AARP On Franchising

A member sent this story in to Mr. Blue MauMau from AARP Bulletin Online, an online journal of the American Association of Retired Persons for people age 50 and over.

Of 760,000 franchises dotting American shopping malls and street corners, a franchise "saves... [business owners] the pain and agony of building a business from scratch," says Terry Hill, a spokesman for the International Franchise Association in Washington.

AARP's top 5 franchise picks of 2006:

  1. Subway
  2. Quiznos Sub
  3. Curves
  4. UPS Store, the Mail Boxes Etc. 
  5. Jackson Hewitt Tax Service

 Its list looks identical to Entrepreneur's 2006 top franchise list.

The article includes a cautionary warning from consultant John McDorman:

"Franchisers charge upfront fees and then take a percentage of the business. But one year into it, you may say, 'What are these clowns doing for me?'"

Comments

Sunk Investments: 100% Franchisor Predatory Discretion

It is not difficult but logically impossible to rank franchise offerings regarding risk.Time Periods do Not MatchThere may be less risky ones now [as of Feb 8, 2007]. You decide to sink your investment tonight [Feb 28th]. You sign.On Feb 9th a.m., your franchisor decides to become opportunistic [ie. your risks increase infinitely increase = crushing any potential return you have on your capital]. Franchisors have 100% discretion within the contract. You have 0%.You do your best now: they decide when to strip value.All contracts are the same: All infinitely risky [the risk is manifested at the franchisor's whim]. Fallacious LogicIt's not Door #1, Door #2, or Door #3.It's Door #0.Les Stewart, MBAIndustry Investment AnalystFranchiseFool.com :: the Wise learn to say No

Pain and Agony of Building Business from Scratch

Yep! Those predator franchisors, those big brand names, permit you to use your own money to build them a business from "scratch" knowing that they will always benefit from your investment even if you have to "scratch" for a living ---or even if you fail. The visibility of stores that fail and are acquired at "fire sale" prices for for second and third owners perpetuates the appearance of viability of the network. The body bags are hidden from view and "discounted stores" become a kind of perk for insiders and a deceptive mask.

The business failure rate of some franchise networks is hidden in the statistics of Item 20 of the UFOC because the churning of the network is not revealed to the public through these statistics. New prospects for franchises aren't often made aware that there are several "discounted" stores up for sale in the network for obvious reasons.

It is truly malicious, if not illegal, to sell franchises to new prospects who build new stores with their own capital when you know that the network has profitability problems that have not been solved or adressed by management.

If the courts will not order an injunction againts Quiznos and UPS to prevent them from selling franchises to new owners who spend hundeds of thousands of dollars to build new "brand" stores, surely the Boards of these Organizations should look at their moral and legal obligations under the law and voluntarily suspend the sale of new franchises until the problems are solved. The courts should realize that these networks continue to sell franchises to defend their legal position in the courts -----i.e. that they are selling something of value and increasing their sales.

The irresponsibility of business magazines and the AARP contributes to the financial injury and death of innocents who trust the integrity of these organizations and the truth of their reports to the public. For AARP to print heresay because they need product to distribute and to qualify it with a tongue in cheek comment is truly negligent because it acts as an advertisement to buy the product.

When Fran-Vet-SBA loans are available and there has been no due diligence done by the VA or the SBA, who pays the price of fasilure other than the franchisee? It isn't the banks; it isn't the franchisor; it is the American public who picks up the tab for the defaults on loans for franchises and it is the American taxpayer who is subsidizing franchising

WE NEED TRUTH IN FRANCHISING!

Voices of Opportunity and Warning

Entrepreneur - One who starts a business or other venture that promises economic gain but that also entails risks.  (American Heritage Dictionary)

Franchisees look at ourselves as entrepreneurs. We are risk bearers.

I have waited patiently to hear creative franchise and small business ideas in remarks to this AARP story. But the voices of franchise negativity have not been able to deliver.

If you disagree with Entrepreneur's top 5 and only criticize it, there is a misundersting of the franchise audience if there is not another alternative list provided on what franchise concepts should be at the top and why. The bigger part of the equation for most entrepreurial minded franchisees is where is the opportunity.

If there is risk, logic games are only so helpful. Risk and returns need to be quantified. Show where the greatest rewards are.

If you are a political activist for or against franchising, please take your activism to the appropriate political story or the legislation and political activism forum.

Sunk Investments: 100% Franchisor Predatory Discretion

It is not difficult but logically impossible to rank franchise offerings regarding risk.Time Periods do Not MatchThere may be less risky ones now [as of Feb 8, 2007]. You decide to sink your investment tonight [Feb 28th]. You sign.On Feb 9th a.m., your franchisor decides to become opportunistic [ie. your risks increase infinitely increase = crushing any potential return you have on your capital]. Franchisors have 100% discretion within the contract. You have 0%.You do your best now: they decide when to strip value.All contracts are the same: All infinitely risky [the risk is manifested at the franchisor's whim]. Fallacious LogicIt's not Door #1, Door #2, or Door #3.It's Door #0.Les Stewart, MBAIndustry Investment AnalystFranchiseFool.com :: the Wise learn to say No

Oh NO he DIDN'T.....

LMAO!!!!!

........."saves... [business owners] the pain and agony of building a business from scratch," says Terry Hill, a spokesman for the International Franchise Association in Washington.

This is the best one yet.  Oh to have all these 60-80 hr work weeks back.  We've been at this over 4 years now and it inspite of our franchise that we are successful..............NOT, because of them.

 

AARP Endorces Predator Franchisors Quiznos and UPS Stores

I can't believe that this well respected organization that does so much good would intentionally endorse Quiznos and the UPS Stores to their readers if they knew the facts.
Hopefully, they will correct their Pick Five in an effort to prevent further harm to those readers who believe that they are reading the truth when they read an AARP bulletin.
They owe their readers an investigation and a retraction of two of their Pick 5 if they find that the facts indict UPS and Quiznos.

Who's Qualified?

"I'm sorry, Frankman, I'm just not qualified to make any selections -----That's your business." - Guest

I think you have the wrong man. Ain't my business. I made my own unqualified choice years ago from very imperfect information. With the information you have here, you are  probably way more qualified than I was.

So if you were boxed into a corner and had to make a split-second decision, what sector would you lean towards? Why? Make a stab at it.

Frankman

Oh NO he DIDN'T.....

LMAO!!!!!

........."saves... [business owners] the pain and agony of building a business from scratch," says Terry Hill, a spokesman for the International Franchise Association in Washington.

This is the best one yet.  Oh to have all these 60-80 hr work weeks back.  We've been at this over 4 years now and it inspite of our franchise that we are successful..............NOT, because of them.

 

Give Us a Break

Les,

You always have the same message: don’t buy a franchise -- ever.

Your profile with the Canadian flag on Blue MauMau says that you’ve been a member for 13 weeks and 1 day, and have 90 points. That’s one message a day, and it’s always the same. After your first post we got the message. How about giving us a break?

Jan

What Small Business Sector Would You Choose Then?

"the risk is manifested at the franchisor's whim" - Les

Huh??? I've known a few franchisees who added quite a bit to their own business risk. One buddy never kept accounting records. Didn't even know how much he was spending. But that's another story.

Even if your assumption above were true, the question is still relevent -- which franchiser's whim is better? And whose whim is getting a nice lift from market trends?

Or since you don't like franchising, what independent small business sector would you choose in your homeland of Canada? Why?

Item 20 Comments

Could you please explain in more detail, say using a UFOC as an example, what are your concerns about item 20?

I have always taken the view the ratio disclosed in item 20 reveals the maximum risk of total loss.

But you seem to believe something different, I think.What is your view about why item 20 is deficient?

Michael Webster PhD LLB

Misleading Advertising Law

What Is Your Top 5 List?

Dear Guest,AARP writers are not franchise experts. They have done well in a short period of time to research that Entrepreneur.com has one of the more established lists in the industry. (Poor chaps.) I really do understand your concern about listing #2 Quiznos and #4 The UPS Store because of past franchisee litigation. An editor of Entrepreneur wrote to me (their note was posted on Blue MauMau) that Quiznos dropped out of the list for 2007 because Quiznos didn't provide them required information. But that just skirts the issue. Why didn't Quiznos want to submit required information to a magazine that consistently ranked them one of the top franchise concepts?So I understand. But just criticizing Entrepreneur's mysterious listing does not fully address the need.  So to our esteemed franchise wiz kids, what is on YOUR top list of franchises to suggest to AARP members. Why?FrankmanP.S. For any guest that replies, can you make up a signature to set you apart from the mass of 'guests' who visit?

I Choose not to be Servile nor do I Recommend it to Others

Bob,1. Franchisors have almost unlimited discretion to exercise their near total ability to strip value from a franchise investor: whenever they choose. You seem content to advise people to enter into such a personal net worth harrowing roller coaster rides. I choose not to.2. There are good business investment opportunities in North America but they take skill to uncover, grow and harvest.I choose a conservative, medically-based model. Rule #1: Do no harm to your life savings. The failure rate in any business should provoke a cautious approach, expecially to 1st brand time renters.There is risk in life but some arrangements are infinitely risky (defined as reckless: self and others). I would not encourage anyone to use DDT to control insects nor use PCBs to clean your oily hands with.Small Business: A Surprisingly High-Skilled CareerI agree with you Bob. I flatly reject the idea that any monkey can run a small business  successfully. It takes adequate capital, hard work, technical skill, emotional intelligence, some luck and lots of perseverance.Most people do NOT have this skill set.The small businesspeople I have known (as well as the equally low-status farmers) are smart, tech savvy and discerning. They know when people are blowing smoke.Those people have my respect because they have demonstrated sufficient character not to promulgate falsehoods in others, even when they could profit from doing so.Les Stewart, MBAIndustry Investment AnalystFranchiseFool.com :: the Wise learn to say No

Differentiating Critical Thinking from Criticism

Jan,I have tried my best to provide a restrained presence because I realize a little Les goes a long way, at times. Thanks for the feedback.However, it is difficult to allow the grossest misstatements to be left standing as in any way resembling what is observable fact or objective truth.To equate patriotism with critical thinking on any issue has always seemed to me to be the refuge of a borderline scoundrel.  It tends to insult the collective and individual intelligence of all community members. Unbundling your Concern(s)Is it my nationality, numbers of words written, numbers of posts, FranchiseFool, depth/breadth of research, cafo.net, my mere existence, and/or the content of the message that you're finding unacceptably toxic? There is sometimes a conflict between:

  • an individual pundit's self-interest and
  • the preservation of unsuspecting readers' life savings.

I leave it to the rest of the Blue MauMau community to judge how my position [only invest when a reasonable level of risk is present] improves my personal net worth.Efforts to extinguish contrary opinion is inconsistent with what I have understood to be the founding principles of your great republic.In the long run, attempts at censoring heretics in the self-proclaimed Church of Franchising is unsustainable, corrosive to basic human rights and plain foolhardy.Cheap shots often indicate monetarily-compromised thinking.Les Stewart, MBAIndustry Investment AnalystFranchiseFool.com :: the Wise learn to say No

Item 20 obscurity

The statistics in item 20 provide information on units under certain categories. The category of "termination" obviously indicates an end to the relationship that results in a loss for the franchisee. The other columns that indicate transfer or sale-transfer of the franchised units do not clearly reflect that "transfers" and "sale-transfers" are generally business failures.
I think you know that franchisees can invest $200,000 and $300,000 or more in the business (their basis) -----work for nothing or for a very small salary ---and when their capital is exhausted and they haven't broken even, they fail, and in the failure they lose almost their entire investment in the business ---and many go basnkrupt and lose their homes and other assets as well.
The co-terminus default provisions of the franchise agreement; the personal guarantees, and the financial distress the franchisee is experiencing means that the business can be acquired for almost nothing in a fire sale to a franchisee standing by. The standby franchisee can make a small offer to the bank to acquire free title to the assets --- or offer the owner a small amount if the assets don't have a lien, and begin again. This franchisee has a drastically reduced basis in the business and obviously has a greater chance of survival to break-even ---because he is standing on the back of the original franchisee. The franchisor is merely inconvenienced by the failure of the original franchisee but has little interuption in the flow of royalties and commissions.
The truth is that almost all transfers in some networks are business failures and I believe that this should be clearly and plainly disclosed in this statisticsl section through the use of at least a + or a - sign. The franchisors know when their franchised units are sold at a loss; they have to approve the sale, etc.., and it would put no regulatory burden on the franchisors to separate plus transfers from minus transfers in the statistics section.
I know, Michael, that you advise your clients that networks with too many transfers are probably not healthy networks but why can't the statistical picture presented in Item 20 more clearly disclose this fact. In the 2003 UFOC of The UPS Store, they disclosed the personal information of several hundred teminations and sale-transfers and arrogantly invaded the privacy of these ex-franchisees to present the appearance of full disclosure to prospective franchisees in the UFOC. Almost all of these terminations and sale-transfers were business failures but prospective franchisees would not know this. Most of these ex-franchisees in the sale-transfer columns had signed confidentiality agreements that would not permit them to discuss their relationship with MBE-UPS or the terms of their sale of their franchised business, etc... This disclosure was a disengenuous effort to disguise the failure rate at the time The UPS Store was introduced in the UFOC in 2003.
Even attorneys looking at this UFOC would not necessarily point out the great failure rate of the stores because The UPS Store was introduced as something "unprecedented" and "new" ----under new management, etc....in 2003. and attorneys have great respect for the great American Corporation, UPS.
You know, Michael, that many franchisees who purchased in 2003 believed that they were getting something new and unprecedented and different than a MBE franchise and The UPS name itself seemed to negate the need to pay someone for due diligence investigation even if franchisees had the money to pay for independent due diligence investigation.
Those people who bought these stores in 2003 and after didn't believe that the world-famous UPS would allow a store that bore their highly respected name to suffer from unprofitability that would lead to failure of many of the new stores and unprofitability and failure of many of the MBE stores who converted to The UPS Store. They thought they were privileged to be awarded a franchise where they would be part of the giant UPS.
The failure rate of the business plan of the franchise is relevant to prospective franchisees and when this failure rate is disguised in UFOC's under the term "Transfer" or "Transfer-Sale", this permits the churning of networks to take place out of view of the public and the regulators. Does it not? The government obviously takes the view that it is none of their business whether or not these franchises are transferred at a loss or a gain and that they have no obligation to require the franchisors to disclose this information to the public.
Additionally, the statistics in Item 20 are provided by the franchisors in the UFOC's but do the states have any law to punish Franchisors if their statistics are incorrect ----or do they have any means to check the reliability of these statistics as provided by the franchisors.
Incomplete disclosure as now allowed under law tends to give prospective franchisees confidence that the franchisors that they are dealing with are regulated by state and federal laws and that they are protected from "sharks" and this in itself is a disservice to that segment of the public that invests their retirement savings, their homes, and their lives in big brand franchises. They don't view these big brand franchisors as "sharks" and thus they are eaten!
WE need TRUTH IN FRANCHISING just as we needed TRUTH IN ADVERTISING LAWS.

I Choose not to be Servile nor do I Recommend it to Others

Bob,1. Franchisors have almost unlimited discretion to exercise their near total ability to strip value from a franchise investor: whenever they choose. You seem content to advise people to enter into such a personal net worth harrowing roller coaster rides. I choose not to.2. There are good business investment opportunities in North America but they take skill to uncover, grow and harvest.I choose a conservative, medically-based model. Rule #1: Do no harm to your life savings. The failure rate in any business should provoke a cautious approach, expecially to 1st brand time renters.There is risk in life but some arrangements are infinitely risky (defined as reckless: self and others). I would not encourage anyone to use DDT to control insects nor use PCBs to clean your oily hands with.Small Business: A Surprisingly High-Skilled CareerI agree with you Bob. I flatly reject the idea that any monkey can run a small business  successfully. It takes adequate capital, hard work, technical skill, emotional intelligence, some luck and lots of perseverance.Most people do NOT have this skill set.The small businesspeople I have known (as well as the equally low-status farmers) are smart, tech savvy and discerning. They know when people are blowing smoke.Those people have my respect because they have demonstrated sufficient character not to promulgate falsehoods in others, even when they could profit from doing so.Les Stewart, MBAIndustry Investment AnalystFranchiseFool.com :: the Wise learn to say No

Differentiating Critical Thinking from Criticism

Jan,I have tried my best to provide a restrained presence because I realize a little Les goes a long way, at times. Thanks for the feedback.However, it is difficult to allow the grossest misstatements to be left standing as in any way resembling what is observable fact or objective truth.To equate patriotism with critical thinking on any issue has always seemed to me to be the refuge of a borderline scoundrel.  It tends to insult the collective and individual intelligence of all community members. Unbundling your Concern(s)Is it my nationality, numbers of words written, numbers of posts, FranchiseFool, depth/breadth of research, cafo.net, my mere existence, and/or the content of the message that you're finding unacceptably toxic? There is sometimes a conflict between:

  • an individual pundit's self-interest and
  • the preservation of unsuspecting readers' life savings.

I leave it to the rest of the Blue MauMau community to judge how my position [only invest when a reasonable level of risk is present] improves my personal net worth.Efforts to extinguish contrary opinion is inconsistent with what I have understood to be the founding principles of your great republic.In the long run, attempts at censoring heretics in the self-proclaimed Church of Franchising is unsustainable, corrosive to basic human rights and plain foolhardy.Cheap shots often indicate monetarily-compromised thinking.Les Stewart, MBAIndustry Investment AnalystFranchiseFool.com :: the Wise learn to say No

My Top Five?

I, of course, and not qualified to pick the Top Five and when the Top Five are chosen by Entrepreneur, etc.. and AARP parrots their Top Five, this is, of course, very misleading to the public, and especially so to prospective franchisees our there looking for a job and a happy life style change.
What is the criteria for the Top Five and shouldn't some kind of disclaimer accompany this kind of "ad" in Entrepreneur if The Top Five are chosen only from the standpoint of visibility in the economy and friendship with the IFA and SBA loan access. .

How to Treat Item 20 Disclosure

You said: "The truth is that almost all transfers in some networks are business failures and I believe that this should be clearly and plainly disclosed in this statisticsl section through the use of at least a + or a - sign. The franchisors know when their franchised units are sold at a loss; they have to approve the sale, etc.., and it would put no regulatory burden on the franchisors to separate plus transfers from minus transfers in the statistics section."

Suppose the market for franchises treated all transfers disclosed in item 20, not matter what the category, as complete failures. 

Everyone calculated their potential loss in the most conservative manner.

Would that meet your concerns?

Michael Webster PhD LLB

Misleading Advertising Law

YOUR Top Franchise Choice

I understand your point. Franchise buyers are in GREAT need of an honest list of franchise picks and the reasons why. Right now it is either a mysterious black box of weighted criteria or it simply is a list of fastest growing by franchise unit. Franchise buyers are STARVED for the equivalent of Wall Street stock analysts coming in and writing about their picks. They may disagree but analysts always try to one up other analysts with reasons why, ie - analysis.So, give us a franchise choice to get the ball rolling. Give me a little time to come up with a couple concepts that take advantage of long-term market trends. I like:

  • premium pet care - the market has steadily grown in this direction. Let me think of a concept that is well run in this sector.
  • ethnic fast food - Mexican ethnic concepts like Qdoba, Baja Fresh Mexican Grill, El Pollo Loco are erupting. But our number one ethnic food in America is Asian - Japanese and Chinese. The market is poorly served.

Let me come up with a little research to give these assertions some backbone. Then I'll name a concept or two.How about your selections?Frankman

Criteria for Franchise Picks

I am not suggesting, Bob Frankman, that there are not some good franchises out there. I am not stupid -----I know franchising is here to stay and you people who help people to buy good franchises from which they can make a living do a good service.
There should, of course, be estasblished criteria on which to pick the "Top Five" and an explanation of that criteria. But, to do this we need TRUTH in FRANCHISING and franchising needs to be regulated in the same manner as securities.
If the capital of those on the bottom is to be captured by those at the top for the purpose of guaranteeing royalties and profits and there is no guarantee of profits for those at the bottom, there is no good reason why government should not regulate franchise opportunities in the same manner as securities are regulated and in the interests of both parties.
Because the franchisor collects royalties even when the franchisee is operasting at a loss, it seems only fair that the franchisee be given equal protection under the law.
It seems that public policy has been developed to give the franchisor the upper hand at all stages of the franchisor-franchisee relationship. It appears that public policy has been developed to sacifice some franchisees to the fires of development in the economy because it is good for business and franchisees have a small voice. The FTC doesn't listen to this small voice and the state regulators don't want to dampen any enthusiasm for franchising and always there is compromise that gives the franchisor the upper hand. The Courts support public policy decisions.
The criteria for Top Five should not be the most visible because the most visible may not be the most viable as is evidenced by UPS and Quznos ----Top Five Picks. Business magazines should be held responsible for false advertising and false endorsement of franchise products and then they would conduct independent research and veify the accuracy of their reports to the public.
I'm sorry, Frankman, I'm just not qualified to make any selections -----That's your business.

Both Loss and Gain are Relevant ---Item 20

Yes, Michael, I know that you counsel your clients to calulate their potential loss in the most conservative manner and this is an ethical position.
But, what is wrong with disclosing the truth? Business plan failure is relevant to new prospects and so is Business plan success. In longer-term franchise operations, we would hope to see some franchise transfes in the plus column because franchises who had completed the terms of the agreement would, hopefully, be able to sell their franchised business at a profit.
Franchisees invest in franchised business plans with the view that this will be an asset that they can sell at a pofit at the end of the franchise term. The plus column is just as relevant to the prospective franchisee as the minus column in revealing the truth about the viability of the franchise they are thinking of buying.
What is wrong with disclosing the truth? Because the truth of transfer of franchises at either a loss or a plus ---or even break even ----is not disclosed in the statistics regarding transfers, networks are able to conceal the "churning" of the network from the government and from the public, and from business magazines. The network is visible in terms of the number of stores out there but in Item 20 those stores leaving the network at a loss or a gain are not ascertainable from viewing Item 20 statistics.
In start-up franchises where there are yet no statistics, the risk cannot be determined. But, in the franchises that have been around for some time, the statistics would paint a true picture of the viability of the network.
I understand that government does not want to paint this true picture and I understand that they don't know and don't want to know whether these "transfers" are made at a loss or a gain so that they can protect their position as the regulator of commerce and close their eyes to the realities of the franchisees who are sacrificed in the process of churning the appearance of viability.
This is the way of things. Is is better for business and the economy? to just indicate that there are several thousand stores out there under the Brand name and to ignore the "churning" and to allow the big brand to sell new franchises on the basis of its visibility to the public. The viability of the franchise as a business plan is a factor that is sacrificed to expediency by the regulators and the brand's visibility becomes the basis on which business magazines and respected publications like AARP tout the Five Top Franchises.
How many UPS and Quiznos franchises are sold to innocent prospective franchisees with the words "We are in the Top 5 in the Country"? There is no explanation of course that the Brand achieved this position through the churning of discounted stores and that this new prospect could be the next victim.
Malice! We need TRUTH IN FRANCHISING!

Sir Guest, your positions are untenable...

I am no friend of UPS or Quiznos. If you lost your investment in one of those brands or some other concept so be it. However your positions are impossible and yes you are rude.

Churning and Item 20

The franchisor's view is that they cannot figure out every transfer.

The regulator also believe that this is too difficult a task.

I accept this.

But, I strongly encourage the prospective franchisee community to treat every transfer as a complete failure when doing their due diligence.

And when the prospective franchisee community exercises their veto, we will see relevant item 20 disclosures.

Don't ask what your government can do for you, ask what you [as a community] can do for your government.

Michael Webster PhD LLB

Misleading Advertising Law

Sir Guest, your positions are untenable...

I am no friend of UPS or Quiznos. If you lost your investment in one of those brands or some other concept so be it. However your positions are impossible and yes you are rude.

Sanity...

You are on the right track. It is logical, responsible for franchise buyers to take this approach.

Sanity...

You are on the right track. It is logical, responsible for franchise buyers to take this approach.