The Moron's View of Franchise Investment Risk, Fleecing the Sheep

Year in and year out, people who understand almost nothing about small business investment risk and how to identify and assess it sign long term draconian franchise agreements, putting everything they have or will have on the line in impossible propositions.

One of their many miscalculations is an assumption that government regulations at federal and state levels are in place to protect them from being defrauded and to provide relief for them when/if they find they are in way over their heads and have been had.

Eventually they come to realize that there is no self executing relief from their predicament and that the way out – even without recovering the losses – costs a fortune; requires releasing all claims against the people who robbed them; agreement that they will not continue in the business under any other name as an independent; agreement that they will never say anything bad about those who screwed them (non disparagement clauses); and agreement that everything about the entire situation, start to finish will never be disclosed or discussed by them (confidentiality clauses).

The alternative is to hire a lawyer – which they no longer are able to afford – to seek redress. If they do have enough money for a lawyer, they often discover that (1) they waited too long to assert their claims; (2) the claimed misrepresentations were of the prospects for future financial performance and fraud is limited to misrepresentations about presently existing facts – not future predictions – and – very importantly, the misrepresentations about future financial performance ere not actually made in the FDD, but in sales and marketing materials and presentations on discovery day; (3) that they hired a cheap ass lawyer who failed to see that in their franchise agreements they were agreeing that they were never told the things they later claim to have been told that were false, and that they also agreed that if they had been told any porkies they did not rely on them in making their investment decision.

Frequently they signed agreements containing arbitration clauses, losing their potential rights to jury trial and agreeing that their “case” will be heard by a lawyer as arbitrator and that they are not allowed to ask the arbitrator if his practice or business includes doing business with franchisors whom the arbitrator expects to continue serve and would never find against in any dispute. You could ask the AAA to pose such bias clearing questions to arbitrator candidates under its Commercial Rule 16, but the AAA won’t do it. Your lawyer doesn’t even know in most instances to ask anyway as the refusal may give you an avenue of attack on an adverse award under the Federal Arbitration Act – which, by the way, does not provide as a basis to attack an arbitral award that the arbitrator failed to follow applicable law and even that the arbitrator’s rulings are contrary to controlling law/manifest disregard of applicable law. Manifest disregard is not even listed as grounds for vacating an award in the Federal Arbitration Act.

If these absurd, arrogant people had any snap at all, they would have accepted that in almost every instance none of them had ever evaluated a small business ownership investment opportunity, and therefore had no idea whatsoever how to go about sorting out the risks. They ridiculously believe that their “business plan” is a serious document and not some hoax cooked up to get a business start up loan approved. They would – before, not after subjecting themselves and their families to ruinous losses - have sought help from people who vet not only the legalities of franchise propositions, but also the business risks of franchise investing. They ignorantly assume that any business lawyer will do that for only a small fee, but in reality the small fee lawyer vets only the contract and disclosures from a compliance with rules perspective and won’t go near the business risks. They don’t have malpractice coverage for business risk analysis and wouldn’t know how to do that if they had to. When the bozo client asks the lawyer “Hey, do you think this is a good deal?” the response they are taught to make is “Well, it could be if what they told you is correct.”

But it is the business prospects quality of the transaction that puts you in the poor house, not whether someone said what a rule required him to say. DUH!!! Leaving that incompetently vetted is what kills you. Occasionally some of them may call a lawyer who does both the business and the legal analysis in a pre investment due diligence consultation, but when they find out that this level of assistance costs several thousand dollars while the bozo lawyer consult costs less than $ 1,000, they usually opt for the cheap seat.

They also listen to such absurdities as claims that lawyers should only give legal advice and stay out of giving business advice. Lawyers with many years of industry specific experience acquire great insights into the business issues, and their clients who recognize the value of that do not resent paying for it. Of course, it is also true that many who oppose lawyers vetting the business risks of franchise investment don’t want people to see a light shined brightly on defects that they never would have spotted without expert help. They are very vocal against lawyers with a lot of business experience dispensing those insights to potential franchise investors. Those insights have great value and the lawyers who do have that level of experience and insight charge for it accordingly. But if you resent that, you are free to put yourself and your family at risk any way you like without the higher level of assistance.

Later, when they realize that for a few thousand dollars they could have avoided losing everything they have in the world, they refuse to accept the responsibility for their stupidity and blame the government for not providing the protection they think they deserve. Some of them even go on the Internet and criticize the lawyers who charge the bigger fees for the complete pre investment work.

They demand to know why it is that franchisors can comply with what is essentially a consumer protection rule and rob hundreds of people blind with no fear of prosecution. They demand that the government provide them the protection that is provided for those who robbed them, and they don’t understand why it is that there is no equality before the law in small business investment.

The IFA has a political action committee (FranPac) that spends millions on lobbyists and spreads money and favors around legislators and enforcement people so that what appears to be a solid and effective prohibition against franchise fraud and abuse is in reality just theater, utterly transparent in its impotence. That costs money. The head franchise guy at the Federal Trade Commission used to work for the IFA and for a large franchisor law firm and expects to be welcomed back there when his stint in “government service” is done. When he is gone someone similar will replace him. If not such a person, then some academic who is so mired in theory and policy that nothing ever gets done. And in the end, if he wanted to do anything, he has no adequate enforcement resources to do it. Occasionally the FTC will act against some small fry crooked franchisor that lacks money to fight back and just rolls over. It never goes after anyone who can afford good legal representation.

Not that long ago – at least in my frame of reference – Congressman LaFalce (perfect name for this story) convened hearings looking at something called the Small Business Franchise Act, a numbers trick/charade in which the central plot was to bring good faith and fair dealing to franchising. Since franchisees failed to pony up appropriate levels of financial support and the IFA ponied it up in substantial quantities, nothing happened. It was a case history example of franchisee failure to understand government and how to participate constructively in government theater to protect franchisee interests.

People who make fortunes in apparently – but not actually – regulated business activity pay for these charades. In the first quarter of 2010 more than $ 900 million was spent on lobbying the federal government. At this rate, 2010 will end up as a banner year with $ 3.5 Billion spent on lobbying the feds. www.opensecrets.org .

One would think that franchisees would organize and build their own political and legal war chest to go out and buy the kind of protection that franchisors get. They won’t do that. They demand for free what the franchisor community has paid many millions to get. You can see them ranting and cursing on www.BlueMauMau.org and other franchise blog sites almost every week. There is an army of screwees ranting and whining about how badly they were mistreated and why doesn’t the government do something about it because that would be the right thing to do.

Government rarely does anything because it is the right thing to do. What you were taught in high school civics class and in your make believe political science courses in college is mostly fantasy. Government runs on money, not on morality. If you want something from the government you buy it, just like everything else in this world.

It isn’t your fault that governments work the way they do, and franchising isn’t the only area in which everyone thinks there is effective control when in truth there is only theater. The oil well disaster in the Gulf of Mexico is another perfect example of the appearance of effective controls under government agencies charged with assuring competent back up systems in drilling for oil and gas in that area. During the Bush administration, despite many warnings, the enforcement staff of the SEC was downloading porn on their government office computers while the sub prime securitized mortgage disaster, the Bernie Madoff disaster and the Stanford Financial Services disaster unfolded. And the list is much longer than this. Things aint what they seem.

But if you invest in a high risk activity without availing yourself of competent protective resources, that is your fault and that is your problem.

Since it is highly unlikely that franchisees will ever get together to buy themselves some government, their only practical resort is to buy really competent pre investment due diligence that vets the deal as well as the legalities. That is really the only alternative. But you are, of course, free to roll the dice with everything you have in this world and see what number comes up. Good luck.

Profile picture for user Richard Solomon

Comments

The only thing I would add

‘They ridiculously believe that their “business plan” is a serious document’ and when they hand over a copy to their assisting franchisor it will be filed away to be used against them should they get upset and then hire a limited budget lawyer [when it’s too late].  

The due diligence message is easily delivered to those who are reached.  Probably one of the little frustrations; those who are reached come and go, rarely a comment, nothing to count, they just wonder off and either get expert advice or just wonder off.  Oh well ..

This description of non-participating government is not limited to the US. It is exactly the same in every layer of franchising in Aus and I suspect everywhere else in the ‘civilized’ world.

Re: The "Moron's" view (Ray and Richard)

Richard, I am the one who started this whole thing. I am somewhat disappointed having expected a more cynical and sarcastic tone so I guess the popcorn and soda will have to wait for another time.

There is little to disagree with here. In this blog you very specifically mention the need for franchisees to collectively seek changes. Your messsage in this respect has changed somewhat from previous postings. Your prior comments and postings railed against franchisees expecting their hands held yet here you acknowledge the need for franchisees to band together to force legislative change (although you are not holding your breath). You also explicitly acknowledge that franchisors are having their hands held and are seeking "protection" from the federal government thru payoffs (I'm sorry, "campaign contributions").

My main disagreement with you and others who "blame" the franchisee is this: It seems to be acceptable that a fraud took place JUST because the franchisee didn't figure it out in the first place. You mentioned several situations above : Madoff, well, he is in jail, the government confiscated his assets, distributed it to his "marks" (albeit a small percentage of what is actually owed) and continue to seek redress by investigating his family. BP, well, the government is charging them for the cleanup ($450mm as of recently) PLUS having to pay those whose work has been interupted by this debacle and more legal and financial issues will be resolved after they first get the leak under control. The Stanford mess, well, he is being charged with fraud.

The difference, Richard, is that the government DID IN FACT get involved in these cases, and those involved are seeing jailtime and fines as a possibility. Is there ANY similarities between these cases and franchisors? Other than the fraud being perpetrated, no. Franchisors have "legalized" the fraud because of their lobbying and corrupting government officials.

Your argument that "you should have done better due diligence" can be worded another way: "you didn't figure out the fraud in the beginning so its ok that the fraud occurred - just suck it up". WHERE ELSE, in our society, does this occur? Surely not in the situations you selected to highlight.

Lastly, I have been reading on BMM that the Coverall case (employee vs. independent contractor) is the biggest case and most damaging to franchisors. I would argue differently. I believe the most damaging case to franchisors is the SEC case against Goldman Sachs. The issue? Deustche Bank, one of the largest and most sophisticated investment banks in the world, is claiming that even with all their expertise, there is NO WAY they could have figured out the mortgages backing the security they purchased was more likely to default than pay thru maturity. Deutsche Bank is claiming that Goldman Sachs, who had knowledge that these mortgages were more likely to fail, did not disclose this information to Deutsche. The SEC, apparently, agrees. There should have been more disclosure enabling Deutsche to be able to make a more informed decision. Do you yet see the similarities between this case and franchising, Richard?

Franchisors know that most of their systems do not work. They know that losses will be ongoing for years and few actually turn profitable. Just like Goldman, they do not disclose the real information. Unlike Deutsche, franchisees are NOT sophisticated enough to have a chance in hell in figuring it out. YET, Deutsche, even with their expertise, could not uncover the situation without further info and the U.S. AND British governments are stepping in. If Goldman loses this case and the SEC is able to make claim about disclosure, THIS will be the most damaging case to franchising and could be a watershed case in stronger protections for franchisees. (I am not an attorney so I would like to hear your thoughts on this.)

Wrong conduit

Guest,

Excellent comparisons.

There is no evidence to indicate that resources funneled through either (1) an IndFA or (2) an "association of IndFAs" would be effective at any level.

Indeed I would suggest that this mimicing the IFA's purchased top-down strategy is the very worst way to garner long-term policital influence.

Politics always follows (it never leads) grassroots public awareness.

Create a virus: It's called Franchisee Pride.

Wrong conduit

Guest,

Excellent comparisons.

There is no evidence to indicate that resources funneled through either (1) an IndFA or (2) an "association of IndFAs" would be effective at any level.

Indeed I would suggest that this mimicing the IFA's purchased top-down strategy is the very worst way to garner long-term policital influence.

Politics always follows (it never leads) grassroots public awareness.

Create a virus: It's called Franchisee Pride.

PAC Money

 Les writes: "There is no evidence to indicate that resources funneled through either (1) an IndFA or (2) an "association of IndFAs" would be effective at any level. "

Yes, so far the evidence doesn't exist.  But isn't that why we are all going to Chicago to chat with AAHOA about this possibility?

A Mari Usque ad Mare

Michael,

Yes, and I would defer to your experience since I haven't gotten out much in the last decade or so.

I barely finished gold-foiling our coat of arms on my passport/passeport before the IAFD conference last week. Impressed as hell, btw. [From Sea to Sea]

Looking forward to the discussions on overcoming the IndFA tyranny of the democratically-enabled stupidity dilemma.

A Mari Usque ad Mare

Michael,

Yes, and I would defer to your experience since I haven't gotten out much in the last decade or so.

I barely finished gold-foiling our coat of arms on my passport/passeport before the IAFD conference last week. Impressed as hell, btw. [From Sea to Sea]

Looking forward to the discussions on overcoming the IndFA tyranny of the democratically-enabled stupidity dilemma.

Per aspera ad astra

When in doubt, whip it out. You don't win if you don't fight.

The question, therefore, is how long do you talk about something before you recognize that talk aint cuttin it?

Why would anyone concede a revenue opportunity - regardless of any fairness isue - before you put something convincing up against his short and curlies? 

It should come as no surprise

to anyone that I assemble that remark.

It should come as no surprise

to anyone that I assemble that remark.

Government does protect franchisees

Just you ask the FCA and the IFA and the FTC and the ACCC. Admittedly the confession varies depending on the audience but ifin they say they protect then why is there so much franchisee confusion about whether they should or not, do or don’t …

Best time to contact any of these is probably 4.55pm on a Friday ifin you want some honesty.

I did notice that Les ... I thought briefly that it was the camera angle ...

I disagree. The petroleum industry paid off congress to pass

legislation limiting their exposure in catastrophic event cases. There is no responsibility for most of the real colateral damage - injury to other businesses affected by the blown out well - injury to future reproductive health of the affected ecosystem.

Putting people in jail in spectacular single event fraud cases is nothing at all like the epidemic of fraud and abuse in the franchise industry today. They are not comparable and even in those cases the victims will never be made whole.

People are responsible for failure to take effective available steps to reduce critical risk in franchise investing. While fraud will not be exonerated, it will not be reduced either. They are not going to get together and buy some government. So their only self protection resource is really competent pre investment dfue diligence on the deal being offered.

If they don't get it they will keep on getting fleeced. If they don't establish early on aggressive independent franchisee associations, they will continue to suffer unspeakable abuse. The ball is in the franchisees' court - like it or not.

Re: I disagree (Richard)

Richard, the jury may still be out on BP so I will give you (partially) that one. They will be paying huge damages down the road - maybe not equivalent to the total devastation but has a franchisor ever done the same - at the hands of the federal gov't? As for the other "spectacular single event fraud cases", you brought them up, not me. Regardless, the government was/is involved with all of them.

Beyond that, I agree with your comments. Yes, franchisees, (especially potential franchisees because current ones have already signed the papers) need to watch out for themselves. However, WE need informed, (dare I say) "intelligent" people like YOU to encourage franchisees to speak out 'together', not discourage, deter or denigrate those wanting to do something as needing to pull up their "panties". As I said, franchisors have sought "protection" and have had their "hands held" for decades. Time for franchisees to take the gloves off.

Lastly, any comments regarding the Goldman case?

Lest We Forget

There is an issue here that can sometimes be forgotten with the majority of focus being on educating those that haven’t signed.

Many existing franchisees create huge problems for themselves when they find out they have been cheated. Brains trumps anger every day especially when there is a contract running and a template system designed to deal with loud mouths.

Those franchisees need an expert lawyer just as much, if not more, if they are to minimize not maximize the damage. And mostly they go to half-wit lawyers that don’t know didly squat about franchising and just drain the final few dollars while they get an introductory franchising education and achieve nothing for the franchisee before they accept the client is busted a-broke and they walk of course. 

I might suggest that Madoff went down because he took too much money from too many of the wrong people.  The wrong people had the level of money that brought out the real entrepreneur in Bernie.

The Cost of Government Disclosure Regulations

Guest wonders:    "If Goldman loses this case and the SEC is able to make claim about disclosure, THIS will be the most damaging case to franchising and could be a watershed case in stronger protections for franchisees. "

What you are assuming is that the stronger protections will lower the pre-purchase economic cost to a prospective franchisee.   Not going to happen.

More rigorous disclosure laws simply make due diligence more expensive because of the documentation to wade through.  Especially when you get paid by the hour to read.

(We have the same type of securities fraud we had pre disclosure - but the frauds just cost a lot more.  

Of course, you could continue to rely upon the Government to collect from wrong-doers - currently they are averaging around 15 cents on the dollar for securities fraud.)

There is simply no way around it: good pre purchase insurance costs money, which most franchisees will not pay. Increased government protection is not going to lower this cost, it will raise the cost.  (A result I am perfectly happy with as an attorney.)

Michael, perhaps I didn't

Michael, perhaps I didn't make my point. Tell me, how many banks would make a loan to help purchase a franchise when the "documentation" proves the system doesn't generate a profit? How many franchisees would buy into that same system armed with that same info? Maybe, in the beginning, there will be more money spent by franchisees because of this more extensive due diligence. However, as time passed, with no one buying into those systems whose docs prove (once and for all) their non-profitability, those systems would cease to exist since they could not generate enough sales of their systems.

As for your "$0.15" on the dollar recovery, you are comparing apples to oranges. That number refers to recovery AFTER the fraud has taken place (again, with the gov't at least stepping in which it doesn't do with franchising). With increased disclosure (what Deustche is now demanding - and they ARE a sophisticated investor) there will be far fewer "recoveries" since far fewer systems will be in existence.

Market Fraud

Guest writes: "With increased disclosure (what Deustche is now demanding - and they ARE a sophisticated investor) there will be far fewer "recoveries" since far fewer systems will be in existence. "

No.

Increased disclosure regulations have never lowered fraud, they simply raise the barrier for entry.  Once passed that higher barrier, the fraud does more damage.

There is no silver bullet against fraud.  

No regulations.

No government.

No free help.

Even paid expensive help may not work.

Stop dreaming about the "power" of disclosure.

Michael is right; greater disclosure often makes

frauds more sophisticated. I could show you a whole cupboard full of files where the ability to conduct a fraud was contained in one sentence in a prospectus over 50 pages long.  Even then, it did not look like a fraud - it was only the mechanism for the fraud to occur once it was triggered.

It is the same with franchising - it is not necessarily what you are told that does the damage, it is how it is used.  For example, take the entire 'end of term' debate - if a franchise/license is purchased for a 10 year term (which is disclosed) and the license expires in the normal course should the franchisee be entitled to any goodwill attaching to the business built under that license? 

Many agreements clearly say "no", but that does not stop the arguments that it is 'unfair'.

It is the explanation/interpretation that is the key to good advice, and this ability generally improves with experience, not greater disclsoure.

Simon you remind me of

a point I had forgotten for a long time and you just made it. 

When I was a franchisee my franchise agreement had existed for some years and it wasn’t a problem under the then franchisor.  Then under the same contract with a new franchisor all hell broke out leading to around 190 franchisees [within a system that averaged at 100 franchises] being badly burned.

That contract did evolve into something tougher [many lawyers would suggest it was refined to cater to new franchisor 'risk'] but in the majority of collapses it was the existing ability to toy with the Operations [Standards] Manual to profiteer from franchisees and destroy what was once a producing financial model.

I doubt very much that such a mechanism doesn’t exist in any franchise agreement with the variable being the finger on the trigger. The freightening thing is that the mechanism is almost always for sale.

Re: "Moron" franchisees story - Richard, Michael, Simon, et al

First, I am the "guest" who "started this all" with Richard and I have been commenting along with this string.

Having read all of the statements from Michael, Richard, Simon, et. al., perhaps I am missing something - but I doubt it. The difference between franchising and EVERY case and instance each of you have cited is simple: in franchising, THE FRAUD IS LEGAL!!! Will attempts at fraud continue - YES. However, has government eventually stepped in and stopped the fraud and rejiggered the laws to shore up the loopholes, YES. Franchise fraud occurred over decades. Why? Because the laws are written to allow it. Did Enron break the law? YES! Worldcom? YES. Madoff? Stanford? However, their cases were not legal and the government stepped in.

I am a VERY conservative Republican and do not favor a huge government presence. However, allowing "the marketplace" (what a joke - especially when one party is significantly more powerful than the other) to figure it out has done nothing in this instance. The franchisors pay big to market the 'power of franchising' and few people - INCLUDING lawyers and accountants nationwide - are unaware of the problems. AND what franchisors are doing is legal!

Eventually, disclosure works. I provided an attorney on this site some "information" not too long ago. I gave him the actual first year gross revenue numbers for my franchisor (which they did not provide when we signed on and I believe they published unaware of how 'telling' the info really was and don't do anymore) and it was clear: why would anyone buy this thing? Their own numbers show that franchisees were going to lose in the vacinity of 6 figures in the first year (second year not much better). Had I known that would I have placed my family's financial future on the line? Hell no! Information like that changes the landscape. As for the comments about the SBA, you would be surprised how stupid they are and totally unaware of the game that is being played against them.

Would Deutsche Bank have purchased those bonds if Goldman disclosed that the underlying collateral was selected because it was expected to implode? Government regs may not be perfect but it does create a buffer. Those "scams" you mentioned are not every day run of the mill situations - they are few and far between. Most important, when the fraud does occur it can then be addressed. Tell me, how many franchise frauds can you say that of? They continue because there is no real disclosure and no laws to stop it. If a premier, world class investment bank can be hoodwinked with just one piece of the puzzle missing (and they are experts on the product) what chance do franchisees have in deciphering the credit worthiness of a franchise purchase (yes, investment) when little pertinent info is disclosed?

Agree with Simon

Simon writes: "It is the explanation/interpretation that is the key to good advice, and this ability generally improves with experience, not greater disclosure."

I agree with this, and it explains why disclosure is either free or very expensive - either it is a gift born of experience or you pay for it.  And in order for the experience to translate, the attorney has to do a great deal of work.

As a devout conspiracy theorist, I have always believed that

disclosure documents were haystacks in which the writers concealed needles. The more text, the more "stuff".

Many years ago I started - more as a personal game than anything else - looking for the undisclosed. The trick in prospectus verbosity is more likely to be in what is not said than in what is said. As a conspiracy theorist, I see every disclaimer as a window on a needle.

If one says something and then follows it up with a disclaimer, the message is that what was affirmatively said is a trap of some sort. Just using that little exercise on any FDD Item 19, and then taking into account the additional overall disclaimers that are called Acknowledgments, Entireties/Merger clauses and the Non-Reliance clause, and you start coming to the conclusion that what you have just been loooking at does not include most of what you need to know in order to assess the investment risks.

You have to do your homework on "stuff" that is nowhere to be found within any FDD if you are going to even begin to assess franchise investment risk. Then one day I was drafted into a group of lawyers within a large wall street firm to review a draft public debt offering prospectus. The only thing anyone looked for was typing errors.

When the lawyers review a prospectus only for typing errors, they are distancing themselves from all the substantive shenanigans, not contributing to the inherent quality of any message to investors.

That is how the franchise firms deal with franchise fraud. The lawyers who prepare the FDD are only looking at the "work" from the perspective of rule compliance - have we said something that complies with what a rule says we must say or disclaim? Whether what is said is false or misleading never enters into the scope of the work of any FDD preparer. The escape hatch is that the lawyers rely upon the other contributors to the "work" and accept as given that that work is as it should be - without question.

We saw that even the most upidy big time accounting firm that pontificates all over creation about professionalism will willingly become complicit in any scheme if the client is a big customer - Arthur Anderson in the Enron debacle. We saw in that same case that the lawyers relied entirely upon management's descriptions of transactions in making a determination of whether the transaction's documentation was telling the whole story ' the Andrew Fastow Raptor Deals in the Enron debacle. No lawyer asked any "due diligence" question about any of the Raptor deals - such as for example "Does this document really describe all the terms of the transaction?"  The lawyers in question were not novices.

Add to all that the generally accepted belief that the more you say in any disclosure document, the less likely it will be that anyone will even read it; and to that add the additional dynamic that no one who reads it will read it for inconsistencies. Now you have the real reason for disclosure document verbosity. No disclosure document is ever prepared for the purpose of making effective disclosure.

Appreciation of disclosure documents

I think that will change a lot of peoples' appreciation of disclosure docements. Maybe not so simple but the concept is.

I have to do that all the time with various documents sent to me but they generally don't come with any disclaimer flags. The first I thought of was CVs where I initially only contact those who aren't listed as references. Lease agreements are another. Complaints another ... the list is endless but the approach is common sense. Nice one young Richard.

  Michael, perhaps I

Michael, perhaps I didn't make my point. Tell me, how many banks would make a loan to help purchase a franchise when the "documentation" proves the system doesn't generate a profit?

Take  a look at the data.  They already know that the majority of the operations are not viable.  That is why they reject the loan application when they are playing with the banks money and wait for a nice SBA guarantee.   And this goes on right in front of the prospective zee who should ask "why is it the bank insists on a Government guarantee on this loan?"   Of course they do not ask nd sign on the dotted line!  You cannot cure stupidity through Government mandates unless you sterilize those with IQs below 135.

There is no I Q number above which one does not encounter

rampant stupidity. I Q is not a measurement of perspicacity. A law professor of mine once made this point by directing the class to go to the university library and observe the phi beta kappa types engaged in regluing the spines of old books.

How many mensa types bought into franchises like Huntington Learning Centers within the last five years? And is Sylvan any better?

Part of this syndrome results from "teaching to the test" - teaching "students" how to pass tests rather than how to deal with sorting out real issues through insight.

Insight trumps I Q every time.

I'm glad you brought this up

because on the proposed qualification I would have been discomfited years ago.  I have the last laugh however; fortunately my children have their mother's talent and intelligence.

Deterrents

Simon I’m sorry to intrude on your confession but what of the deterrents in particular being proposed in the SA Franchising Bill? Worthwhile or not?

Of interest;

Remedy?: 'People should have access to a range of options to resolve disputes but there should also be a proportionality check on which options are selected.

Not all matters need to go to the High Court for determination, nor can all matters be resolved through mediation.'

Billable Conflict: Western Australia's Chief Justice; ‘there was an inherent conflict between a client's wish to have a dispute speedily resolved and a lawyer's interest in billing time.’

Always scope for improvement in using ADR

One of the big issues in franchising (both here and across the pond it seems) is that of effective dispute resolution.

People should have a range of options.  Currently the options are:

  1. try to work it out relying upon the good faith and intent of your opponent;
  2. Mediate (see above, but add an independent person with no power to impose a decision); or
  3. Court (it usually takes longer than you need and costs more than you are prepared to pay.  A decision is made, but within limited parameters).

Because of the lack of other viable options many people end up with the fourth option - the pineapple (as in, nothing can be resolved and you just have to wait for it).

The SA Bill has a genuine stab at providing a further option, but I have concerns about the process.  I do not believe that a Government Dept. should have the power to determine a dispute without accountability.  Even so, the SA Bill brings into focus the current shortcomings in the system and the difficulty of finding a better replacement.

As far as the conflict between a lawyer's billable time and their client's interests goes, I do not consider this to be a significant issue in the sense that clients are being deliberately misled (or milked).  In my experience the overwhelming majority of lawyers do their job to the best of their ability with the client's interests as their first priority. 

More of a problem is lawyers assuming they can handle a matter but they are really not up to the task ; adapting the classic line - their egos are writing cheques their professional capacity can't cash.   

In franchising particularly, a good lawyer will often cost less in the long haul than a cheaper lawyer without the same experience.  This point has been raised plenty of times before on BMM and it is still one of the "experts tips" for new players. 

Advanced ADR

Simon writes: "In franchising particularly, a good lawyer will often cost less in the long haul than a cheaper lawyer without the same experience.  This point has been raised plenty of times before on BMM and it is still one of the "experts tips" for new players. "

The big problem here is one of mind set: some attorneys are like pure mathematicians always seeking the final correct answers without regard to cost.  The alternative, the A in ADR, is to use techniques so that people with different preferences, risk tolerances, or views about the world, can make a deal instead of seeking justice.

Creating these devices is one of the problems that the IAFD is working on with other experts.

Curing Stupidity

The esteemed Fuwa writes: "You cannot cure stupidity through Government mandates unless you sterilize those with IQs below 135."

No, the problem is with having sufficient skeptical experience - to always ask "what's in it for the other guy?".  If you don't know that answer, don't know how to test it, and aren't sure of your answers to the first two questions, then fold and leave the pot to someone who does know.  

and the Barrister chimes in....

No, the problem is with having sufficient skeptical experience - to always ask "what's in it for the other guy?".  If you don't know that answer, don't know how to test it, and aren't sure of your answers to the first two questions, then fold and leave the pot to someone who does know.

Since the good Barrister was kind enough to riposte my post into something of substance I'll attempt to reply with something of substance.

I reviewed the Barrister's point and will simply say I think he is off the mark.  My experience has been that many people can tell you what is in it for the other guy, they are simply so blinded by their own greed and cocksureness of their success that they are arrogant enough to consider the other guys gain as mere table scraps that they will toss him as his just desert.

I encountered this not 4 months ago.  I was trying to get the chap to realize how the zor gets paid on ever dollar coming through the door whether profitable or not and he simply could not see the issue because he knew better than anyone else who attempted to be successful with this franchise and location.  He was convinced the previous operators did not follow the system, did not control their costs correctly, and did not run lean enough.   

Back to your point and the one I am trying to make, I think often people do see what the other guy gets, it is just that many are deluded into thinking they really are the ones taking advantage of the other guy.

Re: "Moron's" - Is disclosure as difficult as you think?

The more comments I read from the specialists here the more I feel that you guys don't want franchisees to know the real information on their own. I don't know the reason, but I think you make it out to be much more difficult than it truly is.

Let me give a little "for instance". I bet that if a franchisor was forced to provide for each year the total number of brand new franchise sites and the average gross revenue for those first year sites, with mean and median (a very easy process since 99% of franchisors know exactly what each site does thru computer tie ins), it would provide just about enough to know if they are even profitable from the get go. (Franchisors will also know that with an approximate gross comes with an approximate expense number - i.e. so much gross means so many sandwiches sold which cost "x" to make, etc.) Rent, insurance, personnel etc is for the franchisee to find out.

A franchisor whose first year sites only average $250,000 but need $450,000 - $500,000 to turn a profit is not one in which someone would want to invest their money. All of this talk about "hidden" verbiage and the meaning of "y" is all well and good. But, if forced to disclose the real numbers? - it might work even better if each of those "first year franchisees" sign off on their gross numbers and each is listed out separately in the FDD so not only is the franchisor on the hook with the average but the franchisees can no longer lie about their "success". (Although audited numbers signed off by the franchisor's accountants should suffice.)

I understand there are other parts of the contract that are very important. But the real key is not the marketing or anything else, it is the profitability of the system. Forcing disclosure of those numbers is the key. Which is exactly why franchisors fight this very point to the death. The rest of the contract can be "interpreted" but the numbers show financial viability. Realistic? I don't know.

But with all of you shouting financial disclosure down by claiming how much worse it would make the process, it definitely makes me wonder why.

Guests Who Post

Guest writes:   "I bet that if a franchisor was forced to provide for each year the total number of brand new franchise sites and the average gross revenue for those first year sites, with mean and median (a very easy process since 99% of franchisors know exactly what each site does thru computer tie ins), it would provide just about enough to know if they are even profitable from the get go."

Yes, if there were mandatory item 19 disclosures, financial performance representations, certain aspects of due diligence would be easier.

But, of course, you know that there is no mandatory item 19?

You know that only 25% of franchisors give an item 19?

And you know that you cannot rely upon supplementary information needed to make the item 19 claims verifiable?

Right?

Michael, I do realize that

Michael, I do realize that item 19 is not mandatory. This blog was written because Richard was always coming down hard on franchisees banding together to make changes: some of his postings referenced "panties" and, basically, just accepting that franchisees made a dumb decision and to just suck it up. I attacked him (see below) on another blog at BMM (Tombstones) which resulted in this blog.

"Are we seeking government "protection"? Well, franchisors are doing it, aren't they? The very thing Richard rants negatively about (getting legislatures to help protect us from fraud) is EXACTLY what the franchisors do every day with their lobbyists and legal friends (some of whom are Richard's, no doubt). So, when he rants and raves about "growing a brain" and that franchisees don't need the government to protect them, think about how much money is spent by franchisors every year to do exactly that. The laws have provided great "protection" to franchisors over the years - allowing Richard a generous income by providing him with an overabundance of clients."

My goal is to get franchisees to fight FOR disclosure. My second point, to back up my cause, was, if Deutsche Bank, a preeminent investment bank, can be "frauded" due to one (significant) item not being disclosed - with all their expert analysts, accountants and investment bankers at their disposal, how the hell does a franchisee stand a chance - regardless of all you guys placing yourselves on pedastals.

The SEC, as well as their British counterparts, are now going after Goldman. NOT informing Deutsche that the underlying collateral was more than likely to fail seems to be a pretty damning omission by regulatory standards (see any similarities to franchise failures on that one?). I believe, should the SEC succeed, that this could be the most important legal case for franchisees in decades. A 'watershed', if you will.

Yes, item 19 is not obligatory. That is the problem. Much more so of a problem is the "Silence of the Lambs" - Franchisees. For this, Richard's blog is appropriately titled - "MORONS". However, Richard, you and the other specialists here, instead of encouraging franchisees to speak out and rally together, tend to shout franchisees down telling them "we know best" and NOW you speak out AGAINST more disclosure.

Where the hell are you guys going with this? If you are on the side of franchisees then rallying them will bring about change. Denigrating and humiliating sure as hell won't. And, yes, the financial disclosure I suggested before is THE most important aspect of the disclosure argument. Which is exactly why franchisors fight like hell to make sure it doesn't happen.

People who think they will get for free what franchisors pay

millions for are self denigrating - and - yes - they are morons. They are even more moronic when they risk everything through ignorance and stinginess. Then they wonder why it is that they get fleeced. Can anything be more moronic than that?

I do not ever - and will not ever - rally anyone to seek for free what others have to pay for. Protection is valuable. That's why government does not provide it for free except in extreme situations - and in those situations there is payment of another kind - not cash.

Why, for example - do you think the Democrats championed civil rights? Do you think that Democrats are more altruistic than Republicans? If so then you are a moron too.

Democrats championed civil rights and voting rights for minorities in America bacause they believed that if the minorities got protected voting rights, they would vote for Democrats. Wake up, bozo. 

Re: People who think they will get for free

Richard, your original argument was that franchisees should not expect to have their "hands held" by the government, that they made a dumb mistake, suck it up and pull up their panties.

If your argument NOW is that it will cost money - then there is no argument.  I agree and have always agreed with that.  There are thousands more franchisees than franchisors so it will take a relatively insignificant amount of money from each franchisee to establish a war chest many multiple times more than what the franchisors have.  Protection IS valuable.  If you reread the quote I published in my last comment it will tell you that it was that very same "protection" for the franchisee that you railed against.

So my question to you is:  Which argument are you making?  The one which started your blog in the first place (that "protection" is for "sissies" - even though that is what the franchisors make sure they get) or, now, that it will cost money?

I have never said this would be easy.  Just that franchisee leaders like you, Michael, et al (who are very intelligent and, yes, fight FOR franchisees) need to put forth a much more positive message that combining franchisees voices AND wallets can change the landscape down in DC and level the playing field.  AND that holding hands with government regulators can be a very positive experience (just ask the franchisors).

I am an amateur

Hey. McLuhan and Tom Wolfe were on week on TVO last week. He looks pretty good for someone who's been dead for 30 years.

He's a moron about the manufacturing of news.

Professionalism is environmental. Amateurism is anti environmental. Professionalism merges the individual into patterns of total environment. Amateurism seeks the development of the total awareness of the individual and the critical awareness of the ground rules of society. The amateur can afford to lose.

In big industry new ideas are invited to rear their heads so they can be clobbered at once. The idea department of a big firm is a sort of lab for isolating dangerous viruses.

I am an amateur

Hey. McLuhan and Tom Wolfe were on week on TVO last week. He looks pretty good for someone who's been dead for 30 years.

He's a moron about the manufacturing of news.

Professionalism is environmental. Amateurism is anti environmental. Professionalism merges the individual into patterns of total environment. Amateurism seeks the development of the total awareness of the individual and the critical awareness of the ground rules of society. The amateur can afford to lose.

In big industry new ideas are invited to rear their heads so they can be clobbered at once. The idea department of a big firm is a sort of lab for isolating dangerous viruses.

Peoople like you can put forth the "positivist" messages.

I am a realist. I know frachisees are not going to write these checks. Before the shyte hit the fan in your franchisee life, you weren't writing any checks for the glory of the ultimate good either. Your fellow franchisees - in deep doodoo right now - still aren't writing checks for their own good yet. I am - as you know - somewhat familiar with the issues in what used to be your franchise system. It is a text book example of franchisees not yet totally destroyed financially - just waiting around complaining but not interested in taking any proactive steps on their own behalf - mainly out of fear and the desire not to have to write checks to lawyers.

That's OK, but they will be on here with you soon enuf lamenting their sorry state.

Dream on, OldSport

Oldsword doesn't get it

You'll never collect $10 from every franchisee to build a war chest to lobby Washington for your foolish barbarians at the gate program. You want a war and you will lose before you begin, because you are Oldsword the coward and loser. I guess you don't understand that franchise buyers will continue to buy crap franchises since most will never get due diligence right. Being too lazy and cheap is the enemy of the franchise buyer.

HK

Jumping into a Debate

Guest writes: "This blog was written because Richard was always coming down hard on franchisees banding together to make changes: some of his postings referenced "panties" and, basically, just accepting that franchisees made a dumb decision and to just suck it up. I attacked him (see below) on another blog at BMM (Tombstones) which resulted in this blog. "

When you jump into a debate, it is often hard to understand the whole thread, especially if we cannot tell what you have read before because you are a "guest".

Here my positions, enunciated over the last 6-7 years.

1.  Franchisees won't pay for real due diligence when they get their FDD because of cognitive dissonance - having found their perfect business they won't do anything more than look for confirmation in the 10 or 14 days afterwards.  Everyone knows this and adjusts their selling pitches accordingly.

2.  Yes, item 19 should be mandatory, but this will increase and not decrease the cost of due diligence.  Revert to 1.

3.  Properly educated franchisees are a boon to a franchise system - who should pay for this education?

4.  Due diligence would not be as necessary if prospects would work at minimum wage for 6 months in their favourite franchise to understand the business.  Dominos used to promote this idea, but I am not sure if they continue.  Chik-fil a also does this.

5.  Substantive fairness legislation usually is too late to solve real problems.

6.  Franchisees are their own worst enemy seeing themselves as only independent operators, instead of interdependent operators.  Go to 1.

And here is a new idea I am playing with.

7.  Eliminate all disclosure laws but make exits from the system simple, inexpensive, with no restrictions on competition.  Or at least amend the disclosure laws to allow for this exemption.  You make a bad deal, and you are out of it with minimal pain or fuss - something like no fault divorce.

 

Lawyers in shepards clothing.

One of their many miscalculations is an assumption that government regulations at federal and state levels are in place to protect them from being defrauded ……

Lawyers and advisers are major contributors to this miscalculation.  The first thing Moronic lawyers do when advising on a franchise agreement is to point out the applicable code or legislation and launch their  advice from this precarious platform.

I’m yet to meet the franchisee whose lawyer told them that regulation was useless before they signed.

Instead , regulation and the false notion of government relief is  reinforced both explicitly when they advise that “bodies such as the ACCC are there to protect  you” and implicitly  when they critique the contract against itemised requirements of the relevant regulation and little else.

……they would have accepted that in almost every instance none of them had ever evaluated a small business ownership investment opportunity, and therefore had no idea whatsoever how to go about sorting out the risks.

Yes, that’s why they put their trust in a lawyer and an accountant to advise them against any moronic decisions. This is where people with a criminal background have an advantage over your average wannabe franchisee, they know just how bad lawyers can be when they  proffer advice about things they have no experience in. The rest of us  rely on cheap ass lawyers because we don’t know any better and because the real professionals are hard to locate.

If most of us are getting cheap ass lawyers then there is not much potential for any of us to be referred to someone better. If higher quality lawyers with experience want to penetrate the franchise market better might I suggest that they do more pro bono work so that they can influence the referral mechanism towards themselves more often?

The illusion of a well regulated industry is like the chairs in a theatre, franchisees sit down for the show and think well this is alright the chairs are comfy and supportive and there are lots of people in the theatre with me just like the ticket seller told me. The curtain goes up and suddenly they  realise that if they want to see the stage they’re going to have to stand up.

A good lawyer would have advised me that if I was looking for somewhere comfy to sit down that I probably should not attend the theatre.

It is extremely hard for a potential franchisee to identify a franchising expert from amongst the population of advisors. Lack of experience with  law firms, the inability to make proper comparison, lack of formal qualifications for advisors, and the fact that you don’t realise how bad the advice you got actually was until it is too late further compounds the likelihood that franchisees will get cheap seat sellers and bozo lawyers.

There is an army of screwees ranting and whining about how badly they were mistreated and why doesn’t the government do something about it because that would be the right thing to do.

I disagree here. Franchisees don’t want the government to do something because it would be the right thing to do, they want them to stop pretending that there is any protection in the first place.  If my tax dollars are funding a body that purports to protect franchisees then they either need to do what I pay them to do or they need to stop pretending because the pretending  is doing major damage. The pretence  is perpetuated by the very same lawyers that franchisees  engage to protect their interests. 

One would think that franchisees would organize and build their own political and legal war chest to go out and buy the kind of protection that franchisors get.

I don’t know why you would think that.

If I am a franchisee who is doing well and have few problems I’m not likely to use my money to campaign for better protection even though I am in the best position to afford it (even if perhaps I should because things can change.)

If I am a franchisee who has been screwed I will see the need for better protection but I’m still not going to pony up the money because by the time the war chest campaign contributions have had any effect my franchise contract will be over and there will be no benefit for me. Just look at how long the Australian senate inquiry is taking to implement anything.

You’re asking all those who have been defrauded to cough up to prevent the next person from being defrauded.

How moronic these suckered franchisees are to not want to pay money they don’t have for something that will never benefit themselves.

Lets ask all those who have lost both arms to raise their hand if they want to campaign against door knobs….

I’m fairly sure that Richard would want me to lay the blame at the feet of cheap ass lawyers, as he does repeatedly, because its good for business.

(Incidentally, so is denigrating his panty wearing marketing department; which is us screwed  and whining franchisees. Higher priced OR higher quality lawyers need us to whinge so that we highlight the need for their services and  increase consumer perception of the value of those services, so it's really no surprise when the insults come out. It gets us all fired up again about how we were screwed.)

But I don’t see this conclusion as a reason to buy off government for better protection as Richard suggests we are all morons for not doing.

I think the most logical thing to do with a war chest is to use it to expose elements of the legal industry who are too greedy to tell their client that they have no idea what they are doing and to establish a framework of qualification for advisors who vet franchise risk.

I don’t blame the govt for not protecting me, I blame the lawyers who told me they would and for taking my money in return for pointing out some typos. They are the ones who failed to protect me.

After all, govt’s change frequently so the fight would never end whereas lawyers are typically lawyers for a lot longer than the term of government.

Why go after a government that fails to protect when the real issue is with the people who were actually paid to protect your interests and failed.

Before anyone accuses me of  disliking lawyers, Id like to point out that my cat thinks she is a lawyer (she once puked on my  contract) and we get along just fine.

Blind Advice

 The Blind writes: "I don’t blame the govt for not protecting me, I blame the lawyers who told me they would and for taking my money in return for pointing out some typos. They are the ones who failed to protect me. "

Uh, going to bet a) you didn't listen to your lawyer, and b) you don't have anything in writing about what your bad lawyer didn't tell you.

Yep, totally blind.

And that's partly my point. I didn't know how to differentiate between his experience and his ego. If I had of, then I wouldn't have placed so much weight on his advice and would have gone elsewhere.

I listened to his itemised comparison between the DD and the Franchise code and listened when he said that it complied with the Franchise code (which it didn't) and was therefore probably resonably sound if I was happy with the Financials.

I was happy with financial projections but a lack of communication between the lawyer and the accountant led to me having a business plan that was not compatible with the legalities of the contract. My business plan hinged upon competitive cost price with the franchisor "making no margin" on my stock purchases however the contract  allowed for something completely different by way of ambiguos wording and the operations manual. That is just one example.

In answer to b) Of course I cannot produce the impossible of having something  that says that something wasn't said.

But I do have something in writing showing that he said the opposite of what he should have said when I asked about government regulation of franchising and whether the government body responsible would assist me should it all go to the dogs.

Will that do?

Specialists and other lawyers

I am regularly involved with franchisees who have entered into a franchise contract.  The vast majority receive advice from their family lawyer if they have one or someone with similar zero experience in franchising. In these cases the first real information they get is from a non-lawyer when they go through induction.

Richard has often pointed out the need for expert advice.  Cheaper alternative lawyers typically have an understanding of contract law but that’s a far cry from a franchise contract. 

Michael mentioned a term the other day in reference to prospective franchisees only wanting confirmation of their choice and that’s a fact Jack. Franchisees need to learn to start their due diligence by finding out about Risk and then what the hell due diligence is. And then maybe they will select more appropriate lawyers for advice.

Boudica’s questions to her lawyer regarding the Code and protection are exceptional.  I’ve never heard of an incoming franchisee asking a lawyer anything in that regard so I congratulate her. Franchisees typically don't ask those questions until they find out what they didn’t bother to find out when it might have helped them. But there is a machine behind the promotion of franchising that ensures that may never change.

Accountants simply review what is put in front of them and unless there is an obvious ‘error’ they don’t verify the viability of the offering and they typically have no idea of the implications of changes to the franchise model that will influence the franchisee’s financial model. It isn’t a silly idea to have the client insist that the lawyer and the accountant communicate.

But there is so much more to a franchise offering than the contract and/or the financial representations or even the current financial performance that can potentially introduce the new franchisee to the wonderful world of bankruptcy etc.

I have a family doctor who I have the utmost faith in because she will either fix me or tell me straight if I need to see a specialist. The only time I get in trouble is when she’s pregnant or on holidays. And then I go to the first doctor I can find and usually end up wondering why I'm so stupid.

Investment Analysis

As a Finance major, who graduated from a state university, Investment Analysis was a mandatory elective for successful completion of the undergraduate business school program. However, in my current franchise world, I find myself in limbo asking the question - "Did I ever learn anything from Professor Kim & the topics covered under the Investment Analysis course syllabus?" For me to answer this question today, I must revert to an answer provided by Professor Kim when I asked him as a student - "What is Beta?"

His answer was on the money and was further emphasized with his Asian accent - "Only God knows what Beta is."

Being in litigation, today, is a result of my moronic belief that franchising was an efficient market industry. After all, doesn't the IFA have a hand written code of conduct that was drafted by my franchise founder? Think about the logic - I can be terminated in a "little" FTC registration state, if I cheat my franchise system by under-reporting my true gross sales, and thereby, under pay my royalties due based on our franchise business contract. In this scenario, the Beta assessment depends on my perception of our mutual franchise obligations to each other and our respective level of trust to determine the true Beta "risk".

If my franchisor was instrumental to the growth of the industry, then one must assume the code of ethics to hold regardless of reviewing the merits in a specific case matter. Aside from traditional text book theory, assume the franchised world has now changed for the convenience of fitting into an acceptable Wall Street model....and let's call it the world of mortgage backed securities. I understand the franchisor is free to do what they want with their "trademark" - they can sell it off without any disclosure or contingent franchisee approval. However, does this presumption apply when the predecessor franchisor intends to maintain the same level of control by outsourcing successor obligations to a general management company?

So, what did I learn from Investment Analysis and Professor Kim? The Beta depends on today's environment. Efficiency is created through market dynamics. Therefore, your assessment of Beta risk depends on what actions you are prepared to take to minimize your exposure to system wide Beta variance. If the model has changed, then the morons must accept this change as a new Beta risk variable. However. if the morons are pre-occupied within their own environments, would they still be able to assess their dynamic "Beta" exposure for tomorrow? Hence, Professor Kim's assessment was correct - "Only God know what Beta is."

I argue - God did not create franchising - if he did, franchisee's would undoubtedly support a franchisee "jihad". As a franchisee, I have learned that the Beta is driven by the trust placed in the franchise relationship itself. This is where the GotRocks differ from the GotKnots. To live in harmony the two groups must assume each others risk. Individually, why would a GotRock put themselves in a position of a GotKnot? The definition of such relationship is dynamic in time. Hence, a franchise system's Beta is defined through the strength of it's ever changing franchise relationship and overall market strategy. A 100% franchisee owned system, must identify a franchisee led association that works towards the betterment of the "non-corporate turned franchisees", within the system, to neutralize all Beta risk exposures.

You cannot apply market risk assessment principles to

measure franchise relationship/investment risks as you might with a securities investment. You will never get a responsible or a reliable answer.

The reason for that is that the dependent variables of relationship management are not in market risk assessment principles as applied to investments in businesses where (1) you are not going to be running the business, but depending upon the management of others; and (2) relationships in franchising are too idiosyncratic, leading to variables explosions/chaos - too much that can immediately impact return are simply discretionary with someone else who may not be what you think is rational.

Irrational variables include things like deciding that you should make incrimental investments in modifications/"improvements" that have not even been vetted operationally for efficient application within your business. They include the divine right to determine changes of businesss direction that do not even include you within the changes, but that also negatively impact you - think deciding to sell your heretofore exclusive products through chain stores.

In order to minimize Beta risk, you have to have some measure of control beyond that allowed in franchising. In franchising your control is illusionary. You are limited to following orders. You are not even consulted for the most part when critical investment degrading decisions are being made.

While that can also happen in a securities investment, you can dump securities easily. You cannot just sell your franchise with a phone call to your broker. BVeing able to escape is so different in franchising than it is in any market investment that Beta risk management is essentially scuttled. Being able to escape is an ultimate Beta risk management prerogative - that you as the franchisee simply do not have. To put it into the words of a franchisor with whom I am currently dealing, why should I allow you to realize the capital value of your franchise by selling it when I can simply default you and take it away from you for some legal fees spent in arbitration (that you may not even be able to afford when all is said and done) that is skewed in my favor?

Professor Kim would still be laughing if you had ever asked him to apply market investment analysis to any franchise investment.