In Praise of Bankruptcy protection

June 29, 2008

My 2001 personal and corporate bankruptcy was substantially pre-ordained the moment I signed the franchise agreement in 1998.

It was wishful thinking that I could be profitable as a Mom-and-Pop operator when I got hooked up with, what turned out to be (see hindsight bias) a system that didn’t have a proven business model. I kept putting more and more time and money in (sunk costs) believing I could turn the corner.

Michael Kernaghan of the Weed Man was right: I didn’t have enough money to grow the business quickly enough to be sustainable.

Once in the soup, I created an internal fallacy or illusion. It was fueled in part with my increasing attachment to the money I had lost (loss aversion) which is usually 2 times as powerful as the desire for a comparable economic gain (prospect theory).

It was very difficult to square this failure with the frequent successes I had had in my life up to the at time (cognitive dissonance). And the franchisor could always be counted on to counsel perseverance and asking relatives for more money.

  • Very Large Note: I had no flipping clue (at the time) that I was in a very real way acting in a delusional way. I thought I was being perfectly rational. I had did not know I had Drunk the Kool-Aid so badly. (Most other cult members don’t think so, either.

Whether a system is predatory or incompetent, it does not matter: The investor will lose it all, in all likelihood. The only difference will be the style you exit with.

Bankruptcy

Of the tens of thousands of dollars I have spent on professional advice, the most useful franchise expenditure was with my Bankruptcy Trustee.

He once mentioned that the average indebtedness of a client was $25,000.

My former franchisor realized less than seven per cent (7%) of their claim on my business’s disposal. That was no surprise to a 1,800 franchisee multi-brand international corporations.

Observations

  1. I believed I could turn early losses around by working harder and investing more. I was wrong (see pride). Perversely enough, the harder you work, the more you become attached to being a franchisee. It works like a Boy Scout knot that tightens as you struggle with it.
  2. I went 3 to 4 years too long. They call it “protection” under federal law for a very good reason. I was over-optimistic.
  3. Bankruptcy was the best business decision possible.
  4. The manner in which I bailed was important to me (no credit card debt, only the likely suspects got burned).
  5. My spouse never signed anythingever. (Everyone notice this?)
  6. My retirement savings were with a life insurance company which, for me, proved to be beyond the reach of bankruptcy law. (Talk to your financial advisor about protecting yourself before investigating anything.)
  7. Going independent delayed the inevitable and it allowed me to acquire the start of my franchising education.
  8. Financial counselling before I actually declared bankruptcy (ie advice in helping to decide) from a Trustee in Bankruptcy was the 2nd best money I ever spent.
  9. Bankruptcy’s stigma (acting through the human emotion of shame) kept me going. I thought that if I was going down, I may as well learn as much as I could about franchising as I went.
  10. Industry insiders told me stuff that they never imagined I would using in 10 years. Everyone cuts a deal, signs a gag order and exits feeling it was mostly their fault.
  11. I got hooked on learning how this trap is laid, especially the psychology that makes a franchisee seem to so comprehensively collaborate in their own imprisonment (thought reform).

Credit counselling is a part of the process of being a first-time bankrupt. It went pretty smoothly for me.

When my counsellor said, “What lessons have you learned, Les?” and I replied: “Don’t buy another franchise?“, the questions stopped.

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