Deer: Are We Trade Show Activists?

February 13, 2009

wolfdeer5A good question but a better one is:

Can we afford not to understand how we got roped into a losing deal?

I think you better Get Smart or you’ll find yourself on the wrong side of the next buffet.

  • In confidence games, it’s a fact that more than 50% of the chumps are good for at least a 2nd fleecing.

I took a look at a trade show advertisement this week and the posting was picked up on Michael Webster’s weblog.

Anyone who contacts me is invited to join me in interpreting how a trade show works. Live.

It is a very sophisticated and well-thought out selling environment that is used to qualify candidates; economically but mostly psychologically.

Your lack of awareness of the dangers [ignorance?] is really your admission ticket.

The first step in protecting your family is education.

I’ll be relying on the Six “Weapons of Influence”: social proof, authority,commitment and consistency, reciprocation, liking and scarcity. Bring your copies. You’ll get a tutorial on not only the Science of Persuasion but on relevant cognitive biases (especially confirmation), The Tipping Point, behavioral economics, Theories of Unusual Events and Risk Homeostatis, heuristics (eg. human thinking shortcuts that usually help us but sometimes result in catastrophic errors) and 10 years of intense industry analysis.

Agenda

  1. We’ll go over the basic confidence game role structure and process: house, roper, inside man, shill, chump, fixer, etc.
  2. Why it is so critical to have independent legal advice before you sign (goes double for deals less than $20,000).
  3. The selling value of comparing (anchoring) a new system with the best, most successful franchisor: McDonald’s.
  4. What something called “Prospect Theory” has to say why you will stay in a losing business much, much longer than you could ever imagine.
  5. Why you should only sign when there is an Independent Franchisee Association, IndFA present (versus the lapdog Franchisor Advisory Council).
  6. We’ll decode the hidden messages within the marketing material (worked for an advertising design studio + Ivey MBA + McLuhan disciple).
  7. I’ll explain the role of the current SME loan guarantee program.
  8. Why Canada is a safe harbour for white-collar crime.
  9. How this recession is shattering the conventional wisdom that franchises sell better, the worse the economy gets [HINT: new sales, now, are the worst on record].
  10. Why the hook has to be planted in the male first.
  11. How shame is invoked to silence particularly new Canadians.
  12. Why exceptionally thorough pre-sale due diligence is much more limited than you think and could in fact increase your chance of business failure.
  13. The role of the expert seminar.
  14. Why the most rational and dodgiest should absolutely force a copy of Ontario’s franchise law into your hands.

All of these fraudproofing skills are entirely understandable, applicable to many situations and will last a lifetime. I was taught by the best.

In these days of Bernie Madoff, BIM, CitiGroup, etc., I don’t think you (or anyone you know in the traditional or new media) can afford to turn not to learn more about the Science of Persuasion and applied psychology.

Offer to Sellers: You can join us as well. I will gladly discuss my views in front of anyone, at anytime. These persuasion techniques have been proven scientifically and it’s time that more people understood how skillfully they are applied in franchising.

If I were in your shoes, I’d much rather guarantee us free rein rather than be seen to be resisting evaluation. That old hand-in-the-lens shot sells television shows but is, by its airing, basic proof of guilt.

Consumer education is good and only the fraudsters have anything to hide.

Cost?: Nothing

Just call me at 705-737-4635. Bring the whole family. les.j.stewart@gmail.com

PS: Do me a favour: Sign up to receive each new post (see top right, RSS feed). FranchiseFool is now read in 44 countries. Not bad for a single Canuck in one year, I think.

— UPDATED for Fall 2009


Time trumps all franchise Fraud

January 28, 2009

michaelwebster

Con men understand very well when their targets are the most vulnerable.

It’s a game for them: Their comparative strength (trump) is knowing how to manipulate your human weaknesses for their profit.

With hundreds of billions of dollars being thrown into the world’s financial institutions with zero accountability, the risk of funding a franchise fraud  (in my mind) is be greater now than before the www recession.

Michael Webster at Misleading Advertising Law makes a very good point at his post, Selling Franchises to the recently Laid Off:

One of my concerns in this economic environment was with how the newly laid off would react, what they would do, and how they would make decisions.

With nearly 60,000 reported layoffs in the United States alone, it is of pressing concern that these individuals understand the how to avoid failing for the franchise fraud.

Michael provided some extremely useful advice in a recent Blue MauMau interview named, Fraud Expert Says Those Wanting to Be Own Boss Easily Scammed.

First, with high unemployment the blood is in the water for unscrupulous sellers:

With the economy seeing the highest unemployment figures in nearly four decades, Webster thinks once those unemployed have access to credit, there is the potential for record numbers to be ripped off. In order to avoid being swindled, his first piece of advice is to think of buying a business as one option among many investment opportunities.

Michael warns against getting out of the pan and jumping into the fire and relying solely on your own research, which can become distorted (confirmation bias):

WEBSTER: There are times in our lives when for whatever reason we want our aspirations to be achieved immediately. For many, the most compelling overriding value is the need to be in complete control of their economic lives. Simply put, they never want to be fired again.

Those people are sitting ducks.

The con criminals know this and wave phrases like “be your own boss” and “in business for yourself but not by yourself.” Prospects pick up on such words of puffery. Buyers blow it up into full-scale fantasies of business ownership. And then to compound the problem, they perform bad due diligence by sloppily selecting evidence that only confirms they are making a good decision.

You need a professional 3rd party to help you and you need to take your time.

A buyer should take their time – some six to eight months. Read the franchise disclosure document. Get the best professional help to explore the opportunity and its accompanying documentation. Ask questions. Do not jump! Get a part-time job doing anything if you need to so that you don’t feel like you have to buy this franchise. If the opportunity is any good, you’ll figure it out.

Time will trump all frauds.

Excellent advice from someone with great insight.  Michael had also suggested in previous posts to actually work for a franchisee within the proposed system for several to six months and that you should budget up to $5,000 for professional advice (on not only the contract but also the business deal).

Michael’s caution against being sucked into a phantom dream is very important. Follow his advice and this will greatly reduce your chance of experiencing a financial nightmare.


Risk Compensation: Why franchise laws & regulations cause more risky investing

January 27, 2009

noparachute1All franchise laws should be immediately repealed.

Everyone would be better off knowing that they’re in an airplane with an empty parachute.

Specific franchise laws give a false sense of security that, paradoxically, causes investors to behave in a more risky way than if there were no laws.

BTW: The push for franchise laws (with very rare exceptions) has always been by the franchisor and the franchise bar, not by franchisee investors or their advocates.

  1. The U.S. has had state and federal franchise laws for +40 years.  Alberta, Canada since 1971, Ontario since 2000. The outcome is the same: still very high investor risks.
  2. Relationship laws have existed since 1956 in the U.S. The toughest state law (Illinois) doesn’t seem to have had much positive effect, one way or the other.
  3. Direct regulatory federal laws in the U.S. and Australia, although they have the statutory power, are not used, except on the occasional token, hapless, no-name franchisor.

The primary mechanism that causes this INCREASE in risky investment behaviour is found in a theory called risk compensation:

Risk Compensation is an effect whereby individual people may tend to adjust their behaviour in response to perceived changes in risk…Another way of stating this is that individuals will behave less cautiously in situations where they feel “safer” or more protected.

The more we feel safe, the more risk we feel we can take on without additional costs. [Wikipedia]

Risk compensation is most clearly shown in studies of cars equipped with ABS brakes. The stated intent of mandatory ABS brakes was to reduce injuries and death due to collisions.

  • The irrefutable evidence, however, is that drivers (unintentionally, for sure) compensate for having ABS brakes systems by driving faster, following closer and taking corners more sharply (ie. they increase their risky behaviour).
  • The collision rates stays constant because of the human tendency to compensate for improvements not only in brakes but seatbelts, bicycle helmets and even parachute design safety improvements.

Note: Booth’s rule #2:

  • The safer skydiving gear becomes, the more chances skydivers will take, in order to keep the fatality rate constant.

Everyone’s first instinct is to cry for a law or an improved law against human behaviour. Risk compensation theory indicates that this is a fool’s errand and it is consistent with my study of franchise law over the last 10 years.

Opportunistic franchisors and their advisors know this human, perfectly non-rational characteristic to compensate for perceived “safer” situations.

Predators rely much more on their abilities to read human nature accurately, than do their prey. (It is wise to remember that there are only 2 principle ways to succeed: doing good work or cheating.)

Additionally, the Authority of the State is most clearly manifested in a law or regulation. Since the state holds a monopoly on coercive action (exercised by the police, military, courts, etc.), any franchise law signals a state “sanction” of sorts.

In this way, the state’s ultimate secular authority and legitimacy is attributed to the most poo-filled franchise system. It gives credence and camouflage to an industry without control or standards.

The Science of Persuasion: In the very important book Influence: The Psychology of Persuasion, Bob Cialdini calls authority his 5th of 6 “Weapons of Persuasion”:

  1. The logo of the FTC, the ACCC or the Ontario Legislative Assembly confers a legitimacy that can be exploited by some (badge of authority).
  2. Government guaranteed loans confer an aura that “This must be okay because the government and a Big Bank is risking their money, too” to even the most wicked scam (authority).
  3. The threat of  a lawsuit triggers (1) the fear of poverty and shame (bankruptcy) but also (2) of being perceived by other as behaving in an anti-social or near “criminal” way (social proof).
  4. Oh how charming everyone is, before you sign and how much you’ve become a shithead when you start to question the status quo (liking).
  5. How franchises that you should be paid to run, can instead be sold for 100,000s of  $ because of some “secret sauce” spiel (scarcity)

There is much hard science behind being persuasive that can be used for good or ill.

Take a look at this 3:11 video book review and imagine how Cialdini’s 6 Laws (reciprocity, commitment & consistency, authority, social proof, liking, scarcity) are used to snare franchisees.


U.K. franchisor leaders record a new ethical Low: Hard-selling to the recently Unemployed

January 26, 2009

the_bfaTalk about stealing a guy’s life savings when he’s down.

And when I thought I had heard it all and that franchise hustlers would do anything for a sale.

Now word out of Liverpool that their franchisor-only trade association, British Franchise Association, BFA is hard-selling directly to recently laid off UK workers, via their former employers.

It’s like a scene out of the movie, GlenGarry Glen Ross, totally hardcore, old-school boiler room ABCs (always be closing):

We’re adding a little something to this month’s sales contest. As you all know, first prize is a Cadillac Eldorado. Anybody want to see second prize? [Holds up prize] Second prize is a set of steak knives. Third prize is you’re fired.

Lie. Cheat. Steal. All In A Day’s Work. Source

It reminds me of the ambulance-chasing personal injury lawyers forcing their business cards into the hands of people lying in the street from a car accident.

Obviously, what I (or the British public) consider to be ethical business behaviour may not be what the BFA brain trust considers to be fair game. The 2 characteristics of an ideal franchisee are: Did their cheque clear and Can they fog a mirror (alive)?

The story (Franchising could be your next career move) is a little awkwardly worded but these are the most flagrant lies that support this propaganda piece:

  1. franchising is a lower risk than non-franchised businesses (proven to be false),
  2. a BFA franchisor is less risk than someone who is not a member (not proven),
  3. the BFA is a benevolent society doing a public service (they serve their members’ interests),
  4. franchisees fail only because of their sloth or stupidity (fraudulent systems?) and
  5. the BFA represents both franchisors and franchisees (only franchisors).

All of these assumptions are false and dangerous. The BFA executives are either incompetent or knowingly perpetuating a cruel fraud, this time on the newly laid-off Brits.

  • You will be preyed upon when you are at your weakest time in your life.
  • Unemployment is an excellent time to buy into a phantom dream (In business for yourself, not by yourself; Be your own Boss) because you want so much to believe it (mortgage, kids, debt, etc.) you are temporarily a very shitty decision maker.

I know. I signed my franchise agreement two weeks before my unemployment benefits were to run out in 1992. BTW: an Ontario Justice said in 2000 that I had done the best due diligence she had ever seen but still lost $140,000 in 4 years, being sued, bankruptcy.

Another veteran but anonymous observer, Lionel Hutz PA, picked up the story and wrote about it on Blue MauMau under the following banner, BFA Wants Unemployed to Buy a Franchise. Lionel leads in with:

The British Franchise Association, the counterpart to America’s International Franchise Association, is directly approaching companies that are laying off employees, to persuade those newly unemployed to buy a franchise from one of their franchisor members.

Lionel goes onto say and pose a most relevant question:

Note the false claims that franchised businesses have higher success rates, and the assertion that British Franchise Association members must “meet the strict ethical and business criteria.” I wonder if the BFA has ever expelled a franchisor for bad franchising conduct?

Ray Borradale, a very effective Australian franchisee advocate and mouthpiece chips in with:

AFA, BFA, IFA and FCA read from the same book.  This is symptomatic of franchisors; good and bad – and it is dangerous.  I note the reference; “educate people about the many benefits of buying into a franchise” with contempt.  Where is the education about risk and due diligence?  This unbalanced marketing of franchising is not new and BMM has covered many similar stories. It is misleading and deceptive but it appears to be accepted by authorities in every country. [I would add the CFA to Ray’s list of talking heads.]

Remember: Franchising is practiced identically around the world. Some countries know about the dark side of franchising and have developed national spokespeople to combat the propaganda. Some countries (like the U.K.) do not know.

IN CONTRAST, note the level of discernment found in this Australian headline of January 26th (care of Franchise-Chat.com), The Franchising Trap:

The Australian dream of becoming self-employed can be the path to financial security, but it can also go disastrously wrong.

For years franchising has been viewed as a reliable, somewhat less-risky option for small investors looking to start their own business. But the 500-plus complaints received by the Australian Competition and Consumer Commission every year arising from disputed between franchisees and franchisors show that franchising is often not the easy entry to business that some people think.

In the U.K. there is a greater danger than is faced by franchise investors in Australia.  Aus does not have a small business government guaranteed program, but the U.K. does.

  • A guaranteed loan program can be misused to fuel franchise fraud. I wrote about it in Canada, I know that that it is happening in the U.S. and also in the U.K.’s aptly named Small Firms Loan Guarantee Scheme.

Heads up to these other countries that have a similar loan guarantee program for small business (Canada CSBFA, U.S. SBA 7(a), and U.K. SFLG):

  1. Korea,
  2. Japan,
  3. European Union (Netherlands, Denmark, Belgium, France & Germany),
  4. Indonesia,
  5. Malaysia,
  6. Nepal,
  7. Philippines and
  8. Taiwan.

Every country gets the type of journalism that it is willing to accept from it’s traditional media outlets. This type of breathless and mindless regurgitating of franchising propaganda is almost never seen in the U.S., Australia or Canada anymore. It was pushed out by volunteer franchisees getting on the back of its nation’s business editors.

  • These blatant lies will continue as long as they are not shot down by a small group of knowledgeable, experienced and vigorous group of Web 2.0 U.K. warriors.

Their basic training can begin once they choose to speak out.


Abolish the SBA: $70-83B reasons why it should happen

January 12, 2009

veroniquedereymercatuscentre1Private gain, Public loss.

Banks, like all buisnesses, just love it when governments underwrite their risks.

It’s only a bonus when Joe Q. Public gets to pay for the drunkard’s binge of “aggressive” to predatory to outright fraudulent loan practices.

Canada, the United Kingdom and the U.S. all have small business loan programs which guarantees defaults.

The North American franchise industry relies very heavily on this debt program to fuel franchise sales. In Canada, the Canada Small Business Financing program is almost the only debt that Schedule 1 banks will offer for franchises (last time I checked).

The U.K. industry discernment is still embryonic. Their Small Firm Loan Guarantee scheme, SFLG is run by the Department of Business, Enterprise & Regulatory Reform, BERR. By the looks of  The Royal Bank of Scotland site, SFLG loans are a big part of the U.K. franchise industry also.

  • Blue MauMau is the most active centre for franchise investor concerns in the world. Tellingly, SBA Loans Free Fall is a current headline.

Dr. Veronique de Rugy, adjunct scholar at the CATO Institute in 2007 (and now senior research fellow at the Mercatus Center at George Mason University) presents some very important facts from a CATO Daily Podcast [see below].

Specifically the U.S. Small Business Act, SBA loan program:

  1. may end up costing citizens $70-billion (maybe $83-B?, if defaults climb faster than projected; unfunded debt that will be added to future taxpayers),
  2. with less than only 1% of small businesses taking out a SBA loan per year, it’s irrelevant economically,
  3. was created 53 years ago when credit information was much harder to determine (program has not evolved as information sharing has improved),
  4. of the loans that are currently on the books, they are “defaulting massively” (SBA loans disproportionally finance doomed business ventures), and
  5. only has 3% of women or minority-controlled firms take take out a SBA loan per year (as a social program it is a bust: 97% of these “discriminated against” groups get their debt elsewhere).

All of this begs the question: If the 7a Loans are defaulting like mad who exactly are benefiting from this program?

To her credit, Dr. de Rugy points directly to the banks and their capacity to sell off the 75% government guaranteed portion on the secondary market and stick the massive debt to the taxpayers if their own default projections are understated (ie. d/recession).

The banks love SBA loans (in a technical sense) because:

  1. 60% of all loans are underwritten by the 10 largest banks can exert market influence even within a very decentalized banking system, comparatively, (in Canada it’s worse: 82.5% all guaranteed loans with Top 5 bankers, 2000-05: FOI author) and
  2. the return on equity for is a minimum of over 3.8 times higher than for regular loans (SBA: 70% v. Regular loans 15-18%).

Listen to the 9:06 podcast and see how $70-billion could be added on top of the current +$700-billion banking bailout. I can’t help but note how fuzzy the banks are so far on accounting for the first bailout installment. [click here]

According to Dr. de Rugy, the SBA loan program serves two very powerful masters:

  1. “lawmakers who have successfully sold the SBA as a program to help the so popular small businesses and
  2. the banking industry, which profits by issuing and selling the low-risk, government-guaranteed small-business loans.”

As of the end of 2006, the SBA had nearly $83 billion in outstanding guaranteed loans that the taxpayers – not the banks – would have to pay if the economy experienced a serious downturn.

BANKING ON THE SBA: Big Banks, not small businesses, benefit the most from SBA loans programs, Veronique de Rugy, August 2007, 4 pages


The Mob: A Working group of Professional Thieves

January 12, 2009

grouppeopleThieves steal to live.

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:

  1. gains are divided equally (although, different for different roles),
  2. all payouts must be paid from the net take (expenses [or nut] first deducted from gross take),
  3. all loans must be repaid from the group’s first fruits (rigidly enforced),
  4. everyone shares in the profit or loss (good or bad),
  5. the fall-dough (shared cash) is used to protect any member of the mob,
  6. each member must deal honestly with each other (burning someone is a almost unthinkable, lying is considered more serious than in straight business),
  7. if someone leaves the mob, he must ask to be taken back (type of social norm or professional consideration),
  8. a member of the mob is not responsible for things outside of his control (appreciation for the role of randomness and luck),
  9. a mob member should not cut in on another member’s area of responsibility (reflects negatively on the competence of the “helped” member), and
  10. 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]


Collusion allegation: AUS bank and franchisor

September 18, 2008

In a Smart Company article by James Thomson called MP renews calls for investigations into mistreatment of Bakers Delight franchisee, he quotes:

NSW parliamentarian Joanna Gash has renewed calls for the Australian Federal Police to launch an investigation into accusations Bakers Delight and ANZ bank colluded to put a franchisee out of business.

Quoting emails between the franchisor and the bank, Gash alleges:

On Monday, Gash revisited the case in Parliament, producing emails from Bakers Delight chief financial officer Richard Taylor and ANZ executives that she says shows “plans had been conspired to terminate Ms de Leeuw’s franchise well ahead of time”.

The bank and franchisor deny all the allegations.

This is the first public AUS public allegation of the key franchisor:franchise banker relationship that I identified and wrote about in a 2005 paper for Industry Canada called Franchising Opportunism [free download].

The Royal Canadian Mounted Police did a 10 month investigation of a related predatory franchise lending matter. [free download: Mounties investigate ‘predatory lending’, Ottawa Citizen, March 25, 2006]

And Mr. Oudovikine is accusing the bank of transferring the loans to Country Style without his authorization before he had a chance to obtain a business plan and other financial details from Country Style.

Mr. Oudovikine says his case shows how big banks, franchisors and franchise brokers team up to take advantage of franchisees, many of whom are recent immigrants like him.

“It’s predatory lending. (CIBC) didn’t do any of the due diligence they should have done,” says Mr. Oudovikine, who sent the Citizen e-mails confirming the RCMP investigation. An RCMP official said the police force doesn’t confirm or deny investigation.

And the Canadian bank’s reaction?

Mr. Oudovikine says he has repeatedly contacted senior CIBC officials and executives about the loan dispute, to little effect. He alleges that CIBC breached the Canada Small Business Financing Act regulations that require lenders to conduct due diligence on borrowers, including their ability to repay loans.


Suing your Franchise Banker: Girding one’s Loins

July 24, 2008

Since I have set this up for a client and defined Predatory franchise lending to the Canadian government, I can tell you.

In 1995, an award-winning Canadian investigative journalist named John Lorinc published his first book, called Opportunity Knocks: The Truth About Canada’s Franchise Industry. An excellent resource; totally blackballed by the industry.

  • Canada is the first stop overseas for U.S. franchisors so our experiences are very relevant anywhere in the world.

Click here for an emphasis-added excerpt from Lorinc’s Chapter 4 called, The 90% Solution: Franchise Economics.

It deals with the a specialized corporate entity: the Franchise Banker. You should find this book and order it online if you are at all serious about learning about modern franchising.

Interesting stuff. The government guaranteed loan program is really just the icing on the cake for these most aggressive of bankers.

If it doesn’t jingle, it doesn’t count.

Rich Mimick, my business school accounting professor

Learn how franchising is financed to know who really is in charge. The brains of this outfit sure ain’t the franchisors, my little overly-trusting friend.

BTW: I should mention I had an eventful 6 week career with a Canadian bank in 2000. The training program was going well [we both thought] until they realized I was that Les Stewart.

  • Big Franchising delivers very sharp disincentives to those that raise uncomfortable questions.

The latest example was last month regarding selling insurance into the Canadian franchise industry. Who wouldn’t want me as their insurance broker, I ask you?

It seems history means nothing to some industries:

It’s probably better to have him inside the tent pissing out, than outside the tent pissing in.

Lyndon B. Johnson, 36th U.S. president

An early (around 1400) drawing of a chastity belt. [above, thanks to Wikipedia]


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.


The Apprenticeship of Les Stewart

May 17, 2008

Justice is one of the four Cardinal Virtues.

My research clearly concludes that the last place for franchisee family investors to find justice is via any franchise bar/legal system.

franchising

Background and unique qualifications:

  • Franchise Industry in Ontario (Canada): franchisee families 40,000 (76,000), employees 400,000 to 600,000 (760,000 to 1,140,000), investments $2 to 8 billion ($3.8 to 15.2 billion), and annual sales $45 to 50 billion ($90 billion), Source
  • twice a franchisee (Arjay Painting and Nutri-Lawn, Midhurst, ON),
  • a franchisee’s crew Barrie and 1st assistant manager, Orillia 3254, McDonald’s Canada (B.O.C., Silver Hat, & AAA, 1972-80),
  • general BA, 1983, Western University and MBA, 1987, Ivey Business School, London, ON,
  • Budget analyst, Victoria Hospital, London, Ontario, (acute care regional teaching hospital, 3,500 FTEs, 1988-92),
  • founded the Canadian Alliance of Franchise Operators, CAFO, Canada’s 1st national franchisee association, Midhurst, ON 1998-present,
  • SLAPP 1.0 (Strategic Lawsuit Against Public Participation): sued to silence: Nutri-Lawn‘s then owner, The Franchise Company (FirstService Corporation), represented by David Sterns and John Sotos,
  • SLAPP 2.0 sued for faxing 150 U.S. Tupperware distributors a website invitation and Toronto Star article while representing 7 former CDN Tupperware distributors, (Tupperware Canada Inc.), TupperWarsSLAPP, represented by Brian Macleod Rogers,
  • took my franchised lawn care business independent in 1998 (Lawn Depot),
  • represented myself at an injunction hearing, franchisor unsuccessfully sought to enforce their non-compete clause, Barrie, ON, 1999 (Justice Paul Herminston, Barrie), favourable outcome,
  • 5 day civil trial, (Justice Katherine Swinton, Toronto,  May 1999) and lost $134,000 unfavourable outcome,
  • unpaid policy analyst for Mr. Tony Martin, NDP MPP, Sault Ste. Marie, ON 1998 to 2001 (provincial, federal politician),
  • expert witness at public hearing which lead to Ontario’s first franchise law, Toronto, ON (Arthur Wishart Act (Franchise Disclosure), 2000),
  • created the Information Sharing Project and submitted unsuccessful project proposal to the Ontario Ministry of Consumer and Commercial Affairs in 2003 (digital teaching, due diligence and business risk assessment tool; early form of WikiFranchise.org),
  • identified and wrote a paper on Predatory Franchise Lending to Industry Canada, 2005 (18 month investigation: bank, consultant, franchisor, Office of the Privacy Commissioner of Canada, Minister of Finance, RCMP Commercial Crime Unit, OBSI, FCAC, PMO, etc.),
  • case preparation for a +$6-million civil law suit based on predatory lending principles (2005, Oudovikine),
  • Stewart has been featured in the Globe and Mail, Toronto Star, National Post, CBC, PORFIT magazine, Continental Franchise Review, and Wall Street Journal, media contributor, 1997 – present,
  • contributed to the Prince Edward Island, Ontario, West and South Australian franchise inquires,
  • Blue MauMau contributor: 459 posts (since Oct 2007),
  • founded and editor of FranchiseFool.com weblog: 1200 posts, 277,713 views & 777 comments (since Feb 2008, Accessed April 26, 2018),
  • founded and co-editor of WikiFranchise.org: a no-charge wiki that assigns corporate and personal reputations more accurately and durably via indexed already-published articles and documents: 208,821 unique visitors, 331,676 visitors, 1,283,386 pages, 2,229,354 hits and 65.8 GB bandwith (since Feb 2009, same),
  • endorsed Bill 102, An Act to amend the Arthur Wishart Act (Franchise Disclosure), September 23, 2010,  Legislative Assembly of Ontario (start @ 1440),
  • attended the International Association of Franchisees and Dealers annual conference, Indianapolis, 2010,
  • pre-trial development of large-scale group and class action legal actions,
  • independent franchisee association: leadership development, creation, training, pre-trial case legal case development (National Bread Network: Maple Leaf Foods/Canada Bread 1,000 CDN Dempster’s franchisees, leader’s blog, case preparation for a +$300-million class action law suit based on good faith, right to associate and mental distress ($50,000 award for one franchisee, 2008-2012),
  • FranchiseGrade.com: The Authority on Franchising, developed data collection methods and hierachy structure and custom reports based on U. S. Franchise Disclosure Documents, FDDs, Les Paul Stewart Consulting: work has been featured in Businessweek, Entrepreneur, Inc., and the Wall Street Journal. 2004 – 2005,
  • Dr. Gillian K. Hadfield: Problematic Relations: Franchising and the Law of Incomplete Contracts, The Price of Law: How the Market for Lawyers Distorts the Justice Systemand
  • LinkedIn

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