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Michael Seid's picture

Context is important

Old Sword

Having been a member of the IFA for a bit of time now, I cant recall the IFA ever fighting full disclosure.  Indeed, it is now incluidng a profile section in its franchise offering section that enhances to some extent dsclosure.  Quite a misleading statement.  Why would you want to support your argument with information so easily challenged?

As to taking things out of context.  Context is important.  Dont know the particular article you are siting, but FPRs and Earnign Claims are a topic I often write and lecture about.  So I think I might be a better judge than you in defining what I mean on the subject. 

For instance, I discuss FPRs to some extent in Franchising for Dummies and in my workbook for potential franchisees.  A portion of what I wrote on the subject in Franchising for Dumies is likely quite a bit closer to my position than the selective sentence you seem to want to highlight as my entire position.  What I wrote a few years back in that book is the following. 

"How much can I make? The Financial Performance Representation

All prospective franchisees want to know how much money they will make if they invest in a franchise. Who is better suited to tell them than the franchisor?

With the exception of cost information that does not tie back to sales revenue provided by franchisors outside of the FDD, the general rule in franchising is that the only place franchisors can provide you with any information on projected sales, income, profit, or costs of franchised or nonfranchised locations is in Item 19 of their FDD. This statement of earnings is called a financial performance representation. Unfortunately, only 25 to 35 percent of franchisors provide you with this written information.

Some franchise salespeople will tell you that franchise law prohibits them from telling you how much you’re going to make. That’s not true. They’re only prohibited from discussing the numbers with you if they have chosen not to include the information in the FDD and the FDD requires the franchisor to alert you to this fact in writing in Item 19

Seeing the franchisor’s side of the coin

If every prospective franchisee wants this information, why do so few franchisors provide it? Good question. Here are some possible reasons:

                     *  We live in a litigious society. If the franchisor’s financial performance representation  contains inaccurate or misleading information, franchisees can sue to get out of the agreement and to recover their losses or obtain some other form of relief.

                     *  In some states, the franchisor’s officers or directors may be considered guilty of a crime if they give you improper earnings information. Rather than risk the penalties, they choose not to include any earnings information at all.

                     *  Franchisors may feel that their system’s locations and markets are too diverse to provide the franchisee with any meaningful information.

                     *  Franchisors may feel that their locations are all at different stages of maturity and that providing information based on averages and varying levels of operating success makes the information misleading — at best.

                     *  Some franchisors fear that because the information their franchisees provide about individual unit performance has not been audited or verified, it may not be accurate.

                     *  A franchisor may rightfully worry that because franchisees are often late in providing their financial information, the information may be incomplete.

                     *  Some franchisors also worry that information their franchisees provide may not be uniform. They feel there’s a high risk that any earnings information they prepare won’t accurately reflect the financial performance of units in the system.

                     *  Most systems have accurate information on the performance of their company-owned locations. However, they may not have similar information on the franchisee-operated locations. These franchisors believe that providing information based only on company-owned unit performance may not give prospective franchisees a true representation of the performance they can expect.

                     *  Some franchisors feel that providing earnings information gives competing franchise systems an advantage because it may contain what they feel are system secrets.

                     *  No uniform standard exists for how unit financial information should be provided to a prospective franchisee. The type of information can be as brief as gross sales on the average location in a system. It may be as extensive as full profit and loss statements on every location. Some franchisors include helpful statistical information in their Financial Performance Representations. Others don’t feel that statistics are particularly helpful.

                        Because Financial Performance Representations may differ from franchisor to franchisor, even when those companies are in the same industry, many franchise professionals don’t think the information is particularly useful for comparing one franchisor to another.

                     *  In some systems, the numbers are so bad that franchisors don’t want anyone to see them because if they did, they wouldn’t be able to sell a franchise.

On the other hand, some franchise systems give detailed earnings statements for every kind of franchise arrangement in their system.

Rupert Barkoff, partner in the Atlanta law firm of Kilpatrick Stockton LLP and a former Chair of the American Bar Association’s Forum on Franchising, warns: “Even when intended to be helpful, earnings claims (now known as financial performance representations) can be misleading because there are so many factors that enter in the success or failure of a franchisee. For example, hard work and diligence may make one franchisee successful, but might never offset the consequences of a poor site selection.”"

Context is important.  Do you have a disagrement wth what Rupert is quote in the book as saying?

Being more than one dimentional in your arguments, and being more than an inch deep in your thoughts and a mile wide in your opinions would also be beneficial to you if you want to discuss a subject as complex as franchising.  

Also, from your back handed comments I get the impression that you think I have some background as a hair dresser.  Hate to break that bubble as well - not a skill I picked up during my career.

Michael

Michael Seid's picture

In a nut shell

Paul

That is the entire point.  The person with the most power to decide whether or not to invest in a particular franchise is the prospective franchisee.  There is no franchisee until a prospect makes that decision.

At the same time, the person that owns the intellectual property that is being licensed is the franchisor or the entity licensing that property to the franchisor.  They get to choose the terms under which they are willing to license their property as a franchse system.  After all, it is their property that is being offered as a license and they get to choose the terms of what they want for their opportunity (and should).

If the offering does not meet some level of being commercially marketable, then it should not find any prospective franchisees willing to invest in it.  The purpose of the disclosure document is basically to define what the offering is and it is up to the prospective franchisee to make the very personal determination of whether or not that offering is comercially marketable and acceptable to them.

Since there is no requirement that anyone become a franchisee or invest in any particular franchise opportunity, if the information available to them through the FDD or on the internet or through other information sources, and based on their own unique requirments, does not meet their investment requirements, they should not sign an agreement.  Its as simple as that.

If Old Sword's base line requirement is that he is not going to invest in any franchisor that does not provide first year information, then he should not do so.  Those franchisors then have lost him as a potential franchisee.  If they choose not to include that information there is may be an entire class of potential franchisee they have lost. 

We have moved from less than 20% of franchisors offering an Earnings Claim to close to 70% including an FPR.  That did not take any government mandate to do so, it took basic market forces.  Potential franchisees, brokers, banks and others make an FPR more common today because franchisors were unable to close the deal without including an FPR. No magic or government was required, just market forces.

In a nut shell, if you dont like the offering terms, if you dont think you have adequate information upon which to make an investment decision, dont make the investment. 

Personally I think a well contructed FPR is important, but not essential for me in evaluating a franchisor.  I will gain the information in the detail I require other ways.  Great systems and concepts fail generally because of bad management more often than not.  Marginal concepts will often do great because the management of the system has the talent to make it so.  Certaily management can and do change and that is a business risk whether I am investing in a franchise or stock.  But the point is, my criteria for making an investment is unique to me and I have my own base line requirements and for me, who is managing the brand is my essential deal point.  If someone' base line requirements, what ever they are, including the type and depth of the FPR does not meet their requirments, they should never make that investment.  That is no different if the invesment is in a franchise, a stock, their homes, their cars, the college they send their children to, etc.

BTW - I like FPRs and advise our clients to include them.  Since I actually construct a lot of FPR disclosures for our clients, it might be useful to understand that in general I rarely advise clients to include first year unit performance becuase in general and in some industries in particular, they can be quite misleading.  There is a bell curve that happens in many if not most businesses when a new location opens.  People tend to want to go and explore the new locations or the new offering, even if the brand is well known in the market.  Sales may therefore be higher during a period of time (generally within that first eighteen month cycle) than will be sustainable or representaive of what will happen once the business enters its second and going forward years.  For us, making a go no go decison on including an FPR in a franchise system with limited unit operating history rests on that determination.  No different than why we rarely if ever include an FPR for a system that has a bulk of its operating units in a densly populated area like a Time Square when we know the offering will be in markets more akin to a Little Rock Arkansas.  The information there would also be misleading - even though it is factual. The FPR is part of the information presented by franchisors but is insufficient upon which to make any investment decision.  The FDD is just a starting point in evaluating a franchise opportunity just like the Ks and Qs are base line information upon which to invest in a public offering.  For me, including in Item 7 a realistic working capital line and notes in our clients disclosed intial investment is a whole lot more important than most FPRs.

Last point, we do a lot of M&A work within MSA.  We work with a lot of investment bankers.  Many are experienced with franchise systems and most today are not.  Often, and with some amusements, we have to explain to an investment banker more experienced with traditional acquisitons that the value of the business they are aquireing is not going to be represented anywhere on the franchisor's balance sheet.  After all, the investment is ultimately going to be based on valuing the going forward cash inflows from existing franchisees, whether or not those franchisees will enter into successor agreements and whether or not the system still has the potential to succesfully market ther offeing to new prospective candidates. Even in PE firms with experience, the deal makers may not have the depth in franchising they need and why firms like mine and law firms experenced in franchising are included in the deal team. 

Knowing some of the brands being traded, I often, as do other professionals in franchising, scratch our heads at the multilpled being paid for some deals.  I am often as amused when the deal closes and they chose to leave existing management in place when i know the management of that brand.  Just as with prospectve franchisees needing the right level of support before making an investment, and some choose not to make that investment into quaified professional advisors, the same is true for PE firms acquiring the entire system. 

Simple folk want simple answers.  I can understand and appreciate that.  And harping on first years sales FPR may seem logical or simply focusing in on SBA loan rates may seem important.  In reality, making an educated evaluation of any franchise or any investment is not that simple.  It is one of the reasons that I published the Making the Franchise Decision work book and wrote Franchsiing for Dummies. 

Its also one of the reasons that we have made the decision to become the managers of the About.com franchising portal.  Over time, and once we figure out how to eliminate much of the information now on that site and add more up to date and hopefully better informaton, it can become a useful resource fro both potential franchisees and franchisors.  It will likely take us a year to achieve that goal, but we have just begun to make the investment in putting together the information needed to do that.  We have aready begun to reach out to other professionals on both sides of the isle to help us evaluate those changes and will be including their suggestions and content as we move forward.  It is a site where the people who control the content dont make any money on the site (last months check was nine cents), so we think we have a unique opportunity to have a valid and unbiased portal or information over time.  Clearly when you look at the site today, it is not at a place that can make that claim - although it will over time I trust.

Michael

real estate

Very efficiently written information. It will be priceless to anybody who uses it, together with myself. Sustain the good work – for positive i will try extra posts.

Paul Steinberg's picture

Seid not taking contradictory positions

While I do agree with the underlying assumptions of Old Sword's comments, they can be reconciled with the Seid and IFA positions.

Essentially the rebuttal would be: if you are not given the desired financial performance data, then don't invest.

Old Sword is correct regarding the unit economics of many franchise systems. I am not clear that he is correct in assuming that disclosure would make as significant a difference as Old Sword assumes.

Remember that systems such as UPS Store and Quizno's had unit performance data in the public domain and they continued to grow.

Cold Stone Creamery had a major television expose plus the infamous targeting of Cecil Rolle which kept the bad news in the headlines. They had instances in which franchisees testified in court as to Cold Stone keeping rent money instead of sending it to their landlord. And yet, they continue to sell franchises.

Looking to legislation is the course which franchisees have pursued for the past 40 years. Perhaps it is time to simply stop buying crappy franchises.
 

Old Sword's picture

Out of Context? No, Just the Facts Michael

Taken out of context?  Michael, you listed 4 reasons why a franchisor would not want to divulge its revenues.  Each reason stood on its own laurels; they were not contingent upon one another.  The fourth reason was "For some, unit performance is so bad that if they included the results in the offering material, they would have a slim change (chance) of ever selling a franchise."  Pretty straight forward.

Tell me, Michael, which franchisor from the SBA default list provided in this comment thread do you think would want to provide their (honest) revenue numbers?  Better yet, how about their first year revenue numbers?  There's your "context", Michael.  You can put lipstick on a pig, Michael, but, well, you know.  Perhaps better stated, you can perm a clients hair to make it curly but eventually it grows out and the real hair eventually shows, right?. 

Did you discuss "due diligence"?  Yes.  Unfortunately for you, both the GAO and the SBA OIG found it impossible to find the real numbers and had to audit the SBA's loan files to get them. In fact, the GAO specifically stated that the distortion between franchisee first year revenues and average revenues for the entire system was so severe that the SBA should require franchisors to provide real first year data in order to obtain a loan. 

But why the distortion?  Its called survivorship bias. If you want me to go into it let me know - I'm sure the readership would like to know even more about how the fraud works.  By the way, it was confirmed by the lead GAO investigator - a CPA and forensic accountant - so I'm pretty comfortable with how facts work - sort of like the SBA default list.

As you clearly stated, the bad franchisors (of which only a partial list is given here) don't want their revenue numbers known because they would never sell another franchise.  On that, Michael, you are 100% correct and, I thank you for your honesty.  The IFA continues to fight full disclosure regarding franchisee revenue numbers because it would destroy so many of its upstanding members.  At least that is what I believe.  Am I right?  To paraphrase a line from an old commercial - "Only the IFA's hairdresser knows for sure."

Staffing the Moscow franchise

From the photo, it looks like Putin could apply for a job at hooters. That must at least a C cup.

If the orange fish wears a bow tie, can we at least photoshop a sports bra on those russkie boobies? Please!

McD quality

Quality differentiation?

Have you eaten an Egg McMuffin or a McGriddle? Fat and salt, plus lots of fructose in the McGriddle.

Supersize me!

Other way around

Don't know how active Ed Teixeira was in Maine, but his view is that the votes in favor of the legislation were high because the legislators knew the bill would eventually fail.

There are those who disagree with that view and say that the Senate vote AGAINST was far more lopsided than the true sentiment because there was an assessment that the bill would fail.

While I shall now go mute, the matter of whether Teieira is correct or has it backwards is not moot.

Speaking Of Quiznos

Mr. Schaden is using some of the money he made from Quiznos to fund projects to help the homeless (No former franchisees as far as I know) and support his local church. Could be he's trying to get himself right with Jesus but after breaking several Commandments during his Quiznos run it's probably not going to be enough. As Clint Eastwood once opined on the big screen; "God hates idi0ts too".

It also works the other way

Pols also vote against for and against bills to satisfy constituents, slates or political opponents. You can't have it both ways.

It passed the house, that means 70 legislators voted for it. That is the first time a franchise relationship law has passed a State House of Representatives in 20 years. That's actually a pretty good indication that your reasons for "failure" are nothing more than wishful thinking.

Local politics are complicated and most people like yourself who claim to know why legislation failed or passed don't have a clue what really happened. Sometimes the pols and lobbyists themselves don't know what really happened, each side will have it's own take.

The one thing I've noticed in legislative politics, very often when legislation passes one branch of government it's never dead, those bills have a way of coming back again and again.

Ed Teixeira's picture

Lesson from Maine

In many cases, a legislator will vote in favor of a bill knowing full well there is little chance of success, however, their vote will satisfy constituents. I doubt that the pols in Maine weren't surprised by the senate vote. In any case the bill failed. BTW, the word is moot not mute.

Ed Teixeira's picture

Primary Reason

Michael, I would say you've encapsulated the issue quite well

Lesson from Maine?

The Bill Passed the Maine House of Representatives!

That fact makes most of your points mute!

A bit out of context

When statements are taken out of context they are simply perfect examples of why facts work best in dealing with issues and legislation. Why not print the entire section of that quote so the meaning is not misconstrued.

Michael Seid

Primary Reason

Ed

The primary reason that I think resonates with legislators is that fact that the laws propose sacrifice the hard earned equity earned by the vast majority of franchisees for the potential (and I don't agree there is any real potential) benefit of a very small minority of franchisees. I think that is the overriding reason. The proposed laws simply are counter productive for the franchise systems and most franchisees.

Add to that the clear Federal and possible constitutional questions these laws raise, I think legislators simply understand that the opponents facts and positions are on very solid ground.

It really is as simple as that.

Michael Seid. (Having some problems being overseas signing on for some reason)

Quiznos Rats Are Singing The Blues

The old commercials were good but the new episodes in bankruptcy court are absolutely delicious. I love to hear the rats singing the blues. We're unsecured creditors and we're getting zip, zero, nada. Wahhhhhhhhhhhh. We're smarter than everyone else Wall Streeters and we lost 200 million. Wahhhhhhhhh. We were lied to by the King Rat. Wahhhhhhhhhhhh. We weren't supposed to lose money. Wahhhhhhhhhhhh. Why did we invest in the incredibly shrinking Q when we could've cornered the frozen orange juice market? Wahhhhhhhhhhhh. And to think this could go on for years. Hahahahahahahahahahahahahahaha

Old Sword's picture

Franchise Fraud: Sick of Franchisee Whining

I've spoken to dozens upon dozens of franchisees and only know of one franchisee that didn't use an attorney and accountant - but its a nice little excuse the IFA makes to blame the franchisee.  The GAO report from September 2013 was was also pretty clear:  performance numbers for first year revenues were not available.  The SBA OIG proved it as well - the numbers are not available.

Rather than rehash proven information including disgraceful failure rates from these "proven successful business models" most important is the post requesting franchisees to reach out to the CFA.  I don't know if you Visitors are just one franchisee or many, but instead of talking big behind the "visitor" label how about getting off your collective a$$es and reaching out to the CFA.  You will win nothing until franchisees work together.  All the talk about fraudulent proformas is from me.  The four federal government reports: me.  That the banks are involved and that they are regulated by SBA Standard Operating Procedures: me.  That this SBA loan fraud is being used by hundreds of franchise systems: me.  That SBA franchise loans don't pay their own way regarding SBA insurance: me.  I am sick and tired of sticking my neck out - which, btw, I am doing for all of you because there is no money in it for me.  Not to mention spending my own money to go to Washington and meet with Senators/Congressmen.  

How about some damn help.  How about instead of mouthing off you all actually assist.  Do you think franchisors are acting on their own?  No, they work collectively under the IFA flag - stopping laws that would require full disclosure because, as Michael Seid says, no one would buy these systems if they knew the real revenue numbers.  The CFA is there trying to help and all I have heard is BS lipservice from franchisees.  These reports/investigations have proven the fraud - and I have worked tirelessly since September 2008 with people down in DC to get these reports done - only to have other legislators (BTW, how IS your re-election campaign going Senator Landrieu?) either try to kill the investigations or successfully push the reports aside.  How?  Well when you are the only one speaking up, regardless of how often the fraud is proven, there is not enough outcry from all of you failed and failing franchisees to move this further.  Damnit, grow a friggin pair, take your thumbs out of your a$$es and contact the CFA.  Yes, you will have to leave your name and phone number because they need to make sure you are who you say you are.  Its a small inconvenience to accomplish something big.  Now lets see how big you all talk.

Corbin Williston's picture

Terror Finance columnist disputes Edible Arrangements claim

Writing on TerrorFinance.Org, columnist A.D. Kendall addressed the claim by the attorney for Edible Arrangements regarding the supposed support of a women's shelter:

ICNA Relief USA isn’t exactly a ‘special fund’ anyway.  It is a tax-exempt entity operated by ICNA.  The statement that ICNA Relief USA provides transitional housing to women may be true, but it is quite misleading in terms of the charity’s primary activities:  according to their own last tax return, ICNA Relief USA spent just $580,000 on housing for women out of its total $5 million in annual expenses.

On the revenue side, ICNA Relief USA received a $30,000 grant in 2012 from Helping Hand for Relief and Development, a Michigan-based Islamic charity with links to a Pakistani front charity that funds Hamas.

Interesting Post but...Does too much regulation hurt franchisees

Mario,

Great post and definitely an interesting topic. I agree with your premise that there may be many disguised licenses that would qualify as a franchise. My concern however relates to the premise or assumption that more regulation means more protection. Consider FDD disclosures. The information contained in FDD's (as required by federal and state law) have become so extensive that in may instances the voluminous FDD disclosures have the unintended consequence of actually conditioning franchisees and franchise buyers to actually ignore the disclosed information. Also, if prepared properly the extensively disclosed FDD has the effect of providing enhanced protection to the franchisor as the FDD will most likely disclose information that the prospective franchisee really has no clue about.

So I guess my point is that too much of anything is not a good thing and we may have reached the FDD disclosure tipping point.

- Charles Internicola
www.FranchiseLawSolutions.com.

Steve is more media-savvy than Matt

The new face of the IFA is more careful about explicitly stating demonstrably false information.

But as Bob Purvin pointed out, Steve Caldeira's letter to the Wall St. Journal about the alleged 90% renewal is designed to achieve the same effect. To call it disingenuous is being polite.

Purvin article at:
http://www.bluemaumau.org/franchisee_renewal_rates_here_we_go_again

As to Sam Crawford, he was quite different from Susan Kezios, which is why they worked well together. The IFA was for almost 40 years openly contemptuous of franchisees, and in the days before the internet the IFA was not afraid to make that clear to franchisees.

For obvious reasons I am not going to call out the GC. Suffice it to say that his discomfort with the zor's business model was well known in the franchise bar, particularly after an embarrassing document came to light in a highly-publicized trial.

As to contract terms, the key issue is the relational nature of the franchise contract. That necessarily requires terms which are amorphous insofar as they vest near-unfettered discretion with the franchisor.

That last point brings us full circle to the new IFA, which has achieved success in conflating disclosure legislation with relationship legislation. This was seen most recently in the Senate "amendment" in Maine. The IFA and its lobbyists are certainly aware of the distinction, and if franchisees ever get their act together the IFA misinformation is going to seriously undercut their credibility in both the media and the legislative arena. Spending millions of dollars on an "educational" foundation is lobbying money well spent, unless your opponents can think logically long enough to expose bias sufficient to discredit even the accurate "educational" material.

Maybe!

Just maybe if the Franchisor's were held as accountable as the Franchisee as far as doing their homework, They already know they would not be able to sell their franchise!

Ya Think!

and why do you think lawsuits for fraud keep popping up? Even with accountants, Lawyers, and especially Franchise supplied Pro forma's as well as so called store performance records. Oh I suppose its because people just want to risk everything away on a gamble! Not! A lemon is a lemon is a lemon.

And why

Pre-sale disclosure and a proper professionally supported due diligence is so important before entering into any franchise agreement. There are potential down sides to any investment and understanding and evaluating them needs to be done before you make any investment.

She certainly was

From her point of view. And that is the point. We moved on to something that worked better for us.

Why people don't dump a bad franchise business

"If you think franchising is that bad, why are you still involved? When I have a bad investment I get rid of it and move on. There must be something that keeps you involved."

1. Some franchisees are upside-down: they owe more than they can sell for. In such a case, they risk losing their home and life savings, so they stay in a bad investment.

2. Some franchisees have clauses which make them pay phantom royalties and ad fund contributions for years or even decades if they close down before the full contract term.

3. Some franchisees are personally liable for various debts. These include not only the phantom royalties but also the premises lease. Unlike residential rentals, many jurisdictions do not require landlords to mitigate damages in the event of a commercial lease default.

4. Some franchisees have family members who are Guarantys and so if the franchise shuts down, then not only the franchisee but also their family members will be liable for tens if not hundreds of thousands of dollars.

5. If the franchisee purchased the store from a previous owner, he likely assumed the premises lease. So if the franchisee shuts down, the assignor (previous franchisee & any Personal Guaranty) will be liable for potentially the full unexpired lease term. If the assignor had a smart attorney, then the assignor probably has recourse against not only the assignee but also the personal assets of the assignee and/or family members of the assignee.

6. Kind of like an abused dog, some franchisees develop a perverse entanglement with their abuser. This is something which is more suited to a psychology discussion board than Blue MauMau.

7. Some franchisees are older and have been out of the workforce for a while. They are not able to get any employment, and so they continue "working" for whatever few pennies they can get from the business.