Symbols: Strength through Unity

September 19, 2008

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

August 30, 2008

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

August 20, 2008

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]

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 ( 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.

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