Top 10 - Churning Franchisors

I am new to the whole franchise churning scam and, frankly being a "churnee", find it quite disturbing. 

For the sake of those who may be investigating potentential churners, I would like the franchise analysts and veterans of this sight to offer up their insights into the top 10 franchisors that churn or have churned their way to a stable appearing Franchise.

Top 10 Churning Franchises:

1. The UPS Store UPS/MBE

2.

3.

4.

5.

6.

7.

8.  Entrepreneur's Source

9.

10.

thanks in advance, and at this point in time I will refrain from adding to the list, personally.

PS.

Leading indicators of Churning:

1- High percentage of units up for sale

2- Frequent turn over

3- Franchisee litigation

4- High Closure rate

5- SBA Failure Rate

 

-jm

Conclusion: Top 10 Churners...

I believe I have over estimated the audience of the Blue Maumau site.

Either 1) (ex)franchisees who have been churned are remaining silent (which is understandable for an assortment reasons), 2) or (ex)franchisees are not visiting this site yet, 3) or there are not many (ex)franchisees who have been churned, 4) or there are (ex)franchisees who don't know they are being churned because (like me) this is a learning process, and have yet to use BMM for post-traumatic therapy.

I have enjoyed the discussions and education about Churning and see points on both sides.

My 2 cents, I see "churning" as a progression that starts with the system that falls into non-viable operations and the tactical reaction to that failure by the franchisor.

Once tactical plans are put into place to silence the franchisees (using the UFOC) and build the "success façade" then a strategic effort is made to churn as many of the 1st generation franchisees out of the system and get 2nd and 3rd generation franchisees in who are willing to pay the fees and attempt to succeed in a non-viable operation (ie. Deck chairs on the titanic).

As has been pointed out in this forum, I think this is all facilitated by a well-crafted UFOC and a non-existent regulators.  

So, not all Franchises start out as churners and not all Franchises will turn to "Churning", however, they do have the satisfaction of knowing that it is an effective tool among many in their tool box.

Therefore, Churning does not occur in the seminar rooms of franchisor conferences but in the executive board rooms where a tactical solution to stop the bleeding is agreed upon and the plans for a pretty façade are constructed.

If anyone is interested in nominating top 10 churners, please email me directly and I will update the forum.  I am off to other topics.  Thanks for the interest.

-jm

on April 17th, 2007

Add one to the list of churners

The Entrepreneur's Source seems to lose a lot of franchisees on an annual basis.{And gets sued by them, too. Shirley or Terry, that must count for something!}Let's put them at a shining number 8Franpro

Posted by franpro on April 18th, 2007

Heads Up

Please notice Taco Del Mar has many poor locations for sell at great prices....a company definitely learning to spell C-H-U-R-N-I-N-G Please do Due Diligence when investigating....

on April 22nd, 2007

Maybe Churning is a not a problem?

Maybe the problem is lack of due diligence?

on April 22nd, 2007

I vote UPS as No. 1 on your list JBMon

l. The UPS Store UPS/MBE

2.

Maybe we cqn then have a public vote for "churner of the year" and maybe Entrepreneur will publicize it?

on April 13th, 2007

Closure vs. Failure

Here's an interesting SBA Article titled "Redifining Business Success: Distinguising Between Closure and Failure". 

The article does not focus or breakout franchised business, however it does provide some very good data on small business closures and failures.

The conclusion of the 11 page report is: Only one third of new businesses (33%) closed under under circumstances that owners considered unsuccessful.  

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on June 2nd, 2007

Churned or Turned Over

Still fried!

on April 13th, 2007

Needs Teeth

A list of names associated with churning is just an accusation. The list needs teeth on why the franchise names are churners. And that sort of information is difficult to come by.

Frankman

on April 13th, 2007

I was almost a victim

I saw the posts on this site and I am now going to keep my money in CDs instead buying a franchise. It is just to risky with all the franchise sharks out there. When will it ever be risk free to buy a franchise?

on April 26th, 2007

Churning: Buttermilk??

JB:

Congrat's on starting a Hot (ACTIVE) Forum Topic.   I've pretty much stayed off of the topic for two (2) primary reasons.

1.   I do not know what 'churning' is, or that it exists.  I've been in, around and involved with franchising almost since Hitler was a private.  I've worked with thousands of Zee's and hundreds of Zor's and I've never been involved in a meeting or seminar titled "Churn your way to Success", or anything similiar.  In fact I had never even heard the term used in franchcising until just recently.

2.  You began your post in an initially negative manner by tossing 'churning' out as a scam and come just short of calling yourself a 'victim of churning'.

Would it not make sense to first identify a 'fair - impartial & consistent' definition for 'churning' which all sides can agree to.

If and when ANY business loses a customer, they try to gain a new customer.  Many people buy things and then re-sell them, for less than they paid.  Thusly giving the 2nd generation buyer a 'better deal'.

Many failed independent business owners/operators would love to be able to 'churn' their failed business into some dollars, even if it's dimes for dollars.

Ultimately it is the franchisee who agrees to accept any given amount for their asset regardless of if that amount is a profit or loss.

No franchisor developes a strategy of "let's go out here and sale a whole bunch of franchisees, help them to fail so we can turn it over and over again, eventually creating a scenerio where so little is invested that anyone could be profitable and we will then profit".

Is the 'Churning' not triggered by the failure of the franchise?  If the franchisee succeeds, how can there be an opportunity for 'churning'?

How can any franchisor establish sustainable long term success by creating a large number of failures, so that they can CHURN?

Franchisors do not typically make a "lot" of profit on the sale of a franchise.  The franchise fee is very little relative to the total investment.  How does a franchisor profit by "Churning"?

I can agree that there are Franchisors who SPEND TOO MUCH on SALES, and TOO LITTLE on SUPPORTING THOSE SALES.

What percentage of Failure relative to sales would be considered acceptable?  Over what period of time?

I just don't get this whole CHURNING CONVERSATION!  Perhaps you or someone, anyone can help me understand what CHURNING is, and how it is the fault of the franchisor.  What is the definition of Churning? 

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!

Posted by FranSynergy on April 14th, 2007

Does Lack of Conspiracy Evidence = No Churning? No.

The proponents of the if you can't prove a conspiracy then there is no churning argument are engaging in a formal fallacy called False Dilemma:

...a situation in which two alternative statements are held to be the only options, when in reality there exist one or more other options which have not been considered. The two alternatives presented are often, though not always, the two extreme points on some spectrum.

Churning ExampleThey have created the invalid argument that runs along like this:

  1. Somebody alleges churning exists.
  2. Either it is a conspiracy or it does not exist.
  3. Since they can't prove the conspiracy, therefore churning does not exist.

Throw this argument out because there is no evidence whatsoever that there are only 2 alternatives possible (a conspiracy: yes or no).Using opportunism Improves franchisor SurvivabilityI would suggest that churning and other opportunistic practices rooted in the franchisee's sunk cost dilemma are used as a tool simply because they create wealth for those that control them [increased utility and discounted cash flows versus not using them].No Conspiracy Needed: Scotch Self Interest Alone'll Do

  1. Franchisors increase their survivability and ROI by using opportunism.
  2. Some Industry associates (eg. consultants, bar, association, developers, suppliers, etc.) join them and do likewise to achieve the same benefits. 

I believe that cooperation (independent but coordinated) between franchisors and associates can be explained simply because it improves their chances of personal and corporate survival and prosperity.However, blatant conspiracies are not unknown:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.  (Adam Smith's Invisible Hand)

The purpose of churning et al is not to do badly by franchisees: it's simply to do good for others. It's about as banal as all that, I'm afraid.Analogies

  1. Sunflowers move their heads east to west each day, following the sun (heliotropism). No one is suggesting conspiracy among plants. They're just doing what they do: as business associates tend to do, also.
  2. Canada geese fly in formation for very good reasons although I'm not too sure if their understanding of aerodynamics is up to level of churning deniers.

Les Stewart, MBA :: industry analystwww.cafo.net :: FranchiseFool :: the Wise say No

Posted by Les Stewart on April 14th, 2007

The Real Churners Stand Up

JBMont60,

It was a nice try in identifying churners. Franchise churning is difficult to nail down for a franchisee because you have to know a system's inner working in detail, something franchisees are not privy to. A franchisor CEO or VP of franchise development may know they are systematically churning, but they are not standing up to be counted. In my humble opinion, it is one of those things that is difficult to prove for an owner of a franchise unit(s).

If I had to bet on finding a churner, I would place my money on identifying slow churners - of ice cream, that is. And for the record, they are:

  • Dreyers slow churned ice cream
  • Edy's slow churned ice cream (for East Coasters)
  • Breyers Double churned
  • Yarnell's Churned ice cream

Churners, take a public bow! Your marketing departments have done you proud.

Frankman

P.S. Sorry, I know this is an important topic for you. I couldn't resist. It was  a humorless day and I needed the jolt. (Hmmm, not much of one though.)

on April 17th, 2007

Ten Top Churning Franchisors ---JBMon

I, too, JM, will have to give up on this topic. You have said it all. And, as you have indicated, franchise fraud is not something that is new. It is the status quo and the UFOC is really, as so many others have indicated, just a license to steal for those who will exploit the innocence of those naive and innocent middle-class prospects who believe that visibility equals viability, and that in America, we are protected by government from fraud perpetuated by large ornanizations whose famous names have the public trust, and new franchises that come on the scene daily under UFOC and Federal Disclosure Rules to pick the pockets of the middle class.

Of course, there are some good franchisors out there but it is just luck if you find one and don't have Dale's telephone number.

I believe, of course, that public policy, to include legislation and the law, has been developed to permit the exploitation of middle-class Americans in the interests of feeding the fires of development in the interests of a "good" economy and profits for the franchisors and those business opportunities surrounding the franchising industry.

I have enjoyed your postings and am happy to see that The Franchise Rose Line and Top 10 Churning Franchisors appears on GOOGLE SEARCH and perhaps our concerns and comments will be viewed by others as a message to LET THE BUYER BEWARE, and we will have accomplished some good.

We have to hope, also, that government views sites like Blue Mau Mau and that they will begin to understand that the free speech possible on the Internet will mean closer scrutiny of government and better protection, perhaps, of the guaranteed rights of all Americans under our Constitution and the law. Maybe the revolving door between the franchisors and the government will be slowed down!

We see comments today on Blue Mau Mau about BAI, indicated as one of the Top New Franchises, are posted on the Bad Business Bureau, Rip Off Site, that is a site that allows ordinary Americans who have NO access to big media to expose "rip offs" to the public. The owner of this Site is sued all of the time but the Constitution protects him thus far and he has not yet been put out of business by big business but they keep trying.

I am ashamed that I have not had the courage to post on the Rip-Off Site concerning The UPS Store ---because I know that this would be an even greater warning to new UPS Store prospects who might check the Rip Off site for complaints ---and it might be encouragement for current and past franchisees to post their experiences. This would be a better opportunity than Blue Mau Mau to really warn and try to expose the truth about this franchise and to save some of our brothers and sisters from the pain of a bad investment that can change their life for the worse.

Don't be too disappointed. You understand the conflict of interest that is inherent in the franchisee-franchisor relationship in that current franchisees don't want to damage their own asset; ex-franchisees have been destroyed often and have tuned out, and current franchisees who are about to fail still hope that they can save themselves from bankruptcy and fear retailiation from their franchisor. Silence is golden ----for franchisors!

I'll be looking for your blogs that I greatly enjoy.

on April 17th, 2007

No Nominating Competitors

I think we should come up with a rule that says you cannot list your competitor to any negative list.

Having said that, can you imagine the conflict of interest in The Entrepreneur's Source finding franchise recruits for their franchisor clients and then the temptation of selling those franchise recruits on their own franchise? Talk about a conflict of interest.

on April 19th, 2007

Unbelievable...

Taco del Mar may be a failing concept, but it does not mean they are "churning" or planned to "churn" as part of thier business plan. They might have poor unit economics and found fools for franchisees.

So put a sock in your crazy "churning" theory and maybe consider urging prospective franchisees to employ serious due diligence. Prospective franchisees have a duty to themselves to investigate prospective investments.

on April 22nd, 2007

Add Taco Del Mar to Top Ten List

Why don't you add Taco Del Mar to Top Ten Churners in the Forum Topic Section.
I agree, all prospective franchisees, please do your due diligence and remember that you must do your "due diligence" on your objective advisor as well!
LET THE BUYER BEWARE. PIRANHA POOLS ARE NOT DISTINGUISHED FROM GOLD FISH POOLS.

on April 22nd, 2007

And the Hands Down Winner in

And the Hands Down Winner in this catagory is (drum roll) Quiznos!

on April 23rd, 2007

Closure-Failure -----Public Policy ----Government Failure FTC

Thanks, Dale, for providing this article that is not too helpful in drawing any conclusions about the one third who closed up their businesses and didn't consider them to be failed enterprises. Maybe these were franchisees who had completed their contractual terms with the Brand and just quit and went out of business? Who knows?

As far as franchising statistics are concernned, it appears that one can pick and choose from all that is out on the Internet and in print, etc... but I believe a case can be made for saying one thid succeed in franchising with profits, one third fail and lose their entire investments, and one third break even and are indentured in low-paying jobs with long hours and no employment or retirement benefits for the entire term of the franchise agreement.

It is the cooperation of the government to obscure the statistics and the failure rate and to ignore predatory churning that destroys many first-generation franchisees while permitting netwoks with unviable business plans to continue to sell their flawe4d poduct to the public that greatly concerns me. (We see that the ISoldIt CEO advised that they wouldn't sell more franchises until they fixed the problem)

It is the appearasnce of government endorsement of certain franchisees to veterans, such as The UPS Store Franchise, through the alliance of the SBA Franchise Registry/FranDats/FranVet and the SBA Preferred Lenders List that I believe should be exposed and corrected by government.

Also, to suggest that the ROI of first-generation franchisees is not known to both the franchisors and the franchisees and to suggest that this ROI could not be disclosed under law in the transfer columns of Item 20 of the UFOC sppears to me to be both disingenuous and self-serving in continuance of the FTC compromise that I believe was agreed to by government and the franchisors in the 1970s.

While MY Government hasn't permitted the franchisor to lie to me in the UFOC, the government has knowingly allowed the franchisor to obscure the true and known and knowable risk of failure or success of the franchised business plan in Item 20 under the Rule and in the UFOC.

on June 2nd, 2007

Churnees fear retribution!

Yes! The use of Item 20 to blur the failure rate and the success rate of franchised business plans makes such an accusation difficult to prove unless you can recover the UFOC's and look at the turnovers, etc... and research.
I personally believe that "churning" is a management tool for some networks and the government doesn't have to do anything about it because they never read the UFOC's and if they did, they wouldn't know the failure or the success rate, or the churning rate of the stores.
We have to believe, therefore, that government doesn't want to know anything about churning, isn't this right? This is a form of government subsidy for franchising that isn't indentified as such in the research I have read.

on April 13th, 2007

I realize that names added

I realize that names added to this list are based on opinions by those providing them and could be viewed as accusatory. 

However, if any of the opinions are invalid then members of this forum are welcome to provide information why the churning opinion is not correct.  The purpose, by the way, of the forum is to provide feedback on such topics.

Teeth can be added later.  I am interested in what the industry insiders consider as the top churners.

-jm

Posted by jbmont60 on April 13th, 2007

Risk Free Franchise Talk?

Sounds like someone is throwing bait out there to invite more comments on due diligence, etc...
A few of the truth tellers on this site have indicated that the return on franchising hardly ever justifies the risks involved. Franchising is not an investment but rather, generally, a means of earning a living while investing your own capital and your own labor at great risk.
The trouble is, nobody really wants to address the risks involved and the UFOC doesn't require the franchisors to reveal the risks of their business plans becauser they are not required, under law, to do so.
Of course, it will never be risk free to buy a franchise and if you aren't looking for a job, CD's or the Stock Market, Bonds, or Tax Free Municipals are superior investments.

on April 26th, 2007

Split the pie chart

The actual quote, as found on the bottom of numbered page 58, is that the Census Bureau survey "showed that about a third of all closed businesses closed while successful... Only one third of new businesses closed under circumstances that owners considered unsuccessful."

This is like the "1/3 of zees make money, 1/3 break even, 1/3 lose money" aphorism. Life is not a pie chart of simple fractions, and anytime a 5-year old can work the math, I am a bit suspicious of the claim.

And of course, we all know from our own personal experience that 67% of businesses which close their doors are actually successful since "using financial criteria does not take into account owners' intangible goals" (seriously, that's on page numbered 52!). (For those into holistic measures of life, who know that "intangible goals" are more important than crass matters like paying the rent: don't say that to your loan officer until you are approved.)

Haven't we all said to ourselves "Wow, my business is a roaring success. Let's close it!"

For the posters who didn't bother reading the original post which did state that the data did not break out franchised businesses, you might wish to read a bit more closely. Interestingly, the rate of survival in the data for all businesses was quite high, and the six-year survival rate bears an eerie similarity to the AAFD study of franchisor survival, suggesting that there may not be a greater survival rate for franchised outlets per se (mature systems vs. independents is another matter).

But before franchisee-side advocates start using this data, I would suggest caution. The businesses were startups between 1989 and 1992, the CBO survey cited was in 1996, and the article itself is from 2003.

Worth looking at, but any time people start talking "intangible goals" one questions not only the predicate assumptions but the writer's conclusions and bias.

Although this was written by someone working in the SBA "Office of Advocacy" it is not clear what his affiliation is, what he is "advocating" for, nor even whether this represents the view of his employer or not; one would expect that if this were an official government report that it would be released by the agency and not published by a Dutch for-profit company in a subscription journal.

on June 10th, 2007

Wise decision

Congratulations, wise decision.

Posted by jbmont60 on April 26th, 2007

Reference

Please see Mr. Blue MauMau's franchipedia and churning.

Posted by JimB on April 14th, 2007

To: Almost a Victim!

Guest:

If you are a ‘legitimate guest’ and your statement is a ‘legitimate statement’ I am saddened by the fact that you’ve given up on pursuing your dreams of owning your own franchise business.

The world of franchising is not filled with as you say “franchise sharks”.  Although the ‘sharks’ may exist, 99% of the people in franchising are honest, hardworking, caring, compassionate people, who truly enjoy helping people like you pursue their dreams of business ownership.

You should not let the post here at BlueMaumau deter you from becoming a franchisee - that is not the objective of BlueMaumau, as I understand it.  You should however use the knowledge, experience and opinions of those who post here at BlueMaumau to help you in selecting the right franchise concept, in avoiding certain franchise concepts, in performing proper due-diligence, and to avoid the few ‘sharks’ that swim in the franchise water.

You ask “When will it ever be risk free to buy a franchise?”  The answer is NEVER.  All things in life involve risk.  Getting out of bed in the mornings can be risky, as can staying in bed.  The idea is not to eliminate risk, because it can’t be done.  You must learn to manage risk.  You state: “I am now going to keep my money in CDs instead buying a franchise”.  This approach, also involves risk!

Dr. Robert Needham in his book “Solving the Puzzle of Franchise Ownership” writes:

If you have $100,000 there are several things you can do with it. You could place the money in a jar and hide it in your back yard. You money would be reasonably safe, but you would not earn any return on it (interest), and you would have been willing to accept what is called inflation risk. If inflation is 2% a year, then the value of your $100,000 would depreciate $2,000 and your $100,000 would have the spending power of $98,000 after one year.

Next you could invest your money in a bank certificate of deposit for 1 year at 4%. At the end of one year, your CD would be worth $104,000, less your inflation risk. During the year, if interest rates increased to say 6%, you would be locked at 4% and the 2% difference would be called an interest rate risk. And if the inflation risk was 2% your spending power would be about $102,000 making your net yield really only about 2%.

If you purchase a bond with your $100,000 at say 5% interest (par) and interest rates rose to 6% you would earn the 5% but the principal amount of the bond would discount to about $99,000. If you took your money out it would only net about $104,000 and have the spending power after our 2% inflation of still only about $102,000. This is called a market risk. If interest rates decline, the bond would be at a premium and your principal might increase making your net yield higher.

If you purchase stocks or mutual funds, there may be no interest or dividend and you could also suffer market risk and inflation risk.

In the investment risk examples above, you are relying on someone else to make your money grow and there is always some risk associated with it, even if small.

Owning a business is no different. The principal you invest must earn a profit or your principal is at risk. While there is no guarantee of making a profit, net profits of 10 to 30% are available in franchising which is far greater than you can earn on your money, especially when you consider the business is paying you an income too.

Guest: do not allow a post or anything else to deter you from pursuing your personal and professional goals and objectives.  Your attitude should not be to give up on your dream of owning a franchise; but rather to understand that investing in a franchise is like all things in life, it involves risk.  Find an experienced advisor, who you can trust to help you select the right franchise opportunity for you, and who can help you manage the inherent risk.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!

Posted by FranSynergy on April 26th, 2007

The difference between Cooperation and Conspiracy

Is in the eyes of the beholder, the judge or the jury, in a courtroom.

on April 14th, 2007

Examples of Churning

"I do not know what 'churning' is, or that it exists.  I've been in, around and involved with franchising almost since Hitler was a private.  I've worked with thousands of Zee's and hundreds of Zor's and I've never been involved in a meeting or seminar titled "Churn your way to Success", or anything similiar.  In fact I had never even heard the term used in franchcising until just recently."

Well, I have only been involved in litigating franchise cases for eight years.  In that time, I have had over 15 cases in which the franchisor resold a location, often on a yearly basis, a location that was a no go.

The franchisor picked up their franchise fee, 30-50k, each time.  

This is churning.  It isn't that hard to understand, unless you think that every location should be profitable.

Michael Webster PhD LLB

Misleading Advertising Law

Posted by michael webster on April 14th, 2007

Buying Low And Selling High

Why is it so difficult for most people to understand that being an entrepreneur is about paying less and selling for more. The reality is that most businesses fail regardless of what industry they are in. There are many individuals that have made millions from buying failed businesses, increasing sales in the business and selling it for a substantial profit.

Please stop the whining!! Businesses will always fail and smart entrepreneurs will capitalize off of their failure. I have personally seen a UPS store locally sold twice. The individual that bought it two years ago is doing phenominally well. HE HAS CHOSEN TO WORK THE COMMUNITY AND SEEK OUT MORE BUSINESS. HE WAS NOT CONTENT WITH SITTING BEHIND THE COUNTER AND WAITING ON BUSINESS TO COME TO HIM. As a result, this gentleman now owns several other businesses (which were once failing businesses)and has been blessed financially. This is smart business, not taking advantage of another individual.

on April 15th, 2007

They count on churning to keep units going......

I know off hand about a dozen other franchisees of this concept all spending their life savings to keep their operation alive. It has destroyed my family as well as many others that I know of. After meeting with many other franchisees, we all have noticed that the churning of older locations is the only way that many of them remain, and the quickly expanding company, signing master developer agreements is was fuels the corporation, not the royalties collected. Why do you think this is almost all they are concerned about, growing. "fools for franshisees", man I would like to see you say that to some of the other owners who have countless years in this business and have been very successful business people up until now. We are fools for falling for the "be your own boss" scheme and the lie that was fed to us. The concept is good, but there are key details that are causing us to fail that corporate just can't understand.

on May 7th, 2007

Ice Cream Churners

Actually, I found it pretty funny -you had me going at the beginning. Nice work!!

Michael Webster PhD LLB

Misleading Advertising Law

Posted by michael webster on April 17th, 2007

By franchisees, for franchisees

"I am ashamed that I have not had the courage to post on the Rip-Off Site concerning The UPS Store" - Guest

Rip off is a site "by consumers, for consumers". Good place to go to if some jerk at a UPS store ruins your parcel.

Blue MauMau is a site "by franchisees, for franchisees." You've done well in placing your story here where we franchise entrepreneurs hang out.

Frankman

P.S. I think that overt plug was worth at least two community brownie points in Blue MauMau, don't you?

on April 17th, 2007

Leading Indicators

Guest brings up a good point.  Rules.  I don't have problems with nominating competitors, if the information presented is compelling enough to merit churning.  Those who disagree with the information are welcome to present other points of view and adjustments can be made.

Would anyone like to offer up some practical "Leading Indicators" of churning?  Franpro just mentioned a law suits from franchisees.

 Perhaps a few:

1- High percentage of units up for sale

2- Frequent turn over

3- Franchisee litigation

4- High Closure rate

others?

-jm

 

Posted by jbmont60 on April 19th, 2007

Churn for the worst

I've never used the term "churning" before, but I have been aware of franchisors and franchise sales people using transfers as a way to hide from failure or diminished returns.

The concept is pretty simple. If a franchisee sells their franchise for less than 100% of the money they invested in the franchise, no matter what the reason, that transfer in effect diminishes the value of the investment.Item 20 does not require disclosure of the price the transfer was made.If a prospective franchisee is investigating a franchise opportunity such as Quiznos, Item 20 would show the transfer, but would not show that those transfers were made at a substantial loss to the original franchise owner. The new transferee has bought into the franchise at a cost that may have a ROI, but the originating franchisee took the loss. Even though "churning" is a new term, the reality has been around franchising for decades. I believe most franchises have examples of "churning" in their system.There are some franchisors that are distinctly aware that a high percentage of their locations are "churning" and hide behind that data (because they are not required to disclose it) and continue to sell that franchise anyway, fully aware that a high % are "churned" (sold at diminished return by the original franchisee).That is when the concept of "churning" is so despicable and in my estimation fraudulent.

Jim Coen

Email: Jim@franchiseperfection.com Blog: Lets Talk Franchising

Posted by Jim Coen on April 20th, 2007

ADD Taco Del Mar, on what grounds?

If anyone is looking at Taco Del Mar, or ANY franchise opportunity, perform proper due diligence to determine:

  • Am I right for franchising and is franchising right for me?
  • Is this particular concept worthy of my investment, and if so
  • Is this a concept in an industry which I will enjoy owning and operating a business?

There is NOTHING posted in this forum which would indicate that Taco Del Mar is guilty of ‘Churning’ or that if they are guilty of ‘Churning’ that they should be on any Top 10 List of ‘Churners”.

Taco Del Mar offers a very nice product line.  They have a very reasonable Franchise Fee of just $17,500 for the first location and $15,000 for each additional location.  The royalties are 6% and the ad fund is only 1%.  The average total investment is in the $225K range.  They have no litigation or Bankruptcies requiring disclosure.   They have historically received very modest rebates from vendors, all of which have been deposited into the general Advertising fund.  As disclosed in their 2005/2006 UFOC they had 111 and 179 franchised locations and 6/15 respectively.

The above information is based on a QUICK and unofficial review.  It is not intended to be an endorsement of Taco Del Mar, by me or FranSynergy.  It is simply intended to show that Taco Del Mar may very well be a viable concept worthy of further consideration, and there is nothing at this stage which would indicate that Taco Del Mar should be added to this ridiculous fictitious list of ‘Churners’!  Like any franchise opportunity there are no guarantees and there are risks.  However, the Ethnic Food genre is one of the fastest growing segments of QSR and franchising in general.  If you are considering an Ethnic Food Franchise Concept, Taco Del Mar may be worthy of your consideration.

It should also be noted that last Wednesday Taco Del Mar celebrated the opening of its 250th franchise location

I CALL FOR RESPONSIBILITY IN POSTINGS!  Share Knowledge, Share Experiences, Share Facts!   But don't be irresponsible and bring harm to a franchisor and their franchisees, simply for the sake of making a post, or supporting a cause.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!

Posted by FranSynergy on April 22nd, 2007

Simply Expectations!

You are very welcome!  I once loaned a copy of 'Think & Grow Rich' by Napoleon Hill to a young man who did not find it to be helpfull.  I guess it all comes down to expectations.  When I read a book, article, report or post, I do not expect every word to be applicable, but I do look for the 'Golden Nuggets' and they are almost always there.

As for Item 20 and Franchisee Profitability.  To a very large degree the franchisee is responsible for the Top Line and controls much of that in between the Top and Bottom Lines.  The Franchisor although an important part, has little to do with PROFITABILITY or the timing of a sale.

THE ABSOLUTE BEST ADVICE: I have for any franchisee comes down to 2 things:

  1. Perform your due-diligence wisely so you select the right franchisor in the right industry that best meets your needs and objectives.
  2. Once you are a franchisee, you must assume full responsibility for your decision and your success.

Ultimately, every franchisee must say: "If It Is To Be, It Is Up To Me!"  You can put the best franchise system in the world into the hands of the wrong franchisee and they'll fail.  You can put the worst franchise system into the hands of the right person and they will succeed.  It's a lot like the rodeo saying "There aint a bronc that can't be road, or a cowboy that can't be throwed".

I love seeing business owners succeed, you can call it 'Tough Love' or whatever you want, but success is based on: Personal Responsibility and other fundamental basics like: Persistence, Perspiration, Money Management, Commitment, Proper Planning, and Determination.

You're business failed, that does not make you a failure.  It means get up-dust yourself off, and try again!  Stop the BLAME GAME!  Success is not determined by the number of times you fall down, but by the number of times you get up!  You continue to let the past controll your today and your tomorrow.

AND as a side note to your post: The government DOES NOT prevent a franchisor from lying in a UFOC, because they DO NOT validate the information in the UFOC.  They impose a penalty for doing so.  If you're a prospective franchisee the UFOC is but one small component to the due-diligence process.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on June 2nd, 2007

Well crafted post Dale, the guest should take heed!

The guest is a blamer, complainer and whiner. What a sad existence his must be; when one believes outside forces determine their success and happiness. The guest is to be pitied.

on June 2nd, 2007

Wendy's Churning in the beginning

Evidently Wendy's is a profitable franchised chain but I thought I read where IN THE BEGINNING (as per a bio on franchise starte) some of the Wendy's franchisees suffered from something that looked liked churning ----too many stores too quickly, etc...
Maybe the person who posted this information could give us more details. Maybe "churning" is a method to achieve visibility that then helps to sell more franchises that then start to be profitable as second and third generation stores?

on April 13th, 2007

Re: Churnees

I think you give government too much credit for franchising knowledge. These are mostly a bunch of lawyers who may know no more than the average American does about franchising. This is something that those directly connected to the industry have to educate them about and urge action. If franchisees see a problem and don't get active, they have no one but themselves to blame.

Naturally there are most likely going to be at least some franchisors that will look after their own interests at the expense of franchisees. No one can look after franchisees' own interests as well as they themselves can. Soon-to-be franchisees desperately need the help of those franchisees, who are already in the know, to protect their ineterests too.

As John F. Kennedy said,"Ask not what your country can do for you, ask what you can do for your country."

on April 13th, 2007

Churning Informaion

Dear Guest,

 Please provide additional information to your supposition of "churning" before we can add it to the list.  Of the 250 units how many are up for transfer?  how many of them have already turned over?  what is the average selling price compared to the average startup cost?

-jm

Posted by jbmont60 on April 24th, 2007

CD's or the Stock Market, Bonds, or Tax Free Municipals

These are low risk investments that cannot be compare to business investments.

on April 26th, 2007

Sudies on franchising are unreliable

It is hard enough to study industries and market channels let alone franchising. Franchising is not an industry it is a distribution and finance model that is practiced in myriad ways (i.e., industries and channels). I find them sometimes interesting and always lacking.

on June 10th, 2007

Lifestyle don't pay for retirement

Oh, and read the part on page numbered 55 about how "even if the business is barely staying afloat", this counts as a "success" since the owner "probably gains satisfaction from the lifestyle." Is this "study" a satire?

Now, that should be the motto for the next IFA sales expo!

 

on June 10th, 2007

JB can I buy your franchise?

You seem to know a lot about franchising. I'm sure we could together on a fair deal for both of us. What do you think?

on April 26th, 2007

JimB, please help...

Jim B.  

Thank You!   I'm not sure if it was Mr. BlueMaumau's intent to provide a "Legal" or "Trade" definition or if perhaps he was simply identifying a term used here at Bluemaumau.

Regardless, as we look at the term as identified by Mr. Bluemaumau we read:CHURNING.  This situation often occurs when the franchisees are not successful...

So does this mean that FRANCHISEES are to blame for churning by their failure?

Does the franchisee - not want the franchisor to assist or at least approve the sale?  Is this not a benefit to the franchisee?  One that he or she may not have had, if the failure had occured in an independent environment?

If a car dealer is forced to recover an automobile as the result of the purchasers failure to meet their payment obligations, should said dealer not have the right to re-sell the automobile?  Should the subsequent purchaser not have the right to benefit from such a transaction?  Same question could be applied to homes, or nearly anything whereby one party has the right to re-acquire an asset.

I JUST DON'T GET THE COMPLAINT HERE! Please help me to understand, on a factual, non-emotional basis.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!

Posted by FranSynergy on April 14th, 2007

Franchising Dreams Can Become Nightmares

But, give Dale a call!

on April 26th, 2007

I have read with great interest JB's and the churn guy's posts.

And when they speak their truth it scares me.

on April 26th, 2007

Michael, excuse me but...

Excuse me but I still don't get it!  I still see no clear definition of what "CHURNING" is.

1.)  Over the past 8 years there HAVE NOT been "a lot" of franchisors with 30 to 50K franchise fees.   

2.) 8 - Years/ 15 - Cases.  Is that 15 different franchisors?  The same franchisor?

3.) If we're talking about re-sells of the same franchise, on an annualized basis, was there a 'Franchise Fee' or a 'much smaller' transfer fee?

4.)  EVEN IF, franchisor is receiving Franchise Fees of 30 - 50K per year, do you think the franchisor is making "A LOT OF MONEY" on that or do you think it's getting sucked up in marketing, training, commissions etc?

5)  Your comments make it sound as though we are SPECIFICALLY TALKING about PHYSICAL LOCATIONS?  Is this correct?  Therefore it's not a "Bad System" that causes "Churning" but "Bad Locations", is that correct?

6.)  Based on "Bad Locations" being the contributing factor of "Churning" then a franchise concept like a plumbing company, staffing company, or other concepts where "location" is not nearly as important as it is in a QSR could not possibly be guilty of "Churning" is this correct?

I'm simply trying to understand what "Churning" is and is not.  Can someone not write a clear, concise definition of "Churning".  Here on Bluemaumau, I've seen the word "Churning" used in place of "Termination", but if "Churning" is synonymous with Termination, is it also synonymous with 'non-renewal'?  Expiration?  If the franchisee terminates the agreement, is the franchisee now guilty of 'Churning'?  I think it's obvious that "Churning" and Termination are not the same!  So what is Churning?

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!

Posted by FranSynergy on April 14th, 2007

Churning and the Federal Rule and UPS Churning

Churning as recognized in the federal rule seems to define churning as a unit that the ZOR turns over again and again, implying that the ZOR buys the unit and resells it to a new franchisee.
Churning as accomplished by UPS is their policy and practice of abetting the acquisition of a failed NEW units (and used units) through a third party purchase and TRANSFER of the unit's tangible assets at the lowest possible FMV to the third party buyer.
When NEW units are acquired through asset purchase agreements by second-generation franchisees for a very small investment; almost nothing, or $5,000, $10,000 for the tangible assets and the original franchisee is forced to sublease and is not released from the original lease, a second generation franchisee who has negotiated lower rent (the Landlord wants a tennant) can try to take the store to break even with a very small investment and greatly reduced risk. If he is an existing franchisee-manager he can also manage this store with part time help and reduce his overhead even further. Of course, the second franchisee, the new owner has a much better chance of getting to break even in the next few years because he is starting with gross sales that have already been built up by the original franchisee who has exhausted his capital but is not breaking even and is failing and defaulting on his loans, or can't qualify for new loans.
The second generation franchisee is reducing his overhead and perhaps working for nothing with the view that he can bring the store to breakeven in a year or so. The gross sales of the failing franchisee may be at $200,000 and this is a gift to the second generation franchisee and a gift to UPS who continues, without interruption, its collection of royalties and shipping fees and commissions, etc.. as well as its presence, its visibility, in the community and territory the store is serving under the franchise agreement.
Thus, the visibility of The UPS Stores is not disturbed and the public, to include prospective purchasers of The UPS Store new franchises, interpret this visibility as viability of their business plan.
It is my belief that if the truth were known, MBE-UPS very rarely, if ever, acquires failing stores through the "first refusal" process or their "termination opitions" as disclosed in their UFOC's.
It is my belief that they have churned the appearance of viability through visibility through the churning of first generation units through the policy and practice of finding and abetting third party buyers of these failing or "hobbled" The UPS Stores.
Remember that The UPS Store was born in 2003! The President of MBE-UPS was out on the Internet in 2005 pushing the purchase of existing franchise locations to third =party buyers in July of 2005. You can read this PR on www.startupnation.com under a Google Search for Reducing Risk by Buying Existing Franchise Locations, by Dan Brady, as well as Franchising Delivered to Your Door.
Because the affects of the flawed business model of THE UPS STORE was being felt acutely by mid 2005, Mr. Mathis felt, perhaps, that he had to do something to encourage more third party buyers to get in there and pick up these failing or "hobbled" (as the article describes them) stores to maintain the visibility of the network and to blur the failure rate of the units that would be carried as "Transfers" in the stattistics of Item 20 of the UFOC's. We see that it has been indicated by a reliable source, The Wall Street Journal, that there were almost 2,000 transfers, terminations, etc..pf MBE-UPS stores between 2002 and 2005.
It is my belief that MBE=UPS is selling flawed business plans to the public with full knowledge that their business plan, presented as The UPS Store, is unviable and presents a great risk to new franchisees.
There is apparently no mechanism under law that prevents them from doing this.
Please, Dale, look at the facts and don't play dumb. It isn't becoming.

on April 15th, 2007

Specious Arguments about Churning.--Buying Low

You say "I have opersonally seen a UPS store locally sold twice. The individual that bought it two years ago is doing phenominally well."
Why wouldn't this individual do phenominally well when he got the business for nothing as either the second or third generation franchisee and had many years in which the gross sales were builtup, and probably cheap rent, as well.
You make my point for me. Thank you. UPS churns first generation franchisees to the benefit of second and third generation franchisees, maybe, and always has a pool failing stores available that can be picked off by those entrepreneus who are interested in Reducing Risk by Buying Existing Franchise Locations.
I have even had an ex-franchisee tell me that one of these Entrepreneurs who buys used stores told her and her husband that it would be in their best interests to just sign the store over to him.

You go on to indicate that this is just "smart business,and not taking advantage of another individual. Of course, in a legal sense, the third party buyer has a right to take advantage of the distressed seller but it is UPS who is taking advantage of the franchisee.
That specious argument about sitting behind the counter and waiting on business to come to him as the reason The UPS Stores fail is a poor argument because most The UPS Store Owners have to work their own stores, that are drop boxes, in order to pay on their debt and to pay on the lease.
Sure enough! It is UPS policy to turn and burn and squeeze as is indicated in UPS, Tales of Gore, and other postings on Blue Mau Mau. It is UPS policy to squeeze the franchisee to the benefit of the third party buyer and themselves, and they premeditate this squeezing in their UFOC and Franchise Agreement.
This is policy and practice that you do not find in writing. Instead, they mislead by disclosing practices concerning the right of first refusal and termination that are just cover for their actual practices in their network.
You fry your fish is bad oil. .

on April 15th, 2007

Cold Cuts

Nations Restaurant News (Apr 16, 2007 pg 52) reports that Cold Stone Creamery will now act as the franchisor for the barbershop company which cuts the hair of Cold Stone's CEO (Doug Ducey).The barbershop, V's Barbershop, has 5 units, 2 of them franchised.

on April 17th, 2007