DDIFO Calls for Greater Controls over Dunkin' Franchisee Ad Fund Following Indictment
Bellingham, Mass. (Blue MauMau) - After yesterday's news on Blue MauMau regarding the federal indictment of a former executive of Dunkin' Brands, the DD Independent Franchise Owners is now releasing an official response calling for the institution of greater controls over the franchisee ad fund. It will include direct franchisee oversight and regular audits by an independent CPA and will be made available to all franchisees.
Wednesday's news reports stated that a former executive with Dunkin’ Brands has been indicted by the U.S. Attorney’s office on charges of mail fraud in connection with an alleged kickback scheme involving ad fund dollars. The U.S. Attorney’s case, filed on August 31, 2008, alleges Carolyn Kravetz, the former communications director for Dunkin’ Brands steered $400,000 in business to Boris Levitin, owner Luminore, of a graphic design company called in exchange for a 50% kickback. The funds Dunkin’ Brands paid to Luminore came from the ad fund, which is financed by contributions from all Dunkin’ Donuts franchisees.
Kevin McCarthy, Chairman of the Board of Directors for DDIFO, points out that this case highlights the fact that no entity can realistically be expected to always “obey all laws” even though that language is currently used by Dunkin’ Brands as justification for the termination of Dunkin’ Brands’ franchise agreements. McCarthy says, “If nothing else, this federal case shows that not even Dunkin’ Brands can comply with its own ‘obey all laws’ clause.
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Related reading:
Indictment of Dunkin' Executive Gives New Meaning to 'Obey All Laws' Provision
Dunkin' Donuts
has a culture of corruption.
Can someone post the Franchise Agreement
I was just reading one of the DD lawsuits and the franchise agreement stated that a franchisee has the right to ask for a schedule of receipts and disbursements prepared by a independent certified public accountant.
So, unless the franchise agreement has changed to delete that, then I don't know what all of this complaining is about, because you have the right to ask for that schedule, at which time I'm sure you can complain about what it is being spent on.
Accounts
jd, didn't you earlier claim that the results of an audit wouldn't show fraud - how obtaining these schedules be any different, if they were faked?
Michael Webster PhD LLB
Franchise News
Michael,
I don't think you understand what I was saying. The DDIFO is proclaiming that they want audited statements by a CPA, but in looking at a past franchise agreement, they have the right to ask for them. I was asking for a copy of the new franchise agreement, to see if that provision was still in there. If it is, I think it would be pretty clear that they have the right to get them from DD since it was in the agreement, rather than proclaim they deserve that right in a press release.
As far as the fraud and the audit, taking the system wide revenue from Don's earlier post, the ad fund would be earning roughly $50mil/year if you use a 1% ad fund rate (which I'm not even sure if that's the correct number). Assume that I am correct or conservative on that 1% number, you are talking about a $200k/year fraud, which is less than 1% of that revenue. I doubt it would be found in an audit, since it isn't a material amount, and especially if the payments were in the $15k-$20k range.
To tell you the truth, I doubt that any franchisee oversight committee would've seen it either. People will say they will, but if you are then you are talking about looking at thousands of invoices/year.
If they really want a CPA to look things over they would ask for 'agree-upon procedures', which would then detail any findings that the auditor would find in their review no matter the materiality, and the zees would be giving the CPA the necessary scope. The problem with this, is that it'll be costly, and I would imagine they would have to find a way to pay for it, since I doubt DD would.
Dunkin Zees Right to Independently Audited Ad Expenditures
PREVIOUS COMMENT: "The DDIFO is proclaiming that they want audited statements by a CPA, but in looking at a past franchise agreement, they have the right to ask for them."
That clause on ad fund rights can be found in the Dunkin' Franchise Agreement on electronic page 264 of Dunkin's 2008 Franchise Disclosure Document (pdf file). It says:
It isn't difficult
where the franchisor is supplied "advertising" by an agent company - one he owns. Then include those administration fees and salaries etc where agreements are designed to cater for legitimate marketing expenses, but are then interpreted to reduce the franchisor overheads for toilet paper because someone who faxed a logo needed to take a crap. No, it isn't difficult to drain very large amounts from advertising funds and get away with it.
Even though that is the short-term plan of weak minded franchisors and doesn't represent management by legitimate franchisors; it does exist and it is representative and only one of the mechanisms that leads to the failures of franchisees in systems where it exists. Of course it leads to the eventual failure of the franchisor which goes to explanations of high failure rates of franchise systems, particularly in the US – 3 in 4 in the first 10 years of operations.**
But at least in the US some things are being tracked.
** Shane, Scott A 2005, From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company, Prentice Hall, Upper Saddle River, NJ.
** Stanworth, J, Purdy, D, English, W & Willems, J 2001, ‘Unravelling the Evidence on Franchise System Survivability’, Enterprise and Innovation Management Studies, Vol. 2, No. 1, pp.49-64.
** Blair, D. Roger & Lafontaine, Francine 2005, The Economics of Franchising, Cambridge University Press, New York.
And what
happens to the failed franchisor. He offers up the new the new "Coat Hanger" franchise of course.
But back to fraud in advertising funds. It is a work of art and something to be admired from a distance. The entire accounting system is brilliantly designed where it's sole purpose is to satisfy an audit or any basic forensic investigation. I don't doubt that the more sophisticated franchisors could almost determine the balance sheet a year before they deliver it to an auditor.
Getting influence over how the advert funds are used is
a major positive project for any franchisee association where there is a corps of successful long term franchisees. It is something that DDIFO should have been working on a long time ago.
The ability to do that is facilitated by a constructive, non accusatory approach.
What I see in here is a highly accusatory approach that is more likely to get push back than cooperation.
The question is - - Why is/are the Assn/numerous franchisees going about it in this manner?
There seems, based on the colloquy in here, to be no affirmative positive agenda - just name calling and demanding - - where no name calling and a constructive approach would probably have worked.
DUH!!!--
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
Rubbish Richard
You may be right in some instances but you know that the advertising money use for whatever the zor deems good for him/her is to be protected at all costs. Most confrontation over advertising funds doesn't begin as confrontation - it just ends there when zors ignore and BS the zees. Then, eventually, they get nasty.
There would be very few zees or zee associations that start out challenging the zor. They know that is a dangerous game. Challenging the zor to deliver evidence and value comes when all else fails. And you know it doesn't happen any other way so why mislead readers?
Why not instead tell them to start nice, miss the name calling and every other form of stupidity, evaluate whether the fight is worthwhile - and if it is - go straight to end game choices.
Richard; you make so much sense at times and then at times you seem to be deliberatley misleading readers. If you want to sell a good story then you mix fact with BS so the BS appears to be fact - and you do it well.
"name calling and demanding" may be a direct result...
Richard Solomon said:
..."There seems, based on the colloquy in here, to be no affirmative positive agenda - just name calling and demanding - - where no name calling and a constructive approach would probably have worked".
Richard, did you ever stop to consider that "name calling and demanding" may be a direct result of being ignored, sued and generally disrespected? Dunkin' is famous for calling its franchisees "valued business partners" when they want something from you, but when you want to get something fixed, they turn a deaf ear.
I suspect DD Franchisees will continue to crank up the heat in the press until the franchisor begins to have trouble selling new franchises or more favorable laws passed to regulate the franchising relationship. This is a franchisor who is way out of control.
Bill Rosenberg, Dunkin' Donuts founder, must be rolling over in his grave. Dunkin' Brands (as a franchisor) has morphed into something that I think he would neither recognize nor approve of.
name calling
You are correct about Bill Rosenberg. The company has not been the same since Popeye took over.
Nice in theory, imposible in execution.
Richard Solomon said:
..."Getting influence over how the advert funds are used is a major positive project for any franchisee association where there is a corps of successful long term franchisees. It is something that DDIFO should have been working on a long time ago".
Richard, nice in theory, impossible in execution. I don't know how to get into Fort Knox unless and until they unlock the door. Right now it is impenetrable.
Dunkin' Brands has summarily dismissed a formerly used (and mutually acceptable and well-negotiated) Marketing Operating Principles (MOP) Document that gave DD franchisees all the rights we needed in terms of spending authority, oversight and audit provisions.
That this situation occurred is a direct result of Dunkin' Brands' dismissal of the MOP document. Dunkin' is culpable and needs to pay restitution to its Franchisees' Ad Fund from their own coffers, as well as restore the MOP document.
Control over Advertising Funds
Guest writes: "Richard, nice in theory, impossible in execution. I don't know how to get into Fort Knox unless and until they unlock the door. Right now it is impenetrable.
Dunkin' Brands has summarily dismissed a formerly used (and mutually acceptable and well-negotiated) Marketing Operating Principles (MOP) Document that gave DD franchisees all the rights we needed in terms of spending authority, oversight and audit provisions."
Uh, what was in it for Dunkin Brands to accept these principles?
What problem of theirs did it solve?
Why would Dunkin win by transferring spending authority?
Please don't use the word "fair" in your reply.
Michael Webster PhD LLB
Franchise News
Local Control
It might be a useful strategy to for the DDIFO to coordinate the local advertising budgets.
Michael Webster PhD LLB
Franchise News
concern of Fraud
I am an consultant and am more concerned over the Fraud. I have heard over the years that (and this is general to other companies) that Ad Fund are also Slush Funds. Corporate employees often receive reimburses of company expenses unrelated to ad. or marketing expenses. I have heard that travel expense and year end bonuses often come from these funds. It is alarming b/c bonuses need to be tax appropriate (payroll and other gov't taxes) and T/E is only 50% deductible. It is odd and disconcerting that this fund with so much money is not annually audited. I would think the CPA firm could be held liable as well for overlooking this area and due to the large amount of money and possible fraud that could and HAS currently occurred. The other point is was this fraud disclosed to ADFund board members or only leaked thru the press. If DD was trying to hide this then more parties should be held accountable.
concern of fraud
What makes you think that the fund isn't anually audited. It appears that Dunkin found the fraud and turned the information over to the authorities as appropriate for the situation. It would not have been appropriate for Dunkin to release any information while the authorites were conducting a criminal investigation.
Wrong. There were negotiations with Dunkin about it
Dunkin corporate steadily refused reasonable requests by DDIFO to alter the new form of franchise agreement to allow the oversight that franchisees had for many years. This was done in private.
This is exactly one of the examples used by DDIFO for why it wanted what it wanted. It appears that corporate KNEW about it while at the same time brushing off the request and characterizing the example as ridiculous.
Wouldn't you be miffed?
Was this effort before or after the change of ownership?
While it is important that an effort was made, its timing and the ambient circumstances are significant.
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
Obvious result of Dunkin attitude to franchisees
The alleged mail fraud (theft) that involves a kickback scheme to convert franchisees' advertizing funds controlled by Dunkin’ Brands executives, employees and agents is a direct product of the overall attitude Dunkin' Brands has of its franchisees and the philosophy of Dunkin' Brands implements as a whole with regard to dealings with franchisees as is evidenced by their track record of extensive litigation and termination of franchisees over the years and their complete lack of accountability to franchisees for their actions. Something like this was bound to happen sooner or later.
When you hold your own franchisees in contempt it gets easier for the staff to steal their money.
Guest
You seem to have an anger issue. Either you've been caught with your hand in the cookie jar yourself or your just an angry person. Either way, seek help.
Dunkin corporate culture
Well it was widely reported that a franchisor exec was the one caught with the hand in the cookie jar. Of course, you need to know how to read and actually do the reading. So, that settles that.
As for Dunkin's corporate executives being emboldened to steal from the franchisees,that starts at the top. If there is a big company effort to set up franchisees to shake them down for giant penalties for alleged infractions that have nothing to do with the business, that tells the corporate employees that franchisee money is there for them to take and that it is an ecouraged corporate goal to take franchisee money.
Is there a big company effort to shake down the franchisees? Lets let the litigation record speak for itself. Read the depositions of the company employees. Talk of how much they can get in a penalty from a franchisee and not to write things down or create paper trails. Survelliance. Appalling.
Compare the litigation rates of other franchise systems to Dunkin. Why are there hundreds more cases against its own franchisees than other systems? Dunkin had giant growth before the litigation started. Clearly these franchisees were obviously as good as or better than the franhcisees in other systems that aren't being litigated into vagrancy. After the litigation strategy started, Dunkin's growth has slowed and sales are off. Why is this good? Are franchisees now empowered and motivated to work hard so they can get sued out of their profits?
Dunkin's PR guy says that the franchisees Dunkin suies are hurting the brand image so they have to get fined. But how were they hurting the image when the allegation is some failure to properly document tax deductabloe expenses? No one was aware of it until Dunkin files a federal lawsuit and gives the news to the papers. They literally make a federal case out of something that was private and then say it is hurting the public image.
Please find out why you want to defend this behavior before trying to.
Stealing
Guest writes: "When you hold your own franchisees in contempt it gets easier for the staff to steal their money."
You need to back this up with some evidence, I looked at the indictment and so no evidence that DD benefitted from the scheme, nor that the employee had any malice towards the franchisees.
DD says: ""We detected the fraud and promptly reported it to the authorities, and we have recovered all monies," Caldeira said. "We take very seriously our obligation to protect the brand for the benefit of all customers, franchisees, and employees."
Is this true or not? What other investigations were performed? How was the fraud detected? Could it have been detected earlier if franchisee input was used? How can this be prevented?
These are the questions to ask, not simply lobbing easy personal attacks at DD.
Michael Webster PhD LLB
Franchise News
Dunkin corporate evidence
Michael Webster said "You need to back this up with some evidence" about franchisor executives approval of corporate taking franchisee's money.
According to the head of Dunkin's loss prevention department, I definitely do NOT need to do that. Steve Horn tells me how. If a corporate franchisor employee seems too happy or is walking around with a frown all of the time but still comes in to work at Dunkin Donuts every day, you need to get private detectives on his trail immediately.
Did he buy a new car? A beach house? Hey, Jon Luther bought a house in the HAMPTONS! He's got to be stealing franchisee money, right Mr Horn? Can you show us some telephoto lens shots of his beach house? Did you peer into the windows so we can see the color of his carpets? Did your handy little life destruction selectomatic device turn up any more corporate employees who smile or frown too much or who might have a chick on the side?
This brings to mind the manner in which one might be accused,
charged, summarily convicted and shredded in the days of Caesar Augustus, Nero and Caligula.
At the Augustinian level of paranoia, it would be a crime against the ruler if a conquered town were to raise a monument to those of its citizens who had perished in defense of the city.. The solicitation of support to raise a war memorial was deemed a revolutionary act.
It was a crime to remove one's pants at night without searching the pockets and removing any coin having the image of Caesar on it, for taking off your pants and leaving Caesar's image in the pocket was an act of treason.
Writing a poem that could be interpreted in two ways, one of which might seem to express seem dissatisfaction, was also a crime.
A revolutionary crime was committed, and many were were whipped to shreds, sent off to mines, torn apart by animals, or cut in half for failing to invoke the divine inspiration of Caligula upon the undertaking of any civic task or project.
Under Nero, if you failed to show joy at the death of a friend or relative at the hands of the government, you were a criminal.
You feared being known as a popular person, for you would be seen as a rival to the prince, just waiting to spark a civil war. If you shunned popularity and remained quietly at home by the fire, this made you noble and respected, and therefore suspicious.
If you were rich, you were suspect of corrupting the people through your generosity and were considered suspicious. If poor, you must be watched all the more closely, as there is no more opportunistic a person than he who has nothiing.
Being somber made you suspicious, as it was deemed that the status quo of society was unsatisfactory to you.
Sounds a bit like DD, doesn't it!--
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 give up
I have known franchisee groups that have managed their relationships with difficult franchisors to achieve positive working cooperation. The ambient dialogue omitted the name calling and accusatory tone I see with regard to the DD situation.
As that ranting seems to be endless, I doubt that there will be any constructive consequence from the postings on BMM dealing with the subject, So, like the Cuppy's fiasco, I won't be wasting my time posting anything further about DD.--
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
Re: I give up
"So, like the Cuppy's fiasco, I won't be wasting my time posting anything further about DD.--"
Thank you very much.
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