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Part 2 of 3: How common is it to skirt state franchise registration laws?
Considering the ease of finding franchisors on the Internet who ignore statutory registration requirements, the problem seems widespread.
Just look at Obee’s Franchise Systems, Inc. and how California’s Department of Commerce abandoned Obee’s registration (pdf) in 2006. That means that the firm’s California master franchises, typically entities that sell and administer franchises in a territory for a part of the franchise fee and royalty, cannot sell franchises. Yet, their California master franchises continue to prospect for buyers and offer franchise opportunities online, as seen on their website.
Mark Leyes, director of communications for the California Department of Corporations, says this could be a problem. He declares, “If Obee’s is advertising (offering) master franchises or individual franchises currently in California, even if no sales are made, it would be a violation of Section 31110 of the Corporations Code.”
Some firms are not registered in their own home state but still market franchise offerings there and elsewhere.
Take Uncle Al’s Famous Hot Dogs, for instance. The Virginia-based firm announces the newest Chesapeake, Virginia franchisee on its website. There are two problems. According to Denise Jacobs of the State of Virginia’s Franchise Division, although Uncle Al’s Famous Hot Dogs have franchises in Virginia, they withdrew their application last year. This may be due to their lack of adequate funding. As an Over-the-Counter company, their public financial statements show how little money in the bank Uncle Al’s had—$963.
Bruce Schaeffer, a tax attorney and president of Franchise Valuations, answers whether or not this company is even solvent. Observes Schaeffer of a 2007 Quarterly Report, “There are two definitions of insolvency: liabilities greater than assets or inability to meet obligations in the ordinary course of business. They [Uncle Al’s] appear to be insolvent under both concepts with liabilities greater than assets and with a pitiable $963 as cash on hand.”
Uncle Al’s called this investigative reporter, who was disguised as a franchise buyer, and said that they had franchise opportunities in my city of interest—Virginia Beach, Virginia. The executive on the phone reassured me that a bank had provided Al’s a new loan so as to have enough funds to begin franchising efforts again.
And what about the company that markets franchise offerings everywhere but is registered nowhere?
SpudsToGo wanted to create quick service restaurant franchises that sell baked potatoes. Unfortunately, according to the New York attorney general’s office, SpudsToGo has no registration in New York, where its founder and training center are located. In fact, this budding franchisor stated that he had not registered his franchise in any state. And yet his firm is marketing franchise opportunities through the Internet for the whole country.
Susan Kezios, president of the American Franchisee Association, in a recent interview observed, “The problem is big. New franchisors do so because they save money on filing fees with government agencies.”
Franchise consultant Nick Bibby, president of the Bibby Group, adds, "My guess is that the marketing of non-registered offerings is rampant among new franchisors, especially via the Internet. And I also think it's a good bet that some sales are also made without regard for local (state) law. While the actual sale may not be terribly common, certainly 'data collection' is."