Want to Sue? Get an independent 2nd opinion

Wise in medicine. Critical in franchise law.

Independent consultants ensure their honesty from pre-trial evaluation (before 1st interview) to settlement.

Any CDN lawyer who can’t work with me is saying a lot about themselves.

Don’t trust in non-verifiable monopoly services.

TEST: How’s your one franchisor: one franchisee relationship working for you?

Do franchisee attorneys cheat at settlement time?

Attorneys provide services that economists classify as credence goods which are quite susceptible to fraud.

Franchisee attorneys sometimes act on their own self-interest because only the elites know the game and they mostly keep their mouths shut. After the confidentiality agreements are signed, there is very little danger of client complaints.

Here is one perspective on the U.S. Quiznos class action lawsuit settlement process that resonates.

If you were a conspiracy theorist, might you suspect something like…..

The lawyers for both sides colluded to end the case in a manner that got the franchisees nothing; cost the franchisor nothing other than its legal fees (because the debt written off was worthless anyway); the “benefits” to the franchisees are illusory and valuless; the judge would sign off on anything just to clear the case from his docket so long as he had some/any piece of paper in the record saying that the franchisees were getting real value; and they found a valuation “expert” with a degree in alchemy.

NAH! THEY WOULDN’T DO THAT.WOULD THEY?

Richard Solomon has over 40 years of franchise law experience in the United States and his Franchise Remedies site is an important resource.

Stewart’s Franchising Laws: Group power growth

Stewart’s Law (Group power) – the strength of a franchisee group will double every 3 months if not interfered with by a credence good provider.

This network effect-empowered capability is cheaper to deal with from within the group than by the franchisor directly.

Explanation: As franchisees gather together, their power grows exponentially not in a straight line way (ie. not added but MULTIPLIED and CUMULATIVE).

They gain progressively more confidence, build trust and move forward very much independent of the pettiness that revenge breeds.

Click on image (above) to see as you add a few members, their collective power increases by a much greater amount that they ever imagine. (This is what franchisors and their advisors know that franchisees fail to appreciate.)

Well before they realize their own, unleashed capability,  a lawyer usually has been assigned to confuse and derail their efforts.

Credence good providers are paid very, very well by the industry via referrals, new clients, hourly rates, promotion, and publication opportunities.

Franchisees should never start with a brand name attorney as their leader.

This is what differentiates an ordinary IndFA and what I have defined as an Attorneyless franchisee network, AFN: a AFN is franchisee-led  toward success, an IndFA is attorney-captured and almost 100% guaranteed for failure or impotence.

What happens when franchisees turn off the Cash Flow tap?

I do not know, precisely.

But the greatest “winners” may very well be those that  turn it hard off, immediately.

I think anyone with any skin in the franchise game should be re-thinking their assumptions very carefully, right now. With their peers and with a commercial lawyer.

I wrote over at Blue MauMau that I thought franchising was undergoing a crisis of confidence. FuwaFuwaUsagi seems to agree.

This distrust is really different in four ways:

1. it is for all franchises (not Brand A or Brand B),
2. systemic (affects all brands),
3. cataclysmic (most systems underwater in one year?)  and
4. it is from the franchisor’s lending associates (not franchisees).

This is fundamentally different than in any other time in franchising’s history. Pay attention.

How an Industry Adapts into Into It’s Own Destruction

Unfettered capitalism is exceptionally efficient in allocating resources, maximizing ROI. But capitalism has some very nasty byproducts (externality: spillover costs). Fraud is a well-known example of an externality that markets, alone, cannot correct for. We are seeing now the carnage of short-term only incentives. Totally predictable, totally understandable.

1. Once upon a time, franchisors acted responsibly and achieved an adequate return on investment, ROI. They invested in real industries with competent managers and franchisee partners. Col. Sanders, Ray Kroc.

2. A franchisors decided to cheat. They pushed the opportunistic envelope by treating slaughtering instead of shearing investors. They made a higher ROI than the less sharp franchisors because it is always more profitable to steal than to earn money.

3. A sophisticated understanding, “conspiracy”, cabal was knit together with the franchise bar, suppliers, lenders, regulators, and the media (Big Franchising). There is never any reason to write down anything: each independent party is simply acting in their self-interest by peddling these false franchises. Of course, short-cyclers always cut the apple trees down for firewood instead of caring into the long-term.

4. The public still believed that franchising was Ok but with a few rotten apples. Over time, though, greater doubts were raised even though the information monopoly still was holding.

5. The influence of the few innovator franchisors and Big Franchising grew and grew.  It was going very, very well: no one suspected a thing and the sheep were as docile as anything. Only the chumps didn’t adapt by becoming tyrants themselves. Everyone made out like bandits that was wise to what became more and more to resemble a confidence game or ponzi scheme.

6. Then came the internet and lower-cost sharing of information. This would be technological revolution that not change but destroy the credence good monopolists’ power.

It’s over because their own greed and hubris will result in wholesale investor defections lead by non-franchise bar solicitors.

The Fixer: Getting professional thieves out of Trouble

Professional criminals have always relied on  The Fixer.

He is someone of high political, economic and career influence who solves a professional thief’s problem for a fee.

Secrecy and deceit are required because of the extra-legal nature of some of the work.

A historical example of The Fixer would be  William M. (Boss Tweed) Tweed of Tammany Hall. [see above]. Tammany Hall, likened often to a machine, ruled the City of New York from 1790 to to the 1960s.

People wonder why franchisors, franchise bankers, sales agents, the franchise bar, etc. can get away with [almost] bloody murder. A study of history of professional thievery can provide some hints:

The professional thief generally has a record in the Bureau of Identification as long as your arm, but after most of the cases “dismissed” or “no disposition” is entered. This is due to the thief’s ability to fix cases.

In order to send a thief to the penitentiary, it is necessary to have the co-operation of the victim, witnesses, police, bailiffs, clerks, grand jury, jury, prosecutor, judge, and perhaps others. A weak link in this chain can practically always be found, and any of the links can be broken if you have pressure enough. there is no one who cannot be influenced if you go at it right and have sufficient backing, financially and politically.  p. 82

Professionals within franchising make more money by fixing problems (sabotaging valid claims) than they do by solving them (reducing opportunism). It’s that simple: Less money is deducted from the theft when you fix a case, even after paying The Fixer’s fee. It is very easy for a franchise legal expert to lie to complaining investor [Credence good cheaters]. The lawyer knows that he is not under any legal duty to tell the truth until a solicitor-client relationship is created. And the proof is in the pudding: In 10 years, I know of no franchisee-lead case that would be considered a success by the investors themselves.

The fixer acquires his position with professional thieves by service. He tries to maintain a batting average of one thousand. Not all of them can do this, but their record is so good that the thief feels secure if a regular fixer is on the case. [Blonger, the Denver fixer for confidence men, had the reputation of not having one man sent to prison in twenty years under his protection.] p. 88

Modern franchising runs on political and economic influence. Our Australian friends are simply the latest who have been wised to that reality. Again, from the past:

Fixing is a mixture of finance and politics. It is primarily a financial transaction, bought and paid for by everyone concerned. But it is made possible by politics and often involves political favors as well…For the thief, fixing is almost always a financial transaction…from the point of view of coppers, clerks, and bailiffs, fixing is primarily a financial transaction…The prosecutor and judge are probably handled with more finesse.  p. 98-9

I have already used a tree as an analogy for Big Franchising (vast weight of organism is below ground: iceberg). Modern franchising has a visible and invisible nature (Overworld :: Underworld):

From the point of view of the fixer, also, this is a financial transaction. One fixer said to a thief: “Everything I get is bought and paid for, just as you pay me. No one gets any political or other favors.” The fixer can operate only if he has the consent and good will of those who are politically powerful. he may get a start on the basis of old friendships, but he can keep his position as fixer only if he kicks in. He must turn over to the political barons the larger part of what he gets from the thief, and his standing is determined by his reliability in dealing with them. p. 100

Thieves of nominally independent corporations (ie. franchisors, lenders, sales agents, legal, supply, etc.) would NEVER act with such arrogance if it were not for The Fixer’s protection racket. The weakest link is always the franchisee who 99% of the time goes away thinking they had a one-off bad luck with a cartoon-character type of franchisor thief. They are satisfied to receive 10% of their own money back and remain in silence via shame and contract. Professional franchising practitioners are, however, experienced and shrewd students of human nature.

No thief ever expects to have the bad luck to run into a case that cannot be fixed in some manner. This conclusion is not formed because of he thief’s conceit but because of his knowledge of the weaknesses and limitations of the average citizen and public official. p. 106

National franchisor associations act as a forum for coordinating Overground and Underground activities. The Fixer usually enjoys a very influential role such as Chief Counsel or Chairman of the franchisor controlled association. The Fixer is a lawyer because solicitor-client privilege harbours his clients’ extralegal activities. Politicians who are very often lawyers, know their political career is short and are not foolish enough to destroy their future legal earnings by crossing a mandarin partner of the some of the most influential and aggressive internationally-based, multi-line law firms.

It is sometimes believed that he fixer is the general boss of the thieves. This is an error. The function of the fixer is to get thieves out of trouble, not to control them. He often gives some advice to out-of-town professionals, after agreeing to take care of them. p. 107

The Fixer runs a monopoly on the most lucrative and industry-challenging cases [national, well-funded franchisees group or class-actions) while allowing the tactical fixing to happen to Tier 2 law firms who are seen as franchise experts within the franchise bar. The Fixer operates a protection racket that has the appearance of a law practice.

There is in every large city a regular fixer for professional thieves. He has no agents and does not solicit and seldom takes any case except that of a professional thief, just as they seldom go to anyone except him. The centralized and monopolistic system of fixing for professional thieves is found in practically all the large cities and many of the small ones. p. 87

Source: — The Professional Thief, Chapter 4: The Fix, The University of Chicago, 1937 [my emphasis]

I am at a serious disadvantage when discussing the subterranean nature of franchising. I am not a member of that brotherhood and have only caught glimpses of behavior that has piqued my interests over the years.

• Professional thieves and modern franchise executives function in a similar way, in so much as they are primarily profit-making activities that need to manage risks and returns, under stealth.

They are highly energetic, charming, some exceptionally well-educated people who hold 2 conflicting ideas in their heads: They know they prey upon society but also want not to be an enemy of the state (which as profiting from crime, they surely are).

• This internal, unresolved conflict (cognitive dissonance) accounts for their bullying, arrogant, irritable, defensive and plain mean behavior. They can’t ever quite buy their acceptance into respectable society.

They:

1. possess highly migratory and portable special skills (especially persuasion, and communication),
2. rely primarily on on-the-job training (often passed down from father to son, mentorship, tutelage),
3. are highly congenial and supportive of other professional thieves (including competing trademarks, are compelled to warn and bail out even those they personally dislike),
4. steal in a full time, planned and methodical manner,
5. converse privately in a highly-specialized language (argot: legalese, mumbo-jumbo)
6. achieve recognition for competence from other peers (who you know is important),
7. operate in a very rigidly adhered to code of behavior, and [above all else]

8. particularly loathe anyone that (a) would inform “squeal,” or “squawk” and/or (b) has yet to lose their integrity.

They inhabit a modern version of The Waste Land or purgatory. Their only defense is confusion and attempting to degrade those impertinent enough to hold up a mirror to their face.

Solicitor-client relationship: When does it start?

Congratulations.

You’re just finished your initial meeting with a franchise lawyer. You chose the baddest ass, most franchisee-friendly sob you could find. He was “kind” enough to give you 30 minutes of his time and you told him your whole story. The great man asked a few questions (actually a fair number about your net worth) but alas…unless you can rally another 9 other losers: Too bad, so sad; you’re shit out of luck.

Great bed side manner…regret to inform how weak the law is…best to put this all behind you (my most favouritest thought-terminating cliche).

You’ve just shot your mouth off to an industry insider that may very well use that information against your best interests. What?

I’ll explain with a real-life example.

1. Seven distributors walk into the most “pre-eminent” CDN franchisee lawyer’s office and tell him their story. His response: No case here go bankrupt. No if ands or buts: Do not pass Go…

2. The Group of Seven wants a second opinion. They call to me, I meet the group at their home and talk to a then-independent 2nd lawyer (just new into franchisiing but quite keen). We conclude: Excellent case. U.S. franchisor was too lazy to give disclosure documents after the Arthur Wishart Act (Franchise Disclosure) was passed in 2000. These are franchisees not distributors and therefore they can rescind their contract, dissolve their relationship and get their money back. Easy peasy.

1. One set of case facts PLUS
2. one Ontario law EQUALS
3. 2 irreconcilably, diametrically opposed legal opinions?

How is this possible? Simple it has to do with duty and the timing of when a solicitor/client relationship is formed.

Fiduciary Duty: I am not a lawyer and the Upper Canada Law Society website wasn’t much help so here is a definition from the Canadian Encyclopedia.

The legal system recognizes a multitude of special relationships in which one party is required to look after the best interests of the other in an exemplary manner. These relationships, which include solicitor/client, physician/patient, priest/parishioner, parent/child, partner/partner, director/corporation and principle/agent, are called fiduciary relationships.

Fiduciary relationships entail trust and confidence and require that fiduciaries act honestly, in good faith, and strictly in the best interests of the beneficiaries of such relationships.

Solicitor/client Relationship: This relationship ONLY starts when you formally enter into a contract for legal services. The signs are when you cut the cheque for a retainer, sign an agreement, etc.

Anything that you say to a lawyer before you are his client (when you or the relationship is consummated) does not have this legal protection (ie. the information you provide can, and in franchising is, be used against your interests).

This is how an internationally known franchise lawyer can give you knowingly false advice at the first meeting:

There is no legal duty for him to do so because the solicitor/client relationship has NOT been created yet (before contract for legal services started).

But why turn away work? The franchisees were steered away from defending themselves because there were (and still are) literally hundreds of franchise systems in Ontario that are ignoring the Wishart Act. These are called accidental or unintentional franchises (true franchisors who don’t want to bother with some stupid provincial law) .

The first lawyer knew that by exposing the Group of Seven’s franchisor  in public (ie. in Superior Court) he would be very unpopular at the next franchisor-only national trade association golf tournament. (Please don’t tell anyone but this is why this organization [ie.] has an Ombudsman program [ie.]: To have you come in and be convinced you have no case. Skim off the biggest floaters. That’s why the banks are the biggest sponsors based on the theory that they have the most damaging facts to conceal, like, Predatory franchise lending.)

• It would be bad form for the franchise law expert to showing the other 32,000 Ontario lawyers (the unwashed masses: 99.9% of the province’s lawyers who are not in the cabal) where the juicy billable hours are.
• Let alone the risk of dozens of copy cat lawsuits against franchisors, banks, sales agents, lawyers, etc.
• And the inconvenient lawsuit against the franchisor’s lawyer for contempt of a provincial law that he is, as an Officer of the Cour, duty-bound to respect (should have dropped his masquerading client if they refused to self-identify accurately).
• This would not do when the franchise bar pays so lucratively when run as a credence good monopoly (see Winand Emons, Credence Goods: The Monopoly Case).

When you hear these words together: You should use an expert franchise lawyer…

…you should “reach for your gun”

(Hermann Goering’s advice when you hear the word culture).

Yes you should trust your lawyer. But you should qualify him or her first. Trust but verify is a very good idea.

Since being a lawyer means having to survive in business to practice another day, you should determine where the vast bulk of his future earnings are coming from (franchisee, franchisor or non-franchised commercial law).

• Based strictly on economics (95% of legal services paid for by franchisors and friends and credence good cheaters who are run as a monopoly), a franchise expert lawyer should be the last person a franchisee talks to.

I always say talk to a 60-year old regional commercial lawyer with his name on the building. Anyone else is more than likely to torpedo your perfectly watertight case.

Credence good Relationships: Those that know more than you in franchising

Remember as a child the feeling you had when you were the one that was WAY up there?

Remember the feeling in your stomach when you imagined what would happen if your partner decided to bail on the relationship?

• This is exactly the problem with franchising: you are dependent and reliant on many people who know much more than you do.

In franchising you will enter into many relationships that by their very nature have hidden dangers. The source of the greatest danger is the economic reality of credence goods.

Credence goods relationships are commercial exchanges that have the following characteristics:

1. the buyer cannot tell really well if he has a problem (can’t diagnose),
2. the buyer does not know how much of the good or service he needs to fix a problem (can’t assign appropriate resources to solve problem),
3. the buyer cannot judge the quality of the service they need or have received (even after paying for it) and
4. the person providing the service knows your vulnerability and tends therefore (even sometimes unintentionally) to and persuade you what is in their (as opposed to your) best interests (see Credence Goods attracts Experts who Cheat).

Some examples in every day life are: your vitamin supplements, car mechanic, doctor, lawyer,  and accountant.

Credence goods have a very, very important role to play in franchising.

Let’s specify the sources of vulnerability (others know more than you do) for franchise investors:

• often no small business experience (added to an arrogant attitude that running a SME is a no-brainer v. being an employee),
• no experience in vertical market of franchise (can’t compare; relies on franchisor’s support),
• there are much more monopoly or near-monopoly situations in franchising v. independent business (monopolist can charge more for lower quality: extracts economic rents from captive)
• monopolies create a moral hazard: others do not pay the cost for their actions (externalities),
• required to devote 100% of time to investment (all eggs in one basket),
• spouse and others often gets sucked in as unpaid labourers, and
• usually 1st time as franchisee (very few repeat mom-and-pop franchisees).

You’re on the short end of the information imbalance which creates an incentive for the other party to cheat (strip value from you).

Franchise Relationships

• franchisee : salesman/consultant,
• franchisee : media [sponsor of Discovery Day],
• franchisee : franchisor executive [pre-sale honeymoon],
• franchisee : pre-sale lawyer [usually a dunce generalist but gives the pretense of wisdom],
• franchisee : current franchisee [most existing Ees know they will be punished if they are honest; so deeply into denial that they honestly believe their own lies],
• franchisee : supplier [assume cost savings are going to flow-through to them],

Undue Influence: The Case of the AUS Professor

Publicly funded institutions can become co-opted or captured by special interests.

Some university faculties have a better or worse reputation for pandering to special interests when compared to other disciplines. Business schools are not well respected by other faculties for their independence of thought.

I’ve seen it at my old school and confirmed it in other universities as well.

The Greeks defined 3 modes of persuasion:

• logos (reliance on facts and figures: can be true or false),
• ethos (authority, honesty of speaker, morality), and
• pathos (appeal to emotions, sense of injustice, outrage).

Franchisees appear in front of public hearings and rely almost entirely on the rhetorical device of an appeal to justice: “It’s not fair that they did this and that.” Policy makers listen and judge its “truthiness“.

• Generally, their narratives are concrete, visceral and credible.

Big Franchising responds if they have any remaining credibility, directly with at times shaky logos and ethos.

1. Consider the following article in Australia’s SmartCompany: Survey reveals drop in franchising disputes as franchising inquiry continues.

It says:

A new survey of Australia’s $130 billion franchise sector has shown disputes between franchisees and franchisors have declined, with just 2% of Australia’s franchisees classified as being in dispute.

Let’s stop there and list the persuasive assumptions that this single sentence relies upon:

• survey: a scientific, logical, rational, independently verifiable academic study that is reviewed by other academics [did it appear in a refereed academic journal? no],
• $130 billion sector: size matters: infers that big = successful, growth is good [uses social proof, is a huge credit crisis and run-away cancer growth good?],
• declining number of disputes: situation is getting better [what is a dispute? how many have abandoned? is the mean dispute big or small?],
• just 2% of franchisees in disputes: tiny problems, inconsequential, minuscule [can use anchoring to deceive].

This opening sentence is strictly a blatant misrepresentation, lacking in any connection to formal logic or any verifiable measure. The “just 2%” is a hallmark give away as to lack of any journalistic standards or any pretense of editorial oversight. Shame on SmartCompany but why is a university named?

If the 2008 Report is similar in method to the 2006 Report, it may be junk science: bought and paid for by its funders, the Franchise Council of Australia. Franchisor-controlled associations are well-known for blocking any changes to a statute, regulations and public regulatory body mandate.

You decide.

2. Next, let’s take a look at more detail into the role of the Griffith University. See the FCA’s media release: THE POWER OF ONE STRONG SECTOR REVEALED IN POSITIVE RESEARCH FINDINGS

Authority is clearly defined as another Weapon of Influence by social psychologist Robert Cialdini that can be applied to universities. They can be used to give the impression of academically rigorous research when really the work is simply a consultant’s report.

I don’t begrudge business admin profs or their peers earning the vast majority of their income from consulting to one or the other industry.

What I wonder is whether it is appropriate for an academic to overstates their conclusions (either intentionally or unintentionally) during a time of national lawmaking?

You decide if Professor Powell has exercised undue influence or abused his duty:

“The continued growth and maturation of Australian franchising is impressive, particularly considering the current economic outlook, a recent change of government, and a franchising sector that has faced close government scrutiny” said Professor Michael Powell. Pro-Vice Chancellor (Business), Griffith Business School.

Did Professor Powell interfere with the Parliamentary Joint Committee on Corporations and Financial Services’s Inquiry into the Franchising Code of Conduct? I checked the 140 written submissions and didn’t see his name.

The test could be: Did he know or would he be reasonably been expected to know that his publicly funded authority could be used used to influence [inappropriately interfere?] with the operation of a  parliamentary committee?

1. True scholastic work is published in refereed professionally-recognized journals to ensure high quality (an editor and reviewing peers, correct methodology, usually a very, very narrow scope, transparent auditing, meets ethical and conflict of interests standards, vetted before publishing, etc.). There is a whole series of checks and balances to weed out biases [innocent and not so innocent].
2. Consulting work, no matter how many PhDs are piled up, has none of these centuries-old safeguards in place.

• Blurring these lines is not fair, especially during a time of a fairly controversial public lawmaking process.

Academic research is a credence good and as we have seen, is susceptible to cheating because “Joe Public” cannot determine if it is the appropriate quality or quantity.

I have read enough articles and progressed far enough in a good school to seriously question the validity and reliability of this work. I imagine any academic that values their reputation would not rely or quote this report in their submission to the Joint Committee.

Unfortunately, some scholars are more closely attuned to serving dominant commercial objectives rather than the pursuit of reality-based truth (as opposed to power-based truth) as is their duty as a tenured academic.

My qualifications only go so far to speak on behalf of academic rigour and the arguments not made [eg. sunk costs as the primary and unique source of franchisor opportunism] in the current Australian public hearing.

If a second opinion were to be sought, I believe Gillian K. Hadfield might be an appropriate candidate. pdf CV

il Duce Franchise Lawyer

Il Duce means leader in Italian.

It is a term that is often applied by those that choose to influence others in a dictatorial manner.

A national franchise association assists the setting up and marketing of business format franchises in that country.

They lobby and represent the franchisors’ view and oppose franchisees when their interests are in conflict with their masters’.

Most national associations are members of the World Franchise Council, WFC. The WFC is headquartered in the franchise powerhouse nation of New Zealandand controlled by the U.S. International Franchise Association.

Each Nation: Every country has one lawyer who is recognized as Il Duce, the general, the top dog or alpha male (ie. the individual in the community to whom the others follow and defer.).

He wields influence primarily through the national franchise association where he is often the general counsel, Chairman of the Board or other such title.

Their job is to co-ordinate the defence and promotion of franchising within their country.  They are profit maximizing businesspeople who rely on the public’s erroneous belief in their professionalism and impartiality. They give advice freely when they there is no client:solicitor duty to do so (before a contract is formed) and remain in the shadows otherwise.

Because of the credence good nature of legal services and their closely guarded monopoly on providing legal services, many franchise lawyers act as fraudulent experts. They are fully aware of this which explains why there are so many unhappy lawyers.

The Il Duce is seen as an expert who is never personally tested on his abilities by a discerning superior: He never goes to Court. These cowards:

1. control their clients (franchisors) by preying on their fears of what franchisees could accomplish if franchisees were smart and organized (the weakest franchisee group is stronger than the strongest franchisor),
2. promotes the self-serving and hazardous thought that you should talk to only to a franchise lawyer (akin to having a murderer’s brother performng the autopsy),
3. make sure the most lucrative legal service referrals (international expansion from North American franchisors) go only to lawyers who “play by the rules” (franchise lawyers who “support” the franchisors’ position),
4. speak to governments under the guise of an “impartial” expert (although they NEVER take on franchisee cases),
5. punishes franchisee advocates by suing them into bankruptcy (just for fun and as an example),
6. award revenue-generating opportunities (speaking at association-sponsored trade shows) to themselves and “their team”,
7. write carefully crafted legal columns in the national franchisor-sponsored trade rag (sales: see Franchise Canada magazine or pseudo-journalism, see Franchise Times),
8. a senior partner of an internationally influential multi-line law firm (allies of friends into political back rooms),
9. degrades the political process credibility by showing that money buys laws,
10. keep active in the state, national and international bar associations, and, especially
11. the American Bar Association’s Forum on Franchising (the latest and greatest ways to serve those that buy 95% of their services: ie. franchisors),

Credence Goods attract Experts who Cheat

If I had to choose the second concept that was critical to know in the study of franchising, it would be This one.

HINT: If they’re talking about protecting franchisees and not talking about credence goods, they’re all hat and no cattle [all show and no go].

Some goods and services, by their very nature, come with much higher risks than others. These risks can be compounded and therefore astronomically high if:

• there are few experts to choose from in a market,
• the costs of switching experts is very high,
• this is the first time you have contracted for these expert services, and
• the experts organize themselves to protect one another.

As we shall see, franchising has compounded, interdependent and very aggressive expert stakeholders [see Big Franchising: franchisors, franchise bar, lenders, sales agents, consultants, politicians, media, etc].

• As a franchise investor, you are at a severe disadvantage because of credence good service providers.

A Credence good is a good or services with the following 3 characteristics:

1. the value is difficult or impossible for the buyer to determine accurately before they buy it,
2. the buyer can’t know if it was useful [even after they did buy it] and
3. also, the seller does know the value of #1 and #2 [could therefore exploit this ignorance for their own self-interest: information asymmetry leads to opportunism risk]. Wikipedia

Uwe Dulleck and Rudolf Kerschbamer:

Consumers’ concerns about being defrauded seem not to be unfounded: Emons (1997) cites a Swiss study reporting that the average person’s probability of receiving one of seven major surgical interventions is one third that of a physician or a member of a physician’s family. Wolinsky (1993, 1995) refers to a survey conducted by the Department of Transportation estimating that more than half of auto repairs are unnecessary…These examples reveal that infomational asymmetry matters. Free download: On Doctors, Mechanics and Computer Specialists – The Economics of Credence Goods

Gillian K. Hadfield, University of Southern California:

Economists refer to a good as a credence good if it is provided by an expert who also determines the buyer’s needs. Buyers of credence goods are unable to assess how much of the good or service they in fact need; nor can they assess whether or not the service was performed or how well. This puts buyers at risk of opportunistic behavior on the part of sellers: they may be sold too much of a service or billed for services not performed or performed poorly. Theoretical work on markets for credence goods predicts that markets for credence goods may be characterized by fraud (billing for unnecessary services or services not performed) and a price mark-up over cost…Legal services are credence goods… Free download: The Price of Law: How the Market for Lawyers Distorts the Justice System

Winand Emons, University of Bern:

With a credence good, consumers are never sure about the extent of the good that they actually need. Experts such as doctors and lawyers, as well as auto mechanics and appliance service-persons (the sellers) not only provide the services, but also act as the expert in determining the customer’s requirements. This information asymmetry between buyers and the seller creates strong incentives for the seller to cheat. Free dowload: Credence Good Monopolists

We will come back to credence goods and how these types of services really help value being stripped from investors with deceit [opportunism].