Legitimate business or Scam?

July 28, 2008

John Tozzi writes an interesting article on business opportunities for BusinessWeek Online.

The Internet is littered with offers for home-based business opportunities that promise big profits for easy work. But many of these offers, which range from envelope stuffing to medical billing, are really scams that prey on people’s aspirations to work for themselves.

Michael Webster (bizop.ca) is quoted as saying:

While some home-based business scams target vulnerable people such as the unemployed, experts say anyone can be taken in by the right pitch. “The techniques are no different in kind from the ordinary marketing techniques that normal sales people use. They’re just selling nothing,” says Michael Webster, a Toronto lawyer and the author of a blog on business opportunity fraud. “Anybody can be a mark on any given different day. Even I could be.”

This is very generous of Michael.

This article [and don’t forget the slide show] highlights that scammers are not without skill or charm that can hoodwink even an especially knowledgable professional, including a wary trial attorney.

  • Only about 5% of fraud victims ever report their loss.

Let’s not forget that Richard Solomon, a 45 year U.S. franchise veteran, believes that the large majority of new franchise offerings are just selling nothing [impossible to determine + from – RE: advertising mask + sham business].

Independent franchisee associations: A requirement for investment

July 26, 2008

This is an excellent article by Rupert Barkoff on Blue MauMau about independent franchisee associations, IndFA: Franchisee Associations: Nothing to Fear but Fear Itself, Usually.

Very good history lesson. Please note the role of IndFA in working toward fairer purchasing arrangements and the comments, especially TIF who is a franchisor.

  • The easiest way to tell the difference between an IndFA and a lapdog Franchise Advisory Council is the presence of a lawyer who works with the franchise investors.

Michael Webster is a pro in this area.

No IndFA, no buy.

Hadfield on Opportunism

July 17, 2008

Gillian K. Hadfield wrote Problematic Relations: Franchising and the Law of Incomplete Contracts in 1990. It remains the gold standard of defining why franchising remains such a difficult area for the law to deal with.

See here’s the rub: Franchisors legitimately require discretion because no contract could ever be written that would exactly specify, to the penny over many years, through market changes what each party will do. That’s fair.

What is not fair is when a franchisor exercises his discretionary powers in a way to strip a franchisee’s [and their family’s, usually] labour, life savings, credit worthiness and future earnings. This is possible largely because the investment is trapped [sunk cost] and dependent on the franchisor’s whim.

The Problem for the Law: Did a franchisor have a legitimate business reason for doing what it did OR is it just acting as a predator? This is what judges have a hard time dealing with.

You can can download a copy here.

Hadfield’s 2000 expert testimony to the Ontario government is also presented here. She presents an excellent judicial test for opportunism and I got to help with the overhead projector.

  • Opportunism fueled by sunk costs: the most important and distinguishing characteristic of franchising. If you aren’t talking about opportunism, you are wasting your time.

A very useful thumbnail sketch of Problematic Relations is provided by Michael Webster here. The franchisors problem is quality control but that is fairly easily solved.

The franchisee’s concern is defending against opportunism.

The incentive that causes a business with sunk costs to stay in operation despite losses makes franchisees vulnerable to franchisor behavior known as “opportunism.”

Because the franchisee will continue to operate even if it is not recovering its sunk investment, the franchisor can make decisions that induce such losses without the franchisee going out of business.

When these decisions benefit the franchisor at the expense of the franchisee, the franchisor opportunistically extracts a portion of the franchisee’s sunk costs.

It is this point: franchisees will continue operating a losing business [long past the time an independent business would have abandoned it] because of their sunk costs.


Oz banker writes off its own franchisees’ loans

July 14, 2008

An interesting development with the Bank of Queensland. I haven’t ever seen this type of franchisor debt cancellation before.

The Financial Standard of Australia reports today that BOQ writes off franchise loans.

Of 55 owner-managed branches in New South Wales for BOQ, most have been trading for only three years or less. More than three-quarters of the BOQ franchises set up in Sydney over the last three years are failing to meet business targets.

Normally the costs are very high when a franchised business fails: personal and corporate bankruptcy for the investor.

Owners of BOQ outlets in Sydney often walk away from their businesses. The owners of the Kellyville and Rhodes franchises are two to have done so in the last two weeks.

That is not happening here.

When an owner of a franchise opts to walk away from the business (and its continuing losses) BOQ invariably employs the staff directly in order to keep the branch open.

In a number of cases BOQ has also hired the former franchisee as branch manager, a situation that appears to include relief from at least some of their liabilities to the bank as part of a package deal.

I believe there are several solid reasons for this very unusual banker charity:

  • the business model clearly does not work, everywhere making it difficult to scapegoat any individuals,
  • the financing was almost 100% by the bank itself [a few conflicts of interest: duty as lender, duty as employer, self-regulated operator],
  • banks are extremely sensitive about charges of bullying or loan pushing and do not want to be dragged in as Exhibit A in the upcoming national government inquiry,
  • these former franchisees seem very savvy [national media, threats of collective legal action], and
  • maybe a few of these banker-now-franchisees-now-banker remember the intricate details of franchise financing [ie. they know where the BOQ buried their franchise dead].

As I always say, whenever you get a chance, complain to self-regulatory authorities and sue the professionals [lawyers, bankers, accountants, appraisers]. Double that sentiment when you can threaten to put dozens of pissed-off whistleblowing industry insiders on the stand within a massive a civil lawsuit.

  • I bet the newly re-employed bankers actually got a bump in pay and some much needed job security. Better security that the bozo BOQ execs who took the doofus idea of franchising branch services: hook, line and stupid sinker.

These are just like Canadian professionals.

Tell you what: I’ll let the kids carry on at university while T and I emigrate. Let me find out where the washrooms are [a little draw] and let me keep, say, 5% of all settlements. Heck, start passing the hat.

Les Stewart :: Ace Bounty Hunter

BTW: This article shows how much franchisor:franchisee relationships are very much like employer:employee relationships.

In fact, some franchise contracts have been seen to be so controlling of the franchisee’s business that the relationship was judged to fall within labour law. In other words, the franchise was seen for what it is: the veneer of an independent business with all relevant control given over to a dominant party.

  • The most recent situation was the Coverall system and the Supreme Court of Massachusetts, USA [see Michael Webster’s Are Franchisees really Employees? on Blue MauMau].
  • Webster has a particularly deep understanding of both franchise, business opportunity and labour law.

I think this is very fertile soil for getting money back. Complain to labour boards saying franchisors are just trying to evade duties as an employer. The janitorial cleaning segment is notorious for having microscopic control over their faux investors

I bet a clever banker could make the same argument because of the complexity, huge information investments needed and memberships in affinity programs such as Visa, MasterCard.

I wonder how much lending the Bank of Queensland does for other franchise systems and if this is what they really want to protect from scrutiny?

  • In 1998, I was told by the head of franchise banking for the Royal Bank of Canada that franchising is the most lucrative form of commercial lending there is. Period.

No question: guaranteed loans at prime +3% v. prime or less for mortgages.

More disclosure law is Meaningless?

June 6, 2008

Michael Webster runs an influential blog called Misleading Advertising Law and he frequently comes up with some excellent conclusions about franchising.

Commenting on new research to show that executives that disclosure most are the most self-interested when they sell their personal stock, Michael says:

Is it any surprise that executive can game this system of disclosure?

Does something similar work in franchising?

Sure, and why? Because the disclosure requirements in franchising are completely formal and meaningless.

Further, when Blue MauMau asked the new head honcho of the U.S. Federal Trade Commission some questions, Michael summarized Mr. Tregillus’s expert advice as:

Great, so as long as you disclose in the appropriate manner to the prospective franchisee that the deal is very bad, don’t let them review the disclosure before they are hooked, and then have no regulator review the disclosure – well then according to the FTC, you are “protecting” consumers.

What nonsense.

Anyone listening in Australia? More fish-on-the-hook disclosure does not help.

The Solution: Improve the due diligence process so investors are nudged into choosing only higher quality business offerings.

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