SureSlim says: We are not a cult & +80% of our operators did not tank in 2008

March 1, 2009

sureslimnz

They must have just been unlucky in choosing their franchisees, then?

However, running a New Zealand SureSlim franchise seems to be a one-way ticket to losing your life savings and your home

A great article from New Zealand’s Sunday Star Times and Garry Sheeran called Big losers in SureSlim row head to court:

Failed SureSlim franchise owners are lining up to take legal action against the franchisor in New Zealand after 17 of the 21 SureSlim diet clinics here closed their doors last year.

SureSlim NZ says those businesses failed because people had cut discretionary spending on attempts to slim as the recession began to bite.

But franchisee business owners, themselves under fire from clients who paid money for diet regimes and now feel left in the lurch, say the SureSlim franchise model is the cause of their woes.

Here are some classic death rattles (sounds made just before death) of a failing franchise system:

  1. lost homes for franchisees but profits to lenders (lending due diligence?),
  2. churning: rapid re-sale of franchises (Fee1 gift to franchisor, sells to F2, etc.)
  3. can’t afford legal action to get money back or prove fraud,
  4. the business model is broken; sales free-fall (ie. 80% sales drop in 2008),
  5. 29% royalty and ad fund cost (unusual in that it is out-in-the-open; most charges are buried in mandatory products from the franchisor and their suppliers) ,
  6. franchisor slashes co-op advertising to during recession,
  7. independent accounting points toward “hugely questionable” franchisor actions,
  8. new president spewing excuses du jour RE: blaming the franchisees (bad lot with +80% tanking in one year: fire the s.o.b.s that accepted their applications!), and
  9. tip-of-the-iceberg litigation history in an older market (at least Oz has a toothless franchise law to plead).

The only bright spot is the honesty of a Sydney, Australia lawyer named Mark McDonald. He hits the nail-on-the-head for thousands of franchisees caught in franchising’s Trap for the Trusting:

“Most poor bastards caught in the SureSlim net can’t anyway because they have totally done their arse. And we discourage people from throwing good money after bad.”

Throwing good money after bad. An apt description of taking legal action against any franchisor in many countries.

  • I wonder how SureSlim is doing in other countries?
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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]


Franchisees catch pneumonia when a franchisor gets a cold

June 18, 2008

Sometimes franchisees inherit problems that they had nothing at all to do with. Sometimes those complex, uncontrollable issues are toxic enough to kill their already weakened business.

A couple of articles from South Africa caught my eye this week.

And as usual, the immediate issue was not the the full story. You have to know what questions to ask to find out where the bodies are buried.

The problem was initially defined in a June 13th article as a dispute between the franchisor and a DVD distributor: DVD stores face legal action after ruling

Video and DVD rental stores across South Africa may face legal action if they are found contravening copyright laws, after the Cape High Court barred Mr Video and 22 of its franchises from renting DVDs not acquired through local authorised licensee Nu Metro.

It seems the franchisor made business decisions that other companies disagree with. In this case the adversaries (that the franchisees have inherited) are fairly substantial: Twentieth Century Fox Film Corporation, Disney Enterprises, and Warner Bros Entertainment.

These other companies have filed suit against the franchisor and the franchisees.

Attorney Anthony Norton, representing the studios and the distributor, said the rental outlets now face claims of damages by the major studios.

He said in some instances, the titles were released for rental by Mr Video before their theatrical release here.

As a franchisee you rely heavily on your franchisor. If a franchisor acts in a controversial way, you often suffer much more than they do.

A June 18th follow-up story paints that picture: Mr Video faces another legal wrangle

…some of its former franchisees who have accused the DVD rental company of “grossly unfair business practices”.

At least four former franchisees in KwaZulu-Natal have confirmed they were forced to close their shops because they could not pay their debts. Some have lost everything because their assets were attached to settle outstanding debts that ran up to R500 000 for each franchisee. The debts include bank loans and royalty fees.

Churning is a term that has been used in North America that describes a specific franchisor business behavior. The signs are:

  • New stores are opened with little regard for where, when or who (if they can “fog a mirror” and sign the loan papers — they’re in!).
  • Existing stores are sold, and then sold again, and then resold (often as quickly as every 12 months, sometimes less time).
  • The “promiscuous” (I’m being generous here) financing is largely through one lender and one loan officer. Potential owners are steered to them for almost instant approval which breaches the lender’s due diligence duty).
  • If the loans are underwritten by a government guarantee, this really acts to fuel the predatory fire.

Bank loans used to finance a franchise system that is alleged to be churning?

  1. Does South Africa have a small business loan program (ie. a high percentage of any defaulted small business loan is paid back to the lender)?
  2. Were any of these specific defaulted loans written under the program?
  3. Were the “bad” loans all with the same lender?

If the answer is “yes” to two of these questions or some similar red flags, then the likelihood of Predatory Franchise Lending should be looked into.

Some franchise systems operate like a Pyramid or Ponzi scheme. They were created to fail from Day 1:

  • the franchisor collects and hides as much cash as possible from the most unsophisticated investors available (sound familiar?) and then declares an intentional insolvency which leaves everyone with a claim against that specific company holding an empty bag.

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