Why Franchising Needs To Be Adequately Regulated

A Memorial to Quiznos Franchisee Bob Baber! A Memorial to Truth! As I see it!

Just a year ago, November 27th, 2006, an emotionally and physically ill franchisee of Quiznos took his life and left a suicide note in which he asked the media and government to look into the criminal practices of the Quiznos organization who had destroyed him and who are, today, destroying other franchisees of this system in this country and in the world where Quiznos franchises are sold.

Franchisors like MBE-UPS and The Coffee Beanery, and Cold Stone Creamery, and Sona Med Spa, as well, have victimized their franchisees with immunity and impunity under our current regulatory policy and laws.

Apparently, Bob Baber did NOT fully realize that HIS government had helped Quiznos to destroy him and that he was just one of tens of thousands of franchisees who are calculated sacrifices to government regulatory policy that favors the franchisors at the expense of franchisees who are routinely and legally destroyed in arbitration and in our courts ( if they even survive to access arbitration or the courts) because they have acted in good faith and have signed abusive, exploitive, and legally binding contacts of adhesion. These binding contracts permit franchisors to “legally” exploit and destroy franchisees at will under the rule of law that has been written by the special interests; i.e. the franchisors, the lenders and banks, the developers, the landlords, the FTC, .and the SBA. -while The Congress sleeps and FRANCHISEES weep in great numbers. The IFA advises that the members of Congress, on the whole, don’t know the difference between a franchisor and a franchisee.

I indicate that the FTC is a special interest because, while they may advertise that they protect the American Consumer, their central mission is to encourage “legal” trade and business activity in the economy. The FTC violated the trust of the American people in the late 1970’s and they continue to violate this trust today because their regulatory policy helps the franchisors to hide the true and known risk of an investment in their franchised proven plan from new buyers of the franchise. There is no competition between franchisors of the same or similar concepts because there is no information required to be disclosed by franchisors under the Rule or the FDD to new buyers upon which comparisons can be made between startup costs, return on investment, and success or failure rates of the business plan.

The Federal Rule and the State UFOC’ together with the contracts of adhesion have worked to perpetuate a constructive fraud against that portion of the public who invest their labor and their savings in a franchise, a touted “business of your own” that is the answer to the American dream and a job and profits, as well! Prospective franchisees are easily brought to the table to sign these adhesive contracts because of the appearance only of government oversight of franchising and the appearance of a boiler plate contract and uniform contract that cannot be bargained or changed .if the prospective buyer franchisee wants to gain access to the great profits that are promised outside of contract by the franchisor or his sales agent.

As Richard Solomon indicates, the UFOC can be a license to lie, cheat, and steal. Prospective franchisees do not realize that franchising is the newest source of cheap labor and capital upon which corporations can maximize their profits and attract investors to further maximize their profits, .while, at the same time, transferring the risk and costs of building and operating the physical units that wear brand names to the franchisees.. Franchisees don’t realize that it is the portfolios of binding franchise agreements that are upheld by the courts that support and hold up the franchisors’ paper empires. It is these paper empires that are bought and sold in our financial markets and this is why the franchisors must exercise complete and absolute control under contract and why the courts almost always uphold the contract terms. Prospective franchisees don’t realize that their franchisor can and does profit even if they stand at break even with low pay and long and hard hours for the entire term of the franchise agreement. Prospective franchisees don’t realize that their franchisor can continue to profit even as they fail and lose their entire investments. Prospective franchisees don’t realize that the binding franchise agreement that they thought was uniform and standard and incapable of being bargained is, in reality, a malicious legal trap for those franchisees who invest in unviable franchised business plans that look so viable and successful from the outside to inexperienced “entrepreneurs.” . .

The FTC rationalizes that their ugly and unfair regulatory policy serves the greater good and ignores the franchisee victims because this policy does stimulate the economy and even though franchisees may fail in great numbers into bankruptcy and/or debt, these failing franchisees do feed the economy in all of the time they are working to make their businesses successful, and generally their assets, both tangible and intangible, continue to feed the economy in failure -----because failure for the franchisee does not mean failure for the franchisor who can acquire these assets of the failed franchisee for almost nothing to continue in the service of the franchisor’s brand and the franchisor’s profits.

. .

The purpose of the Rule, as stated by the FTC, was aborted from the beginning and was a lie and just a cover for the franchisors that protects them from charges of fraudulent inducement to contract and fraudulent misrepresentations, once the adhesive and exploitive franchise agreements have been signed by the prospective franchisees.. The “due diligence” references provided in Item 20 are just an artifice to protect the franchisor because, of course, any damages suffered by franchisees who do complete due diligence on Item 20 are proximate to the “lies and/or misrepresentations” of the ex-franchisees and not to any misrepresentations made by the franchisor. The franchisees, ex franchisees especially, are silenced often by confidentiality terms in the fire-sale asset contracts that must be approved by the franchisors before franchises can be transferred.

The matter of “risk” is moot once the franchise agreement is signed by the franchisee. The provisions of the FTC Rule (Item 19) also make it possible for franchisors to obscure the P&L statistics, and success and failure rates of their first-generation franchisees from new prospects and to churn their way to visibility in American Communities. Under the UFOC and regulatory policy as established by the FTC, franchisors can sell their franchises at any degree of known risk as long as they are compliant with the Rule and the UFOC. The SBA will guarantee these loans at any degree of risk because they don’t take note of the failures of first-generation franchisees who are obscured in the Item 20 transfer columns of the UFOC who have financed their purchases of a franchises with home equity loans or other private savings, .such as 401’s and 403’s.

Bob Baber didn’t know all of this and I’m glad he didn’t because it would have added to his great despair and depression. . I didn’t know this a year ago but I suspected that Item 20 was a deal from the beginning. I could have saved myself a lot of time if I had found Paul Steinberg’s “Beguiling Heresy” at the same time I found Les Stewart’s Franchise Fool, Richard Solomon’s tutorials on franchising, and Robert Purvin’s public comments written to the FTC ten years ago, in 1997. Michael Webster’s writings also have contained clues that led me to the conclusions I have stated above. .

Obviously, what took me months to discover and understand is widely known among the franchise industry and the legal profession and it is just ego on my part to think that anything that I say on Blue Mau Mau will make a difference. But, knowledge is power and Bob Baber wanted .franchisees to gain power and to fight back. He wanted the media to expose the injustices that destroy families. He wanted to bring truth to franchising and to pressure those powerful corporate forces who would hide the truth from the public. Bob Baber didn’t know, of course, (or maybe he did?) that his government and their regulatory policy protect the powerful corporate forces and that he was a premeditated sacrifice to an ugly status quo that is resistant to change.

The new FTC Rule that was ten years in the making is just more of the same and will enable predator franchisors to recruit from the Internet with immunity and impunity under the law while using their SBA Franchise Registry listing and their new FDD as a sales tool. The implied endorsement by government of franchising on the Internet will bring even more prospects and marks to the table to sign the contracts of adhesion and there will be even more victims of the FTC Rule. All those who surround franchising and make their living from franchising will rejoice in the boon of new investment in franchising. Government will continue to have deniability because they will still be ignorant as to the failures that are carried in the Transfer Columns of the FDD’s. Churning will continue on the backs of innocent franchisees who will invest in very high risk franchises that appear on the SBA Franchise Registry.

The new targets of the franchisors are the veterans and retired military personnel and their families who will have access to the SBA Patriot Express Loans. The country is fighting to avoid a recession; times are uncertain; our dollar doesn’t buy as much for Americans; good jobs are scarce; and, of course, government will rationalize that this is not the time to alter the status quo and regulate franchising at least as well as securities are regulated by the SEC. Many of our veterans may make further sacrifices to serve their country because they will see the carrot of profits and a job and tricked into signing contracts to purchase franchises that have a high failure rate of first-generation franchisees and are eligible for PATRIOT EXPRESS LOANS from the SBA.

The constructive fraud will continue. Bob Baber’s sacrifice will be forgotten. Others will join him. Our country will continue to slide into the control of corporations and their short term solutions to maximize corporate profits will continue to bring long term problems to the American people. Every four years, those politicians with big egos will emerge to promise change to the American people, but there will be no real change because whether you give your proxy to a Republican or a Democrat, the Congress and the Executive have already been bought and paid for by the special interests, those multi-national corporations who intend to colonize the world in the interests of maximizing profits in a Global Economy.

Too bad! So sad! I’m out of here! It is time to realize that Bob Baber and I cannot do in one year what the FTC has refused to do for ten years but we did try! And, maybe others will join us and the truth will someday “Out” and franchising will be regulated –at least as well as securities are regulated by the SEC. We need TRUTH IN FRANCHISING!

Carman