Les, you’ve been a disappointment.

An outstanding observation after 4 years of work with a franchisee association.

Generally speaking, espionage offers each spy an opportunity to go crazy in a way he finds irresistible. Kurt Vonnegut Jr. 1922 – 2007

Incentives favour franchisee attorneys defecting from their clients’ interests

The good grasp of the academic disciple of Law and Economics is necessary in understanding franchising.

Economics is (almost) all about incentives: A highly unified profession, serving a highly centralized, tightly disciplined franchisor-dominant industry  would lead the observer to predict very high levels of attorney-generated opportunism (self-interest + deceit) at the expense of their clients: individuals and groups of franchisees. The rational lawyer defects because that decision makes the best of a highly imperfect information situation.  The new franchisee bar member quickly realizes that economic survival depends on his or her obedience as a gatekeeper for the “team”, in stark contrast to a Canadian justice system that is more and more sympathetic to franchisee arguments.

Hadfield is required reading for franchisees considering contracting for such high-risk legal services (credence goods).

The Price of Law: How the Market for Lawyers Distorts the Justice System

Gillian Hadfield
USC Law School and Department of Economics
October 1999
Michigan Law Review, Vol. 98, No. 4, 2000

Abstract:
This paper begins with the question, Why do lawyers cost so much? The analysis is an investigation of the imperfections in the market for lawyers, imperfections that have been largely overlooked by focus on either the model of perfect competition or the impact of artificial barriers to entry into the provision of legal services. The paper catalogues multiple sources of imperfection: the nature of the incentives and mechanisms at work to determine the level of complexity in the system; the extent to which complexity and uncertainty make legal services into credence goods par exellence; the winner-take-all and tournament nature of the competition among lawyers; the sunk costs of lawyer-client relationships and hence the potential for opportunism and the limited potential for conventional market mechanisms to control opportunism; the incremental nature of legal fees–which structures legal expenditures as a sunk cost auction in which the cost of services can easily and rationally exceed the amount at stake; and three sources of monopoly–the familiar monopoly established by artificial barriers to entry, the “natural” monopoly arising from the limited supply of individuals in the economy with the cognitive skills necessary to engage effectively in competitive legal reasoning, and the state’s monopoly over coercive dispute resolution.

The analysis uncovers deeply disturbing implications for justice from the economics of the market for lawyers. The price dynamics of the system operate within the framework of a unified profession/unified legal system that essentially puts individual clients–with justice interests at stake–into a bidding contest with corporate clients with efficiency (more generally, market) interests at stake. Corporations by definition are aggregations of individual wealth and, as a consequence, are able to bid for the resources; they also are a richer feeding ground for the wealth extraction generated by the imperfections/monopoly aspects of the market for lawyers. This is not an ethical critique of lawyers; it is the implication of ordinary economic response to incentives structured by a non-competitive market.

The economic dynamics of the market for lawyers operate like a vacuum, drawing the resources of the system into the corporate sphere, in the service (from a public perspective) of efficiency, and away from the individual sphere, in the service of justice as in the relationships between the individual and the state, the market, the family, the community and so on. This stands on its head the lexicographic relationship between efficiency and justice: efficiency is of normative significance only to the extent it promotes individual welfare through just social relations.

The implications of the economic analysis in the paper are supported by the empirical evidence we have about the structure of the legal profession and the changes over the past several decades. The profession is roughly divided into two segments–one serving business clients and one serving individual clients. The business segment is populated by lawyers who graduated from elite institutions, who are well-connected and influential in the profession, who charge high fees and earn high incomes, and who are perceived to be in short supply. These lawyers work in large firms or high-end boutiques and are increasingly likely to be specialized. Their work is perceived to be of the highest level of prestige by all members of the profession. The personal segment is populated by lawyers who graduate from lower-tier schools, charge lower fees and often flat fees set in apparently competitive fashion providing largely routine, non-contested legal services such as house closings, uncontested divorces and wills. Their work is perceived, by them and the rest of the profession, as low prestige. Lawyers in this segment tend to work in solo practice or small general practice firms. The supply of lawyers in this segment is perceived to exceed demand, and there is evidence of un/underemployment and falling prices.

The allocation of total hours spent by lawyers on legal work is increasingly skewed towards the business segment of the profession, and thus towards the efficiency and away from the individual justice goals of the justice system. [my emphasis]

Number of Pages in PDF File: 84

Accepted Paper Series

Download from SSRN here.

 

Reebok, adidas franchisees take protests into India’s streets

It is not hard to understand what this is all about: franchisees in any language are the least likely 99% protesters in the world.

1. Franchisees protest at company’s doorstep, Business Standard, Aughust 31, 2012:

Excerpt:

The tussle between a section of Reebok franchisees and German sports-goods maker Adidas took an ugly turn today, with about 100 people protesting at the gates of the company’s headquarters in Gurgaon.

The franchisees from the National Capital Region (NCR) were protesting against the new terms proposed by the German sports goods major for operating stores in India. The company had given an ultimatum to about 70 franchisees in the NCR region to either accept the new terms, or shut shop by August 31.

Together, these franchisees operate about 125 Reebok stores in the NCR region. The franchisees, who have formed a consortium called Delhi Reebok Franchisee Association, say the new terms and conditions aren’t viable. These terms seek to do away with the minimum guarantee (MG) model the franchisees were operating on so far. Under the MG model, franchisees were assured a minimum amount from the company, irrespective of sales. It was because of this model Reebok was able to set up about 900 stores in 325 cities and towns, becoming the largest sports-wear brand in India.

2. Reebok’s Delhi franchisees cry foul over notice to close shop, SmartInvestor.In, August 26, 2012

“Now they are asking us to close the shop in just 15 days. They are saying that once the goods are transferred, it is our responsibility,” Delhi Reebok Franchisee Association spokesperson told PTI.

The franchisees claimed that they received notices from Reebok India’s parent Adidas Group on August 13 for closing down their stores by August 31 if they do not accept the new terms of the agreement.

“They are purely holding us on ransom and are not ready to settle our claims at all,” they alleged.

And…

In May this year, Reebok India had filed an FIR, alleging that its former Managing Director Subhinder Singh Prem and Chief Operating Officer Vishnu Bhagat were involved in a Rs 870-crore fraud by indulging in “criminal conspiracy” and “fraudulent” practices over a period of time.

Currently, Serious Fraud Investigation Office and the Income Tax Department are probing the alleged financial irregularities in Reebok India Company.

Salad Creations Canada: two time award-winning CFA franchisor?

Salad Creations Canada and the Canadian Franchise Association (CFA):

birds of a feather flock together.

Franchise lenders are swill

Some systems hardly have any franchisee debt.

This is particularly true of ones that converted employees to franchisees.

That changes once franchisors listen to their bankers explain how much they both can make (ie. interest kickbacks) if they leverage as many franchisees to the teats.

The primary control method of newer (maybe more formally educated?) franchisees is debt. Hundreds of thousands of supportable debt, if the franchisor who controls their gross margins, lets them service their debt.

It’s ugly:

1. prime plus 5% (“love to give a better rate but it’s unsecured, don’t you know“),
2. immediately callable (demand loan = short leash),
3. plus personal guarantees up the wazzo (“just need the missus to okay the paperwork…“), but
4. secured by NOTHING but the franchisor”s “good faith” (ok as long as the present management stays put but all deals are off if…).

If you want to unlock the chains, start asking your “preferred” lender some questions (on a public blog, btw) about their lending duty under the Bank Act.

Franchise bankers: a breed apart.

A little more sensitive than you run-of-the-mill doofus franchisor: don’t like being fingered for loan pushing, collusion or predatory franchise lending.

• Franchising Opportunism, Les Stewart

Franchisees can regain the Hope that may have been driven out

Bad habits need to be unlearned.

In my experience, it takes 18 months for franchisees’ families to re-build interpersonal trust and faith enough to really become effective.

1. Patience is the art of hoping.
2. All human wisdom is summed up in two words – wait and hope
3. Patience is the companion of wisdom.
4. The two most powerful warriors are patience and time.
5. Have patience with all things, but chiefly have patience with yourself.

It’s too bad that most groups are sabotaged by their franchise bar lawyer before they reach that stage.

The time can be compressed if the partners get involved.

Patience is a virtue,

Possess it if you can,

Seldom found in woman,

Never found in man

Freedom’s just another word for nothin’ left to lose

Funny how freedom starts when you serve someone else.

Just starting to learn some things. On a good day [yesterday wasn’t].

One thing I know: if Kris Kristofferson comes to my door asking to take Terry away, our marriage is over.

Hard to accept but there you have it. 😦

25 years with my best friend.

I wouldn’t blame her if she went.

Life’ll kill you.

Me and Bobby McGee, The Highwaymen

Busted flat in Baton Rouge, headin’ for the trains,
Feelin’ nearly faded as my jeans.
Bobby thumbed a diesel down just before it rained,
Took us all the way to New Orleans.
Took my harpoon out of my dirty red bandana
And was blowin’ sad while Bobby sang the blues,
With them windshield wipers slappin’ time and
Bobby clappin’ hands we finally sang up every song
That driver knew.

Freedom’s just another word for nothin’ left to lose,
And nothin” aint worth nothin’ but it’s free,
Feelin’ good was easy, Lord, when Bobby sang the blues,
And buddy, that was good enough for me,
Good enough for me and my Bobby McGee.

From the coalmines of Kentucky to the California sun,
Bobby shared the secrets of my soul,
Standin’ right beside me through everythin’ I done,
And every night she kept me from the cold.
The somewhere near Salinas, Lord, I let her slip away,
She was lookin’ for the home I hope she’ll find,
Well I’d trade all my tomorrows for a single yesterday,
Holdin’ Bobby’s body close to mine.

Freedom’s just another word for nothin’ left to lose,
And nothin’ ain’t was all she left to me,
Feelin’ good was easy, Lord, when Bobby sang the blues,
And buddy, that was good enough for me.
Good enough for me and Bobby McGee.

Is a Franchisee of less value than a calf?

It seems that way.

When franchisees fail, many other people take a hit, too.

Some of these externalized losses are:

• employees (wages, severance),
• customer prepaid deposits (goods & services),
• federal income & sales taxes,
• workers’ compensation payables,
• provincial sales tax remittances,
• electrical utilities,
• product and equipment suppliers,
• landlords,
• banks,
• relatives (love money), etc.

These over-and-above the direct devastation on the franchisees’ financial, relationship and physical health must reach into the multiple millions of $ every year.

Where’s the Beef?: In Canada, every young cow is tagged as they leave their herd of origin.

This is a very good thing because if you don’t track potential problems, you can never solve them.

Are Franchisees Tracked?: Nope: 0 per cent. Not one of 76,000: Anywhere.

No one (other than their franchisors) knows when a franchisee becomes ill and dies. They stay fairly tight-lipped about those numbers. Four of the provincial governments that have specific franchise laws, don’t care enough to compel the industry to track their own investors in any independent way. Same in the U.S.

No one cares about the health or sickness of 40% of retail sales. A Canadian industry with:

1. 76,000 mostly family investors,
2. 760,000 to 1,140,000 employees,
3. $90 billion annual sales, and
4. a staggering $3.8 – 15.2 billion invested (mostly franchisees’ $).

Source

People and industries keep track and count what they value.

Once signed, your life holds no interest to any steakholder.

Other than the bankruptcy trustees.

Will GM dealers continue to lose at the Blame Game?

The way things are going,  the answer seems to be a resounding “yes”.

In an important Blue MauMau article, Texas-based legal veteran Richard Solomon asks what will be The New General Motors Franchise Model?

He defines the background:

For many years, GM dealers have, through sound business practices, made fortunes for themselves and their families. During this period, the anything but professional grade people at GM have watched the dealers thrive while they frittered away the revenue at their end through sloth and ineptitude. Up to now the GM management philosophy has been “God will provide.”

They are wrong. God does not reward sloth and ineptitude. General Motors is in bankruptcy. It is now announcing a new dealership franchise model. These are the same people who brought the company to its current circumstances. They believe that the dealers have been stealing from them and that dealer opportunism is to blame for the current circumstances, not their stupidity.

So after blaming their employees, GM is turns to blame their next-least vulnerable partner: their dealers.

Richard, as usual, spells the challenge out clearly:

Will the GM dealers spot that this is what is in store for them? Will they just sign on the dotted line and march into franchise financial hell as did the franchisees of so many other franchise systems?

In the past, auto dealers were in a privileged position.

Now, unless they act, they’ll be just like the other pathetic business format franchisees that inhabit the twilight pizza, coffee and dog poo-picking up industries.

• This is precisely the challenge that the Canadian grocers failed at historically.

Without resistance, this fate is in store not only to GM and Chrysler, but to all of the auto dealers.

1. Dealer opportunism (defined as self-interest with deceit) as the primary problem when compared to manufacturer/franchisor incompetence?

That the dealers let the public/shareholders believe this nonsense is beyond belief.

man smart, Women Smarter: Defining franchisee illness

When I was growing up, no one knew about eating disorders as a class of medical problems.

It was only through the suffering of many (mostly women) that society and the medical establishment has recognized things like bulemia nervosa and anorexia nervosa.

Karen Carpenter raised awareness by her death at age 32. Many psychiatric conditions are left untreated, women disproportionally between the two genders. You cannot treat a cluster of behaviours until it is defined.

I believe franchising failures are such a powerful, life-altering  force that it not only can, but predictably does, trigger serious illness.

The human body and psyche has limits and when those are exceeded, the mind/body systems deteriorate. These affects are usually acted out through major relationships as well as lack of sleep, danger to self/others, occupational adjustment problems, etc.

I have seen many franchise people who have had to deal with depression, violence and suicide.  I think the answer is to organize into a form of geographically-based chapters to keep touch with each other.

I think women are strong enough to do this type of work although I recognize that there are male partners that can help too. Everyone is busy but I think like other traumas, it’s often better dealt with in a peer-to-peer mode.

This is why I think a Partners in Franchising chapter should be formed.

Every human being requires security of person and a minimum economic stability. Without those basic conditions, your mental and physical health is damaged.

To be maintain mental health, you need:

1. a job,
2. a home and
3. a friend.

Only the generous know that the helper receives much more than the “weaker one”. We regain our strength by helping others heal.

That’s how we are wired as humans. Only the deluded and those that profit from misery think otherwise.

Man Smart, Woman Smarter, Carpenters

Let us put man and woman together
And see which one is smarter
Some say men but I say no
The women got the men like a puppet show

Aint me, its the people they say
The men are leading the women astray
But I say, its the women today
Are smarter than the men in every way
Thats right! the women are smarter
Thats right! the women are smarter

A little boy sat down and cried
An old man passing asked him why
He said I cant do what the big boys do
Old man sat down and he cried, too

Repeat 2 x