-verifiable monopoly services.

TEST: How’s your one franchisor: one franchisee relationship working for you?


Do franchisee attorneys cheat at settlement time?

October 6, 2010

Attorneys provide services that economists classify as credence goods which are quite susceptible to fraud.

Franchisee attorneys sometimes act on their own self-interest because only the elites know the game and they mostly keep their mouths shut. After the confidentiality agreements are signed, there is very little danger of client complaints.

Here is one perspective on the U.S. Quiznos class action lawsuit settlement process that resonates.

If you were a conspiracy theorist, might you suspect something like…..

The lawyers for both sides colluded to end the case in a manner that got the franchisees nothing; cost the franchisor nothing other than its legal fees (because the debt written off was worthless anyway); the “benefits” to the franchisees are illusory and valuless; the judge would sign off on anything just to clear the case from his docket so long as he had some/any piece of paper in the record saying that the franchisees were getting real value; and they found a valuation “expert” with a degree in alchemy.

NAH! THEY WOULDN’T DO THAT.WOULD THEY?

Richard Solomon has over 40 years of franchise law experience in the United States and his Franchise Remedies site is an important resource.


Go ahead and choose your executioner: call a franchise expert

February 2, 2010

Rules of franchise groups:

1. A dead association is worth more than an alive one.

2. The owner of the logo pays someone else if they cannot execute themselves. The hooded one is either the charming outsider or the loud insider.

3. Franchise lawyering insists on a quick kill rather than a future, recurring cash flow/life cycle.

4. As an association executive, you’ll go along with the game or become a defendant.

5. A token truth added, infinitely strengthens the Big Lie.

6. 99.5% of visible U.S. independent franchisee associations are Potemkin villages (valuable to the status quo as franchisee false hope, example: FranchiseeAssociationManagement.com).

7. Leaders act as a doctor would because franchisees are in a type of daydream. Democracy is a noble concept but achievable only when debtors break their chains.

8. There is a narrow path but it requires patience, self-reliance, trust and one franchisee.

Call for a meeting.


Fiducia virorum in sinistra non in dextra est: A dead language for a dead legal specialty

September 7, 2009

ChimpanzeeAttorneyA McDonald’s USA CEO once described Micky D’s as a “real estate company with an interest in fast food”.

Being a lawyer within the franchise bar is 1 per cent law and 99% cash flow.

They are profit maximizing agents with marketing masks called: franchisor or franchisee. Technically, the franchise bar is a credence good group service providers which act in a coordinated manner to guard their monopoly on this self-defined subspecialty.

Litigation in franchising is a joke. A play.

A psychodrama for the newly aware. Graduate degree in post-modern amoral cynicism.

Franchisors pay 95% of all legal fees in the franchise industry.

The idea of a fighting chance (or fair dinkum as my AUS friends would say) is a farce.

farce n. 1 a a coarsely comic dramatic work based on ludicrously improbable events. b this branch of drama. 2 absurdly futile proceedings; pretense, mockery. [French, originally = stuffing, from Old French farsir from Latin, farcire, to stuff, used metaphorically of interludes, etc.] Oxford Canadian Dictionary

I watched up-close for 11 years these “titans of industry”.  They are very charming and knowledgeable and while good individuals by any measure, collectively are the greatest brake on any true industry reform because the cash flow:work combustion ratio is, in the short term, so rich.

They quote latin because their communication is meant to intimidate and close off understanding.

I don’t seem to have any commercial relationships with even the ones that insist that they are the Original White Knight franchisee lawyers. No shared clients. No emails. No free lunches. No fee sharing.

Not even Christmas cards anymore.

— Latin Proverb: Real men don’t attack


Being Charmed is okay: Just don’t think franchise Justice means going to Courts of Law

August 23, 2009

SnakeCharmerI have liked, personally, almost every franchise attorney I have ever met.

They are smart, really hardworking and funny as hell.

  • Unfortunately, what they have to do to make a living in the franchise industry, is problematic.

The fundamental problems are twofold:

1. Lawyers are credence good providers: franchisees never know if their services are really needed and if what they provided for services was of a reasonable quality. This is the advocacy service element that can be abused by cheating (bill padding, extra bills at settlement time, etc.).

2. They are gatekeepers to the Courts. Courts in Canada, U.S., Australia, etc. are not corrupt or unsympathetic. Courts are simply incapable of resolving franchising disputes.

Courts are too coarse a filter for franchise problems.

The contracts have specific provisions that CANNOT be trumped by general, ill-defined terms such as “fair dealings”, “good faith” or “commercial reasonableness.”

I have had word sent to me from a few Ontario Superior Court justices over the years. They know precisely the meat grinder that their courts make of franchisees but they are are incapable of doing anything about it. All experienced court officials know that the likelihood of a mom-and-pop franchisee of surviving pre-trial, trial, appeal, etc. is slim to none:

  • in a sense, it is kinder for the Courts to put the franchisee out of his or her misery quickly at Trial.

Smart lawyers work with franchisee associations but those are few in number and notoriously difficult to organize and run, especially in Canada. Help is needed but lawyering up first, sends the very wrong first impression to your franchisor. Be ready, build a multi-1,000$ reserve fund but jumping into a 100% legal approach (a monopoly information relationship) is not wise.

The best solution is to have 2 or 3 lawyers working for an association for discrete projects. One project might be analyzing agreements, another litigation, maybe a corporate guy.

The goal is to separate the what you should do into two areas:

  1. diagnosis (you have a business problem with legal considerations not the other way around) and
  2. implementation (co-op buying group, political action, publicity, supplier or banker relationships,.

By keeping these two distinctions, there is much less risk of a lawyer maneuvering you into a litigation (billable hours) stance or cheating.

This may sound extreme: It is better to have zero lawyers, if you can’t afford  three of them.

I may be as charming but I am extremely accurate in my observations although they run counter to the industry’s conventional wisdom.

To do:

  1. Talk to 2 or 3 other franchisees (avoid the hotheads),
  2. read some of the stories on WikiFranchise.org (so it couldn’t happen to you, then?),
  3. start with the cost of goods you’re forced to buy through your franchisor (see your royalty & ad fund %? Normally, at least that number of $ is packed onto hidden margins on product, renovations, equipment, training, fees, fines, etc.)
  4. work quietly; like a duck: calm on surface but paddling like hell underneath, but most importantly.
  5. rebuild trust in yourself and your core group (bring in the partners from Day 1 as key change agents).

If you can sustain this group for 3 months, you should contact me for a free telephone talk. WordPress weblogs are great and here are some links to some excellent examples but they can blow up in your face without proper preparation. Even 3 of 4 of you have much, much more influence than you ever think you do but your power must be used properly.

I always let you know very quickly if I can help you or not.


Litigation group: Lawyer-led franchisee groups

August 2, 2009

TreasureChestI’ d like to discuss  an email I recieved this week.

Seems a Canadian restaurant franchise system (30 stores) is trying to organize themselves. I was emailed with the information that there is a meeting happening in 2 weeks and was wondering if I wanted to attend?

In a word: no.

The clincher was that the franchisee’s lawyer was “helping” them organize themselves, presumably under the pretense of affecting “change”.

The only change is usually what is left once the hat is passed to build a “war chest”.

I tend to leave these types of groups well enough alone.

The professional is most-likely creating a litigation group (a fundraising mechanism for a lawsuit) rather than a sustainable franchisee group like an IndFA, let along an Attorneyless Franchisee Network, AFN that harnesses the exponential group power in something like a buying group.

I sent along some links to this very nice lady that should show a +10 year history of predatory franchisor actions by her head office and that I knew what I was talking about.

  • Very few lawyers choose to work with me.
  • In 10 years of being available to help franchisee groups, make that 3 different ones.
  • I develop the case. Deliver it in a bow and soon: Thanks but “why is Les still around?”.

Maybe read what Canadian-born law and economics professor Gillian K. Hadfield has to say about the business of law before you hop into a much more difficult credence good relationship (than a franchisee:franchisor one)?

I wish the restaurant group all the best but I would suggest that they also write out their own narratives and consider submitting them to WikiFranchise.org. At least they could do is to send up a signal to the next wave of investors.

I tend to leave the door open but have learned to ask for payment in advance for 2nd opinions.

Really nice people in difficult times tend to choose the wrong people to trust.

I know. I did.


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