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Earnings Claims
The first question most people ask when considering an investment is: How much can I make?
The second question is likely to be: How much can I lose?
In the franchise industry, the first question is closely tied to the matter of Earnings Claims and the second question to matters of Turnover Rate, Termination, and Liquidated Damages.
This forum topic is to address the first question, Earnings Claims. I shall try to give an overview from a US perspective, and encourage our non-US folks to assist with a perspective from their countries.
Please fee free to post your experiences, thoughts, and questions about earnings claims on this thread.
As a starting point, there is nothing to prohibit a franchisor from making earnings claims, even though many franchisor salespeople tell you that. Rather, under federal law, IF a zor makes an earnings claim, this must be disclosed in Item 19 of the UFOC, and in compliance with the Code of Federal Regulations (16 CFR 436.1(b) ) and possibly state regulations; as the NY Attorney General tells franchisee purchasers: If the franchisor does not make a claim of this sort, discussing projected earnings is prohibited, whether it is orally or written on the proverbial "cocktail napkin."
You may hear the phrase "cocktail napkin" which refers to some salespeople who will jot down a number and say something to the effect that their lawyers or the government won't let them talk to you about how much you can make, but wouldn't you be happy making this amount... now, if a franchise salesperson makes that type of statement, don't buy that franchise. Some industry experts assert that the "cocktail napkin" is rarely used nowadays, but my experience is that it is alive and well; most franchise salespeople work at least partially on commission and are under pressure to close a sale with a prospect that won't buy if he has no idea as to how much he can expect to make.
But the "cocktail napkin" is a fundamental violation of law, and you don't want to start a relationship with that type of company. Don't think that you will hold the salesperson to that earnings claim, since even if you can prove it you will come up against a merger/integration clause and likely an explicit statement in the UFOC that the franchisor has not made any representations to you and even if they have that you are not relying on any purported franchisor earnings claims.
Most franchisors do NOT make earnings claims in their UFOC, and there are some valid reasons why they don't.
It is true that most well-run franchise systems collect financial data from their f'zees (many are now doing so in real-time by use of computer POS systems) and actually do have a pretty good idea as to f'zee profitability (or lack of profitability !). However, even in a good franchise system there are many variables accounting for the success of a particular site or a particular franchisee. And significant legal liability can attach to a franchisor who makes an Item 19 claim, which is a frequently-discussed and legitimate concern among franchisor attorneys.
Some franchisors will indirectly make earnings claims by speaking to the media and then hoping the prospective purchasers will seek the f'zor out; there are also cases where f'zors will give prospects copies of those media clippings. (For those interested, we discussed this in our article on pages 139-152, ask your local librarian to pull the citation is 109 Penn State LR 105 (2004).)
A related way of salespeople answering the "how much can I make" question is by way of an assertion that franchising is safer than starting your own business and then telling the prospect that at very worst, a franchisee won't lose money. The assertion that franchising is safer than starting your own business is simply not true ; there are some well-run franchise systems that do increase your chance of success but there are a lot of new, undercapitalized, and just plain poorly-run franchise systems that can actually be an impediment to your success.
There are discussions on the matter of earnings claims and success rates on this board and other discussion boards , and it is a good idea to also look at turnover rate of the franchise systems you are considering.
The second question is likely to be: How much can I lose?
In the franchise industry, the first question is closely tied to the matter of Earnings Claims and the second question to matters of Turnover Rate, Termination, and Liquidated Damages.
This forum topic is to address the first question, Earnings Claims. I shall try to give an overview from a US perspective, and encourage our non-US folks to assist with a perspective from their countries.
Please fee free to post your experiences, thoughts, and questions about earnings claims on this thread.
As a starting point, there is nothing to prohibit a franchisor from making earnings claims, even though many franchisor salespeople tell you that. Rather, under federal law, IF a zor makes an earnings claim, this must be disclosed in Item 19 of the UFOC, and in compliance with the Code of Federal Regulations (16 CFR 436.1(b) ) and possibly state regulations; as the NY Attorney General tells franchisee purchasers: If the franchisor does not make a claim of this sort, discussing projected earnings is prohibited, whether it is orally or written on the proverbial "cocktail napkin."
You may hear the phrase "cocktail napkin" which refers to some salespeople who will jot down a number and say something to the effect that their lawyers or the government won't let them talk to you about how much you can make, but wouldn't you be happy making this amount... now, if a franchise salesperson makes that type of statement, don't buy that franchise. Some industry experts assert that the "cocktail napkin" is rarely used nowadays, but my experience is that it is alive and well; most franchise salespeople work at least partially on commission and are under pressure to close a sale with a prospect that won't buy if he has no idea as to how much he can expect to make.
But the "cocktail napkin" is a fundamental violation of law, and you don't want to start a relationship with that type of company. Don't think that you will hold the salesperson to that earnings claim, since even if you can prove it you will come up against a merger/integration clause and likely an explicit statement in the UFOC that the franchisor has not made any representations to you and even if they have that you are not relying on any purported franchisor earnings claims.
Most franchisors do NOT make earnings claims in their UFOC, and there are some valid reasons why they don't.
It is true that most well-run franchise systems collect financial data from their f'zees (many are now doing so in real-time by use of computer POS systems) and actually do have a pretty good idea as to f'zee profitability (or lack of profitability !). However, even in a good franchise system there are many variables accounting for the success of a particular site or a particular franchisee. And significant legal liability can attach to a franchisor who makes an Item 19 claim, which is a frequently-discussed and legitimate concern among franchisor attorneys.
Some franchisors will indirectly make earnings claims by speaking to the media and then hoping the prospective purchasers will seek the f'zor out; there are also cases where f'zors will give prospects copies of those media clippings. (For those interested, we discussed this in our article on pages 139-152, ask your local librarian to pull the citation is 109 Penn State LR 105 (2004).)
A related way of salespeople answering the "how much can I make" question is by way of an assertion that franchising is safer than starting your own business and then telling the prospect that at very worst, a franchisee won't lose money. The assertion that franchising is safer than starting your own business is simply not true ; there are some well-run franchise systems that do increase your chance of success but there are a lot of new, undercapitalized, and just plain poorly-run franchise systems that can actually be an impediment to your success.
There are discussions on the matter of earnings claims and success rates on this board and other discussion boards , and it is a good idea to also look at turnover rate of the franchise systems you are considering.
- forums:
Has the law changed so that unprofitable zees don't pay royalty?
A franchise broker told me that in November 2008, US Franchise law changed such that if a franchise unit is not making money (profitable), the franchisor cannot collect royalties by law.
Does anyone know anything about this? Where would one look up or research this?
RE: the law changed so that unprofitable zees don't pay royalty?
No, and get rid of your broker and ask your pet goldfish for further franchising advice.
Taking it to the Earnings Claim Forum
Thanks Paul for setting this forum up:
Dale you state:
'We can agree to disagree on the real value of the 'earnings claim'. With or without -- the prospective franchisee should take NOTHING at face value, even from the most reputable of franchisors.'
I don't see why you wouldn't take an earnings claim at it's face value in a UFOC, because at that point the franchisor has a legal obligation to make it accurate or face a lawsuit if someone depended on it. If they make assumptions, disclose those too. It's just like a financial statement that has pages of disclosures after the numbers part. That's where you find out if the company has anything interesting happening. I'm sure if the assumptions made are viable, disclosed properly, and documented, the earnings claims will hold up in a court of law if they are tested.
Earnings Claims and Turnover Rate
Paul, would you say the "Turnover Rate" as revealed in Item 20 of the UFOC is actually the failure rate of the franchised business plans, as indicated by Michael Webster, who advises that he treats all "transfers" or "turnovers" as business failures. What franchisors out there have a high turnover rate of profitable franchises? I know there are some but are they biggies like UPS and Quiznos who are said to have high turnover rates of failed units that are taken over by new franchisees who present an appearance of viability of the business plan while standing on the backs of the failed stores to try again? Lots of visability but not viability! Still can't understand how Entrepreneur can pick the Top 5 and ignore the actual failure rate or turnover rate of the stores in the network that they put in the Top 5. I think AARP just copied Entrepreneur because of the need for "product" and hope that we will see some kind of a disclaimer from them in the interests of protecting their readership.Bogus IFA success rates and earnings claims
I see that the International Franchise Association (IFA) is once more being used as a "source" for such nuggets asand
Not that I would expect the IFA to complain about bogus statistics that are shown as "objective data" to prospective franchisees, but is anyone aware of whether the IFA has had a spokesperson make any such statements for attribution?
JD, In good consciousness..
JD WRITES:"I don't see why you wouldn't take an earnings claim at it's face value in a UFOC"
In good consciousness, I'd never advise a prospective franchisee to take anything at face value---just because it's in the UFOC doesn't in and of itself tell the story, the whole story, and nothing but the story. Things do change and UFOC's are not 'Up-to-the-minute' documents.
JD WRITES:"...will hold up in a court of law if they are tested"
The documents as they are now tend to hold up in court when tested. There's a big difference between a document holding up in court, and the prospective franchisee having the information that s/he might need in order to make a well informed business decision.
If and when it's my few hundred grand on the line OR that of a client... We're going to ask all the questions, We're going to expect to get all of the answers, AND we are going to VALIDATE every single one of them.
In most law suits it's the Attorney's who win. Franchisor and Franchisee both lose! More importantly the potential benefits of the relationship have failed to materialize for either party. Even if the Franchisee who failed in business 'wins' a future law suit, it seldom ever provides for the 'true loss' of the failed business. No amount of money buys back the hopes, dreams, pride, ego, and time lost.
My opinion is that those involved in franchising have a responsiblity to educate all parties. Some prospective franchisees need to be told, you're simply not right. Some prospective franchisors need to be told you concept is not viable. Franchisors must be taught how to better balance sales and support issues of the system. Prospective franchisees must be educated about the importance of proper due-diligence and not to rely on anything other than what is in the agreement.
I'm not in the business of helping prospective franchisees select a franchise, although it is a service we offer. I'm in the business of helping franchisees to improve the personal benefits received from their business once in business. I do however recognize that a 'good franchisee/franchisor fit' and 'the proper selection of the right franchise concept for an individuals unique situation is paramount to having a successful business in the future.
Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising!
F'zee bankruptcy / Kezios
Susan Kezios speaking on franchisee bankruptcy on CNN, click here .Turnover Rate
Webster's usage is an example of a heuristic, which while potentially over-inclusive remains a useful yardstick.Of course, not every transfer of a franchise is due to failure. And you would be laughed out of any MBA program for suggesting such a thing.
But using Item 20 as a quick (if imprecise) screening tool to distinguish among prospective franchises available for purchase by a franchisee is a good idea, and I have even known of franchisors who urge people to look at this. And in the case of franchising, Item 20 may be under-inclusive as a measurement of failure since many franchisees (for various reasons) keep operating their franchise even when it is an economic failure.
Catching Up in 1 Shot
Well, to the relief of some, I had to take time off from my job here at Bluemaumau in order to work on my hobby of owning and operating a business. I’m back and I’m going to get my 2-cents worth in, all in one post.
It has been stated that Item 20 is imprecise…to which I agree. This does not mean anything deceptive or fraudulent. One must both recognize and acknowledge that the UFOC is not precise or current even to the point in time that is written, filed or read by the reader. It was more precise or current to a point in time relative to the time that it is written about. To put it into language which we can all understand, a UFOC is like a computer --- it’s outdated the day you get it.
Note For Prospective Franchisee: Do not view the UFOC as Gospel, it isn’t. View the UFOC as a tool which will provide all of the clues which you’ll need to discover the truth.
It’s been suggested that perhaps some hold onto ‘losing franchises as a tax deduction’.
Note For Prospective Franchisee: Good business people or those with good accountants take all the deductions to which they are entitled; they do not hold onto losing propositions simply to create a deduction. One should also keep in mind that it is NORMAL for a business, to lose money before it begins to make money.
It’s been stated that most Terminations are ‘business failures’. There are many reasons why terminations take place including but not limited to ‘business failure’.
Note For Prospective Franchisee: Business failures are to be expected, do not allow this to deter you from your dreams of business ownership. When evaluating a particular franchise opportunity, the concern is not ‘have there been failures’ but what has caused the failures. Where the failures caused by things under the franchisors control? If so, have those issues since been resolved? If caused by things under the franchisees control, what will you do to prevent those same issues from causing you to have the same outcome?
The question has been posed, if franchisors must disclose reasons for terminations, why do they not need to disclose the reasons for transfers. The answer is quite simply because they are not required to, if they were they would.
Note For Prospective Franchisee: Keep in mind that the franchisor is in the business of selling franchises. In Sales 101, people are taught to accentuate the positives, and to de-emphasize the negatives. Franchisors are going to tell you all that they’re required to and all that will facilitate the sales process. Do not expect them to share dirty laundry, which is not required to be shared.
It’s been suggested that franchisors know the reason for every termination and transfer. This simply is not the case. The franchisor only ‘Positively Knows’ the reason for the terminations in which they initiate, which would tend to be for compliance issues. Likewise, the ‘real reason’ for self-terminations and transfers are only known by the franchisee. Most anyone who’s been around franchising for very long has been puzzled by the sudden self-termination of a franchisee who everyone thought was well on their way. The fact that the franchisor approves the transfer, it does not mean that the franchisor understands the motivation behind the transfer.
It’s been subtly, and sometimes not so subtly, suggested that there is this big franchisor funded conspiracy of the government and lending institutions colluding to hide franchise failures. Again this is simply fiction. I’m not a political science major, but as I see it the government must balance and protect the interest of both franchisor and franchisee. Politicians are dependent on votes first, and money second. If there was this big conspiracy bringing so much harm to so many people, the politicians would be jumping all over it to “Save-the-People’ and “Get-the-Votes”. Lending institutions do not make risky, high-loss loans simply so that they’ll have the opportunity to fund more of the same.
GUEST ASKS: How can franchisors and the AAFD and the regulators justify the failure to inform franchisees of the REAL RISK FAILURE as demonstrated in those networks who "churn" their way to visibility on the American Scene?
I think everyone, including Franchisor, Franchise Associations, bankers, regulators, and even the prospective franchisee understands that there is ‘Real Risk Failure’ in ANY business venture. I believe and I believe that most of the aforementioned believe that there is, for most people, less risk associated with most franchise opportunities than with most independent ventures in the same genre. This is true even if the risk minimization is only marginal.
As for ‘churning their way to visibility’, isn’t this what business is all about? Isn’t this just another way of saying “Keep on Keeping On” or “If at first you don’t succeed, try – try again”?
A guest referenced a 2004 magazine article in which an attorney referred to Item 20 as "statistical information about the expansion or contraction over three years"! This would seem to me to be a fairly accurate statement. The guest goes own to say “The naïve franchisee might think that expansion was a sign of the profitability of the network and contraction a sign of a network in trouble”. If a franchisee is so naïve as to confuse growth with profitability they probably are too naïve to have accumulated the net worth requirements in the first place.
Note For Prospective Franchisee: Growth & Profitability are like Activity & Productivity or Revenue & Net Profit --- they’re not synonymous. To clarify, a system can grow without individual unit profitability, just as one can be Active but not Productive or have high revenue and no profit.
GUEST CLAIMS: that there is no government or academic research on the failure rates of franchised business. Again this is simply not true, here are a few and if I can Google them why can’t you? Here, just like with the UFOC here are the clues you need to do your home work
Guest, after you’ve tracked down the above studies, or any of the more than 100 similar ones, you may want to search for the following abstract: The purpose of this research is to explore the objectivity and reliability of Entrepreneur Magazine's Franchise 500® ranking system.
Guest, after, you’ve spent your night, week or month tracking down these very informative studies may I suggest that you come back and read the words of Paul Steinberg, “In my opinion this is an increasingly meaningless statistic…. if you are an individual franchisee, the particular system is most important”.
Finally, Guest brings back up the SBA document posted here on Bluemaumau and known as the ‘Failure Rate Tool’. This tool is not the ‘top secret’ document which the guest makes it out to be, and if anything it disproves the guest argument regarding the franchisor-government-lender conspiracy. If the Government (SBA) as in cahoots with franchisors and lenders to ‘feed’ the franchising industry, why would a tool like this need to be provided to the lenders for risk assessment? In my opinion it serves very little benefit in evaluating the viability or the lack of for any franchise system. It’s limited to SBA loans which consist of individuals who could not receive financing elsewhere. But if it is so valuable, what does it tell us?
Note For Prospective Franchisee: There is no short cut to due-diligence. You’ve got to make the decision as to go into business or not. You’ve got to decide on which franchise system to plug into. You’re the one who’ll sign the agreement. You’re the one who will have to live with your failure….or YOUR SUCCESS!
Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising!
IFA backed off Bogus Success Claims
The IFA backed of those type of success claims almost 2 years ago.
See:
http://www.franchise.org/files/Outdated%20Franchising%20Statistics.pdf
Michael Webster PhD LLB
Misleading Advertising LawBogus Success Rates Redux
Here’s that often-quoted statistic again in the Honolulu Advertiser (March 19, 2007), which was a reprint from Arizona Woman :“One reason for the growth: Franchise businesses are successful. According to the association, 90 percent of franchises succeed, while 90 percent of regular startups do not.”
However, although the IFA is mentioned in the article, it is not absolutely clear that the “association” mentioned is the IFA, nor is a spokesman named.
In good conscience! JD
JD ---I have to tell you that Dale, Mr. BS, "Believe & Succeed", never changes his mind and has a one track mind concerning the regulation of franchising. His consciousness has been formed on "boot strap" principles and the power of positive thinking and he doesn't believe in ANY government regulation. He is, of course, in the business of helping franchisees ---who find themselves in the NEED of help -----and any really effective regulation that negated any need for help might interfer with his profits in his business. Dale, do you admit to a conflict of interest? JD, You will learn that all the regulars of the forum have their own fish to fry and to sell, but I welcome a new "voice" that appears to be fair and neutral in the pursuit of TRUTH in FRANCHISING in the interests of both the franchnisee and the franchisor and the public. While this is a pro and con franchiseee-franchisor forum, we are "wordy" in defense of our positions to keep our positions alive on the forum ----as I'm sure you have noticed.Turnover and Failure Rate
I'm happy that you note that Item 20 is imprecise and that the failure rate may be even greater because some franchisees use the losing business for a tax deduction against other income. It is still my opinion that Item 20 is a means to disclose information without disclosing the failure rate of the franchised business plan to the government or the franchisee. If franchisors have to disclose reasons for Terminations that most often are obviously business failures, why don't they have to disclose the reasons for transfers? This information is readily avasilable to the franchisor. I don't understand what you mean when you indicate that Item 20 is an imprecise screening tool "to distinguish among prospective franchises availble for purchase by a franchisee". Can you explain this further. Just what is the franchisee screening for when they take a "quick" (if precise)" look at Item 20.No Research on Franchise Failure Rates ---Why?
Isn't it odd and disturbing that in a nation that spends billions of dollars on research and research grants that we have no government or academic research on the failure rate of franchised businesses? Why is this? Isn't franchising a major component of our national economy? Wouldn't this indicate that public policy has been adopted not to inquire into the failure rate of franchised business plans. Is the failure rate so high that "the powers that be" think that the actual truth of the failure rate would discourage franchising and this would be bad for the economy and for those who make their living in and around the industry of franchising? Does the end justify the means?As you've said before...........
RhinoLinings is NOT a franchise so it's odd you would include it in your post and refer to it as such.Franchise Success Rates
I want to remind our guests and members that we collect franchise success / failure rates and small business failure rates on Blue MauMau. We link to aggregate statistics and individually by franchisor. These statistics are located in our Franchise FAQ section.
Blue MauMau could use the assistance of our guests and members in adding to the collection. Small business and franchise success statistics have been difficult to obtain - to say the least - and vary greatly.
Mr. Blue MauMau
Yearning to know about Earning & Churning
Fran says that he agrees that Item 20 is imprecise but it doesn't mean that Item 20 is fraudulent or deceptive. Further, Dale goes on to say "If a Franchisee is so naive as to confuse growth with profitability, they are probably too naive to have accumulated the net worth requirements anyway." Thus, Dale, suggests that naive Americans (those inexperienced in business) can't succeed to possess the net worth required to purchase a franchise. He knows, of course, when he says this that it is the naive Americans who so often invest in franchising to get a job as well as the veterans and early retirees from government and the private sector who are trying to supplement their retirements. He indicates however by his comments that naive Americans will confuse growth with profitability. I thank him for making my point that Item 20 is deceptive if not fraudulent. Dale quotes Paul Steinberg but he doesn't quote Paul's comments that express the view that Paul Steinberg would not invest in networks with high turnover rates. Dale suggests that "churning" is the normal process of building a business ---for the franchisor. The franchisor has a license evidently to acquire the assets of the failing franchisees and to "try -try again --and again--each time at less cost to the new franchisee owner who stands on the backs of those who have failed before him. But, the franchisor doesn't disclose this to the new franchisee who will build a new store for the franchisor based on the advertisements to the franchisee regarding the capital it will require to get to "break-even" in a new business. Franchisees borrow and use money based on the estimates of the franchisors who quietly "cover themselves" in the franchise agreements with terms that make them not responsible for their advertisement of the capital needed to start and achieve break-even status under the business plan they are selling to the public. Those who do break-even and never make any actual profits are trapped because of the necessity to either service their debt or lose everything. Dale's comments appear to be sincere and he is the opposite of naive but his version of the truth is just more BS (believe and succeed) mentality. Of course, the franchisors know the reasons for the terminations and the sale-transfers(fire sales) in their networks. You can't transfer your franchise without transfer-selling your tangible assets and you can't do this without the approvasl of the franchisor of the asset agreement. The franchisor won't approve the sale-transfer for pennies unless you sign a general release and a confidentiality agreement. (The new rule will make it a little more difficult for the franchisors to silence franchisees) Unfortunately, the new rule will make it possible to hide terminations (failures) in the transfer column along with the fire-sales of the unit's tangible assets that represents a failure of the business plan. I'm sure that the regulators will deny that Item 20 is deceptive, but, of course, the truth is that it is deceptive and misleading, whether or not this is the intention of the regulators. You get 1C for your 2C's worth, Dale!Default Rate is Misleading and Deceptive
The default Rate that Dale published above is deceiving and deceptive. Dale knows that in Quiznos and UPS-MBE franchises, the business is more often than not financed with a loan against the house and the 401 or other savings and that the network may represent a small percentage of SBA loans. This, of course, is how the "failure rate" and "default rate" can be manipulated by predator frnchisors to tell untruths to business magazines, etc...and the government. The banks have the collateral of the house and the money up front and they don't mind lending you the money on your house. But! when the start-up capital is exhausted, what happens then? We see that there are small and short term loans available from the SBA and we see a surge of loan opportunities for amall business people from lending organizations. Not being an economist, I only know that the franchisee, the borrower, will be the loser, when his borrowing exceeds the value his personal collateral and the franchisee is treading to keep from drowning. If the banks are protected from risk by SBA disclosure, why shouldn't the franchisee who takes the total risk have the same protection from risk by government disclosure of the failure rate of these big Brand networks?Turnover Rate - Clarification
Paul,
I agree with your observation about Item 20 really describes - not every transfer is an economic failure. I have never said that.
But in the absence of more detailed explanations, relative to a particular system, of the economics of the transfers, I maintain that the ratio revealed in Item 20 is a good conservative measure of the risk of complete failure and loss of the entire investment.
Why complete failure and loss of the entire investment? Surely most of the transfers are sales, perhaps at some loss to the franchises. When a franchisee is selling at a loss, as compared to the original purchase price, the franchisee has been operating in the red, after debt service. If your return on equity won't service the debt, then as a matter of law, your equity is worthless -even if you can transfer it. It is for this reason, I recommend using the ratio in Item 20 as the risk of complete loss of the entire investment.
The ratio can be used to screen out unacceptable risky franchises, or even to calculate an opportunity cost.
All of this is grade 3 math, which even prospective franchisees are capable of.
Michael Webster PhD LLB
Misleading Advertising Law
Question for Guest . . . In Good . . .
And what is your fish that you're frying? JanGuest: NO CONFLICT...
GUEST: JD & I were sharing viewpoints. You participating is GREAT! You deviating from the dialogue to slam me (regardless of how nicely) and others is not acceptable behavior!
You have your opinion, I have mine. This is America, Isn't it GRAND! Yes, I am in business. Yes, I do help franchisees who have a need for assistance. The services we provide have little to do with regulation of Franchising. We do provide many services to help franchisees comply with existing regulation. So if anything, more regulation is actually good for my business. Furthermore the services which we provide cover basic business items like payroll, Legal, Accounting, Marketing, etc..... etc... etc...
SO NO THERE IS NO CONFLICT OF INTEREST! My interest lies in promoting franchising in general based on sound business principles ---- not on blind faith --- not on 'oh government protect me" ---- just simple business processes and procedures.
Furthermore, In my humble opinion this forum nor any other is going to dramatically impact the way people think. I'm not going to convince you that there is not CONSPIRACY ....You're not going to convince me that more REGULATION is good for business ---- nor are either of us going to convince someone that the world is round, or that man has actually walked on the moon, if they believe otherwise. It is my hope that this board will allow individuals interested in acquiring a franchise, starting a franchise, or managing a franchise or franchise system to become more knowledgable for the GOOD OF FRANCHISING!
Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising 1 Franchisee at a time!
Item 20 UFOC Changes ---Failure Rate Obscured
Just exactly what will the changes in Item 20 in the new rule do for prospective franchisees. Does anyone know and would they care to comment. It looks like more of the same ----except that the mandated disclosure of "confidentiality clauses" might make it more difficult for franchisors to stop disclosure of names of ex-franchisees that may be unfriendly to them. It appears that the "last transaction" that can be counted as an acquisition will allow franchisors to obscure even more failed units in the UFOC. Just what is the government trying to accomplish with Item 20 disclosure from the standpoint of the franchisee. We can see that "Transfers and Acquisitions" will still not be explained and franchisees will know neither the sucess rate or the failure rate of the units in the network. It is my opinion that Item 20 is deliberately "imprecise" and this is a "secret" that everybody knows except the "mark" ----the naive prospective franchisee. "Imprecise" so often means inaccurate or incomplete and UFOC's that obscure the failure rate of the business plan and that permit franchnisors to sell franchises without disclosing earnings or sales figures are imprecise and misleading. How can franchisors and the AAFD and the regulators justify the failure to inform franchisees of the REAL RISK FAILURE as demonstrated in those networks who "churn" their way to visibility on the American Scene?Franchisor failure research
Professor Jenny Buchan of the Univ. of New South Wales has done some research on the failure rate of franchisors recently. She was in contention for an Australian government research grant last year, and made it through a few rounds of review but ultimately did not get funded. She is also doing comparative research, so if any MauMauers have expertise in this area, her email is jm.buchan@unsw.edu.auOf course, there was also the similar work done by Robert Purvin back in the 1990's analyzing failure rates of US franchise systems.
Failure rate of franchisees: this site has discussed the matter. In my opinion this is an increasingly meaningless statistic if you are speaking in general (industry-wide) terms, and given the upsurge in new franchisors over the last 3 years (many of which are inexperienced, undercapitalized, and likely to fail) my guess is that there will be a lot of system failures dragging their franchisees into bankruptcy soon.
From a legislative standpoint, the "big picture" is important, and that is why the CPA Australia study got so much attention down there. But if you are an individual franchisee, the particular system is most important, followed perhaps by sector-specific studies such as those that compare franchised and non-franchised QSRs.
Item 20
I disagree that a large franchisor will know the "reason" for a transfer. It is quite possible that the Seller is motivated by a desire to get out from a money-losing franchise, but there are a host of reasons ranging from better return on investment in a different franchise system to long hours... your premise is that a transfer is ipso facto a business failure, and I don't see objective empirical support for that, although it is common in my personal experience. But I doubt the FTC is going to push for a revision to the Franchise Rule based on anyone's personal experience.
Regarding my comments about screening: There is a distinction between using Item 20 as defining a "failure rate" and using Item 20 to screen. For example, if a system has a 30% turnover rate I would not say that 30% of the units "failed" but I certainly would be reluctant to waste a lot of time considering purchase of such a franchise.
I didn't put them on the list!
Tinker,
You're correct...I have said before....Rhino presents itself as a dealership. We've had the discussion.
Note, I did not 'include' them....they are on the list....take a look.
Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising!
Misleading Default Rate?
Dear Guest:
As I indicated in my post, the 'Default Rate' was taken DIRECTLY FROM the SBA Franchise Failure Rate published here on Bluemaumau. It was not something I made up. I've said since THE DAY the thing was posted that it was an inadequate tool. Nevertheless it has been popular. The rates I listed are directly from it!
Guest asks: why shouldn't the franchisee who takes the total risk have the same protection from risk by government disclosure of the failure rate of these big Brand networks? Guest, guess what....they have access to Bluemaumau....AND this TOOL is on here...AND the numbers which you say are Deceptive when I posted them are the numbers from THE TOOL. Which way do you want it?????
Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising!
What Fish am I Frying?
Catfish, my friend! ----seasoned with the salt of Truth, which is the salt of Life for some.I apologize, Dale! Not tur about "Sticks and Stones"
If I offended you, I am sorry. I didn't mean to. I, too, hope that our discussions and any truth that comes out of them will be for the Good of Frnchising which ecompasses good for the franchisees as well as the franchisors and the public. I accept that you believe that you have no conflict of interest or any special interest in posting on this forum but, of course, I can't say the same about myself. I post here because I want to hear and listen and confirm what I believe to be the truth about franchising and the lack of effective regulation. My "do gooder" instincts are at work but I have been personally injured by a bad franchisor who is free to injure others because my government is not interesting in disclosing the true failure rate of the business plans in the offering circulars. Others ate amd will be injured but, perhaps, some of them will be spared if I can work to reveal the evils of "churning" and the evils of hiding the "churning" of networks in disclosure circulars. Rhetoric has always changed the world. It may be, also, that we are all in love with the sound of our own words and Mr. Blue Mau Mau lets us post to our heart's content----to exchange points of view for the Good of Franchising and for the "joy" of the diversion that is provided in communicating our views and opinions to others. TGIFJan 2004 Entrepreneur Item 20 Comment
In the Jan 2004 Entrepreneur Magazine, there is a comment by an attorney who indicates that Item 20 is "hard to read" statistical information that gives "statistical information about the expansion or contraction over three years"! The naive franchisee might think that expansion was a sign of the profitability of the network and contraction a sign of a network in trouble. In reality, it tells the franchisee nothing about the viability of the business plan of those networks who have developed a policy of "churning" and "visibility" to present a false picture of the viability of the network to the public and to the government. I'm sure the regulators require disclosure of expansion and contraction over a three year period with the view that these statistics are meaningful to the franchisee. But, how are these statistics meaningful to the franchisee if the actual "failure rate" of the franchised business plan is obscured through "churning"?Failure and the Asset Purchase Agreement Item 20
How could franchisors not know the reason for the transfer when they mandate that there will be no transfer-sale of the franchise or the tangible asssets of the business without their approval of the buyer and the terms of the asset agreement? You must know that some franchisors have developed the policy of approaching failing franchisees, who intend to terminate, through third parties who purchase the assets of the failing franchisee for pennies on the dollar and the unit remains in the network and is carried as a transfer in the UFOC. When "turnover" rates and the reasons for the turnovers are not revealed in the UFOC, it enables some networks to "churn" an appearance o a viable network on the basis of its visibility, does it not? How could we have objective empirical support for defining the turnovers as "failures" or "successes" when they are identified imprecisely as "transfers" - and not even the government knows whether or not these transferred units are transferred at a profit or a loss to the franchisee? And, they don't want to know! Yet, we believe that Government is regulating franchisors in the interests of the franchisees --in the interests of that segment of the public that puts their personal assets at risk to get a job. If the SBA releases the default rate on franchise loans to enable the banks and lenders to manage their risk, why isn't it equally important to the franchisee to know the "failure rate" of the franchised units and the default rate behind the asset purchase agreements and the termination acquisitions that are disclosed imprecisely as "transfers" before they assume the risk of taking out a loan?SBA Loan Default is Not Entire Picture
As I said before this tool that is on blue Mau Mau because of the FOIA is a great service to determine the SBA loan default rate but this SBA default rate is not the REAL DEFAULT RATE of the franchise networks because it does not account for the default on personal loans from banks that are secured by the franchisees homes and other personal assets pledged as collateral in personal guarantees. Also, the default on loans from the franchisors to the franchisees, made in some networks, are not accounted for in the SBA statistics. You know, Dale, that many franchisees go this route rather than the SBA because they want to have more control over the repayment of the loan. Also, they use their savings in their 401's to finance startup costs and capitsl to operate to the break-even point without the extra burden of servicing debt believing that the business will be an asset that will serve as their 401 retirement fund in the future. When they can't break even and they run out of capital, they fail and they lose everthing. I think you know this, Dale. But, of course, the Default Rate you posted from SBA statistics is correct for SBA Loans. To suggest that franchisors don't know what units have failed in their networks is beyond my comprehension. If franchisors have to count their transferred units to disclose in Item 20 of the UFOC, it would not be a "regulatory burden" to report those transfers that are made because of business failure or business success. They choose not to do this and the regulators permit them to obscure the rate of business failures in Item 20 through hard- to- read imprecise statistics that mislead and deceive!Reply to "What Fish . . ."
What does that mean? It sounds like the meaning is that others here don't have the salt of Truth, and you are one of the chosen few, perhaps the only one. But perhaps you can clarify. JanJust sitting on the pier
Guest wrote: You will learn that all the regulars of the forum have their own fish to fry and to sellActually, most of the "regulars" are spending a fair amount of time supporting this board in the anticipation that as it continues to gather momentum it will serve as a good exchange site for information about the franchise industry. Many post under pseudonyms, and others such as myself have a narrow geographic area and hence do not derive any pecuniary gain from this forum.
Not everyone on this board is selling something, and frankly I have no objection to those that are pitching so long as they disclose and engage in a logical, reasoned discourse.
Guest & SBA Default Rate
I agree with your assessment 100%. However, SBA Loans typically have a higher default rate that conventional financing. With that said, one would expect the overall default rates to be lower than that shown on the SBA Loan Default Sheet. Furthermore, an SBA default does not necessarily translate into a franchise or franchisee failure.
Very few franchisors make loans to franchisees, so any such failure would and minimal effect on the overall success or failure.
Although what you say can be true, most use their own assets for far different reasons than you suggest. I’d say they use their own assets, because:
An SBA loan does not prevent one from ultimately losing the assets which could have been used in lieu of the SBA loan.
An SBA loan does not change your fact. It may only allow them to lose more. Franchisors, Franchise Counselors/Brokers etc…In my opinion should be advising prospective franchisees that you can’t start out with too much money….you can start out with too little.
Thank you, I was just seeking clarification. It seemed as though you were suggesting that I’d just pulled them out of my ear or something.
Believe & Succeed,
Dale
FranSynergy, Inc.
Synergizing Franchising!
The Words are Mine ---The Interpretation is Yours
Jan! You and others are free to interpret my words in any manner that you like. I write my truth on this forum and I have thanked Mr. Blue Mau Mau many times for the opportunity to speak my truth ---to raise my voice with the hope that my "truth" will be heard and recognized. You have the same opportunity but when you become so sensitive to my rhetoric and want to attack my person, you become suspect and, of course, you do not want to discuss the issues I put forth with your "truth" to counter my "truth"! Why is this?Calm thyself
Seriously, Jan appears to be only asking for some clarification on your rather ambigious claim of frying catfish seasoned with the salt of Truth. Given that truth is often subjective, her question appears to be warranted. "To me, truth is not some vague, foggy notion. Truth is real. And, at the same time, unreal. Fiction and fact and everything in between, plus some things I can't remember, all rolled into one big 'thing.' This is truth, to me." - Jack HandeyJack ---What is truth?
Truth is subjective based on one's interpretations of the facts tjat are available to be examined and understood! Truth can be improved upon with new facts that disprove previous facts, etc. etc..and in court and in arbitration the "truth" of the facts that are presented to the court or the forum is what produces a judgment or an agreement. One's truth is real but truth is subjective because of one's interpretations of the facts and the "subjective" deduction of the truth based on the facts available. Attorneys always present their "truth" to the court and the facts and interpretations that support their truth and it is, of course, true that there are opposing truths and the judge or the jury or the arbitrator get to determine the "real" truth under the law on which to render a judgment because they are "objective" and unbiased. I was merely telling Jan that this was MY TRUTH based on fhr facts available to me. I wanted him to counter my truth with his truth if my truth can be attacked with facts.Haha
I'm sorry, but I am not Jack, I merely quoted him(he's an author of comedic quips). Regardless, I think it is a bit naive (no offense) to equate "truth" with the legal system, be it ADR or the courts. Attorneys present the facts and argue the law. Granted, the "facts" will vary dependent upon the agenda and party; however, to state this as "truth" or "real truth" seems overly simplistic. The bottom line is that truth is relative and a claim by any party to an ownership interest in "truth" is at best a specious one.So true, Haha! Truth IS relative
The bottom line IS that truth is relative but don't tell that to the judge, because you have to abide with the truth of the judgment in the legal system in any case. Americans see lots of judges on TV and the latest one in Florida in the Anna Nicole soap opera must have been a drama student whose real dream was to be an actor. Yes, it is naive to equate "truth" with the legal system but what other system is there to uphold order and respect for order in our society, and we would hope that "truth" is the goal of the judge and the jury. I see where The Supreme Court has again rejected any possibility of putting cameras into the court, and I think that is probably a good idea. We have enough judges on TV as it is -----and attorneys advertise with their photos in the yellow pages =====and TV dramas about attorneys and their clients are rampant. I'm not sure all of this exposure breeds respect for the law and the courts.Post new comment