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Darnelle White's picture

A Changed Mindset

It used to be that many franchise candidates viewed franchising and small business ownership as a way of achieving their wishes, hopes and dreams, regardless of what they may have been. Today, it’s more about goals and objectives, and necessities. - Paul Segreto

Very nicely put, Paul.

I also like your point that business investors are choosier nowadays for many reasons, and that they expect immediate and interactive communication. My sense is that the old hierarchical gates are dropping too. Buyers and franchises expect quick access and interaction with senior officers, when they deem it necessary.

And if things are tough now, wait until those young whippersnappers start coming onto the scene soon. The Internet's social and informational technologies are just spoiling the whole world, aren't they?

Old Sword's picture

Re: Item 19 and Questionnaires

Michael,  first off, I made the comment about the franchise compliance questionnaire, not Joe.  Second, you are absolutely correct.  If the franchisee sees beforehand what is not allowed to be stated in any way shape or form, they would be better prepared to deal with the situation once it occurs.  Usually, the franchisee is already "sold" on the concept and doesn't question why they are being asked to sign the document; only to find out "why" when it is too late.

michael webster's picture

Item 19 and Questionnaires.

Joe is making a lot of interesting suggestions, but I want focus on one - the use of franchise compliance questionnaires.

Typically, a prospective franchisee is going to be presented with a compliance questionnaire right before signing the agreement, and despite the fact that the questionnaire will be wrong, the franchisee will sign anyways and effectively short circuit any legal actions he or she might have had.

It is far better to get the questionnaire in advance, purchase or from Caleasi for free, and study exactly what you will be representing to the franchisor if you sign the contract.

It is very important for you to do this, otherwise your pre purchase investigation is bound to fail.

Old Sword's picture

Re: Intentional and Inadvertent Earnings Claims

Joe, (may God help me for saying this), I agree with you on every point.  Unfortunately, the problem occurs regardless of these steps.  By providing other numbers to franchisees, they dilute the effectiveness of Item 19. 

1.  By "suggesting" monthly expenses it is possible to make Item 19 numbers look good.  Expenses increase as sales do.  By providing Item 19 numbers that are averages of "seasoned" franchises (not just brand new first year sites), it skews the sales numbers up but franchisors will suggest "average" expense numbers that actually relate to sites doing minimal business - not reflective of those sites doing the average or higher.  I know, they did a good job on me with this one.

2.  By requiring franchisees to sign documents stating that no information was ever provided, told, stated, written, whispered, etc., along with General Release forms, franchisor salespeople are immunized from most any prosecution. 

3.  My franchisor had all the language you suggested in your commentary.  They are fully aware that information is "whispered" to franchisees because they have received enough complaints (having spoken to other franchisees and attended a conference where things were said, I can state that unequivocally).  It happens.  The language you suggest is actually used to immunize the franchisor from future prosecution.

4.  Your # 3 item is by far the strongest and most important.  Where franchisees go wrong (as I did) was to sign on with a "franchise lawyer" who truly was not (unbeknownst to many of us) as strong as they should have been.  I agree with this point completely and this should be THE number 1 priority comment to every franchise attorney's  franchise clients.

5.  As for your #4, sorry, don't trust them at all (I agree with your point but it won't do anything at all).  If they truly cared about weeding out the unscrupulous franchisors they would have already done so.

Joe Caruso's picture

Intentional and Inadvertent Earnings Claims

You bring up an interesting point on earnings claims by franchisors and their third party sales agents. It does happen intentionally and inadvertently by franchisor staff and third party sales agents. It is not only wrong, it is unnecessary.  

1. The first franchisor remedy is to develop an Item 19 Franchise Performance Representation (FPR, formerly known as an Earnings Claim) with a reasonable basis. 

2. Franchisors with or without an FPR should have a written zero-tolerance policy and training for franchisor staff prohibiting illegal claims, extraneous verbal or written claims and proxy claims. This zero-tolerance policy should be embraced in contractual relationships with third party sales agents/organizations.

3. Franchisor attorneys should make a greater effort to instruct their clients on pre-sale disclosure process and procedure with intensive focus on Intentional and Inadvertent Earnings Claims (and some attorneys already do).

4. The IFA should take a lead role in franchisor and prospective franchisee pre-sale sale compliance education and promote Item 19 FPR adoption by franchisors. 

One constant will be that franchise buyers will continue to demand earnings claims and unscrupulous franchisors and rogue third party sales agents will recklessly intentionally continue to provide them.

And untrained franchisor staff (sales, development, operations, finance and executive suite) will continue to inadvertently, through seemingly benign and helpful interaction with franchise buyers make earnings claim transgressions.

Old Sword's picture

Re: A Changing Mindset or The Same Minefield?

The prevailing wisdom within the attorney/franchise consultant punditry of BMM, as well as, within U.S. Government research studies, is that there are a far greater number of franchise systems that don't work versus those that do.  Given the current state of the economy, the 40% drop in investment portfolios and a real estate market that turned many "upside down", there are significantly fewer financially qualified franchisee candidates.  With an over abundance of franchise systems chasing a much smaller pool of investable dollars, more focus should be placed on the potential for franchisors and their salespeople (independent or otherwise) to "embellish" the already infamous "cocktail napkin conversation" to feed their own families at the expense of the buyer.

As stated here by many franchise professionals, having unbiased, world class representation PRIOR to purchasing a franchise is of utmost importance.  I have found few people outside of industry experts that truly understand how franchisors report (skew) financial information, success rates and overall store performance.  Forget about "social networking" and internet searches.  Most franchisees are either too afraid or too concerned with just breaking even to post information of much consequence.  As for "franchise attorneys", knowing what I now know, I would have chosen one of the individuals on this site.  Many who hold themselves out as "franchise attorneys" do not have the experience necessary to assist with proper due diligence. While some here may be more pompous than others, they ALL have the same goal in mind for their clients.  Most important, they don't care what franchise you purchase, they have no horse in the race, what matters is the financial viability of the system itself and their clients' well being.