Trade Show activism: Counterspin the Lies on their Selling Field

February 11, 2009

franchiseshowThis ad appeared in today’s Toronto Star.

Just a few points:

1. Contrary to the heading, you do not “buy” a franchise. You sink cash into this type of business opportunity and hope to achieve a salary and ROI over the life of your license of using the trademark using a promised “proven system”.

2. Small business is always a lot harder than you’d ever think. It takes years to develop the technical, management and decision making skills to be a success. Often the cash burn rate in franchising is so great that you never get to see profitable times: You simply flame out too early.

3. Your first contact with a trademark franchise system should never be at  a trade show. You are at a very big disadvantage at a trade show: they control the atmosphere, appear much more successful than they actually are and give the false sense of being in a group of profitable businesses.

Big Show costing Big Dough: National franchise associations such as the Canadian Franchise Association rely very heavily on the revenue that these shows deliver. These types of shows are ground-zero in the subtle and not-so subtle art of persuading mom and pop investors that the next franchise will make them a millionaire.

In 1998, I showed up with a CBC television crew to the fall CFA show. We handed out pamphlets warning attendees, intercepted the minister as he was exiting from his franchisor rah-rah speech (the last time an Ontario minister showed up, I think) and barged our way into the trade show to get some grip-and-grin footage with thinly smiling salespeople.

  • The CFA and their supporters were not amused.
  • Everyone pays a lot of money to bamboozle the next chump.
  • They certainly don’t need anyone coming to piss on their parade.

Their carefully planned PR news puff piece, was turned inside out: Toronto viewers instead saw a be careful of the predators out there story instead.

I guess it was predictable that Dan Farmer of the Royal Bank of Canada would insist that I never show up at another franchise trade show if I wanted financial support for the Canadian Alliance of Franchise Operators. I kept my word although I never saw $1 from any of the 5 banks that financially underlay all Canadian franchising.

In 1998 we had to convince a television editor to assign a reporter, a videographer, record, edit and then air the results. Tough getting media attention because franchise fraud is pegged as a niche audience item.

A little over 10 years later, someone just needs to:

  1. slip a digital camera in their jacket,
  2. record a few clips,
  3. use free edit software,and
  4. create and post YouTube video (I’ve already reserved a FranchiseFool channel, btw) that shows examples of how franchise salesmen openly lie at a trade show because the franchise agreements that give them a License to Lie, Cheat and Steal (kudos to Blue MauMau) from mom and pop investors.
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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]


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