More garbage info in = better decisions?

July 12, 2008

A good article from the Mr Video situation that illustrates many of the basic problems in franchising, worldwide.

Australia and New Zealand investors and media have really picked up on the industry’s propaganda in the last 12 months or so. As I have increased my knowledge about franchising, the more I want to wash my hands.

Slindile Khanyile reports from South Africa in the Business Report article: Information is franchisees’ best friend in agreement with franchisors.

More is always better?: Partially true in theory but is absolutely misleading in franchise practice. It’s called baffling them with bullshit so the contract is seldom even looked at.

In FranchiseLand, things are often much more complex and counter-intuitive than a “rookie” small business investor would believe. Sheep are useful for both a fine woolen sweater or the barbecue

I would suggest that South Africa’s franchisor-only trade association has some explaining to do. BTW: whenever you see the words “franchising consultant” together, translate that into a commissioned salesperson. You’ll be right 95% of the time.

I took this article into the Information Sharing Project and these are the keywords I extracted:

  • 100 per cent of settlements have gag orders,
  • Access to justice is not available,
  • Apologists,
  • Cannon fodder,
  • Can’t afford to sue,
  • Churning (serial reselling),
  • Complaint letter to franchisors trade association,
  • Designed to fail as franchise investment,
  • Disclosure laws: 10 per cent solution,
  • Disclosure laws: false sense of security,
  • Financial failure of first franchisee a material fact to the second,
  • Franchise laws protect franchisors, not franchisees,
  • Franchise agreements are so complex, they are breached the moment they’re signed
  • Franchise agreements create a License to Lie, Cheat & Steal,
  • Franchise agreements: Masterpieces of deceptive wording and artful omission,
  • Franchisee repudiates loan,
  • Franchisee-on-franchisee opportunism,
  • Franchisor association not trusted by franchisees,
  • Franchisor association not trusted by professional journalists,
  • Franchisors want the minimum regulation they can get away with,
  • Gillian K. Hadfield
  • I own the assets but the franchisor controls them,
  • Incompetent or predatory: for the small business investor, the outcome is the same,
  • Loan repudiation,
  • McLaw: toothless legislation designed to protect the dominant parties,
  • Mediation: information gathering that aids the destruction of valid legal claims,
  • More one-sided information leads to greater deceit,
  • Must sell business (eventually) through franchisor,
  • No franchisor support,
  • Only 3 ways out: resell (next loser), independence (be sued) or abandon (bankruptcy),
  • Opportunism: contract creates powers which are used to strip investor value during relationship,
  • Opportunism: self-interest with deceit,
  • Opportunism Test: If asset ownership were reversed, would decision likely change?,
  • Stores shuttered,
  • System designed to fail for franchisees,
  • Sunk costs: franchisee’s trapped capital keeps them chained to treadmill,
  • Short-term profits to franchisor much higher with cannon fodder investors,
  • Shocked, I tell you: just shocked,
  • Unproven business model,
  • Unsophisticated buyers,

Want to gamble? You better know when you sit down with businesspeople who the chump or the fool is. If you don’t have superior relevant information and power, look for the victim in the mirror.

You may believe you are getting into a sort of a partnership with a franchisor. It is much, much more. You may not care but, believe me, if you ever have to disagree with your franchisor, these parties will create every barrier imaginable to your pathetic attempts at justice.

Usual Suspects

  1. your specific franchisor (good, evil, whenever…),
  2. a national trade association that defends the rights of the best franchisors to behave [if they see fit] as the most predatory [see FASA],
  3. an international network of these apologists & spin doctors (see next logo),
  4. the biggest law firms in the country who are paid 95% by the franchisors to destroy little guys like you [franchise bar],
  5. banks and lenders who love loan pushing, Predatory franchise lending,
  6. franchise consultants/sales agents [only paid when someone says yes],
  7. politicians whose jobs depend on giving the powerful what they want and
  8. monopoly suppliers.

If you don’t understand these issues, you are incompetent to evaluate a franchise offering in any country.

  • You are, however, fully qualified to sign a contract that gives others the right to Lie, Cheat and Steal from you.
  • And you should not be surprised when they, in fact, do so.

Harold Brown, Esq. didn’t call franchising a Trap for the Trusting for nothing.

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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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