They think they’re Owners: Why franchisees delay in bailing

December 30, 2008

Franchisees stay in money-losing operations much too long because they make a fundamental error (own versus rent).

They see themselves as “owners” of their business, while in fact, they are conditional renters of trademarks and an operating system.

  • This makes them overvalue their investment and continue to invest much, much more of their own personal identity in the business.
  • This is particularly true because the new renter is much less likely to share in that inflated worth.

This mismatch makes a negotiated sale much less possible, without adding in all the self-interest and network issues that the franchisor can bring to the table.

This video from Dan Ariely (Predictably Irrational) shows some research that was done that tends to support my conclusion. Summary:

  1. owners (sellers) would sell at $1,400, while the
  2. buyers valued the tickets at only $170.

Those that thought they were an owner, inflated their value by 8.2 times the market value.


Madoff investor takes own life

December 24, 2008

reneI know very little about hedge funds and how they are managed.

I do, however,  have some experience in dealing with people who are confused, suffering from temporary distorted thinking and have had their confidence in themselves profoundly shaken.

Fraud is primarily a violent attack on the victim’s identity and his core belief in the predictability, if not fairness, of his world. No one I have known lists economic loss as even a minor consideration, if they come out of the valley. Excuse me for  suspending  judgment as I remember those that didn’t make it out of franchising alive.

The New York Times reports that Mr. Rene-Thierry Magon de las Villehuchet, founder and CEO of hedge fund Access International Advisors, LLC, was found dead yesterday. It appears that that the fund has about $1.4-billion exposure in the Bernard Madoff affair.

I do not know precisely the pain that drove who appears to be an extremely sophisticated, successful and dignified individual to commit suicide. If the coverage in The Toronto Star is any indication, he presented as one classy person.

  • Beyond that, I have no right to judge anyone else.

Maybe he felt he had committed an unforgivable error by trusting Madoff? That he subscribed to the belief that “To those whom much is given, Much is expected“? Maybe he felt if he was smarter, worked harder, paid more direct attention he could have prevented this loss? Maybe it’s just random, there is no connection at all: It’s just the media picking up on mob’s cries for “some rich elitist bastard to pay” (regurgitation of Storming of the Bastille, off with his head).

  • Who knows? Only time will tell but that story carries its own biases.

Galbraith‘s The Great Crash 1929, however asserts quite strongly that the incidence of suicide did NOT increase because of Wall Street’s collapse:

In the United States the suicide wave that followed the stock market crash is also part of the legend of 1929. In fact, there was none.  p. 131

I suspect that time and hindsight will reveal that Madoff’s alleged (in quotes) “ponzi scheme” was business as usual in today’s perverted form of casino capitalism (eg. the only difference is that this sausage exploded; hundreds of other fraud sausages happily robbing Peter to pay Paul).

What I do know, is that his family will miss him and that this loss sucks at this time of year. I’ve lost way too many people in December.

When everything’s black, let’s hope that each of us has at least one person to talk to.

  • Let’s keep in touch with each other, ok?

Pegi & Neil musta caught crazy from their horses

October 31, 2008

Economics is a dismal science.

If homo economicus is substantially accurate, Neil Percival Young and his wife Peggy are illogical, irrational and probably insane. Their behavior cannot be explained by overly simplistic disciples of the Chicago school of economics.

The couple decided yesterday to cancel a Los Angeles concert because they wouldn’t cross a picket line:

The 62-year-old rocker-activist says he was told a local faction of the International Alliance of Theatrical Stage Employees union planned to picket the show.

Young and his wife are honorary lifetime members of the union, which is striking against The Forum’s owner, Faithful Central Bible Church, because of contract disputes.

Shakey goes onto say he is…:

“…extremely disappointed to have to choose between satisfying my fans or backing my brothers and sisters of the IATSE.” Associated Press

Altruism, brotherhood, fraternity, charity, self-sacrifice are terms that simply do not fit within the classic economic models. They don’t fit within the model. [Drowning your first-born does, however.]

  • My experience is that the Young’s behavior is the rule and not the exception.
  • People make decisions that are predictably irrational.

And thank God for that.

Only fools (on a knee-jerk basis) knock any collective action such as unions or independent franchisee associations.

You’re only putting your head on the block, ya unthinking bozos.

  • I’ll burn my card, right after the franchise bar secedes from their union.

On the Prairie Wind DVD, Young said Ian Tyson’s Four Strong Winds is his all-time favourite song. The Live 8 show was in my home town and was his second public show since brain surgery in March 2005.

  • He showed up at the local Barrie dance club called The Roxx, the night before the Live 8 broadcast. [see the currently featured Jell-O wrestling].

Everybody’s got a cross.


Big Franchising

July 18, 2008

Most small business investors define franchising in an inaccurate and childlike way.Everyone knows McDonald’s and that it has made many franchisees millionaires.

McDonald’s is a franchise and so all businesses that are franchised must be a success. Maybe the relationship is not 100% causal but it’s a close relationship. Right?

Wrong!!

We Deceive Ourselves: We notice the flashy new sub sandwich shop or the prestigious dog poop scooping service trucks. We always wanted to go out on our own but didn’t want to risk too much. Franchising is pre-sold as a less risky alternative.

We think we might like to look into buying a franchise and this one seems pretty good, so far. Unconsciously we have started down the road in remembering information that would support a yes decision but also ignoring any negative data [confirmation bias].

Humans tend to over-rely on the physical, on what you can see, hear and touch. That evolutionary predisposition has worked well for thousands of years but in a complex, commercial setting spanning international corporations, our “lizard brain” is not too well equipped to deliver a good decision.

 

WHAT IS BIG FRANCHISING?

Little franchising is what you can see [the branches, leaves of the tree]. Big Franchising is what you can see plus the invisible organizations that feed and nourish the organism [the roots].

  • As the son of a farmer’s daughter, lawn care operator and retired agronomist, I know that 90% of the weight of a plant is underground. The power and danger of franchising is hidden.

Relationship: the first factual error that the power dynamics are simple; that they are limited between the franchisor and the franchisee. The unwary pre-sale or unaware ex-franchisee believe that it is fairly simple David and Goliath story and that this individual franchisor is either a “good guy” or a “bad guy“.

Nothing could be further from the truth.

Public Policy: the true face of Big Franchising is revealed when you watch closely what happens when a law is proposed. Most of the aligned interests prefer the shadows and only come into the light when their favoured positions are threatened.

Big Franchising: Expert specialists

Definition: an informal understanding between legally independent corporations and organizations that serves their mutual commercial, power and political interests.

Members & Role

1. Product franchisors: The Big 3 [Auto, Grocery & Oil] but also very large corporate concerns such as Coca-Cola. Massive, aggressive and willing to get on the phone and bully any politician into the middle of next week.

2. Business-format franchisors: The Blue Chippers [McDonald’s, getting fewer and fewer]. Largely co-ordinated through the national peak trade association [ie. AU National Franchise Association, Kiwi Franchise Association of New Zealand, Canadian Franchise Association or the U.S. International Franchise Association. or their subservient members and the other [usually] 80 to 85% of franchisors who do not belong to the national franchisor association. These are public apologists and training centres for franchisor opportunism.

3. Franchise Bar: The very few large international law firms that have a very lucrative franchise specialty and other boutique practices. A useless law to investors [McLaw} is a great law for The Bar because of the irrelevant, but seriously misleading disclosure documents that need to be written. This is a very protective group of extremely sensitive businesspeople who happen to discuss law in their spare time.

Any lawyer hoping to join the club better play by the rules. Rule Number 1 is serve Big Franchising who arranges to pay 95% of all legal fees. You can usually find the majority of the Franchise bar in the national franchisor association’s membership lists. [Australia, New Zealand, Canada]

Franchisee clients are thought of as a means to pay the rent until you can do some serious billing to the franchisors. When I was in high school, certain girls were considered practice girl friends. I believe I don’t have to go into too much detail here. The high school male and the struggling franchisee lawyer have the same thing in mind.

Each country has a King Rat franchisor lawyer. His job is to discipline the Big Franchising members and instill fear in dissenting opinions. I could name the U.S., Canadian and Oz/Kiwi guys but I promised my wife, no more lawsuits.

4. International peak association: the World Franchise Council is an information sharing project for Big Franchising. It provides training in keeping each nation’s public asleep to the true nature of franchising [higher risk, rent not own business, churning, on and on]. It keeps all their members aware of the defenses available to thie members: The “How-to” of defeating all franchise investors’ claims.

Responds to Oz’s public understanding is a babe in the woods when compared to the U.S. and Canada. The U.K. are still in Big Franchising’s womb, largely because of a very docile business media.

5. Financial Institutions: franchising is extremely lucrative for lenders and financial service providers. National programs are set up that kick back millions of franchisees’ dollars every year to franchisors. Lenders often will disregard the law when they fake their lender’s due diligence duties. They often engage in a cluster of behaviors I have defined as Predatory franchise lending. [Australia, New Zealand, Canada]

6. Product suppliers: franchised businesses are higher margin customers. The franchisor negotiates their kickbacks and the franchisee is forced to pay the inflated price. This is really an undisclosed add-on franchisee fee [often, at least, doubling what you thought you would be paying]. Here is an example: A franchisee paying more for shipping [franchisor] than he did for rent [no head lease].

7. Salespeople: these charming individuals call themeelves consultants, business brokers or researchers. Some even hide behind their PhDs. They steer you to those systems who pay them for for their ability to invoke your trust. Don’t be fooled: Almost 100% of the time, they don’t get paid until you say yes and only from the franchise system that they get paid a commission from. They may charge you a few thousand bucks to find the “right fit” but the real dough will flow when the trap snaps shut [sign the franchise agreement or loan papers]. [Australia, New Zealand, Canada]

8. Media: this is the more subtle one. Experienced journalists know all the sordid details of franchising and have known them for many years. Editors do not publish stories that interfere with the commercial interests of their bosses which are in the same Big Franchising club. Occasionally, stories are published but they are simple open-and-shut cases that would never give the public an idea that the problems are systemic [affecting all parts] rather than individualistic [blame the victim]. The lies the media tell are told in silence.

9. Politicians/Regulators: politics is the brokering of competing interests. Big Franchising represents some of the world’s biggest corporations.

Politicians and regulators know their career is short and corporations’ memories are long. The practice of law has almost entirely been taken over with corporate interests. The widespread use of compulsory private law contract provisions [arbitration and mediation] hides the industry’s abuse.

Franchisees are unorganized mom-and-pop shops, mostly. People that think that even national inquiries will discover the truth and then the truth will will result in a good law [reflects reality] are hopelessly naive about how power works.

10. Miscellaneous: this category includes academics, especially [with some notable Oz exceptions] those pesky consulting fee-dependent business administration professors, Trustees in Bankruptcy, equipment and business appraisers, mediators, arbitrators, non-franchise bar law firms, financial services ombudsmen [apologists for predatory lending practices], national privacy commissioners, law societies [very attentive listeners to large law firms’ economic concerns].

Summary: There exists a complex web of invisible but very real relationships that created, supports and aggressively defends the franchise industry’s dominant power structure [status quo].

  • All things being equal: You may be profitable or achieve your financial goals.
  • But, all things are not equal in franchising, are they?

Ignorance of your potential adversary’s power and influence is no excuse. At least for those with ears to hear.


Franchising’s collapse: Tragedy of the Commons

July 8, 2008

The Tragedy of the Commons is an important concept that has very serious implications if you are thinking of buying or continuing to invest in a single-unit (Mom-and-Pop, $ as a high % of total personal net worth) business format franchise.

  • Investing [now] in any franchise is like feeding a corpse.

Why that is so is a complex question but one that should be asked. Briefly the Tragedy of the Commons is:

a type of social trap, often economic, that involves a conflict over finite resources between individual interests and the common good. It states that free access and unrestricted demand for a finite resource ultimately structurally dooms the resource through over-exploitation.

The fastest example would be air pollution. If you think this is just egg-head stuff you run the real risk of being wilfully ignorant with your life savings.

Such a notion is not merely an abstraction, but its consequences have manifested literally, in such common grounds as Boston Common, where overgrazing required the Common no longer be used as public grazing ground.

My position is:

  1. the lawyers have been, over time, so good at closing the loopholes that any hope for even legitimate remedy is practically impossible,
  2. the smart money has concluded some time ago that any franchise is too risky (too many types of fatal business risks v. independent businesses), and
  3. the industry becomes increasingly desperate for new sales.

As more and more people talk openly about their negative franchise experiences, the salesman can only increasingly prey on segments of our society that have not been fraud-proofed. There are no new pastures: they are all Wastelands.

The industry has, in my opinion, permanently and irrevocably destroyed their own means of survival. Every ecology has its limits.

  • Psychological denial is a cluster of behaviors and emotions that protects people from pain. It is most evident in the irrational outbursts (see shunning of Blue MauMau contributors) of experts with a career tied to the industry. Note: this emotion affects both “good” and “bad” actors [ie. the illusion of legal remedy enables delay of the inevitable burial].

It is a shame that the franchise bar, franchisors, salespeople, bankers, etc. have invested so heavily personally [education, reputation, status, income, identity] in a dead industry. But it ain’t no Greek tragedy, either as I know the quality of most of these men.

And it sure as hell needn’t cause you to join in their delusional thinking or fate.


Trust but verify: Sometimes, seeing should not be believing

July 7, 2008

Dan Ariely makes some extremely important points about human decision making in this 1:54 video. I highly recommend his book, Predictably Irrational.

Try out a few of the visual illusions he demonstrates on his weblog. If your eye can be tricked so easily, Maybe Dan’s idea that we make many mistakes in decisions that even experience will not solve.

  • The idea of Decision Illusions may explain why so many pre-sale investigations result in catastrophic franchise investment decisions.

What a franchise system does versus what it says

July 7, 2008

You look and perceive the bricks-and-mortar of a store and conclude what a franchise “system” is and is not.

You search for information and start to look into it. Your heart or fear sometimes takes over.

Humans tend to accept some information and discount other data [confirmation bias] based on non-rational notions. The problem is we won’t know until it’s too late; after we’ve signed [hindsight bias]. Some deals are written in blood.

By looking you see what you wish to see, we deceive ourselves [wishful thinking bias]. We are sometimes aided by advertising we didn’t identify as propaganda.

The system is the means of mining value from the franchisor’s customers [franchisees]: Max. cash per unit of time. The pre-sale means are best accomplished by deceiving and encouraging self-deception.

  1. Modern franchisors are in the life savings appropriation business. They use the mask of an operating business to confuse.
  2. Franchising is marketed to those individuals who have sufficient (1) ignorance and (2) capital to make the effort worthwhile.
  3. Qualified investors sign franchise agreements that re-defines (degrades?) themselves as near-slaves in the hope of return [Faust or Deal with the Devil].
  4. When you become aware, you are unable to defend yourself [$, emotion, trust].
  5. Franchise bar members are paid handsomely to maintain the machine and clean up the mess.

Lately, people seem to believe that betrayal is without personal consequences.


In Praise of Bankruptcy protection

June 29, 2008

My 2001 personal and corporate bankruptcy was substantially pre-ordained the moment I signed the franchise agreement in 1998.

It was wishful thinking that I could be profitable as a Mom-and-Pop operator when I got hooked up with, what turned out to be (see hindsight bias) a system that didn’t have a proven business model. I kept putting more and more time and money in (sunk costs) believing I could turn the corner.

Michael Kernaghan of the Weed Man was right: I didn’t have enough money to grow the business quickly enough to be sustainable.

Once in the soup, I created an internal fallacy or illusion. It was fueled in part with my increasing attachment to the money I had lost (loss aversion) which is usually 2 times as powerful as the desire for a comparable economic gain (prospect theory).

It was very difficult to square this failure with the frequent successes I had had in my life up to the at time (cognitive dissonance). And the franchisor could always be counted on to counsel perseverance and asking relatives for more money.

  • Very Large Note: I had no flipping clue (at the time) that I was in a very real way acting in a delusional way. I thought I was being perfectly rational. I had did not know I had Drunk the Kool-Aid so badly. (Most other cult members don’t think so, either.

Whether a system is predatory or incompetent, it does not matter: The investor will lose it all, in all likelihood. The only difference will be the style you exit with.

Bankruptcy

Of the tens of thousands of dollars I have spent on professional advice, the most useful franchise expenditure was with my Bankruptcy Trustee.

He once mentioned that the average indebtedness of a client was $25,000.

My former franchisor realized less than seven per cent (7%) of their claim on my business’s disposal. That was no surprise to a 1,800 franchisee multi-brand international corporations.

Observations

  1. I believed I could turn early losses around by working harder and investing more. I was wrong (see pride). Perversely enough, the harder you work, the more you become attached to being a franchisee. It works like a Boy Scout knot that tightens as you struggle with it.
  2. I went 3 to 4 years too long. They call it “protection” under federal law for a very good reason. I was over-optimistic.
  3. Bankruptcy was the best business decision possible.
  4. The manner in which I bailed was important to me (no credit card debt, only the likely suspects got burned).
  5. My spouse never signed anythingever. (Everyone notice this?)
  6. My retirement savings were with a life insurance company which, for me, proved to be beyond the reach of bankruptcy law. (Talk to your financial advisor about protecting yourself before investigating anything.)
  7. Going independent delayed the inevitable and it allowed me to acquire the start of my franchising education.
  8. Financial counselling before I actually declared bankruptcy (ie advice in helping to decide) from a Trustee in Bankruptcy was the 2nd best money I ever spent.
  9. Bankruptcy’s stigma (acting through the human emotion of shame) kept me going. I thought that if I was going down, I may as well learn as much as I could about franchising as I went.
  10. Industry insiders told me stuff that they never imagined I would using in 10 years. Everyone cuts a deal, signs a gag order and exits feeling it was mostly their fault.
  11. I got hooked on learning how this trap is laid, especially the psychology that makes a franchisee seem to so comprehensively collaborate in their own imprisonment (thought reform).

Credit counselling is a part of the process of being a first-time bankrupt. It went pretty smoothly for me.

When my counsellor said, “What lessons have you learned, Les?” and I replied: “Don’t buy another franchise?“, the questions stopped.


Study those who Engineer the Trap

June 28, 2008

A senior solicitor with the New Zealand law firm Buddle Findlay made a very accurate observation about investing in a Kiwi businesses.

The solicitor (Kelly Foley) was quoted in a terrific little article by Tina Law at http://www.stuff.co.nz called Subway franchisee faces bankruptcy.

“The Subway chain follows standard New Zealand business practices,” Foley said.

Whenever I see professionals offering exceptional information, I will be sure to point it out to my loyal readers.

Why not give the article a quick read and see what you think of Ms. Clements’ situation? I assure you there are perfectly rational reasons [sunk costs, risk aversion, decision making biases, heuristics, persuasion, etc.] why so much capital was re-distributed since 2005.

This type of failure happens every day in franchising.

  • The contract gives the legal right to lie, cheat and steal the moment the 1st one was signed. [They knew it; she did not].
  • The capital was simply moved across the table over a relatively short time.

Disclosure: I lost $135,000 in 18 months in a stupid landscaping deal. Not proud of it but not ashamed for falling into a well-designed trap either. I’m the one with an M.B.A. [Master in Blind Ambition], had run 5 independent businesses before, took 6 months to complete due diligence at PriceWaterhouse, achieved 24% of my sales projections over 4.5 years, flamed-out at trial, paid the lawyers and then went bankrupt.

I’ll be coming back to this article because it shows how churning can happen to extremely intelligent, hard-working and rational franchisees.

  • You decide: Wanna invest your life savings in any New Zealand franchise?

[Oz? U.S.? U.K.? Canada?]

Am I am bitter? Sure; a bit but that still doesn’t mean I can’t have thought some of this stuff through after 10 years. Rx: Overconfidence Effect, Cognitive Biases


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