The franchisee lifestyle can change but your sunk costs do not.

May 23, 2012

Due diligence is like taking a picture.

It’s only good for a certain specific time.

Business risks change; sometimes dramatically during the relationship.

Risks change: Pre-sale due diligence does not

October 24, 2010

Just like entropy (going from order to disorder), things in business normally turn to shit.

Business risks increase (19 out of 20 times…) as the franchise agreement runs but your sunk costs keep you hooked up to a babe that’s turned into a wolf. Every half-baked new cash-grab scheme, you’re “All-in”.

But that does not stop the thought machine, sometimes run by “world class” CDN franchise bankers.

— Thanks: Wolves of Wednesday on

It’s a sin tethering your life savings to easily copied core products

August 22, 2010

Jamba Juice‘s response to McDonald’s getting into their core smoothie business is clever but ultimately futile.

Problem with succeeding at 1. and 2.:

  1. create a new consumer niche,
  2. work to broaden appeal and
  3. watch as THE corporate ideology gobbles it up.

The erosion of franchisee-pioneers’ sales are no laughing matter for Jamba Juice or all the other smoothie-dependent investors.

Equity in business: Who wants to buy you out of your death-struggle with a nearly-unassailable, cultural icon with an almost perfect record of supply management brilliance ?

Pure martyrdom.

A man in debt is so far a slave.

June 16, 2010

When there is an Independent Franchisee Association present, most people figure that members are best split into two camps. Those that are:

  1. members (pay their share) and
  2. non-members (free riders).

[This mindset is the greatest obstacle to effective advocacy, btw.]

The only real, relevant differentiating factor is:

  • those who are slaves (ie have a killer amount of DEBT) and
  • free men; those little or no debt.

The behavior of franchisees has much more to do with their perceived debt load (v. than their character).

With enough debt, any saint becomes a sinner.

Guaranteed. 100%.

Ralph Waldo Emerson (1803 – 1882)

Blazing Saddles shows franchise relationship in 6:34 minutes

April 16, 2010

Pure genius.

For those with a significant tan, one thought:

Q: What is the shovel in 2010?

A: Email addresses.

BTW: Credit-where-credit-is-due: Councilman posting over at Blue MauMau.

3 Classes of Risk: The Known, The Unknown and The Unknowable

September 11, 2009

PetlandElizabethCarlisleAny business has to manage risk.

Before you start an investment, you need to add up all types and then compare them to the likelihood of achieving returns to see if the proposal makes sense to do.

In franchising, you cannot do this with any degree of accuracy before you sign.

Your investment is often tied (a sunk cost) to a losing concept of a self-interested franchisor.

Your debt will be used to make you comply to others interests; not your own.

1. The Known Risks: research your brains out by interviewing current franchisees, make sure the technology is okay, study the vertical market the proposed investment would operate in, do 5 years worth of monthly cash flow statements, talk to lawyers, accountants, former franchisees.  Get some type of idea.

2. The UnKnown Risks: these are real but discoverable. These are ones that come as a surprise that you need to find out before you sign. A good defense: take a minimum of 6 months; do not be pressured into signing. The  best defense is to work as a labourer within  a franchise, for free if you must. If you don’t think you can afford that investment in lost wages, believe me, you can’t afford to be a franchisee.

The Unknowable Risks: these are real but you (or any mortal) cannot quantify or scale them. They’re random but when they strike, they knock you out of the whole game: all your labour, 90% of your investment…all of it: gone. People (especially young people) think that the world is rational and foreseeable. It is not. There are winners in franchising just as there are winners at Casino Rama or Vegas.

Some examples:

  1. a nice franchisor sells out/retires/decides/is forced to give control to someone not so nice or patient,
  2. your VP of government relations cracks jokes about your corporation killing 22 Canadians (food poisoning),
  3. your store is a staggering success and the franchisor wants it for his own,
  4. you are smarter than the franchisor or his heirs (become a threat),
  5. after years of 3 to 4 hours sleep you drive your truck into a group of children,
  6. physical illness requires you to leave (the franchisor picks it up for a song and flips it in 3 months),
  7. the new territory manager decides he likes your store and he happens to be the franchisor’s brother-in-law,
  8. the franchisor racks up too much debt so decides to go insolvent to shake off his creditors,
  9. you spend all your time at work and become divorced (Can you divide your net worth by the number “2”?),
  10. you talk to a few of your peers and get terminated for trying to better your business,
  11. your tradename is sabotaged by some food tampering incident showing up on YouTube (Domino’s),
  12. you’re a Petland franchisee and a photo of 2 drowned bunnies  goes onto Facebook (above and here),
  13. the W.H.O. decides tanning is a deadly health risk,
  14. a competitor contracts for a social media site to trash your shared tradename,
  15. etc., etc., etc.

Franchising is awash with unrecognized, rapidly increasing business risks.

These are all real life examples I have seen that are featured on case studies.

All aboard the McShip of Fools: Das Narrenschiff

August 31, 2009

narrenschiffBuying a franchise is a real trip.

  1. Really good writing survives a very long time.
  2. Lies move quickly but truth lasts.
  3. Lies do not become true over time, no matter how many times they are repeated by shills.

In 1494, a German theologian and lawyer wrote a best seller called Das Narrenschiff (Latin = Stultifera Navis, English = Ship of Fools).

Why Brant wrote this is fairly apparent in the prologue:

For profit and salutary instruction, admonition and pursuit of wisdom, reason and good manners: Also for contempt and punishment of folly, blindness, error, and stupidity of all stations and kinds of men.

It is a classic piece of literature that was instantly popular and still speaks of mans universal tendency to act foolishly (ie. to set sail on a journey of self-delusion).

Note the hat symbolism: the donkey ears.

Brant used satire to point out the abuses of power he saw in the state and the Roman Catholic Church. He did that to keep his head attached to his neck.

I chose the fool theme here at FranchiseFool and on (thousands of case studies) to draw attention to the hypocrisy and dangers within modern franchising without being sued for the 3rd time. My message is ultra-serious but I need to teach in an indirect manner.

Any legitimate industry or authority should be able to handle satire from one person.

Historically, another role of a is to speak truth to authority.

Franchise “leaders” cannot tolerate my persistence that mom-and-pop franchising is the height of folly: It’s Unsafe at any Speed because the franchisor can strip value (exercise unilateral opportunism) while you have little or no defence to protect your sunk costs.

When you hear anyone say either:

  1. But no one can predict the future or,
  2. that person lost money and is therefore untrustworthy or,
  3. He’s just antifranchising

…that is a best indication you’re dealing with a 100% genuine jackass travel agent.

Sunk costs: Sucked under by a franchise

March 1, 2009

drowningPeople do not realize that there are hidden dangers in small business and especially franchises.

You stay in a failing franchised business much longer because of a concept called sunk costs.

Sunk costs are investments that cannot be recovered once they have been incurred. You can’t get out of the water or reach the shore safely.

Most franchise investments are even worse because the assets are very, very specialized.

They’re called idiosyncratic sunk costs: assets that are highly dependent on the situation and the control of others. They may have cost you $1,000 but on the free market you could only get $100 for them.

Some examples are:

  1. a sign with a logo you do not own,
  2. proprietary software used for a specific system,
  3. a customer list that the franchisor owns (constrained by a non-compete provision),
  4. a telephone number that is controlled by someone else,
  5. leasehold improvements that are only useful to another franchisee (who is controlled by you-know-who),
  6. a current account balance that can be accessed by your franchisor,
  7. a centralized telephone system that someone can cut you off from, and
  8. specialized vehicles, equipment or the always highly elusive proven business system.

Almost all assets in your business are practically worthless if you fall out of favour with your franchisor. You keep treading water in the false hope that by serving your master, he will let you realize a high percentage of what you have sunk into the business.

Franchisees very seldom ever achieve a tiny portion of what they imagine their business will be worth because they are renters, not owners.

Lawyers are Rats: A top legal scholar exposes the corruption of his profession

January 14, 2009

Maclean’s which started in 1905, is Canada’s first weekly newsmagazine.

In an August 2007 interview, journalist Kate Fillion interviews Philip Stayton, write, former corporate lawyer and dean of the law faculty at my alma mater (The University of Western Ontario).

Interview with Philip Slayton

Ex-Bay street lawyer talks about how lawyers became greedy, unprincipled enablers of the rich

Question/Answer [my emphasis]

It’s hard to imagine a book titled Lawyers Gone Bad: Money, Sex and Madness in Canada’s Legal Profession (Penguin) is going to be popular with your colleagues. Why did you write it?
I know lawyers are going to say, “Come on, he’s talking about 15 or 20 members of a profession that has 90,000.” But in telling these stories I’m trying to extract general ideas: the amoral nature of legal practice, the gross deficiencies of the regulation of lawyers, the sense of misery that pervades the legal profession.

Do you think most of the lawyers you write about started off bad, or did the practice of law change them?
Why do people end up doing things they shouldn’t do? Their upbringing, their background? The point is, I don’t think there’s anything in the legal profession now that restrains people’s bad impulses, I don’t think there’s a generally accepted code of conduct or a vibrant disciplinary system.

This isn’t just a Canadian problem, either. On my desk I have an editorial from a South African magazine which begins, “Let’s face it, our legal system has effectively collapsed …  One of the more obvious reasons is the culture of greed, pride and self-indulgent arrogance that pervades the legal profession.” Then there’s this gem from the South China Morning Post about a client who asked for a breakdown of his legal bill, which included a charge for “recognizing you in the street, crossing a busy road to talk to you to discuss your affairs, and recrossing the road after discovering it was not you.”

As you point out, in 2004 only 44 per cent of Canadians said they trusted lawyers, whereas two years earlier, 54 per cent said they did. Why do people dislike lawyers so much?
Lawyers are seen as greedy, and in good measure I think that’s a justifiable criticism, and also unprincipled. Thirdly, and this is perhaps the most important point of all, the average person has no real access to lawyers, to the legal system, to justice. It’s all right if you’re very poor and have the kind of problem that legal aid will help with, but most Canadians have middle-class incomes and simply can’t afford to hire a lawyer. The chief justice has spoken out about this, but very little is being done to rectify it. It’s fundamentally undemocratic. It’s as if somebody tried to pass a law that said you can’t vote in a federal election unless you have an income of $100,000 or more. Well, there would be a revolution.

How has the legal profession changed in Canada over the past few decades?
In very general terms, it has become a business: interested in profit, not interested in making judgments, not interested in providing access to poor people or even middle-income people. The old ideas — that lawyers have something to do with justice and fairness, and are part of an important system that provides a stable, safe, law-abiding society — have, to the extent that you can generalize, been lost by members of the legal profession.

You taught law for 13 years, both at McGill and the University of Western Ontario, where you were the dean of law. Is there something about legal training that nudges lawyers toward amorality?
Yes, I think so. Law students are taught and lawyers subsequently believe that it is not their job to pass judgment on their clients as people, or to pass judgment on what their clients want to do. Lawyers are enablers. They are there to try to do what their client wants, and are in many cases paid handsomely for it. The whole question of the values behind the rules of the legal system is not on the whole of great interest to law schools or the legal profession. And there’s an additional point: lawyers are taught to manipulate the rules in favour of their clients. If you’re a manipulator of rules, then you can’t respect the rules as such or believe that they incorporate important values.

What kind of ethical dilemmas does the average lawyer face?
The average lawyer in a big firm practice faces the requirement to put aside whatever kit bag of values, principles and ethics he may personally subscribe to and concentrate on making it possible for clients to do what they want to do. No client comes into a lawyer’s office and wants to have a discussion about whether it’s a good thing or socially desirable to do this, that, or the other. And they’ll seek another lawyer if you try to have that discussion.

There’s a big incentive for lawyers to pad their bills, isn’t there?
Yes, and it’s common practice. It’s easy to round up. It’s easy to reflect on what you’ve done during the day and say you’ve worked for seven hours rather than six.

Why are lawyers so miserable?
If you practise law you’re plunged into what is by its nature a highly competitive, highly stressful environment that sucks up most of your time at the expense of things that most people think go a long way toward making life worth living, such as spending time with family, or reading a book.

The same could be said of many jobs, like banking or even journalism.
No doubt. But I think there’s more to it for lawyers than simply stress. If you’re a doctor, you may have a hell of a day, but at least you can be comforted by the idea that in some small way you improved the general state of society. I don’t think you can believe that if you’re a lawyer. I hasten to add that legal practice is very diverse, and there are lots of different kinds of people practising law, and this is not true of all of them. But it’s true of a lot of them. You come home at the end of the day and say, “Why did I bother doing that? What I’ve really done is make rich people a little bit richer, maybe, and as a result of that I can send them a big bill.” This is not a good way to spend your life. After you get over the initial drama of this high-stakes environment, you’re left with the feeling that this is a pointless occupation and you should find something more worthwhile to do.

Why did most of your students go into law?
A lot of people don’t like lawyers and would be horrified if their child came home and said, “I want to be a lawyer.” But it is a profession, and one with the potential of generating a significant income. It gives its members a certain power, the power of knowing something that other people don’t know [credence good provider]. And there is a kind of glamour associated with it. Look at all the television programs that deal with the law — people are fascinated with this process, even though they’re deeply suspicious of lawyers. And I think in many cases, certainly this was true in my case, people went into law because they couldn’t think of anything else to do.

Is there something else you should have done?
Oh yes, but I’m not going to tell you. I find myself increasingly in the role of critic of the legal profession, but I’ve spent my life as a lawyer. I went to law school in 1966, I’ve been in the legal profession one way or another for 41 years, it gives me no pleasure at the end of all that to look back and say, “Oh God, this was not a good way to spend my time.”

Is this book your penance?
[laughs] No. Do I think it will lead to some kind of significant reform of the legal profession? Of course not. It’s beyond any one person’s ability to do that. Do I think some kind of significant rethinking of the profession is in order? You bet I do.

So many of the lawyers you write about wound up stealing from their clients or bilking their firms. But greed wasn’t always the motive, was it?
No. I first got interested in this whole subject in 1989 or 1990, when I was a junior partner [at Blake, Cassels & Graydon]. The most prominent partner, Bob Donaldson, a nationally if not internationally respected lawyer making lots of money, was suddenly found to have had his hand in the till. That was a startling fact in itself, but here’s the thing that puzzled me most of all: the amounts of money involved were relatively minor. It wasn’t as if millions and millions had disappeared, it was more on the order of using money improperly to buy airline tickets to go to Bermuda for the weekend, penny-ante stuff by his standards. Why would somebody risk everything — reputation, friendship, professional status, even potentially freedom — for that? It certainly wasn’t greed. And in nearly every case I write about, the lawyers didn’t do it, for the most part, for money.

Well, is it self-destructiveness or is it arrogance?
Arrogance is part of it. If you’re taught how to manipulate rules, you lose respect for them, and that leads to a kind of arrogance: I’m bigger than the rules, I’m not the average man on the street who needs to be law-abiding because I know how to get around the rules. And there may be just a touch of the more common form of arrogance, too, which is “I’m smarter than they are, they’ll never catch me.” But you can be arrogant and still have a healthy sense of what’s good for you, and what dangers you shouldn’t run. I have some speculation about why people behave this way, and one reason is simple boredom. When people are bored, there’s a tendency to take risks.

What happens to lawyers who steal? How is the profession regulated?
The disciplinary process of the law societies in this country is deeply flawed. Lawyers are disciplined for breaches of professional rules, but it’s like so much in Canada: everything depends on where you live. What can get you disbarred in Alberta won’t have much effect on you at all in, say, Nova Scotia. The first difficulty with the disciplinary system is that if you’re a lawyer who’s alleged to have stepped afoul of the rules, you’re investigated by the law society. If they decide you’re a transgressor, they’ll prosecute you, they’ll hire a lawyer to do that, and the disciplinary committee itself is the law society. So you have the investigator, the prosecutor and the judge all essentially representing the same institution. I thought in this country we had a fundamental principle, that the person who investigates and prosecutes isn’t the same person who judges.

Is yours a widely held opinion?
I haven’t heard people rising up to complain about this. In the United States, by the way, disciplinary matters in just about every state are heard by courts, not by panels of the bar association, which is how it should be. I think Canada really has to get its act together. Look at the reforms in the U.K., which woke up some years ago to this problem and [adopted] quite sweeping reforms that largely removed self-regulation from the legal profession. Why in heaven the same sort of reforms are not under consideration in this country I do not know, except that self-regulation is regarded with quasi-religious fervour.

You talked to quite a few lawyers who’ve been caught doing something wrong. How many of them actually expressed remorse?
On the whole, there was not a whole lot of remorse expressed. I don’t think these were penitent people who were terribly ashamed of doing a bad thing. Take the case of Martin Wirick, the B.C. lawyer who was involved in a massive real estate fraud, I think it’s the single biggest legal fraud that Canada has ever experienced. It wasn’t as if he was stockpiling money to run off to South America. The most he ever got out of it was payment of very ordinary legal bills, and in fact I don’t think the client ever even fully paid them. So he didn’t do it for money. When I talked to him, he said things like, “Oh, I was just so tired, I just didn’t give a shit, I was unhappy, I hadn’t had a vacation in years.” What he did not say was, “When I think back on what I did, I’m so sorry about it, I’m so sorry about people who lost money as a result of my activities.” I think he was hapless, a bit of a schlemiel, and his client was a charismatic, glamourous person.

Is it common for lawyers to become enamoured of their clients?
Oh yes, very much so. I think lawyers can have a hero worship of their clients. Think of the whole Conrad Black trial, that poor Mark Kipnis who will probably go to jail because he did what the boss told him to do. It’s [a case of] the dull old lawyer with the charismatic client who says “Do this, do that,” and does the lawyer say, “Just a minute sir, this is not right”? No, of course not, because dull people can easily fall under the sway of charismatic people. I think quite a lot of that happens in the legal profession, though I have to emphasize that there’s a lot of difference between [a big firm] at Bay and King in Toronto and the single practitioner in Goderich. If you have an important client, a Conrad Black or somebody like that, who says he wants to do something but you refuse, he’ll just say, “Fine, I’m sure the law firm across the street will do it.” If your important client, who is also a big source of revenue for your firm, walks out the door, well, it’s not going to be good for your career. It takes a very strong and principled person to do that, particularly when you consider that the law is very complicated, and it’s not always absolutely clear what’s right, what’s wrong, what can and cannot be done. That makes it easier to say, “Well, let’s try it out and see what happens.”

Who stands out in your mind as being the worst of the bad lawyers you wrote about? I’m guessing you’re going to say Ingrid Chen, the Winnipeg lawyer.
There’s no doubt that she behaved abominably. She’s now in prison, because it was established that she hired enforcers to beat up clients who upset her, along with a whole variety of other things. But the behaviour was so bizarre, so manifestly self-destructive and likely to lead to catastrophe, that you can’t just say she’s a bad person who got what’s coming to her. It’s more that she has some deep problems that need to be sorted out. An interesting case is Michael Bomek, a criminal lawyer based in Flin Flon, Man. with a largely Aboriginal clientele, who was thought to be a creative and gutsy lawyer who fought against an RCMP detachment that was thought to be racist, and indeed there was subsequently a government commission that found it was racist. He was a notable figure and something of a hero, almost. And then it turned out that he had been having sexual relations with some of his male Aboriginal clients. The RCMP accused him of sexual assault and indeed he pled guilty, went to prison and was disbarred, though for other reasons. I went to Flin Flon and to the reserve and I wound up feeling sorry for him, I found him quite an engaging character. I wrote [an article] about him but subsequently he got into all kinds of other trouble. He got out of prison and was running a hot dog stand in Prince Albert — where’s Monty Python when you need them? — but he wasn’t just selling hot dogs, he was selling marijuana. The police busted him. But then the whole thing took a sinister turn, he was charged with further sexual transgressions involving children and was convicted of some of them. You look at this guy and there’s a lot, dare I say it, to admire, certainly in his early career. But perhaps, as the Crown attorney who prosecuted him the first time around told me, he’s a psychopath. I’d be very surprised if he had the slightest little bit of penitence in him.

Why are lawyers now so instrumental in money laundering operations?
There’s recently been a whole spate of national and international rules about money laundering, trying to get rid of it because it promotes organized crime. In Canada, lawyers have resisted, successfully, application of those rules to the legal profession. To simplify, they’ve said, “You cannot oblige us to report cash transactions to a government agency” — which, by the way, banks are now obliged to do — “because to do that would be a fundamental violation of solicitor-client privilege.” Meanwhile, those who know anything about this, like the auditor general of Canada and various high officials in the RCMP, have said that partly because they’re largely exempt from these rules, lawyers can become, and some have become, agents of money laundering. You go to your lawyer with cash because he’s exempt from these rules. The law society will say, “No, no, no, we have rules about this, any cash transaction over a certain amount has to be reported to the society.” But there certainly isn’t the full oversight by federal authorities that you find in all other areas where financial transactions happen. I think invoking solicitor-client privilege is nonsense. If you’re a lawyer, and somebody walks into your office and says he’s going to buy a house and needs to put a $50,000 deposit down, and here’s a briefcase full of cash, would you not think, Hmmm, this is very unusual? It’s not some massive encroachment of solicitor-client privilege to address this issue. It’s just plain common sense.

How can the average person protect herself from being cheated by a lawyer?
Do not be overawed, and feel free to question both the advice and the bill. Before the Internet, lawyers were gatekeepers, really the only ones, to this vast store of legal knowledge. Now, anybody can go on the Internet and get any Canadian statute, regulation, or case, easily. But people don’t seem to be doing that in the same way they do it with medicine, where if you have a pain in your toe, you go on Google.

The successful implementation of the Information Sharing Project ISP, would:

  1. translate franchise legalese into investor-friendly common English terms,
  2. provide hundreds of real-life examples of common problems from newspapers, public hearings, magazines, internet, etc.,
  3. use an easy-to-use, adult-oriented self-taught search format (think: Google for franchising),
  4. allow an innocent to become a pro very quickly (flattens learning curve by harnessing network effect of the internet),
  5. demonstrate that franchising (rent) has over 200 unique business risks versus non-franchised small business (ownership),
  6. create a true, franchisee-driven Web 2.0 forum by harnessing wikinomics and the inevitability of the Free! market in franchise information,
  7. demonstrate that franchising is practiced identically around the world,
  8. bypass the franchise bar’s monopoly gatekeeping function (cases forwarded on merit not whether or not they support the industry elite’s purposes) ,
  9. allow low-cost [free maybe] worldwide education and self-diagnosis which is independent of the legal profession’s monopoly power on information,
  10. improve access to justice by lowering costs by creating a competitve expert market (supplants franchisebar/legal only with legal, expert system software and  non-legal consultancy markets),
  11. create an opportunity to aggregate resources to fund precedent-setting litigation which is currently suppressed by credence good monopolists who cheat,
  12. separate diagnosis from treatment within the repair cycle (proven to minimize credence good opportunism problems), and
  13. move to solve the lawyer:client opportunism and the don’t-switch-horses-in-the-middle-of-the-race (sunk costs) dilemmas.

Paper-based, 19C linear technology (the law) being electrocuted by hundreds of dissident franchisee blogs, each with an ISP icon that instantly makes the [current economic rents (payments over what is justified: gouging) of a jealously guarded monopoly on information], drop instantly to next-to-zero.

If my analysis is correct, the appropriate regulatory and administrative law response would be to acknowledge and receive an individual citizen’s opinion, but if inaction in the face of demonstrative wrongdoing by “winners” in brokering industrial interests plead either:

  1. resource poverty or
  2. legislative incapacity.

With the passing of the Ontario Arthur Wishart Act (Franchise Disclosure), 2000 (2) was off the table so the only option left was 1.: lack of resources. Mr. Allan MacDermid of the now ironically and historically frequently renamed Ministry of Small Business and Consumer Services played that card: love to help but our hands are tied (no $).

Funny thing is: I never asked the Ontario government for economic help, having determined that this must be a private sector solution. [free download of 2003 ISP Proposal].

BTW: Industry Canada played exactly the same game when I defined Predatory franchise lending in my 2005 paper called, Franchising Opportunism. In 2006 (I intentionally waited 365 days to followup), Mr. Peter Webber said to a consulting proposal I wrote (that he suggested I send to him) that: not enough money to fund any new audit activity.

Mr. Webber suggested that I check back in 5 years when the Canada Small Business Financing Act, CSBFA and Regulations would go up for it next statutory review.

Perspective: In 2005-06, Industry Canada loan program paid out $72.5 million in total claims and my audit service proposal was for $23,200 plus GST for this theoretically self-funded federal program.

Midnight move: This time into the gutter

December 12, 2008

Restaurant dispute 20081211

middlefingerThe top image is from a Canadian Press article by Nelson Wyatt called Passersby stunned as restaurant contents emptied into Montreal street.

It also hit Canada’s evening television news program, The National and resides on the CBC website where some rapidly growing comments are worth checking out.

  1. What the hell happened here?
  2. Whay would a Montreal, Canada franchisee simply rip everything out (including cash from tips!) and leave them on the street?

There is a perfectly good and rational reason for this. These were the actions of a perfectly sane, far-sighted and indeed shrewd small business investor.

  • he or she realized they were going bankrupt no matter what they did (things they can control +/- = wisdom),
  • they did what they thought was the noblest thing to do which was to deny the franchisor and bank their profits on this churn while
  • demonstrating a fine French Canadian tradition of exiting with a some self-respect intact (see bottom image).

Here is what might have happened if this is like other franchise relationship meltdowns I have seen in the last 10 years:

Normal Contract Terms:

  1. The franchisee leases the premises from the franchisor (who then leases it from the landlord). The franchisee is the subleasee: he pays the franchisor who (you hope) pays the landlord. This may or may not have been the case here. (How quickly a new body can be installed indicates a franchisor head lease position.)
  2. The franchisor has the legal right to withhold their approval if a franchisee brings forward a proposed buyer. Some do it to drive an exiting franchisee into a corner.
  3. The operator’s franchise agreement with the franchisor says: “If the franchisee breaches the agreement, in any way at all, (70 pages long, including operating manuals, debt payments, appendices, etc.) then that automatically means that the lease has been breached (cross-default: much easier, faster, cheaper to throw a franchisee onto the street than to sue them under the body of the agreement).
  4. It appears that there were some franchisee free riding but we’re only hearing Enzo’s side of the story. I don’ t think his life savings were on the line because of his “training and operational deficiencies”. Yeah right.
  5. On a breach with a “non-compliant” [shithead] franchisee, the franchisor and/or landlord can padlock the store but they can’t touch the equipment or supplies because it’s owned by the franchisee.
  6. The franchisee is therefore faced with: the right of ownership without any rights to the location to operate the business.

The next step is what happens 99% of the time:

  1. The franchisee acts like a sheep. He sells either to (1) the franchisor (who operates for a short or long time) or (2) to a new sucker (I mean, Canadian small business franchise investor). Seldom do they debrand and become independent.
  2. The franchisee sells because they think their business is worth, say, $400,000, and if they’re “a good little boy” the franchisor will let them keep 100% of the money.
  3. The franchisor (knowing that the business is a dog or wanting to crucify this franchisee as a lesson to the flock) lets them keep 20% instead of the normal 15% because they can control the sale 4 or 5 different ways

What I think happened THIS TIME:

The franchisee saw through the trap. He knew or suspected that they were going bankrupt no matter what they did and that the equipment was already “underwater” (ie. it was of zero value to them but tied to massive debt. The only value it held was, mostly, in-place to the franchisor).

  • The bank financed it for, say, $100,000 based on a bogus appraisal 12 months ago.
  • The bank’s own receiver would only realize 15% disposal.
  • The franchisor would re-buy the equipment (very specialized, an idiosyncratic sunk cost to be technical about it) on the day of auction and
  • then sell on to the next more compliant investor (Sucker2?).

Also he may have been wised to the fact that franchise bankers and franchisors have an “understanding”: long-term, very lucrative relationship spanning the whole franchise system over many years versus one lonely loser family.

ANALYSIS: Going bankrupt for either $300,000 or $250,000 or $450, 000 doesn’t matter very much, does it? The equipment may have actually been used when they opened up (when  they thought they’d be getting new.) The money that appears to be thrown away (on the street) was very minor when compared to the operating losses that have already take place.

The franchisee and his spouse as guarantors of the bank’s debt for the equipment (if they’re not already personally liable under the franchise agreement). btw: Incorporating a franchised business? Simply putting your lawyer’s kids through school.

And with the bank being able to have up to 90% of their loan paid for (if the equipment loan was cut from the Canada Small Business Financing program).

  • What do does the bank care if some street people in Montreal were carting away a small businessperson’s life saving?

Ah: The beauty of dealing with other people’s money.

  • the franchisor (franchisee’s life savings) and
  • the bank (the franchisee and spouse’s bankruptcy).

Of course, this is all entirely speculative.

%d bloggers like this: