Bothams WA Inquiry Sees no Evil…

April 30, 2008

Chris Bothams released his final report this week entitled: “Inquiry into the Operation of Franchise Businesses in Western Australia”.

You judge for yourself: How close to your experience is it? (free download).

Pro:

  1. a national franchisor registration would be nice (including the sunk cost-captured franchisees, of course), and
  2. make proposed government-submitted disclosure documents accessible on the internet (just like Caleasi in California is now).

Con:

  1. it is +30 years behind the times,
  2. potentially misleading, and
  3. mostly irrelevant.

As far as intellectual rigour goes, let’s compare Botham’s report to a Canadian report. In 1971 Samuel Grange who retired as an Ontario Appeal Court justice, said this about franchising:

Throughout the evidence it was a recurring complaint that the franchisee is constantly plagued with the threat of termination of the franchise…

Further…

…the franchisee has invariably invested time and money, and he knows that he will lose it all if the franchise comes to an end. Naturally, he is prepared to be servile, and if not, he is generally not long for the franchise family. p. 40 [my emphasis] [Grange Report full monty]

Unlike Mr. Bothams, Grange did his insightful work without the benefit of reading Gillian K. Hadfield’s work, especially Problematic Relations: Franchising and Law of Incomplete Contracts [BTW: 49 of the most important pages ever written about franchising].

Mr. Bothams ignores the unique vulnerability that franchise investors suffer from (vis-a-vis independent business):

Franchisees own the unit’s assets but their life savings are controlled by someone else (the franchisor).

This ownership/control separation is makes the relationship totally unique.

The franchisor can further use their 101 discretionary powers to further strip time and money from the investor during the course of their relationship.

To mention only once and in an extremely narrow reference, the central fact of franchisor opportunism, suggest the inherent bias of this report.

My Contributions: Please also note on page 68 (Appendix 3: List of Submissions), Number 2: Les Stewart Consulting. That’s me. For what it is worth, I sent the most current, internationally recognized academic research to Mr. Bothams’s office.

This report goes out under his signature to Minister Margaret Quirk. My guess it will quickly sink out of sight.

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Let’s face it: You’re an idiot

April 29, 2008

Not about everything, mind you, but about buying a franchise.

If you think you can perform due diligence that substantially reduces your risk of failure you are Unskilled and Unaware (read the paper to find out).

People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. [my emphasis}

Okay…so everyone but you, right? Right….

  1. If you are in an economic relationship to anyone thinking of buying a franchise (ie. spouse, boy/girlfriend, mother, father, brother etc.) you, by proxy, are also an idiot.

But that’s okay: I’m an idiot too. And it seems recent psychological research suggests many others have problems making rational decisions.

I was a franchisee and have learned why due diligence will not prevent the cancer of franchisor opportunism (definition: franchisors using their discretion within their contract to strip value from a “trapped” franchise.) Franchisees are trapped because they cannot get their investments out without losing almost all its value (sunk costs).

Citation
Kruger, Justin and Dunning, David, “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments”, Journal of Personality and Social Psychology, 1999, Vol 77, No. 6, 1121-1134, Free download from apa.org


Franchisee Dispute Life Cycle

April 10, 2008

Business is dog-eat-dog alright.

But, to quote a friend, franchising is dog-eat-goldfish.

If you thought you had any chance when you signed up, you quickly learn you are heavily outgunned.

Franchisees that do not achieve their financial goals go through 4 stages:

  1. They’re happy and continue to pay.
  2. They are unhappy and want some remedy.
  3. The realize their adversaries are a great deal stronger than they could hope to imagine (ie. the Industry’s Defense Mechanism responds) and then
  4. They abandon their claim.

Industry Defense Mechanism

Modern franchising is a complex, extremely profitable and multi-party machine. The illusion is that you have a single (one-on-one) relationship with a specific franchisor.

Nothing could be further from the truth.

You will be directly opposed by the following extremely powerful aligned interests:

  • franchise bar (95% fees paid by franchisors),
  • franchisor associations (controlled only by franchisors),
  • financial institutions (national service program),
  • salespeople (agents/brokers deal special deals) and
  • bankruptcy trustees (mop up, cover everyone’s tracks).

In addition, indirectly, your efforts will be opposed by:

  • politicians (responsive to contributors)
  • regulators (no effective franchisee voice)
  • media (will only scratch the surface) and
  • product franchisors (the auto, oil and grocery interests).

All direct and indirect resistance is amplified on an international, national and state level. For instance, the American Bar Association will support the heavily franchisor-influenced franchise bar in opposition to franchisee investors.

It is very unlikely that you will ever even get to the Courthouse steps.

BTW: This is why predatory franchising (intentional non-sustainable business investment models) is on the RISE: The odds are stacked too much in one party’s favour.

Please download this 1 page .pdf diagram of the Franchisee Dispute Life Cycle and give it some thought.

Your comments are welcomed and by all means share.


Books and articles

April 10, 2008

I have been very lucky to work through the extremes of franchising: hope, struggle, dispute, legal fight, bankruptcy and recovery. Many individuals have been important but I have gained a new appreciation for the use of trying to study your way out of corner.

Please click here for a free .pdf of my current list of the books and academic papers that have been useful to me. Initially, some of the 13 pages or so might seem a little bit off-topic but they are important in some way. To me at least.

If you have any suggestions, speak up! I’d love to hear from you.

There are some not listed that I have read and promptly burned.

BTW: The photograph is Barrie Public Library and it was built in 1915 with a promise of $15,000 from Andrew Carnegie. It was my first library and it has since been converted to a public art gallery.

Libraries have always been an important part of my life.


Regulatory Capture in Banking, Hardy

April 3, 2008

IMF Working PapersThis is an important paper in understanding the role of financial institutions in a modern economy. It introduces several key concepts.

Regulatory capture: the regulated controls the regulator.

Banks will want to influence the bank regulator to favor their interests, and they typically have the means to do so.

Further, financial service providers pose a natural hazard to their customers and the public:

Finance and in particular banking is necessarily characterized by asymmetric information between banks and their clients, and by systemic effects. Moreover, risk is an inherent feature of the industry. Confidence effects among banks and between banks and their creditors create various form of externality.

In the extreme, banks can reap the benefits of predatory lending while pushing off the costs associated with this type of behavior on other customers or the public.

Regulatory capture, externalities, asymmetrical information., fraudulent expert credence good providers..these all be introduced as I try to explain the mechanisms of that drives modern franchising and the financial sector that enables its actions.

Citation
Hardy, Daniel C., “Regulatory Capture in Banking” (January 2006). IMF Working Paper No. 06/34, 26 pages, Free download from ssrn.org


Suing a Bank (2)

April 1, 2008

In 2006, a client brought legal action against a very large Canadian chartered bank, franchisor, sales agents and bank employee.

Click here to download a copy of the Statement of Claim.

In 2005, I wrote a paper called Franchising Opportunism for Industry Canada the administrator of a small business loan program called the Canada Small Business Financing Program.

In this paper, I defined a term called Predatory Franchise Lending as well as explaining the basic mechanism of modern franchising.

Click here to download a free copy of Franchising Opportunism.


Suing a Bank (1)

April 1, 2008

In Nov 2006, Justice D. Brown, an Ontario (Canada) Superior Court of Justice ruled on a pre-trial motion brought by a Canadian chartered bank defendant which is involved in a lawsuit.

The nature of the allegations are:

[1] This action involves claims arising from the failure of a Country Style franchise. Andralex Food Services Inc. (“Andralex”), the franchisee, sues the franchisor, [franchisor], and related companies, a consultant, [salesperson], and the lender of funds to the franchisee, the [bank]. Claims are also asserted against [loan officer], a Senior Small Business Banking Officer with the [bank].

Further…

[2] In its Statement of Claim Andralex advances several types of allegations against the [bank] and [loan officer]

  1. negligence and breach of a duty of care allegedly owed to the plaintiff;
  2. breach of a fiduciary duty allegedly owed to the plaintiff;
  3. negligent misrepresentation, including breaches of the Competition Act; and,
  4. conspiracy with all the other defendants “to use unlawful means directed against the Plaintiff, knowing in the circumstances that the Plaintiff would suffer irreparable harm”…

From what I can understand as a non-lawyer, the bank wanted two things struck from the lawsuit:

  1. the claims against its former employee in her personal capacity; and
  2. the claims of conspiracy against the bank and its employee.

The Justice said yes to #1 but no to #2. The lawsuit continues, I understand.

To download a copy of the Endorsement, click here.


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