Designing a win in franchising isn’t that hard.
Ontario’s 35,000 lawyers should consider themselves warned.This is not just outstanding peer-to-peer legal advice (which it is: both carrot and stick) but it’s also crucial information for all current Canadian franchise investors.
The benefit of collective franchisee action has never been more justified.
Sterns’ bottom-line advice to lawyers? (especially general attorneys):
The harsh reality is that some franchises have a failure rate as high as or even higher than non-franchised businesses. When the franchised business fails, the results are often catastrophic for the franchisee. The legal advice provided by the reviewing lawyer will come under close scrutiny, particularly if the franchisee misses the rescission window because it was unaware of its rights…
Lawyers should allocate sufficient time and charge a sufficient fee to permit a proper document review and reporting to the client. Otherwise, they should decline the retainer.
Lots of implications for the general and franchise Ontario bar.
But, hey, huge importance for the 40,000 ON investors in a current franchise relationships who are organized. Disclosure requirements are not just for the entering but whenever a material change happens to the relationship (ie. during, at renewal: any time a material or “significant” franchisor decision is made).
Did you get proper disclosure documents the last time your franchisor decided to change the rules in the middle of the game?
These are the business risks I assigned and that appear in the WikiFranchise.org entry:
- Arthur Wishart Act (Franchise Disclosure), 2000, Canada,
- Buying an existing outlet even riskier than from scratch,
- Courts extremely picky about shoddy disclosure practices,
- Disclosure documents are deficient,
- Disclosure document: one, bound and delivered at the same time,
- Disclosure document certificate,
- Disclosure document must disclose all material facts,
- Disclosure document must include third party contracts (suppliers),
- Disclosure documents never given,
- Disclosure documents not given within proper timeframe,
- Duty of care,
- Franchise law being ignored,
- Independent businesses survive longer than franchised ones,
- Independent businesses much higher profit than franchised ones,
- Lawyer alert: advise only prospects with adequate legal due diligence budgets or risk being sued,
- Lawyers being threatened with lawsuits for speaking out,
- Material facts were not disclosed,
- Outstanding advice,
- Professional negligence,
- Refuses to take client,
- Sue the lawyer,
- Unintentional or hidden franchises
This is an important article that I will visit again.
He has become obsessed with books of chivalry, and believes their every word to be true, despite the fact that many of the events in them are clearly impossible.
Quixano eventually appears to other people to have lost his mind from little sleep and food and because of so much reading. Wikipedia
Too much sanity may be madness. And maddest of all, to see life as it is and not as it should be!
Fortune leaves always some door open to come at a remedy.
For if he like a madman lived,
At least he like a wise one died.
- lower cost per unit delivered,
- frees up capital spending,
- avoids labour laws/costs,
- a compliant sunk cost-captured labour pool (day labourers?), etc.
But franchising your delivery system can be a double-edged sword: potentially, you lose all capacity to distribute your product in both the short- and long-term.
I’m not talking about any hostile franchisee action here.
Franchisors that too quickly dismantle their key business strategy (ie. the actual physical delivery of product to meet the end customers’ expectations) are leaving themselves extremely vulnerable.
- This danger is heightened the shorter the production/destruction cycle of the product is.
- Products with a very short life make a franchisor more vulnerable to delivery disruption because there is very little room for emergency delivery.
A wise franchisor executive should treat franchisees as the true experts they are in their fields: direct customer problem-solvers.
Professionals in thievery and business behave in a very similar manner.
Only a tiny percentage of thieves are recognized and view themselves as being professional: full time, rational and consistent planning.
The most prestigious of theft rackets is The Grift or Con games. The Grift requires cooperation among specialists.
The working group of professional thieves is known as a mob, troop, or outfit. The number of members in a mob is determined in part by the racket which is being hustled, in part by the angles which are being played, and in part by the circumstances and situations…Sometimes a large number of thieves work together in a loose organization in the more elaborate confidence games, using a common pay-off joint or big store (fake gambling club or brokerage office.) p. 27
For any group to function productively, certain rules need to be known and obeyed. This discipline is generally higher than in straight business because of the extralegal nature of some of their work.
The mob has many codes, rules, and understandings, most of which are so general that they apply to the whole profession as well as to a particular mob. p. 35
I understand (from books alone) that they are:
- gains are divided equally (although, different for different roles),
- all payouts must be paid from the net take (expenses [or nut] first deducted from gross take),
- all loans must be repaid from the group’s first fruits (rigidly enforced),
- everyone shares in the profit or loss (good or bad),
- the fall-dough (shared cash) is used to protect any member of the mob,
- each member must deal honestly with each other (burning someone is a almost unthinkable, lying is considered more serious than in straight business),
- if someone leaves the mob, he must ask to be taken back (type of social norm or professional consideration),
- a member of the mob is not responsible for things outside of his control (appreciation for the role of randomness and luck),
- a mob member should not cut in on another member’s area of responsibility (reflects negatively on the competence of the “helped” member), and
- it’s “the responsibility of every member of the mob to do everything possible to fix a case for any member of the mob if the pinch [arrest, exposure] occurred in connection with mob activities.” p. 38
In addition to their specialized skills, a professional thief must have a more general capability called larceny sense.
Larceny Sense: This term is applied to the thief just as the term “business sense” is applied to the business man. It is an ability to deal with unusual situations in the best possible manner and is acquired in the course of experience. Every thief with good larceny sense will try to figure out every eventuality in taking off a touch. Some thieves are considered to have no larceny sense, while others have plenty of it.
Quotations Source: The Professional Thief, Chapter 2: The Mob, The University of Chicago, 1937 [my emphasis]
Franchise marketing, for some systems, has evolved into a specialized, highly secretive applied fraud. Each trademark system has a number of 3 or 4 professionals working to sell and resell franchises that are designed to fail for the investor.
There is no boss per se within the group. Because the work is underground, there is little documentation available.
If there is a boss in the traditional sense, it would be the banker in head office who are within the small business lending division. These Franchise Bankers (one bank per franchise system) work very closely with the franchisor for their direct lending needs as well as setting up extremely lucrative service contracts for their franchisees (current accounts, merchant accounts, etc.).
In 2000, I interviewed Dan Farmer of the Royal Bank of Canada. He stated that franchise lending was “the most lucrative form of commercial lending there is”.
Roles & Functions
- mark (potential franchisee),
- sales agent (initial contact with mark, as the outsideman he steers marks to the mob’s preferred trademark; they are sometimes nominally independent, sometimes internal; also-known-as: consultants, franchise brokers),
- franchisor contact (initially charming, aura of success, kept at arm’s-length until the loan proceeds are advanced and removed from mark’s current account), and
- lender (specific bank official, specific bank branch: a high-risk, 24-hour turnaround on government guaranteed loans).
In their function as lenders, bank officers owe their borrowers a legal duty to perform lender’s due diligence. They are prohibited by law from creating debt instruments that they knew or should be reasonably be expected to know would be unsustainable or result in the borrower’s financial ruin. In Canada, the relevant statutes are the Bank Act and the Canada Small Business Financing Act and Regulations.
- Banks and bank officers are not being held accountable because these arrangements, although highly exploitable, provide substantial profits to the franchise bar, franchisors, etc. Canada has a well-known reputation for harbouring white-collar criminals.
- This, however, is very, very fertile litigation soil for outside law firms that can know what questions to ask.
That I am a 1/3 partner in only one active lawsuit, speaks not to the rarity of the fraud but to my restraint and patience for the cleanup to happen. In 2005, we had identified over 12 potential lawsuits involving just one franchise system, bank pairing.
Additional information on Predatory Franchise Lending and my recommendations to stop such abuse, can be found by in a paper I wrote to Industry Canada in 2005 called Franchising Opportunism: Deceit to secrsy confind. [Predatory Lending, IC Feb 2005]