Wednesday, September 16, 2009

When Push Comes to Shove!

With the specter of the global economy and multi-national corporations, who would operate within the global economy, it became necessary for American multi-national corporations to outsource many good American jobs to remain competitive in the global economy. Our manufacturing base has diminished over the years as well, and this has produced a problem for government as to "Where are Americans going to work to realize their American Dream." Where are the jobs of the future?" Franchising has given the government job numbers to report to the American People and franchising has grown disproportionately in our economy because of all of the recessions we have had in the past thirty years.

Thirty years ago the franchisors and the special interests who surround franchising, to include the federal and state governments, determined that franchising could grow jobs and financial activity in the economy, especially during recessions, when those with the financial resources to invest in themselves, and who had lost their jobs and income, would invest in franchises to restore their income and security. These investments and the redistribution of the savings/assets of franchisees would provide the cheap "venture" capital and the cheap labor to encourage those with successful businesses to franchise these businesses and grow jobs within the slowing economy.

McDonald's, the great American success story was, and is, the inspiration for franchisors to franchise their businesses to grow a chain that will make them millionaires within a few years if their "concept" catches on and the American people fall in love with THEIR concept.
It is the Franchisors who are the ENTREPRENEURS and the franchisees are merely the resources of the franchisors used to grow the franchisors' chain operations. Of course, all franchisors are delighted if ALL of their "founding" franchisees are successful and make it, at least, to a "breakeven" status. But, realistically, there are always a certain percentage of "founding" franchisees that will fail and lose their entire investments. The only reliable research available from academics indicate that all startup small businesses, whether independent or franchised, fail at a rate of 50% at sometime within the first five years and only 29% are still standing at ten years.

Apparently, in spite of and because of this grim reality, the Federal Government regulated franchising and took the business model out from under the purview of the States in the late 70's because they wanted to grow franchising and in order to grow franchising, they had to protect the franchisors from the certain percentage of franchisees who would fail and who would believe that they were fraudulently induced to contract because of misrepresentations made in the sales process as to the success and profits they would enjoy when they bought the franchise in good faith.

The failure of "founding" franchisees, however, is not failure for the franchisors if the tangible and intangible assets of the failed founding franchisees can be retained within the system to continue to serve the franchisor. The franchisor has no capital investment in the hard assets of the franchisee's business operation and doesn't fail if these failed units can be CHURNED in fire sales to second-generation franchisees that, perhaps, can bring the business to breakeven status because they buy the business for just pennies on the dollar of the original investor, the founding franchisee.

Unfortunately, "Churning" has become a management tool for some exploitive and dishonest franchisors whose franchises DO NOT produce profits for the majority of the franchisees and whose founding franchisees fail at a rate that, if known and disclosed, would prevent them from selling their franchises to new prospects.

Unfortunately, The FTC Rule of the Federal Trade Commission that regulates franchisors appears to, in practice, permit franchisors to obscure the failure rate of their founding franchisees in the sales process and to sell their franchises to the public without making any representations at all concerning success or profits in the written disclosure document, the FDD, or the written franchise agreement. Franchisees are tricked by the appearance of government regulation to believe that there is some oversight of franchisors by the government and that government wouldn't permit the franchisors to sell franchises with high failure rates of founding franchisees and low profitability experience to innocent prospects who invest their life savings in these "pigs" and "dogs" that are eligible, often, for 90% guaranteed loans through the Small Business Administration (SBA).

Many franchise experts have indicated that there is a fatal flaw in the FTC Franchise Rule that misleads that portion of the “American Public” who invests in franchises. The fatal flaw being that franchisors, themselves, are not mandated to disclose the unit historical financial performance statistics of their systems to new buyers or to investors in the franchisors' commercial paper.

Apparently, the fatal flaw in the FTC Rule continues to be ignored by the regulators and by the Congress because they feel they can't change the law to make the franchisors disclose unit performance statistics because if the REAL RISK were disclosed to prospective buyers of franchises, this in itself would slow the economy. The Artifice of Item 20 of the Franchise Disclosure Document, whereon prospective franchisees are supposed to do their due diligence with current and ex-franchisees, actually acts to immunize the franchisors from fraudulent inducement/fraudulent concealment in the forming of the contract, and all of their inducements outside of the franchise disclosure document and the written franchise agreement are now moot and not actionable.

So we have a Catch 22 that has resulted in great pain and suffering for thousands and thousands of Americans who have been unknowingly sucked into buying unprofitable franchises that often fail or that premeditatedly indenture them in long-term one-sided contracts from which there is no reasonable exit.

The Great Franchising Robbery of franchisees continues and franchising continues to grow in our economy. Because the franchisors know that they are protected from claims of fraud and because they can sell their franchises without making any claims of success or profit in the written documents, franchisors have been encouraged to commit intentional torts and frauds against franchisees to themselves survive --that are NOW going to come to the attention of the courts in great numbers by way of class and mass actions. The government subsidy of the old and the mature franchisors and the startup franchisors will be exposed and there will be some kind of change.

The Robbery will not stop until there is TRUTH in DISCLOSURE OF THE RISK in buying a New Franchise from a new franchisor or from an established and mature franchisor.