Sub Prime Problems could spread to Franchising ???

This article points out again that it is the franchisee who bears the 100% risk and who fails 100% personally when the franchised business fails. The personal guarantees that are requisite to negotiating a lease to house the franchise and often, a personal guarantee on the franchise itself, so often destroys the failed franchisee when they cas no longer service their debt.

When there are only little increases in their overhead, this can topple them. We can see that rising interest rates on adjustable mortgages that were borrowed against by franchisees could be the final blow if the payments can't be made. We can see where this may be an ongoing problem for the banks who have loans out on home equities that are invested in franchisors whose franchisees are distressed and struggling to stay afloat.

This situation, however, will make the banks more cautious about loaning money on the home equity for business investment and it will behoove the banks to know the actual rate of failure of the franchise that can now be obscured in the Item 20 coiumns of the UFOC's. The SBA and Fran Data may also have to take a look at the transfer columns and do a little due diligence as well to protect themselves and reduce their risk.

Maybe the banks themselves will have to become more involved and more proactive to protect their stockholders and they will perform due diligence that will help the borrowers and protect them from unrevealed high risk investments.

The "writer's note" points out that the franchisor limits liability through the corporate form and doesn't have personal assets, like the home, at risk. The franchisor is in a better position to ride out the storm and to save himself.

Because the actual and real risk of the investment is obscured through the sale process and the UFOC that in reality legally protects the franchisor and permits the franchisors to sell their franchises at any high rate of failure, many franchisees really have no idea of the great risk they are taking and the "noose" that is now around their neck when they can't service their debt.

It is one thing to warn that there is risk and no guarantee of success in a binding unnegotiable contract and a UFOC and quite another to throw the red herring of the voluminous UFOC out there to avoid revealing past performance statistics that would reveal a material risk factor that should be disclosed by franchisors under the law in the UFOC's.

Maybe! when push comes to shove, this immoral and unethical status quo that has been with us so long will be uncovered and the churning and sacrifice of first-generation franchisees as a managment tool for predator franchisors will be revealed and prevented.