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toolsParis Buzz Says Franchise Expo Biggest in the World
PARIS, France (Blue MauMau) - "The biggest franchise fair in the world," French franchisors were proudly announcing. The Franchise Expo Paris had some 450 brands, more than at International Franchise Expo in Washington D.C.. While some 80% of exhibitors were French, there were 30,000 estimated visitors, most middle-aged.
In contrast, exhibits were often staffed by those under 30 years of age. In France, the average age of a new franchisee has grown to 44. According to the yearly research made by the CSA institute , while the percent of franchisees aged between 18 to 34 years-old dropped from 22% in 2004 to 16% in 2007, the percent of franchisees 50 – 64 grew from 23% to currently 29%.
Potential franchisees spoke to Blue MauMau's European correspondent, Eugene Driga, that initial investment requirements are increasingly expensive while leases in suitable locations require more capital. Franchisees are selected mostly (70%) from people who have worked as employees for many years. These former employees have savings and now they want to start their own business. Since their narrow business background lacks experience in running a small restaurant or business, they choose to own and operate a franchise to receive support and training.
French Franchisors Want to Export, Americans to Import
Visitors from abroad had free entry to the fair (the entry fee was US$40). It seemed to me an intelligent policy of stimulating French export applied even for small things like this, since 80% of the exhibitors were French and 50% want to export their brand.
Every visitor, whether free or paid, had to complete a survey form to enter the expo.
American franchisors Berlitz, Subway and Curves exhibited separately. Carl's Jr, Crestcom, Fast Fix, Maggie Moos, Rainsoft Sharkey's and others, were grouped at the special USA stand or in International Village. U.S. exhibitors felt that the advice of the IFA or the logistical help of the US Embassy was beneficial.
Interest in Franchising a Business is Higher than Buying a Franchise
According to the research made by the CSA institute, the number of franchise networks in France rose 10% to 1141, while the number of franchised units rose with only 5% (summing 46,000) in 2007. The French assure us that this figure is above the average from other industries, though.
The Paris Expo seemed strongly dominated by young franchisors. This correspondent counted some 30% of brand names being new franchises exhibiting for the first time.
Although no success rate for franchising has been generally accepted, Yves Morot, a member of the experts' college in the French Franchise Federation, declares that over 80% of franchise networks survive for 5 years.
The Doubin Law, the French law of franchising, requires franchisers to provide a "softer" counter part of the American UFOC, named DIP (Document of Information Prior-Agreement). In these French disclosure documents, a franchiser is required to provide only the number of the franchisees that left the network in the latest year and not the last 3-4 years as the U.S. disclosure documents require. DIP does not require disclosure of revenue. Franchise investors look up the records of accounting balances of the existing franchisees.
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Related readings:
Own the casino
As I understand, if you have a dream but no dollar and are a franchisor, then you test your concept with someone else's money. If you win, the trademark becomes valuable and you own the trademark. If you lose, you feel a little sad (maybe) when your franchisees are foreclosed upon.
Conversely, if you have a dream and borrow from the bank, you test your concept with your own house as collateral.
Given the foregoing, I am quite shocked to see that people would rather be franchisors than franchisees. What's next... a finding that people would rather own the casino than be the gambler? That people would rather be the CEO than the hourly worker?
Shocking!
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Rick in Casablanca
Rick: How can you close me up? On what grounds?
Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
[a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much.
[aloud]
Captain Renault: Everybody out at once!
Michael Webster PhD LLB
Franchise News
Why aren't you gambling your own savings, Mr Kroc?
1. I picture the following: one of the first potential franchisees knocks on Ray Kroc's door and asks him “Please don't take my question personally, but why don't you develop your business gambling your own money, like White Castle Fast Food Network has been doing since 1921?”
On the boulevard where I live, 4,500 miles away from your home, Mr Steinberg, there are 3 McDonalds units that pay taxes to everyone, including USA government. From this reality I reason that Ray Kroc's answer to the above question was pretty satisfying.
2. Mr. Steinberg writes: ... a finding that people would rather own the casino than be the gambler? That people would rather be the CEO than the hourly worker?
I find it normal that the simple worker dreams of becoming CEO, and the gambler to become the owner of the casino. In their own realities, their path to achieving this is blocked by either the stock holders committee or the banks refusing financing him/her if his/her plans aren't viable.
For the dishonest franchiser, the franchisee has lawyers, consultants, regulators, BlueMauMau and the cousin that says “no” to the franchisees plans!
NB: the discussion described by me in the first part couldn't have taken place, because Niel Fox, the first McDonalds franchisee signed the agreement in 1953, one year before Ray Kroc met the two brothers.
Mortgage on House
Eugene writes: "I picture the following: one of the first potential franchisees knocks on Ray Kroc's door and asks him “Please don't take my question personally, but why don't you develop your business gambling your own money, like White Castle Fast Food Network has been doing since 1921?"
Kroc put a second mortgage on his house in the late 50's to finance his purchase of a master license from the McDonalds brothers.
Michael Webster PhD LLB
Franchise News
Best franchise movie
A great movie, and Rick would have made a decent franchisor. Unfortunately, I think at the IFA meetings they screen Citizen Kane without the ending.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Honesty not best measure
From a legal perspective, I'm not sure that inquiring into "honesty" is the best route. Rather, I would tell a prospect that there are certain unique aspects to being a franchisee which they need to understand and agree.
This is not a technical distinction. Most of the complaints by franchisees which I have come across are ones which are not violations of statute or regulation. Many of the practices are explicitly permitted under the Franchise Agreement. Now, those practices may be unethical, but not illegal.
If by "honest" we mean adherence to law, then few zors are "dishonest."
As such, many of the common complaints by franchisees are not ones which can be addressed by the judicial or regulatory systems. Your point as to BlueMauMau and the cousin is well-taken, and highlights the need for pre-purchase common sense.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
The Unique Circumstances of the Franchisees
Yes, franchisees are unique "marks" who enjoy their WEAK position in the law because franchisors have influenced and bought the rule of law and procedure. The dishonesty and the deceit of the franchisor is legal and is protected under regulatory policy.
I think this is what Paul Steinberg is saying but I'm sure he will deny my interpretation of his comments.
Common Sense only works well when it is applied to situations where the other party involved has acted with common decency. Franchisors generally don't qualify!
Re: unethical practices
Because I practice in Washington, I found myself asking whether a contractually permitted but unethical practice could stand if challenged under the "bill of rights" portion of our state franchise act. I would think not. I've set out the providsion I had in mind below. What do you think?
R.C.W. 19.100.180(2) For the purposes of this chapter and without limiting its general application, it shall be an unfair or deceptive act or practice or an unfair method of competition and therefore unlawful and a violation of this chapter for any person to: . . .
(h) Impose on a franchisee by contract, rule, or regulation, whether written or oral, any standard of conduct unless the person so doing can sustain the burden of proving such to be reasonable and necessary.
I have also heard
people being successful in business using their second mortgage in an investment. We did in buying rentals. Which has to be sold to pay off the mistake of buying a zee.
In the case of McDonalds didn't they work their system for years before they sold the sytem to others?
That is what is wrong with many zors today. They copy cat successful zors, (Like Subway was copy-cated by Quiznos.) Our zor copy cated Curves.
I believe McDonald's had it right. They proved their system than sold it. The copy cats try to make it better but never battle tested it. Throw it out there let real people be test models. If it doesn't work, the price is a persons life ruined financially. Then the copy cats change the system until they get it right. The problem I have with this type of zor is it is not only one life ruined but many. I can think of at least 30 families hurt by our zor. Not a good thing.
Interesting?
I live in Washington.
Unethical Practices
Would this provision cover the "liquidated damages" clauses; i.e. royalties owned EVEN by those franchisees who are terminating because of continuing great losses in the operation of their franchised businesses.
When franchisees have exhausted the estimated startup costs (for which the ZORS are not held legally responsible) and want to terminate to cut their great monthly losses, they are squeezed with the threat of liquidated damages. Some of the courts have ruled that these provisions are not conscionable ---if they are "penalties" for failure? But, other courts uphold these liquidated damages. These clauses are also used to ensure the cooperation of franchisees in the takeover of their units at the cheapest possible price by the ZOR or his third party agent.
Odd burden in WA
Mr. Morrill cites an odd statute and makes an interesting observation. Since the responses have veered off, I'll take a stab at the Q raised:
At first glance, this would appear to be an invitation to mischief. As I read this, the burden shifts to the zor to justify every semicolon of the Ops Manual and every f'zor directive. The ambiguity of "reasonable" and "necessary" is bad enough, and of course then there is the matter of the IP holder and the rights (and responsibilities) under federal law.
I suspect that this is one of those deliberately ambiguous statutes which is put in for the precise purpose of enabling the regulator (or jurist) to "do equity" and while we may all be in doubt as to whether a particular fact pattern would constitute prohibited conduct, that very uncertainty has a prophylactic effect.
One might argue with the Washington statute on a number of grounds, but let's face it: if you are the dominant party in a jurisdiction where this statute is actually enforced (as opposed to just being window-dressing), it will tend to curb your more extreme overreaching.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Deny? Naah.
Obfuscate, maybe. But never an outright denial.
Seriously; zors have shaped the law (or lack thereof, at the federal level) in part because zors have supported their industry trade group where zees have not. And whose fault is that?
Zors have paid for "research" through their "educational foundation" and directly. However dubious the methodology may be, however questionable the results may be-- the zors have not been rebutted by the zees. True, you have the occasional Dady or Garner or Zarco. But the zors have not only outspent the zees, they have out-argued the zees. And whose fault is that?
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Kroc and McDonalds
Kroc was the master licensee of the McDonald's franchise. He made numerous unauthorized changes to the McDonalds' system to make it work on a national level. He eventually had to pay the McDonalds' brother several millions of real 1960 dollars for his "improvements."
The McDonalds of today is absolutely nothing like the McDondalds of Kroc.
Michael Webster PhD LLB
Franchise News
We had rejected
the managerial contract. That is when I believed this was a scam. They used our money for the build out and we paid for the equipment. I kept the equipment since it was paid off. I am in default with the lease and I'm still concerned about that out come. I basically wantd to dissassociate myself from the brand. I felt they had hurt too many people and didn't want to market a brand that did such a thing.
My take
There is nothing in that statute that explicitly limits its application or exempts any contractual provisions.
That said, there is a dearth of authority (caselaw) construing this provision. At this point, it at least injects some uncertainty into the equation. I would think even the uncertainty benefits the franchisee who would otherwise simply and certainly be crushed by application of his franchisor's contract.
The only purpose of liquidated danages is...
to overwhelm the franchisee.
Fighting LD clauses is not that difficult, but it is expensive in terms of legal fees and the financial analysis evidence to refute its applicability to your particular situation.
For example, you actually have to know that when the franchisor says in its FDD that it only takes 3 months to open a new store and have it up and running, and says elsewhere that breakeven is reached in 6 months, it's hard for the franchisor to get much more than 9 months net revenue by way of liquidated damages.
Moreover, gross income from your franchise to the franchisor is not lost profits. Only the profit margin on that amount of gross revenue is lost profit. Using the franchisor's financial statement and applying the profit percentage of its company, the lost profits from revenue from the departimg franchisee for proabably no more than a year will be much lesss than the LD clause claim and readily demonstrable.--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
I largely agree
"it will tend to curb your more extreme overreaching"
and
"uncertainty has a prophylactic effect"
Both these observations are, it seems to me, correct. On the one hand, no one knows exactly how far the language should be taken. On the other hand, the Legislature is presumed to have meant something by using these words.
But! The nature of the Contract and Relationship
You are right, Paul. If the AAFD had gotten support back in the last century and ZEES had been able to support a lobby of the Congress and the writing of Amicus Briefs, etc... ZEES would be in a better position and would now have a lobby in Washington that would be powerful. They would have to be very strong to overcome the lobby of the banks and the lenders and the landlords and the investors.
But, it is the very nature of the imbalanced relationship that is set up to keep franchisees separated from one another and to require the ZEE to deal one-on-one with his franchisor. This and the fact that ZEES don't realize that they are VICTIMS of the contract until it is too late. They are carried along on their good faith and enthusiasm in the initial start up of the busines. As the owner of the debt on the business, they work hard and are concentrating on trying to get to breakeven and know that if they fault their franchisor in any way, they can be punished.
Richard has commented on this sad state of affairs many times. The only cure for a franchisee is NOT to sign the contract or if he signs to suit up and carry a big- gun killer franchise attorney to represent the Network from the beginning.
It's just a shame that the "law" is like everything else. You only get what you pay for!
Wow!
Several millions of 1960 dollars. Thanks for the history lesson. But he wasn't using the zee's money to build their empire.
Due Diligence -----Be Concerned about your Lease
My friend! Be concerned about your lease. While your Landlord does have the obligation under the law to try and mitigate the damages through trying to get another tenant ---he can take you to court and the courts will honor your Personal Guarantee on the lease and give the Landlord a judgment against you for the entire rents due for the entire lease.
Because leases are securitized and become investment vehicles, just like franchises, the courts uphold the personal guarantees on the Leases and don't care or deal with the circumstances that brought you to default on your lease.
Be careful! Maybe you could talk to your attorney about de-identifying with the franchisor l23 and use your own equipment to run your own business. Maybe you could succeed if you weren't franchised! But, of course, they would probably immediately ask for an injunction. I thought I saw where one of the attorneys said that ZEES should send their franchisors a notice that they were terminating because they sold them a lousy franchise or something like that.
Since you own own equipment, maybe you can continue to pay the rent and sell your assets to another fitness franchisee, not a 123, who may have a better chance but will give you a better price for your assets and assume your lease or sublease from you. If the franchisor has the option to buy your assets and to assume your lease at termination, and he doesn't want to do this, why should the courts allow them to prevent you from selling your assets to anyone, even a competetor of the 123?
Liquidated Damages
Whoa!
While R.S.' s observation about the pragmatic use of liquidated damages clauses in a franchise agreement has considerable merit, there is a legitimate place for LD clauses, and any f'zee thinking that a court or arbitrator will chuck out an LD clause is in for a rude awakening.
As a general rule:
Matters of damages are governed by state law, which varies. Those interested in franchise damages should read Bruce Schaeffer 's work.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
That is the biggest concern
of mine. My Landlord has turned away 6 people already. It makes me think just maybe he is stalling for a big kill.
What do you think?
What if you had to close
because of insufficient funds to continue operating? Should a zee continue to operate when business had dropped to the point where you couldn't pay for the bills.
If you have sufficient proof that the system wasn't working does that stand in court?
When the weather got bad it seemed no one showed up. People were quitting and that is out of our control. The zee is faced with either staying there and hoping business will pick up. The Landlord said we could stay. But every month we were going deeper and deeper into debt. How could we continue?
The Malice of the Unbargained Contract
We would hope that "freedom of contract" as protected in the law but would be applied only to freely bargained contracts and not to contracts that are secured by a kind of constructive fraud produced by government regulation.
The pure and unadulterated malice of an industry who is permitted to hide and not disclose the known risk of a franchise purchase to a new buyer is beyond any civilized description here on Blue Mau Mau.
The franchisors deliberately suck new franchisees into long-term indenturing contracts and they know by their own internal statistics that only a certain small percentage of these franchisees will ever earn any actual profits and that a great percentage of them will fail out of business before the end of the term.
While slavery is illegal, slavery under contract is enabled in this country through the ability of franchisors to own franchisees under contract and to sell these contracts in the marketplace to investors.
Internet legal advice
Seriously, when you take free legal advice over the Internet-- you need your head examined. Sites such as BMM are to give you tools for a discussion with competent legal counsel. BMM is not a substitute for legal, accounting, or real estate advice.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Hard to know but usually the Landlord wants a Tenant
Hopefully, he is looking for a good tenant who will have a good chance of success.
If the shopping center you are in is fully occupied and has some good stable business tenants, it is in the best interests of the Landlord to prevent dark store fronts -----because fully occupied shopping centers attract customers and traffic and investors.
If, however, there are other vacancies, and the shopping center is going under anyway, he might be after the big kill. Hope you only had a five-year lease! I would hope that he has some obligation under the law to tell you why he has already turned away six tenants. Be sure to document this for your attorney!
Sleeping in 8th Grade
Did everyone sleep thru 8th grade? We have a federal system. Since there is no federal common law of property, this is a matter governed by state law. And while generally there may be a duty to mitigate on a residential lease, this is not necessarily true on a commercial lease.
Not to be difficult, but some people talk out their butts on this board, esp. when they are anonymous.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Bruce Schaeffer knows all
Mr. Schaeffer talks about this in his treatise. One of the reasons why zors shift to LD is precisely because getting involved in damages computation can become rather speculative, and where damages become speculative the court will not award damages.
BTW: The raising of economic impossibility as a defense to a breach of contract claim is a matter of state law. I happen to be in a rather harsh state where our highest court once said that a party must perform their contract even if to do so would cause insolvency or bankruptcy [seriously, the cite is 401 E. 61st St Garage v. Savoy, 23 N.Y.2d 275, 281 (1968)].
Of course, in California they would give you a lollipop and admonish the evil landlord. But New York is a tough town.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Franchisor's Breach of Contract
The franchisors, of course, hardly ever breach their contracts that they write and that protect them 100% from breach, but they breach their implied promises of success and profits, etc.. in the inducement to contract through the use of a contract that disclaims that they ever told you that you would earn profits or be successful, or that their plan would produce that result. Government regulation permits them not to disclose material and know risk factors to the buyers of franchises and this is a premeditated subsidy of the franchisors by the FTC.
Obviously, the "powers that be" had to go to great lengths to devise a Rule under which franchisors would not be required to disclose internal statistics and information concerning the unit performance statistics of their networks ---that in turn allows them to churn and turn and pump and dump their first-generation franchisees.
The use of the law and process to deceive to maximize profits and stimulate the economy is not a democratic process and the rule of law is not to be respected when the end doesn't justify the means. It's time for a franchise tea party.
To use freedom of contract to uphold these one-sided, unbargained contracts that protect franchisors and permit them to sell unviable products to the public and to destroy innocent franchisees who have invested in good faith is disgusting and purely malicious!