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Buying a Franchise is Riskier than Ever

risk, high wire walk in owning a franchise

Critics, including this journal, say that buying a franchise is riskier than ever, that the reality of the franchise system is often purposefully and skillfully hidden and that it is easier to fail nowadays once you plunge in.

Sarah Needleman of the Wall Street Journal reports that increased trepidation among franchise buyers has been reflected in the declining number of firms that sell franchises. Franchising firms' numbers stalled in 2004 and then have declined in count since 2005 (the year Blue MauMau was founded), years before the country's financial crisis and recession.

The International Franchise Association, a group started in 1960 by franchisors, says nonsense. All is well. According to their data, there are more franchise outlets and franchises are hiring more workers. It reminds franchise buyers that they simply need to do better homework before buying a franchise of any kind.

Franchisee advocates have a different take.

...some franchisee advocates say more chains are giving potential owners misleading information to get them to buy into the system.

The recent recession and subsequent slow recovery have prompted franchisers in recent years "to be more aggressive on their claims to success," says Keith Miller, chairman of the Coalition of Franchisee Associations, a trade group representing more than 35,000 franchisees nationwide. "They've been stretching the truth on revenue and profitability because people have had less money to invest in franchising."

There's no official count of complaints, but many franchisees and others knowledgeable about the industry report hearing them lately. Miami law firm Zarco Einhorn Salkowski & Brito PA has taken on 15% more cases over the past two years involving franchisees seeking legal retribution from franchisers, says senior founding partner Robert Zarco. He says claims of franchisers misrepresenting themselves in sales pitches and disclosure documents are among the most common complaints.

Critics also warn that people who do buy into franchises may have to sign tougher agreements with more restrictive terms than in the past. Franchisers have long been "tightening the screws on their franchise agreements," says Bob Purvin, CEO of the American Association of Franchisees and Dealers, a trade group with 6,000 franchisee members. For example, he says, more franchisers are requiring franchisees to buy supplies from specific vendors.

While that's not necessarily bad in itself, he says, many franchisers are getting rebates in exchange for the arrangements and not disclosing or sharing them. "The number of complaints over the abuse of the supply chain has soared dramatically in the past few years," Mr. Purvin says.

Also, many franchise agreements now include clauses that prevent franchisees from taking franchisers to court if they believe the franchiser breached their contract or committed fraud, says Justin M. Klein, a franchise lawyer in Red Bank, N.J. "In many situations, franchisees can only go to arbitration," he says, adding that arbitration decisions are typically nonappealable.

It's also more common for franchise agreements to prohibit class-action lawsuits and class-action arbitrations, as well as to include shorter statutes of limitations for taking legal action against chains, says W. Michael Garner, a franchise attorney in Minneapolis. [via WSJ $$]

 

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About Don Sniegowski

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.