Hidden Risks: Franchising as a poisoned apple

February 4, 2009

snakeappleYou know 100% of the time you’re dealing with a snake if they say franchising is safer than independent business.

U.K. predators are still able  to get their media release lies printed as truth.

Comparing franchising with non-franchised businesses is normally an exercise in concealing risk. Hiding risk is exactly what caused the current economic meltdown.

Franchised businesses have unique risks:

  1. usually from several directions,
  2. very powerful because they are unexpected,
  3. many of them at play (hiding in plain sight),
  4. both sudden and slow (blow up versus slow bleed),
  5. unknown by franchisees (most veterans have no idea), and
  6. activated when the investor is least able to defend themselves.

I have identified 344 risk situations that you will face that you would never face in an independent business. There is an old saying: To a blind man, everything is sudden.

These are 8 of them in no particular order of danger:

3.  101 ways to terminate a contract
45.  Churning (serial reselling)
80.  Encroachment (too many outlets put in territory)
168.  Insolvent system renamed and sold to a relative
264.  Right to associate and right to harass
296.  System designed to fail for franchisees
317.  Trial decision always appealed
337.  When the franchisor tanks, so does the franchisee

Note that all of these risks are within every modern franchise. The franchisor decides unilaterally which tool they are going to use, on what franchisee, at this time.

  • Most tyrants keep their serfs compliant by using extreme measures very infrequently.

Sure there’s the occasional Rwandan genocide. The machete’s not needed because the stories are retold of what happens to the minority that stood up for their rights.

This is the role that public stoning or crucifixion played in a previous empire.

If you’d like to take a look at all of the 344 risks I’ve collected over10 years in the Information Sharing Project, here’s the pdf.

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Argot: words in the secret service of a subgroup

December 29, 2008

whisper1. argot n. the jargon of a group or class, formerly especially of criminals Canadian Oxford English dictionary

2. argot noun – (plural argots)

  1. A secret language or conventional slang peculiar to thieves, tramps, and vagabonds.
  2. The specialized informal vocabulary and terminology used between people with special skill in a field, such as between doctors, mathematicians or hackers; a jargon.

Example:  The conversation was in the argot of the trade, full of acronyms and abbreviations that made no sense to the uninitiated.
Synonyms

  1. (secret language): cant, jargon, slang
  2. (specialized vocabulary): jargon Wiktionary

The recurring themes that I see are:

  • secrecy [need to conceal from others],
  • language at the service of self-interest,
  • degree of criminality although not necessarily (ie. see list of drug world argot, prison argot, Prostitution-related jargon),
  • words with multiple meanings (to insider versus outsider, uninitiated),
  • enables credentialing for evaluating new potential ingroup members, and
  • allows connecting and linking diverse user groups, networks and markets, all around the world.

Franchising argot is a communication system widely understood among Big Franchising’s participants, yet it is largely hidden from mainstream culture. A necessary prerequisite to support modern franchising as a confidence game.

There is a need for a language resource to translate franchising words into plain English. I have started by defining terms and collecting examples of industry behavior in the Information Sharing Project.

  • My next contribution will be to write a dictionary of franchise terms.

A book similar to Fowler’s Modern English Usage: a style guide to explain mom-and-pop franchise investing. A doubter’s dictionary.


Can litigation be used to gag New Zealand franchisees?

September 24, 2008

I dislike when anyone tries to decrease freedom of speech, especially on the internet.

Maybe it’s because I was sued [1, 2, 3 & 4] about this very issue, that I am fairly touchy about the subject.

Right and wrong has nothing to do with it. It’s the Golden Rule: Whoever has the gold, makes the rules.

Since Australia and New Zealand are in the franchise regulation news lately, here are three August 2001 articles from Jon Stephenson of The Independent that illustrate how little distinction some franchisors make between fundamental human rights freedoms and their ability to control their message.

You may note that it was only after the original court decision was reversed that the 13 Wordsites International franchisees regained their ability to defend themselves.

I have seen the names Worldsites International Network and WSI applied to the same Canadian-based system. Based on their membership information at the Canadian Franchise Association, WSI has been a CFA member since 2007, has over 1,500 franchises and has been franchising since 1996. I recall that Dan Monaghan and Nigel Mayne co-founded WSI.

WSI and Mr. Monaghan are involved with Make Child Poverty History.

Nigel Mayne is listed by the CFA as president of MatchPoint which claims to be “Canada’s largest Franchise broker.” (In business since 2006, CFA member since 2007).

  • Constitutional rights can be taken away and you have to fight to have them restored. Better have US$20,000 buried in the back yard if you want to live to fight another day.

BTW, whenever you see the following it should be a very red flag for you:

  • this franchise is the next “McDonald’s of dog poop business” for example, and
  • franchisor registered in Bahamas with disputes heard in Delaware, U.S.A.

I wonder what happened to the unlucky 13?

These articles brought to you by the fine people at the Informaton Sharing Project.


NFC to AUS MPs: Contempt from the McContemptible?

September 17, 2008

The Franchise Council of Australia, FCA and it’s Chairman John O’Brien (CEO of PoolWerx Corporation, BTW), is right: Dead right.

  • The NFC seems to be acting AS IF it were the nation’s pique franchising body.

When I observe the recent interplay between AUS federal politicians and the NFC (see Franchise Council hits back at critics), I get a little teary-eyed.

It just seems like old times.

I am reminded of how the Canadian Franchise Association, CFA, dealt with a provincial politician called Tony Martin, who has since moved onto federal politics.

They treated Mr. Martin with contempt.

Tony and I worked together from 1998 top 2001, trying to get the 1st franchise law for investors in the province of Ontario in Canada. We failed to get a decent one and everything has been frozen since. (see Arthur Wishart Act (Franchise Disclosure), 2000, especially S3 and it’s pathetic, and still undefined and unargued, good faith provisions).

What we did succeed at (and in spades I might add) is leave a very interesting paper trail. The Information Sharing Project has collected all of these tasty little documents. Think of it as a www, digital record of very some very stupid comments.

As a example, please note Tony’s April 2000 press release below calling the Government of Ontario to investigate or “probe” the CFA.

Investigate Franchise Association Abuses: Martin
Tony Martin, MPP

April 4, 2000

TORONTO – The Consumer and Commercial Relations Ministry should investigate the Canadian Franchise Association over its failure to help Ontario franchise holders, NDP MPP Tony Martin said today.

The CFA is advising the Conservative government on proposed changes to provincial laws governing franchise agreements. But the association is under fire from hundreds of its own members for its indifference to their complaints, the NDP Critic for Consumer and Commercial Relations said in the Legislature today.

“The CFA has been of no help to many hundreds of entrepreneurs who lost their shirts in shoddy franchise deals,” Martin said. “Instead of taking the CFA’s advice this government should be sending in ministry staff to thoroughly investigate this association’s failures.”

Martin raised the case of Brenda Hope, a mother of two from Coldwater who lost $90,000 as a Chemwise Inc., franchisee. For more than a year, the CFA has refused to look into Hope’s complaints, although it endorsed Chemwise as a member.

Similarly, the CFA has refused to accept a registered letter from Bulk Barn franchisees who have a series of complaints against the franchisor. Martin was also refused when he tried to deliver the letter. The Sault Ste. Marie MPP called on Consumer and Commercial Affairs minister Bob Runciman to act now to protect small businesspeople.

“Perhaps the minister can convince the CFA to live up to its responsibilities to mediate franchise disputes. If he can’t, we need a full-scale probe of this group. It’s the least we can do for hard-working families who lose everything in dubious franchise deals,” Martin said.

The MPP has proposed his own legislation, Bill 35, that is far tougher than the government’s Bill 33. The Martin Franchise Bill would require full-disclosure of franchise contracts, a dispute resolution mechanism, the right to associate and the freedom to source products outside of the chain when not trademark related.

-30-

Information: Gil Hardy at (416) 325-7118 or Robin Cantin at (416) 325-7324
http://www.ontariondp.on.ca


Tied buying creates a Hidden franchise fee

August 8, 2008

This is an interesting article from Kiwi’s Sunday Star Times.

Journalist Greg Ninnesson reports in Marriage made in Hell for upset pizza franchisees that some of Hell Pizza’s franchisees are not pleased with the new mandatory supply arrangements.

No wonder: A monopoly is bad for the whole economy because it leads to inefficient allocation of capital and unjustified profitability [economic rent] based in deceit.

A meeting of several dozen franchisees held in February expressed dissatisfaction with the supply arrangements for their ingredients and other goods.

Previously, each franchisee bought ingredients such as flour, cheese, meat and vegetables directly from independent suppliers on a contract basis.

But in February, TPF set up its own supply and distribution operation and its outlets were required to buy most of their ingredients through that.

The franchisees were concerned about the transparency of the new supply arrangements and the effect it could have on rising food costs.

Maybe forming an independent franchisee association would be a good first step. But you better chip in a few $1,000 each [to start] for the best franchisee-only lawyer you can find.

  • Compare the cost to a 1% increase in your Cost of Goods per year. [You don’t honestly think this is the start of the blood-letting, do you?]

This is how I coded the article as it went into the Information Sharing Project:

  • Advertising fund put into general franchisor’s coffers,
  • Advertising fund use disagreements,
  • Franchisee revolt,
  • Franchisor owns more than one system (subsidizes loses from cash cow)
  • Gouging on supplies,
  • Monopoly,
  • Profits from one franchise system sucked out to subsidize another one,
  • Supply margins are a hidden added royalty payment,
  • Must buy only through franchisor (tied buying), and
  • Veil of secrecy.

Kickbacks, listing fees, volume discounts, co-op $, etc. are a beautiful thing to behold: If you are the franchisor.

  • Were you promised that volume buying through a franchise would actually save you money?

See the American Franchisee Association‘s, The Twelve Worst Franchise Agreement Provisions which include:

  • Sole Sourcing Requirements
  • Lack of Accountability of Advertising Fund
  • Kickbacks

Franchising as a dying Totalitarian State

July 22, 2008

Václav Havel is a Czech writer and politician.

I have played many roles within franchising. My overall approach is similar to Havel’s description of a dissident.

Definition: a person who actively challenges an established doctrine, policy, or institution.

The dissident does not operate in the realm of genuine power at all. He is not seeking power. He has no desire for office and does not gather votes. He does not attempt to charm the public, he offers nothing and promises nothing. He can offer, if anything, only his own skin — and he offers it solely because he has no other way of affirming the truth he stands for. His actions simply articulate his dignity as a citizen, regardless of the cost.

Franchising treats its opponents in a very harsh manner. I doubt if my notoriously short attention span could have been maintained if it weren’t for the shrill reaction of the industry’s leaders.

As always, those that challenge you are your best motivators and instructors.

You do not become a “dissident” just because you decide one day to take up this most unusual career. You are thrown into it by your personal sense of responsibility, combined with a complex set of external circumstances. You are cast out of the existing structures and placed in a position of conflict with them. It begins as an attempt to do your work well, and ends with being branded an enemy of society.

I believe we are very close to the end of Mom-and-Pop franchising.

The elite were the only ones using the industry’s specialized terms, words and language. Now every amateur observer is taking over the discussion. You can hear the professionals moan about their sudden loss of authority and deference over at Blue MauMau.

The degree of impertinence and questioning of the status quo regarding churning, integration clauses, FDDs, gag orders, FTC, etc. is a sure sign franchising’s Berlin Wall is crumbling.

When the internal crisis of the totalitarian system grows so deep that it becomes clear to everyone, and when more and more people learn to speak their own language and reject the hollow, mendacious language of the powers that be, it means that freedom is remarkably close, if not directly within reach.

The Information Sharing Project translates the mind-numbing, legal mumbo-jumbo “FranchiseSpeak” into common English usage. It speaks in the language of the investor, not the apologist lawyer.

It will, in fact, replace some of the functions of the franchise bar. It is a part of what will become a franchising expert system. This will assist in breaking the current economic monopoly on information and developing a common experience shared by the non-elite.

I collect franchise documents in much the same way as Charles Darwin collected beetles. Once you have them, you look for similarities and differences: you create a taxonomy which is the practice and science of classification.

A franchise industry taxonomy and expert system makes investor risk assessment more accurate.

Stripped of its propaganda and confusion, franchising is very similar to a Soviet Union gulag.


Litigation Merry go Round

July 8, 2008

Another class action lawsuit was filed this week as reported by Richard Gazarik at the Pittsburgh Tribune-Review: Quiznos franchise owners sue sandwich company.

I took the article into the Information Sharing Project as Record# 1,575. Here is what the Word file looks like before I split it out into the Access database. The present keywords that I extract from the article are here:

  • Bankruptcy
  • Churning (serial reselling)
  • Coupon programs (forced) destroy franchisee margins
  • Discount programs destroy retail margins but boost wholesale profits
  • Encroachment (too many outlets put in territory),
  • Fear of poverty
  • Fear mongering
  • Forced ordering
  • Franchisor overcharges for required products
  • Gouging on supplies
  • Lawsuits just a cost of doing business
  • Lawsuits, class action
  • Must buy entirely useless goods and services
  • Must buy only through franchisor (tied buying)
  • Must pay future royalties, even when the franchise fails (liquidated damages)
  • Racketeering
  • System designed to fail for franchisees
  • Threats of lawsuits
  • Will work even when Variable Costs > than Selling price

The Future? These are the keywords that will likely fit this situation as it grinds onto the inevitable useless conclusion [if the trajectory does not change]:

  1. Bootstrapping the assets of a corporation
  2. Class-action dead end
  3. Credence good fraudulent expert
  4. Don’t owe your lawyer money
  5. Fee surprises at settlement time
  6. Federal insolvency laws used to shirk legal claims
  7. Franchise agreements create a License to Lie, Cheat & Steal
  8. Financial failure of first franchisee a material fact to the second
  9. Franchisor bankruptcy
  10. Franchisor corporation created to fail
  11. Franchisor insolvency, intentional
  12. Futility of taking legal action
  13. Health consequences
  14. Loan pushing
  15. Piling on: franchisor can afford a few awards but not hundreds
  16. Settlement just covers fees
  17. Sue lender for not doing their lender’s due diligence
  18. Sue the sales agent
  19. System under scrutiny withdraws membership from franchisor association
  20. Trading in false hope
  21. Within the four corners of the contract

I honestly feel for the operators but fighting this [or any other] franchisor in the Courts is just for fools and their paid cheerleaders.

Numbers 8, 14, 17 & 18: They hold some real promise as a group action.

  • I wonder why the franchise bar never argues along these lines?

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