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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The Apprenticeship of Les Stewart

May 17, 2008

Justice is one of the four Cardinal Virtues.

My research clearly concludes that the last place for franchisee family investors to find justice is via any franchise bar/legal system.

franchising

Background and unique qualifications:

  • Franchise Industry in Ontario (Canada): franchisee families 40,000 (76,000), employees 400,000 to 600,000 (760,000 to 1,140,000), investments $2 to 8 billion ($3.8 to 15.2 billion), and annual sales $45 to 50 billion ($90 billion), Source
  • twice a franchisee (Arjay Painting and Nutri-Lawn, Midhurst, ON),
  • a franchisee’s crew Barrie and 1st assistant manager, Orillia 3254, McDonald’s Canada (B.O.C., Silver Hat, & AAA, 1972-80),
  • general BA, 1983, Western University and MBA, 1987, Ivey Business School, London, ON,
  • Budget analyst, Victoria Hospital, London, Ontario, (acute care regional teaching hospital, 3,500 FTEs, 1988-92),
  • founded the Canadian Alliance of Franchise Operators, CAFO, Canada’s 1st national franchisee association, Midhurst, ON 1998-present,
  • SLAPP 1.0 (Strategic Lawsuit Against Public Participation): sued to silence: Nutri-Lawn‘s then owner, The Franchise Company (FirstService Corporation), represented by David Sterns and John Sotos,
  • SLAPP 2.0 sued for faxing 150 U.S. Tupperware distributors a website invitation and Toronto Star article while representing 7 former CDN Tupperware distributors, (Tupperware Canada Inc.), TupperWarsSLAPP, represented by Brian Macleod Rogers,
  • took my franchised lawn care business independent in 1998 (Lawn Depot),
  • represented myself at an injunction hearing, franchisor unsuccessfully sought to enforce their non-compete clause, Barrie, ON, 1999 (Justice Paul Herminston, Barrie), favourable outcome,
  • 5 day civil trial, (Justice Katherine Swinton, Toronto,  May 1999) and lost $134,000 unfavourable outcome,
  • unpaid policy analyst for Mr. Tony Martin, NDP MPP, Sault Ste. Marie, ON 1998 to 2001 (provincial, federal politician),
  • expert witness at public hearing which lead to Ontario’s first franchise law, Toronto, ON (Arthur Wishart Act (Franchise Disclosure), 2000),
  • created the Information Sharing Project and submitted unsuccessful project proposal to the Ontario Ministry of Consumer and Commercial Affairs in 2003 (digital teaching, due diligence and business risk assessment tool; early form of WikiFranchise.org),
  • identified and wrote a paper on Predatory Franchise Lending to Industry Canada, 2005 (18 month investigation: bank, consultant, franchisor, Office of the Privacy Commissioner of Canada, Minister of Finance, RCMP Commercial Crime Unit, OBSI, FCAC, PMO, etc.),
  • case preparation for a +$6-million civil law suit based on predatory lending principles (2005, Oudovikine),
  • Stewart has been featured in the Globe and Mail, Toronto Star, National Post, CBC, PORFIT magazine, Continental Franchise Review, and Wall Street Journal, media contributor, 1997 – present,
  • contributed to the Prince Edward Island, Ontario, West and South Australian franchise inquires,
  • Blue MauMau contributor: 459 posts (since Oct 2007),
  • founded and editor of FranchiseFool.com weblog: 1200 posts, 277,713 views & 777 comments (since Feb 2008, Accessed April 26, 2018),
  • founded and co-editor of WikiFranchise.org: a no-charge wiki that assigns corporate and personal reputations more accurately and durably via indexed already-published articles and documents: 208,821 unique visitors, 331,676 visitors, 1,283,386 pages, 2,229,354 hits and 65.8 GB bandwith (since Feb 2009, same),
  • endorsed Bill 102, An Act to amend the Arthur Wishart Act (Franchise Disclosure), September 23, 2010,  Legislative Assembly of Ontario (start @ 1440),
  • attended the International Association of Franchisees and Dealers annual conference, Indianapolis, 2010,
  • pre-trial development of large-scale group and class action legal actions,
  • independent franchisee association: leadership development, creation, training, pre-trial case legal case development (National Bread Network: Maple Leaf Foods/Canada Bread 1,000 CDN Dempster’s franchisees, leader’s blog, case preparation for a +$300-million class action law suit based on good faith, right to associate and mental distress ($50,000 award for one franchisee, 2008-2012),
  • FranchiseGrade.com: The Authority on Franchising, developed data collection methods and hierachy structure and custom reports based on U. S. Franchise Disclosure Documents, FDDs, Les Paul Stewart Consulting: work has been featured in Businessweek, Entrepreneur, Inc., and the Wall Street Journal. 2004 – 2005,
  • Dr. Gillian K. Hadfield: Problematic Relations: Franchising and the Law of Incomplete Contracts, The Price of Law: How the Market for Lawyers Distorts the Justice Systemand
  • LinkedIn

Red Flags: Predatory franchise lending

May 14, 2008

If you have experienced 4 or more of these most significant warning signs, you should investigate further.

Your problems may have much more to do with falling into a well-concealed trap rather than anything you could have done after you signed.

Predatory franchise lending: a commercial arrangement between bankers, sales agents and franchisor that results in catastrophic but predictable loss to the lender/franchise investor.

Predatory lending breaches the banker’s lending duty to: act prudently, perform adequate lender due diligence, and not “loan-push”.

Red Flags

  1. I worked with a business broker or sales agent to look for a good franchise system.
  2. I came to talk to the the sales agent about one franchise system but ended up buying another one.
  3. There was more than one equipment and leasehold improvement appraisal done.
  4. It took two checks or bank drafts to buy one franchise.
  5. The loan proceeds were disbursed before I saw: a disclosure document, franchise agreement or took possession of the store.
  6. I was sent to talk to a specific loan officer, of a specific bank, at a specific branch.
  7. The bank, who chose the appraisers, also chose the highest appraisal.
  8. The loan registration form came from the franchisor or sales agent.
  9. Government guaranteed loan was approved in less than 14 days.
  10. My banker said they’d have I’d have to have two loans instead of one.
  11. More than three other franchisees in my system, had the same lending officer.
  12. The franchisor is a member of a national trade association.

There are things you can do and I will be writing on these in the near future.

Any of this sound familiar?


Predatory Lending: definition

March 31, 2008

Predatory lending is the practice of making exploitative high-cost loans to naive borrowers.

The academics below have defined predatory lending as a syndrome of abusive loan practices that involve one or more of the following five problems:

  1. loans structured to result in seriously disproportionately net harm to borrowers,
  2. harmful rent seeking,
  3. loans involving fraud or deceptive practices,
  4. other forms of lack of transparency that are not actionable as fraud, and
  5. loans that require borrowers to waive meaningful legal redress.
    (p. 1260)

How does this relate to residential homes?

The solution requires understanding the incentives in the home mortgage market that have fueled predatory lending.

Recent changes in the credit market have created new possibilities for lenders to profit by exploiting information asymmetries to the detriment of unsophisticated borrowers.

What is the role of government?

Neither market forces nor existing legal remedies are sufficient to correct predatory lending. Instead, government intervention is needed. [my emphasis]

Anyone who wants to really understand the problems facing the world’s markets and the New Zealand market in particular, are encouraged to study this academic work:


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