Ontario Franchise Law establishment: It started with Tony Martin, John Sotos and me.

But like all deceptions, the betrayal starts with one and then mushrooms to thousands. Two lure in several others.

Justizia, by Luca Giordano

December 20, 2000 was the last time I met with Sotos and Martin. Sotos told a very interesting story:

It was his experience that those engage on the “shadow side” of large scale franchise disputes, suffer severe health consequences.

It was fatal for the dad in Ontario’s first franchise class action case, Bulk Barn. It was fatal for a friend called Julie.

Tony‘s not doing so well.

I don’t know how well John, David Sterns, Michael Webster, Jay Harris, Peter Webber, Andrei Oudovikine, Alexendre Oudovikine, Jonathan Lisus, Jeff Lefler and Franck Panczyk and their families are doing.

***

Justice (virtue)

Justice is one of the four cardinal virtues in classical European philosophy and Roman Catholicism. It is the moderation or mean between selfishness and selflessness – between having more and having less than one’s fair share.

Justice is closely related, in Christianity, to the practice of Charity (virtue) because it regulates the relationships with others. It is a cardinal virtue, which is to say “pivotal” because it regulates all such relationships, and is sometimes deemed the most important of the cardinal virtues.

 

Sotos LLP: The McDonalds of CDN franchisee lawyers?

I have learned directly, personally, in-their-armpits relationships from the best in franchising.

Ted Gorski, McDonald’s, CollegePro Painters, Nutri-Lawn, Tony Martin, Canadian Imperial Bank of Commerce, Sam Grange, John Lorinc, Paul Herminston, Katherine Swinton, Canadian Franchise Association, Country Style, Gillian Hadfield, Michael Webster, Jay Harris, etc. They’re all brilliant in their areas of expertise.

When I got into a corner and thought I needed legal help I hired the best I couldn’t afford. John Sotos was my on-and-off-again lawyer from 1998 t0 2000 and I learned a great many things from John and his partner David Sterns. Both John and Michael told me to look at and talk to the banks. Oddly enough, the first lawyer I talked to about franchising in 1982 is now a Ontario Superior Court justice in Barrie. I like lawyers but they’ve got to cover their rent too, you know!

Many franchisees want to fight.

That’s good…and bad at the same time.

Many franchisees think in terms of black and white; now or never; us/them.

That’s good…and bad at the same time.

Many franchisees would rather choose a “white knight” professional instead of a group of franchisees plotting their own course.

That’s not good…and really, really horribly bad.

The McDonald’s U.S.A. president described his corporation as a real estate company with an interest in hamburgers. Let me repeat: McDonald’s is a landlord (to franchisees) with an interest in fast food.

I learned that the economics of modern litigation is very similar.

1. The franchise industry legal cash flows = 95% by franchisors,
2. Once the retainer is paid any consultants are shown the door (only one expert, please),
3. Franchisees are one-shot clients (v. repeat business for franchisors),
4. Disclosure laws are a God-send for billable hours, and
5. The industry has a very, very long memory for those that oppose it’s interests.

All lawyers are businesspeople that operate in a near-monopoly on certain words and concepts.

Learning these terms is not hard if you have (1) a learning tool and (2) a willingness to face some difficult facts.

Most let their emotions rule their decision making (ie. denial and fear) but in their defense, aren’t really conscious of doing so. They’ve been conditioned to be on their knees and look to Daddy for acceptance.

Education is the only way out.

WikiFranchise.org

Salad Creations Canada: Is this McSalad bar an unintentional FranWhack?

Some imported franchise systems are designed to fail: to make the CDN franchisor and all franchisees’ life savings evaporate.

The U.S. franchisor comes in, terminates the much smaller CDN licensee and takes over the “x out of 50” stores that were promised under contract.

This is how nice northern families can  end up as cannon fodder.

They blow their brains (and cash) trying to grow under impossible contract terms, the big boys then come in and scoop up what they want. Been done a thousand times in the past in franchising…

To a potential franchisee, it is irrelevant if the national developer/franchisor is:

1. knowingly predatory or
2. 100% well-meaning but, nonetheless,  incompetent or incapable of going the distance.

Since I have tremendous respect for the Toronto Star business journalists, I suspect #2 and not #1.

Case in point, the Canadian launch of Salad Creations (one corporate location, zero franchises).

Lisa Wright interviews Brenda Bot, the franchisor in a story on the front page of the Business Section: Romaine Empire: Green through and through, Salad Creations aims to grow into nation’s Subway of salads.

It takes industry and franchisor experience, adequate capital (very high burn rate, esp. in recession), a business model that has been successfully “transplanted”  and a capacity to utilize network effects (exponentially increasing value as unit sales increase).

• I see none of these minimum prerequisites here.

What I do see is a sincere person who naively believes that you can franchise any business concept and do it profitably for themselves and others. That a single one of a 5,000 Tim Hortons costs way over a million $ to build: yet Ms. Bot thinks she can launch a national chain for less than that?

I also see (and this gives me zero joy to type)  is another in a long line of U.S. born, CDN imported “FranWhack” franchise investment scams: hype masquerading as a business.

These easily-duplicated, one-product business “opportunities”‘  are simply not investment-worthy in the opinion of Blue Maumau stalward, 45-year franchise industry expert, Richard Solomon.

In Richard’s always colourful prose, FranWhack Alert: The Cereal Bowl:

This concept was previously reviewed by me and I am of the opinion that, like Dagwood Sandwiches, Cereality and SoupMan, this should be considered a FranWhack franchise offering – one that will take every franchise investor down to bankruptcy.

I suggest reviewing what is and is not a FranWhack franchise investment on his website, FranchiseRemedies.com.

Get Smart and call Richard in Texas for yourself and ask him if Salad Creations sounds like a FranWhack. He won’t fill your head full with a bunch of phantom dreams as Toronto-based Michael Webster (The Psychology of Scams) so clearly defines.

Don’t gamble with a Walter Mitty-esque longing to Be your own Boss, or Be in business for yourself not by yourself. You will never have fewer alternatives as when you are in a franchior:franchisee relationship.

You and your spouse’s life savings may live to thank you.

Ms. Bot draws the analogy between Salad Creations and Subway. This seems to be a twist on the hackneyed “next McDonald’s” huckster mantra so popular a few years ago. For franchise investors, Subway may leave a bitter taste because that system has had a singular reputation among industry experts.

Folks interested in corporate history as a predictor of future behaviour, might want to check WikidFranchise’s article archive: Subway tradename or maybe a few of the following direct references:

• The Subway system under fire
• Why Subway is ‘the biggest problem in franchising.’
• Franchisees Sue Subway Sandwich Chain
• Subway’s disrespect
• Subway franchisee faces bankruptcy
  

I wish Mr. & Mrs. Bot the very best in this new industry but that sentiment stops cold dead if it requires their their investors lose their life savings. They are green (green as grass?), as the headline editor wryly implies. They have a problem (eg. too much money) and their new best friends (lawyers, consultants, association, banks, etc) will help them overcome.

I’ll just add this article to WikiFranchise.org and check back in a few years to see how this newly minted CFA member and investors are doing.

• Odd how their U.S. site says they have franchisees in California but that there is no listing for Salad Creations on the Cal-EASI Database.

I don’t do pre-sale due diligence consulting so I would defer to professionals like Solomon and Webster for those answers.

Someone in the family should call me so I can explain how the CDN Krispy Kreme development deal went down. No charge to anyone calling as I have zero franchisor consulting clients, ever.

Mr. Clean Car Wash: Poo-filled franchise systems will Not do

Richard Solomon hit this nail right on the head, I think.

Jim Amos and Procter & Gamble put their heads together to make the Mr. Clean Car Wash franchisee.

Solomon calls it a FranWhack: an “investment” that will inevitably fail for the franchisee:

Not even the best cleaners and polishes put out by P&G can possibly spit shine this turd.

The economics of this carwash concept don’t compute, and the choice of franchise leadership is dreadful.

P&G has given birth to a FranWhack here. No one in his right mind should ever consider investing in this debacle in the making.

Everyone should follow these two threads over at Blue MauMau as the pundits ridicule this latest, Is-this-the-best-they-can-do franchise offering.

1. Controversial Amos Leads P&G to Launch Mr. Clean Car Wash Franchise Nationwide, Don Sniegowski
2. Can Proctor & Gamble Succeed with Jim Amos at the Helm?, W. Michael Garner

Solomon is not alone in his skepticism

I have never seen such unanimous condemnation. See: Paul Steinberg, Joel Libava, Nick Bibby, Michael Webster, Bob Frankman, Guest: Brice Food litigation, and me (On the road to The Tipping Point?).

Time trumps all franchise Fraud

Con men understand very well when their targets are the most vulnerable.

It’s a game for them: Their comparative strength (trump) is knowing how to manipulate your human weaknesses for their profit.

With hundreds of billions of dollars being thrown into the world’s financial institutions with zero accountability, the risk of funding a franchise fraud  (in my mind) is be greater now than before the www recession.

Michael Webster at Misleading Advertising Law makes a very good point at his post, Selling Franchises to the recently Laid Off:

One of my concerns in this economic environment was with how the newly laid off would react, what they would do, and how they would make decisions.

With nearly 60,000 reported layoffs in the United States alone, it is of pressing concern that these individuals understand the how to avoid failing for the franchise fraud.

Michael provided some extremely useful advice in a recent Blue MauMau interview named, Fraud Expert Says Those Wanting to Be Own Boss Easily Scammed.

First, with high unemployment the blood is in the water for unscrupulous sellers:

With the economy seeing the highest unemployment figures in nearly four decades, Webster thinks once those unemployed have access to credit, there is the potential for record numbers to be ripped off. In order to avoid being swindled, his first piece of advice is to think of buying a business as one option among many investment opportunities.

Michael warns against getting out of the pan and jumping into the fire and relying solely on your own research, which can become distorted (confirmation bias):

WEBSTER: There are times in our lives when for whatever reason we want our aspirations to be achieved immediately. For many, the most compelling overriding value is the need to be in complete control of their economic lives. Simply put, they never want to be fired again.

Those people are sitting ducks.

The con criminals know this and wave phrases like “be your own boss” and “in business for yourself but not by yourself.” Prospects pick up on such words of puffery. Buyers blow it up into full-scale fantasies of business ownership. And then to compound the problem, they perform bad due diligence by sloppily selecting evidence that only confirms they are making a good decision.

You need a professional 3rd party to help you and you need to take your time.

A buyer should take their time – some six to eight months. Read the franchise disclosure document. Get the best professional help to explore the opportunity and its accompanying documentation. Ask questions. Do not jump! Get a part-time job doing anything if you need to so that you don’t feel like you have to buy this franchise. If the opportunity is any good, you’ll figure it out.

Time will trump all frauds.

Excellent advice from someone with great insight.  Michael had also suggested in previous posts to actually work for a franchisee within the proposed system for several to six months and that you should budget up to $5,000 for professional advice (on not only the contract but also the business deal).

Michael’s caution against being sucked into a phantom dream is very important. Follow his advice and this will greatly reduce your chance of experiencing a financial nightmare.

How can banks get away with repeatedly and knowingly lending into crapola franchises?

It ain’t called a bank shot for nothing.

It’s as simple as Richard Solomon explains over at Blue MauMau.

First, Richard spells out the weasel play in an article named The Complicit Loan Broker In Franchise Fraud. [Whether there is a broker or not doesn’t matter.]

It is common practice in franchising for a franchisor, especially a fairly new franchisor, to steer its franchise investors to a particular loan broker, and sometimes even to a particular bank. It is also fairly customary for the loan broker or bank to pay the franchisor for the “traffic”.

The information in the business plan always comes from the franchise sales/marketing people of the franchisor. The franchisee has little or no input in the whole matter other than to sign what is put before him by the loan broker without reading it or with scant attention being paid to it. The information is almost always false in the sense that it is full of exaggerations, to put it nicely, and the pro forma financial information has little or no basis in fact.

Richard goes through the details and asks rhetorically with knowing what the answer is:

What is the likelihood that a franchise investor, on these facts and with this testimony, will get a favorable verdict? Anyone care to guess? Since it may be a somewhat novel case, what is the likelihood that a favorable verdict will be upheld on appeal? Anyone care to guess?

And when Michael Webster asks a pertinent question:

How can the franchisor provided information to the loan broker, an agent of the franchisee, which amounts to an earnings claim when the franchisor disclaims making earnings claims in their Item 19?

Richard goes on to explain:

In the mind of the jailhouse lawyer crooked franchisor, providing information to help a franchise investor obtain a loan and complete a business plan (which it all total crapola anyway), is not considered (by them) to be the making of an earnings claim. In the weasel word play of franchising there is the FDD, and then there is everything else. The position that we weren’t defrauding the franchisee; if anything we gave the bank false information by providing it for the franchise investor’s business plan, is not just some cynical homorous thaing I made up. That’s how it really goes down.

It is useful to read the whole thread and then keep an eye on the posting.

Here’s a clip from one comment (named appropriately Hindsight) that has shown up:

How I wish I had read an article like this 12 months ago. This type of article should be covered on a major publication small business section.

Betcha wish you had read this article before signing up, eh?

Unsubstantiated industry statistics

Top marks to Jim Coen at Franchise Perfection for bringing up a very important topic.

He posted a great article called Franchise Statistics Debunked Again! on his Let’s Talk Franchising blog and Blue MauMau.

I could not agree with him more: I get really, REALLY irritated when self=serving numbers are thrown around. The unsubstantiated drivel that comes out of the United Kingdom is especially horrendous.

Jim:

These misrepresentations just bug the hell out of me. I first wrote about it back in 2006

Those bogus statistics seemed to go away after that article. Well they are back in full force all over broker websites:

I have never been able to substantiate any of the statistics below or find the study where they came from.

Thanks for Michael for picking it up on his weblog under False Franchising Numbers. It reflects very badly on the listed websites and consumers should vote with their feet.

• A professional does not knowlingly misrepresent facts. Only deal with pros like Jim and Michael.

Clean up your Act, Please

Franchise Next, Roger Wildermuth, Gloria Warner, Austin, Texas – http://www.franchisenext.com/inner/faq.htm

Global Biz Choice, B. Alan Layne, ? –  http://www.gbizchoice.com/page/page/2765698.htm

Smart Choice Franchises Corp., ?, Philadelphia, PA – http://www.smartchoicefinancial.net/franchise/statistics.html

Stonebridge Business Advisors, Jeff Burridge, Sinking Spring, PA – http://www.stonebridgebusinessadvisors.com/franchising.html

Free Franchise Consultant, Michael Belveduto, ? – http://freefranchiseconsultant.net/FRANCHISE_STATISTICS.html

Franchise Sales Inc., ?, ?: http://franchise-sales-net.com/franchise_facts_and_statistics.asp

Career Potential LLC, Ford R. Myers, PA – http://www.careerpotential.com.yourtempsite.com/articles/franchising-information.html

Franchise Industries LLC, Phil, ? – http://www.franchiseindustries.com/franchise_industries_franchises_for_sale_statistics.html

Symbols: Strength through Unity

Michael Webster over at Misleading Advertising Law picked up on my recent posting: Franchising is the latest Big Con.

I absolutely agree with him: the best defense against post franchisor opportunism is a well-funded, professionally managed independent franchisee association, IndFA.

There is no substitute for collective action and only a fool thinks otherwise.

The power of “sticking together” has historically been represented by rods that are bound together, often with an axe in the middle (fasces: from the Latin meaning “bundle”). The English word fascist is also derived from this root.

• In ancient Rome, the bodyguards of magistrates carried fasces and it came to symbolize authority. On early American coins, the fasces symbolizes the unity of the colonies, strength in numbers (A single stick may be broken, but a number of sticks bound together are invincible).

Fasces show up on seals (state of Colorado, two of them crossed on the seal of the U.S. Senate, the Knights of Columbus, {above), the Administrative Office of the United States Courts, and the fascist party under Benito Mussolini.

Ponzi scheme unwinds in Real Time on Blue MauMau

Interesting times over at Blue MauMau for franchisor Dale Nabors of Cuppy’s Coffee and More as he responds to allegations of running a Ponzi fraud (see Cuppy’s Speaks Out on Accusations, SBT, AAFD and More).

Janet Sparks is one of the most experienced and knowledgable franchise journalists there is. Period. She is a real professional that is not afraid of many of the things that go bump-in-the franchise night.

I think it is the best if Mr. Nabors speaks for himself and I would encourage everyone to read this whole story:

“I’m putting money into the company, and the company is putting money into the projects. In a roundabout way I guess it’s fair to say yes, I am putting money into the company to cover some of these projects. But these are very few projects.”

In a posting entitled Cuppy’s Fraud, Michael Webster (see Misleading Advertising Law) responds in a blunt and  thoroughly unCanadian fashion:

• When Nabors says “he was having to put capital into the businesses to keep them moving forward, and some of those monies in turn are used for construction and build out. He said there had been projects that monies were paid on and those monies went into a general operating account and were not used specific for a project.” this is an admission of fraud.

Webster goes on:

You cannot take money borrowed by A to pay off building out B, although you can certainly count on the support of B when that happens or is promised to happen.

This is not a construction company pretending to be a franchise company.

This is a construction ponzi scheme, taking funds from later investors, paying off earlier investors, pretending to be a franchise company.

These related entities are insolvent and the creditors need to shut this mess down immediately, appoint a receiver and come to an equitable solution.

Nabors call for more time is the typical whine of a ponzi operator. [my emphasis and format]

His allegations are numerous, serious and very interesting. Take a close look. I have worked with Michael Webster for several years. He is a very careful person, a skilled litigator and fraud investigator. The last guy I’d want to oppose in a biz op or franchise swindle, if I were so inclined.

Selling Poo-filled franchise systems likely 100% Legal

Michael Webster brings up a good point in his article Can You Sell an Unproven System as a Franchise? It is worthwhile looking at Janet Sparks’ original report in Franchising Times.

When discussing a pending Colorado lawsuit, I tend to agree with Michael’s prediction:

I believe that the law in this area will turn out to be, in essence, that you can franchise any piece of poo, as long as you “disclose” in tricky legal fashion that you are a piece of poo.

It is of course a stupid law that would protect investors in franchise systems [franchisors] by allowing any old piece of poo to float through the system – but such is the dedication to the power of disclosure laws, much like the efficient market hypothesis, our regulators and legislature will continue to allow indentured servitude as long as it properly disclosed.

This is the state-of-the-art of legal protection in the home of franchising. And they are very aggressive in advocating for this lack of accountability for franchisors around the world.

Michael again:

I think that Seid‘s position is legally correct, [franchisors have zero duty to provide a proven system] even though both immoral and absurd.

But that is the problem prospective franchisees face – any piece of poo wrapped in a franchise agreement, and FDD can be sold for hundreds of thousands of dollars to the unsuspecting public who believe that they are buying a “proven” system.

Disclosing you are a worthless piece of poo is all the protection that Big Franchising is willing to give you.

Go ahead and choose your Type of modern franchise [see Bristol Stool Chart, above]. Or…

• For Mom and Pops, Franchising is Unsafe at any Brand.

If you knew how to separate the pepper from the fly poo, you’d start your own business and not share an industry rife with “proven” psychopaths. [social predators: lack of conscience & empathy, glib, bullying, violence]