Franchising Needs Better Government Regulation

Your husband will be a target of franchisors who know that he will be eligible for a guaranteed loan under the SBA Pilot Express Loan initiative that was introduced in mid 2007. Your husband will also be eligible for a "military discount" on the franchise fee but don't let all of this fool you. Franchising could be the worst "tour of duty" your husband has ever experienced. Instead of buying an American Dream, you could be buhing the American Nightmare. The collateral you pledge for the loan, your house or savings, will be taken by the bank or the SBA if you fail.

Franchisors target retired military because they know they can work a long time, and maybe forever, for no pay or salary in a startup because of their retirement pay. Franchisors, of course, take their royalties on the gross sales of the business whether or not the business is operating at a loss, breakeven, or a profit. Franchisors hype the success of their so called "proven" plan and show you how their network has expanded but they don't talk about either success or failure of first-generation franchisees either in the UFOC (FDD) or the actual contract, in which, with your signature, you acknowledge that you are investing at 100% risk of failure. This state of affairs allows franchisors to sell franchises with very high failure rates of first-owners of the franchise out the front door as long as they can abet the fire sale of failed units out of the back door.

When their first-owner franchisees fail, most often this is not a failure for the franchisor because, in failure, because of the personal guarantees you will have signed to get the loans, and because of your personal guarantee on a lease, you will have to give your business away to a second-generation franchisee to get out from under the personal guarantees and save yourself from bankruptcy. If your debt is so large and this won't save you, you will then have to declare bankruptcy. If giving your business away to get out from under the lease does save you from bankruptcy, you will be servicing your debt and standing up the second-generation franchisee for many years to come. The second generation franchisee perhaps has a chance of bringing the unit to breakeven because he has greatly reduced risk and no or little debt to service, and generally reduced overhead (lower rent payments) and more time in which to increase the sales of the unit.

Franchisors are not required under law to disclose the actual performance statistics on a unit basis. Item 19 and Item 20 of the UFOC (FDD) are a government subsidy of franchising that permits franchisors to obscure and hide the rate of success and/or failure of the first owners of their franchises from new buyers and from the regulators, and from stockholders, as well. The government UFOC(FDD) is really just a license to sell franchises at any degree of risk under the law and accompanies a boilerplate adhesory contract wherein you will have to acknowledge that the franchisor didn't promise you success or profits and that you haven't relied on anything that isn't stated within the four corners of the contract. Franchisors can encroach, legally, upon their own franchisees unless the territorial rights are spelled out in the franchise agreement.

A franchise is NOT a business of your own. It is a contract to lease a brand name with finite terms in which the franchisee surrenders control of his assets and his business to the brand franchisor who CAN grow and remain viable even as substantial numbers of first-owner franchisees fail out of business. The franchisor has no investment in your business but he owns you and your gross sales under contract for ten years or more, depending on the contract, and this is "paper" that is bought and sold in the financial markets. Churning and turning of first owners of franchises is legal under current regulatory policy and the courts uphold the contract terms to which you will have agreed.

Many franchisees never earn any actual profits because of the thin profit margins in the sector they are interested in and the saturation of the market, and the fact that they have to pay a percentage of their gross sales in royalties and advertising fees, etc..to the franchisor for the entire term of the contract, and even in failure of the business. Any professional, a CPA, or an experienced franchise attorney, like Richard Solomon, of Franchise Remedies, or the resident business man and expert, FuwaFuwaFuwagi, of Blue Mau Mau, will tell you that rarely do the possible rewards of an "investment?" in a franchise justify the risk of the investment.

I speak from experience. Please be very careful with you future and don't let your NEED and your desire for income overcome your common sense. There is no government oversight of franchising ----just an appearance of government oversight. As a franchisee, you are merely a cheap source of labor and venture capital on which your franchisor can grow his system and his gross sales. The very nature of franchising enables abuse and exploitation. Don't let your franchisor trick you into believing that he can't make money unless you make money. Your franchisor is making money all of the time you are attempting to bring your business to breakeven, whether for a year or two, or even longer, depending upon how long you are willing to provide the capital to keep trying.

If this advice discourages you! Good! This is my intention and please warn other military personnel who will be the targets of franchisors because of the SBA Patriot Express Loan Initiative.

read all the franchisee tutorials - including the franchise fraud symposium articles.

That's your best starting point.--

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'm not the smartest person, so perhaps the 2 of you could explain why you are having this discussion on the McDonald's / EEOC settlement thread instead of elsewhere on BMM.

Am I missing something, or are you simply so narcissistic that you must inject your views into every thread and since you have nothing on-topic to contribute here, you just want to make sure that we indulge your "ME ME ME" rudeness? 

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400