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Separating Good Franchises From Bad

RPurvin's picture
Posted Mon, 2007/12/31 - 14:39 by RPurvin

Chairman explains benefits of AAFD to franchisee community

I've been away for a week, and I return to discover the AAFD is being described as a Chipmunk that is doing little to impact the quality of franchise opportunities. Our principal accuser has never contacted the AAFD, nor taken the time to understand what we do and what we stand for. Please allow me to set the record straight:

1. The AAFD's Fair Franchising Standards serve as an available tool (even available to Mr. Solomon) to help prospective franchisees to separate the good from the bad in franchising. The AAFD Standards are available for free from many sources including the AAFD website, www.AAFD.org.

2. AAFD Seal Recipients must earn a 75% approval rating from their franchisee network! Franchisor's cannot 'buy' AAFD approval, at least not from the AAFD! Were it otherwise, many more than 20 companies would have earned the AAFD Seal. In fact, the AAFD offers the only true accreditation program for franchisors in the world.

3. The AAFD only recommends companies that have received the seal. If a franchisor hasn't met our high standards, our recommendation is "Just Say No!"

4. Profitability is a major criteria to earn the AAFD Seal. So is an equitable deal, a fair contract, and a collaborative relationship. We have seen some great fad investments, momentarily profitable (read 'Cold Stone' and 'Krispy Kreme') that didn't get our recommendation because at the core, if things ever went south or wrong, the contract provided no protection for the franchisees. We have also seen profitable concepts squeeze all the profits out of the franchisee because of unfair contracts.

5. None of the efforts to regulate franchising have sought to regulate profitability -- all efforts have been directed towards imposing contractual protections. Legislative efforts to date have more exacerbated the problems than relieved them, giving investors a false sense that they are protected by a level of government protection.

6. And perhaps most important, MOST of the franchisees who contact the AAFD want their franchise business to work, and desire a great relationship with their franchisor. The AAFD is most proud of our efforts to define, identify and promote great franchise systems that are profitable and embrace collaborative cultures that respect the legitmate needs of both franchisors and franchisees. We have helped several organizations, including once troubled businesses, to get a handle on what it takes to become a great franchise system.

Perhaps instead of belittling the one organization of franchisees that has stood the test of time by lasting more than a few years, Mr. Solomon might support our quest to identify and promote strong franchise systems and help us create greater market demand for such systems.

Wishing all BlueMauMau readers a Happy Holiday Season and the best of fortune in the New Year.

Bob Purvin, Chairman of the AAFD

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Separating the good from the bad! The AAFD is good Influence by Guest
Submitted by Guest on Mon, 2007/12/31 - 15:26.
I understand where Mr. Purvin is coming from. I have always had admiration for Mr. Purvin who has done his best to get a better deal for franchisees but who finally accepted that the franchisees were not going to get a better deal through regulation, the FTC Rule, and the State UFOC/FDDs. Robert Purvin in a realist who has found another road to bring about some pressure on bad franchisors who sell dogs and pigs to the public. If you read his comments to the FTC concerning changes that should be made in the FTC Rule, you understand that he is working through the only avenue open to the realists to get a better deal for franchisees and to make franchising honest and open to view for both parties. The FTC rejected all of his recommendations to make franchising fairer for franchisees. Franchise regulation has been rejected by the Congress of the United States over and over again. The power of the IFA and the special interests, the banks and the lenders, etc.. cannot be defeated by those with less money and influence. The ineffective Rule of the FTC is, in reality, in my opinion, just cover for franchisors to sell their franchises at any rate of failure to an unsuspecting public ---and to be given impunity and immunity under the law for doing so ---as well as a SBA loan guarantee. If the AAFD Seal results in some kind of reputational tool that is available to franchisees and franchisors, this may mean that there will be competition among franchisors to recruit franchisees who will want to buy franchises from franchisors with the AAFD Seal and who will have a chance of buying a franchise that can earn them profits over and above the job that they are looking for. I recently put the AAFD on the Wikipedia Definition of Franchising as an External Link because I hoped that potential franchisees would go to the AAFD Link as well as the IFA Link and be helped by the AAFD Website. I, however, think Richard Solomon comes from a good place and I always plug his $1,000 NEGATIVE due diligence offer with the hope that some potential franchisee will find him ---and especially the Texas VETS----but I think the AAFD offers good packages at a reasonable price to the potential franchisees as well. Since the AAFD and Richard are competetors in the same market, I assume that a lot of Richard's comments are just for the purpose of invoking discussion, etc.. and he will be out here with his comments if he isn't already at Muldoons preparing to celebrate the New Year! Happy New Year to Robert Purvin and to AAFD --and to Richard Solomon.
Question for Mr. Purvin by jd
Submitted by jd on Mon, 2007/12/31 - 16:01.

You state:

 'Profitability is a major criteria to earn the AAFD Seal.'

If profitablility is a major criteria, then how was Cuppy's Coffee evaluated considering that when approved they had been franchising for less than a year?

I've actually wanted to read the franchise agreement for Cuppy's ever since they were AAFD approved, but have yet to find it.  Do you have a copy of it that you can share with the community?  I waited for it to show up on the CA website, but their newest UFOC isn't out there, not sure why.

Cuppy's and the AAFD Seal by michael webster
michael webster's picture
Submitted by michael webster on Mon, 2007/12/31 - 16:11.

It was precisely because Cuppy's did not have sufficient operating history that it was not awarded the AAFD Seal, but rather its contract and practices were deemed to be sufficiently fair for it to have earned, what was called at the time, Accredited Contract Status.  See section 1.7 of the AAFD's standards. 

Michael Webster PhD LLB

Franchise News


Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"


Profitability is a major criteria to earn the AAFD Seal by michael webster
michael webster's picture
Submitted by michael webster on Mon, 2007/12/31 - 16:21.

Bob;

I think that your claim about "Profitability is a major criteria to earn the AAFD Seal" is either false or misleading.

The Standards Committee has always been clear that the AAFD Seal is no a guarantee or recommendation of profitability.

I think that you only mean that it would be highly unlikely for 75% of the franchisees to vote for a franchise system that was not profitable and also have passed the contractual review.

Let me know if I am wrong. 

Michael Webster PhD LLB

Franchise News


Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"


The AAFD and I by RichardSolomon
RichardSolomon's picture
Submitted by RichardSolomon on Mon, 2007/12/31 - 16:35.

are certainly not competitors under any possible definition of the word. They have nothing that might interest me in the least, and any suggestion that there might ever be any connection between them and me would be regarded by me as degrading.--

Richard Solomon, FranchiseRemedies.com,  has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School


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
The AAFD seeks to encourage by RPurvin
RPurvin's picture
Submitted by RPurvin on Mon, 2007/12/31 - 18:53.

The AAFD seeks to encourage new franchisor concepts to adopt fair and collaborative franchising practices by offering Accredited Contract status as a first step to gaining the AAFD Fair Franchising Seal.  Cuppy's actually dramatically modified its franchise agreement to quality for AAFD Accredited Contract status. 

As was indicated in an earlier post, the AAFD Standards are concerned with profitability, but recognize there are several factors that impact profitability, including the value of the product or services being sold, the market for such services, the market protection afforded, the length of the term and the cost of doing business.  The Standards committee recently adopted the following commentary applicable to profitability.

Commentary:  Consistent with Standard 5.1, a franchise agreement should provide for a market opportunity, including multiple avenues to its market, sufficient to provide the franchisee with a fair and adequate return on his or her investment.  When negotiating market protection and a franchisee's territorial rights, the parties should deal with each other fairly and in good faith. Subject to standard 3.2 and its commentary below, in providing a franchisee with reasonable market protection, a franchisor should avoid adversely impacting the franchisee’s market or cannibalizing the franchisee’s sales such that a fair and adequate return is jeopardized.   (Adopted September 14, 2006 by a vote of 11-1-1).

The AAFD largely depends upon the franchisee population to determine the profitability of the franchise opportunity.  
Bob Purvin
Chairman
American Association of Franchisees and Franchise Dealers
Cuppy's Contract by RPurvin
RPurvin's picture
Submitted by RPurvin on Mon, 2007/12/31 - 18:57.

I would be delighted to share the Cuppy's agreement on a private basis, and I will seek permission to publish the agreement to the community.  As we have published the orginal agreement was about 50% conforming with the AAFD Standards, but the final agreement is 99.9% conforming.

 

Bob Purvin
Chairman
American Association of Franchisees and Franchise Dealers
But Michael by jd
Submitted by jd on Mon, 2007/12/31 - 16:19.
Why then is Cuppy's on the AAFD website is Cuppy's shown as a 'Seal Recipient'?
The AAFD and Richard by michael webster
michael webster's picture
Submitted by michael webster on Mon, 2007/12/31 - 16:39.

Cum'on Richard, tell us how you really feel! 

Michael Webster PhD LLB

Franchise News


Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"


I Agree with Mr. Webster by RPurvin
RPurvin's picture
Submitted by RPurvin on Mon, 2007/12/31 - 19:03.

Mr. Webster is basically correct.  The AAFD does not undertake to grade a franchisor's actual business model, and we encourage all franchisee prospects to make an economic determination of the viability of the business.

The AAFD Seal is intended to measure a company's franchising practices, and we do not test the profitability of any particular system other than by a vote of ratification from the franchise network. 

The AAFD would however downgrade a contract (or actual practice) that would provide a barrier to a system's profitability -- high royalty, poor market protection, unfair product sourcing, poor trademark protection, etc. 

Bob Purvin
Chairman
American Association of Franchisees and Franchise Dealers
Profitability and the AAFD by Guest
Submitted by Guest on Tue, 2008/01/01 - 14:27.
"The AAFD largely depends upon the franchisee population to determine the profitability of the franchise opportunity." What does this mean in the real world? Does this mean that franchisors who sell franchises with no chance of profitability can obtain the AAFD Seal of Approval?
AAFD by Guest
Submitted by Guest on Mon, 2007/12/31 - 18:24.
Isn't it pathetic for those UPS STORE franchisees that the AAFD rated this MBE/UPS store franchise one of the worse ever. That was in 2006, and now if they did it again it we even be more horrifing in 2007-2008. This analysis of the franchise is on the BROWN BOARD.COM for all to see. Your only conclusion to this franchise is 100% BAD to the bone.
Accredited Contract Status and Marketing of the Seal by michael webster
michael webster's picture
Submitted by michael webster on Mon, 2007/12/31 - 19:28.

jd asks: "Why then is Cuppy's on the AAFD website is Cuppy's shown as a 'Seal Recipient'?"

It is a good question.  The current view of the Standards Committee is that there is only the AAFD Seal; but for franchise systems that demonstrated an extraordinary contractual commitment to collaborative franchising, it is thought that there should be some important recognition.

But I think that you are right, and the accredited franchisors should be designated as such on the AAFD website. 

Michael Webster PhD LLB

Franchise News


Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"


Business Model and the AAFD Seal by michael webster
michael webster's picture
Submitted by michael webster on Mon, 2007/12/31 - 19:41.

Bob wrote: "The AAFD would however downgrade a contract (or actual practice) that would provide a barrier to a system's profitability -- high royalty, poor market protection, unfair product sourcing, poor trademark protection, etc. "

This is just extremely important to understand.  

All prospective franchisees want to know how much money they are going to make: they don't focus at all on how much money they are going to be able to keep when the hard times roll around for the franchise system.

When economic times are good, the franchise contract is kept in the drawer and never referred to.

But when times are bad, then the contract comes out: "what can we do to make more money from the franchise network?" is what the franchisor will ask.

At that time, you hope that your franchise agreement ranks high on the AAFD scale of fairness - better to get that checked out first.

Michael Webster PhD LLB

Franchise News


Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"


There may be a chance for profitability... by Truth in Franchising
Submitted by Truth in Franchising on Tue, 2008/01/01 - 15:00.

that is why it is of paramount importance to take due diligence seriously, have a significant due diligence budget and ultimately choose wisely.

Oh and one more thing you should do is disregard the rantings of the Item 20 Ranter they can be very appealing since they advocate non-responsibility for one's actions and that the government should be your salvation for your bad choices. 

The Truth Shall Set You Free!

TIF

The Truth Shall Set You Free!

TIF

Profitability of System by michael webster
michael webster's picture
Submitted by michael webster on Tue, 2008/01/01 - 15:11.

No.  Of course they cannot.   

Michael Webster PhD LLB

Franchise News


Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"


Profitability of a Franchise System by RPurvin
RPurvin's picture
Submitted by RPurvin on Tue, 2008/01/01 - 17:23.

Highly unlikely that a poor franchise business model could earn the AAFD Fair Franchising Seal.

 STANDARD 1.1 CRITERIA FOR EARNING THE AAFD FAIR FRANCHISING SEALA franchisor may qualify for the AAFD FAIR FRANCHISING SEAL if it meets all of the following criteria:                

1.  The franchisor recognizes an independent association of the franchise owners in its franchise system.  The AAFD will deem an association or a franchisee advisory council to be an independent franchisee association if it is a Trademark chapter of the AAFD, or if  its board of directors or equivalent certifies to the AAFD that the association has the right to adopt its own bylaws, elect its own board and delegates, establish its own agenda and meet on its own schedule, and has the resources and opportunity to work to accomplish its agenda.                

2.  The franchisor and the independent franchisee association each certifies to the AAFD that the franchisors franchising practices and then current franchise agreement is consistent with the spirit of these Standards, and the AAFD’s Standards Committee concurs in this finding.                

 3.  The franchise agreement either has been negotiated with, or recommended by, the independent franchisee association, and                

4.  The franchise agreement and franchising practices of the franchisor have been ratified by the franchisees in the system through an independent survey of the franchisees in which all franchise owners that are open and operating are invited to participate and at least 75% of all franchisees actually participate, and 75% of the participants vote that they:  (As amended unanimously on October 23, 2000).                

a.  Are reasonably “satisfied” with their franchise agreement;               

b.  Are reasonably “satisfied” with their franchise relationship with the franchisor; and               

c.  Are in favor of the franchisor earning the AAFD’s Fair Franchising Seal.

Only seasoned franchise systems (in business for 3 years with at least 30 franchises) are invited to earn the AAFD Seal.  Unseasoned franchisors are invited to apply for AAFD Accredited Contract status, which requires substantial conformance to the AAFD Standards.

Bob Purvin
Chairman
American Association of Franchisees and Franchise Dealers
Past Performance Statistics and Profitability by Guest
Submitted by Guest on Tue, 2008/01/01 - 16:05.
When franchisors are permitted to sell franchises under law and regulation with no disclosure of past performance statistics of the first owners who build out and labor in and finance the physical units that wear the brand name, LET THE BUYER BEWARE! Optional Item 19 and mandated Item 20 of the UFOC permit franchisors to obscure both the success rate and failure rate of their franchised "proven plans." You can be sure that if the success rate was high in franchising, the franchisors would be disclosing past performance statistics and wouldn't be withholding earnings information. While past performance statistics may not be any indication of future performance, it is all we have to assess the odds of success or failure of a venture that is passed off as a "proven" and "turn key" operation by franchisors. Proven 40% of the time, or 50% of the time, less or more, over the long term of the average franchise agreement would be more accurate disclosure but it is accurate disclosure that the franchisors and the FTC and the SBA work to avoid. Actual profits after royalty payments and advertising costs and supply fees, and the normal overhead of operating a small business must be a rare occurrence in franchising! The UFOC is just a clever artifice and red herring to avoid any discussion about risk of failure or odds of success with potential franchisees --let alone any discussion about "profits." This must be why the AAFD has to leave the investigation of the profitability of the franchise up to the franchisee in order to survive and support federal regulatory policy --in my opinion. These special interests who protect the alliance of government and the franchisors throw out the "Due Diligence" argument to disguise the failure of government to require franchisors to disclose past performance statistics of the franchises that they are selling to the public.
767,483 US Franchises are failures? by Truth in Franchising
Submitted by Truth in Franchising on Tue, 2008/01/01 - 16:46.

If you follow the Item 20 Ranter's rantings this must be the largest scandal of all time!

How did they keep this widespread conspiracy a secret?

Maybe the Item 20 Ranter should get some kind of award for blowing the whistle on this FTC/IFA/AAFD/NASAA/ABA/BMM chaebol?

This scandal is bigger than Enron, Watergate, Tyco. Global Crossings and MCI put together.

The Truth Shall Set You Free!

TIF

The Truth Shall Set You Free!

TIF

Not hard to keep the secret of high failure rate of franchises by Guest
Submitted by Guest on Tue, 2008/01/01 - 17:05.
It hasn't been hard at all for government and the IFA and the special interests to keep the secret of the somewhat high failure rate of first generation franchisees, and, in general, the secret of the high failure rate of all small businesses within the first five years. The red herring that the IFA threw out there; i.e., t that franchised small businesses are more successful than independents has been disproven by new research and the IFA itself has disclaimed this statement. However, this false premise is still used when selling franchises and was even thrown out on Wikipedia as an advantage of a franchise, until a few weeks ago, when this false information was ommitted from this article by a new editor. In a system or business model that serves the best interests of all of the parties involved, except the first-owner franchisees who are silenced and hidden in failure, it is not surprising that government doesn't want to know, the franchisors don't want to know, and the business community and business media doesn't want to know the actual success or failure rate of the first owner franchisees of franchisees. Franchising has been so durable because of the possibility of Ponzi-type growth for the franchisors who use the cheap labor and the capital of the franchisees to seed and grow their systems. A failure of intelligence can be a good thing for government and special interests who can protect their innocence because they "don't know" what is going on. Those who cared were writing about first-generation franchisee failure and fraud 40 years ago but and we can't know how many hundreds of thousands of first-owner franchisees have failed in these last 40 years and it is because these statistics are burried through the mechanism of franchise disclosure regulation, that the constructive fraud continues today with immunity and impunity under our laws. We need Truth in Franchising and franchising needs to be regulated as well as securities are regulated by the SEC. There would then be competition among franchisors of the same or similar concepts to capture the cheap labor and capital of the franchisees and the franchisees and the public would be better served from the competition between the franchisors of same or similar concepts. The SBA would not be a piggy bank for predators who can sell their franchises to the public at any high rate of failure of first-generation franchisees.
Read "The Franchise Fraud" by RPurvin
RPurvin's picture
Submitted by RPurvin on Tue, 2008/01/01 - 17:56.

The whistle was blown (and your question was answered) 14 years ago when I first published my book, The Franchise Fraud: How to Protect Yourself Before and After You Invest" (Wiley, 1994).  The incidence of franchise failures and the false representation that franchising is a safe and secure path to business ownership was widespread then (and unfortunately still is today). 

An updated version of my book is due to come out in paperback this spring.

Bob Purvin
Chairman
American Association of Franchisees and Franchise Dealers
Item 20 Ranter I thank you for 2007 by Truth in Franchising
Submitted by Truth in Franchising on Tue, 2008/01/01 - 17:13.

You provide me with such utter joy. I have never encountered someone so resolutely obtuse as you.

Keep on posting your drivel so I can continue disagreeing with you.

The Truth Shall Set You Free!

TIF

P.S. Will we ever hear from your alias Carman again?

The Truth Shall Set You Free!

TIF

I have read it...And how many times can you sell a Popeyes? by Truth in Franchising
Submitted by Truth in Franchising on Tue, 2008/01/01 - 18:17.
This comment has been moved here.

The Truth Shall Set You Free!

TIF

Updated Franchise Fraud by michael webster
michael webster's picture
Submitted by michael webster on Tue, 2008/01/01 - 21:16.

Bob wrote: "An updated version of my book is due to come out in paperback this spring."

That is great news. 

Michael Webster PhD LLB

Franchise News


Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"