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Sobering Up - Walls Come Tumbling Down - Franchising

Author Richard Solomon is a conflicts and crisis management lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.

I am still hearing franchise salespeople say, and seeing franchisor source printed material say, that franchising provides a 90% success rate after three years in business. As I am soon to be lecturing on the subject and must do some homework, why not share this with the franchise potential investor public? The SBA, which certainly knows this because of its tracking SBA guaranteed franchise start up loan failure rates, still makes this absurd statement in its materials on the subject - another example of lobbying gone wild.

I don't believe that was ever true. It was provided by a bozo in the Department of Commerce who later joked about all the "courtesies" he received from the IFA for having put out that porky.

Could you so configure the base data to ever have made that statement true? I have tried and tried, and I think you could create a false data base that appeared to have corroborated the statement maybe 40 years or so ago. Here's how someone wanting to perpetrate that fraud would/could have gone about it. General Motors, Ford and Chrysler were all franchisors and at that time their franchisee dealers were pretty successful. If you only counted those within your statistical universe of data, a charlatan could claim that franchising was 90% successful. If you included gasoline filing stations but did not count as failures all the dealers who went broke but considered the locations to be successful due to location churning to keep them open, you might still have high (but phony) success rates. The same, back in those days could be said if you included KFC and McDonalds. However, even then the claim would not be true as to franchising in general. The claim would remain false and intensely misleading.

Today's universe is nowhere near that level of franchisee success. Even the franchisees of the great systems are suffering now in comparative terms from the natural flow of concept life cycles having taken them into their decay stage. If you did a search on McDonalds today you would see hundreds of reports about that very subject. We never thought we would live to see McDonalds go over the hill, but it clearly has. KFC is now really a dog. AAMCO now enjoys almost a 40% SBA start up loan failure rate and is accused by hundreds of its franchisees of hanging on by its fingernails through churning - constant rapid reselling of failed locations. Quiznos and Cold Stone Creameries were always nightmares.

Hundreds more are in the same boat. New so called franchise "concepts" are by and large thin air fairy tales being sold as viable business models. Cereality, Soup Man, Dagwood Sandwiches are just a few examples of total nonsense "concepts" sold to the suckers who have no idea in the world how to vet franchise investments; who believe ridiculous stories with no possibility of corroboration; sign the most ridiculous agreements you could ever imagine and go miserably into financial failure and bankruptcy, sometimes preceded by suicide.

But the mantra continues and the morons keep signing checks. By the time they figure out that they were defrauded they don't have money to pay for the requisite legal services, and, even in the face of fraud, they are bound to arbitration clauses that preclude exemplary damages, jury trials and attorney fees to them if they win.

Once you sign the agreement you are toast! But people with advanced business degrees and years of "experience" as employees of substantial companies think they can see through the deception. They can't and they don't.

This past week, as I predicted when the bill was first introduced, the California legislature failed to adopt a revision to its franchise law that would have imposed a duty of fair dealing on franchisors. Fair dealing has been the pipe dream of every defrauded franchise victim for at least twenty years now. Shysters make livings telling franchisees that if they just join this association that the shyster has created, they can have that "Fair Dealing" rule adopted and their lives resurrected from the financial grave. Having been cheated by the franchise sales process in the beginning, they are being cheated all over again by the Fair Dealing shysters promising relief from their suffering. It is just more nonsense, and here is why it is just nonsense.

The commercial law was not created to wipe the noses of suckers who sign ridiculous contracts for bozo business deals. At sign up time you tell the franchisor all about your wonderful business experience and money in the bank to show what a qualified business person you are. Later, when you have been fleeced, you want the law to assume that you were just an innocent child with no possibility of parsing lengthy commercial agreements to inform yourself of what you were agreeing to. This contradiction is too absurd ever to become a rule of commercial law. Grow up. If you are an educated, experienced adult you are expected to perform the obligations of commercial agreements that you sign. Franchise agreements are commercial agreements, not consumer agreements that Deceptive Practices Laws that the law will assume were morons when they signed up for the deal. Moron signed consumer agreements are usually for amounts of money small enough that if they get set aside the markets will not fall. Business investment agreements do not get treated that way. If you act like a moron and sign bad business to business agreements you are held to them unless you can prove they were induced by fraud. (There are one or two other ways out, but they are just as hard to prove and in most instances the fleeced franchisee cannot afford legal representation anyway).

As the sucker who finds himself out of money you will not find a competent contingent fee lawyer in most instances because your agreement recites that you were not told what you now claim you were told, and that if someone inadvertently did say those things to you, you didn't rely on them in making your investment decision anyway. The agreement also recites that there are no promises other than those contained in the written document you signed. And there are those clauses limiting you to arbitration with no exemplary damages, no appeal and no way to recover attorney fees if you win (that are enforceable even if the agreement was in fact induced by fraud). The contingent fee lawyer doesn't have much of a chance to be paid for his work and won't take your case unless he is as stupid as you were.

Most franchise opportunities offered today are worthless, but people still keep investing in them. The sobering up process is beginning to accelerate because it is easier to do good research if you hire someone who knows what to look for and how to find it to help you with pre investment due diligence. If all you hire is some bozo lawyer to "read you the contract and tell you what it means" you are doomed.

I think this will be sufficient for my upcoming lecture on the subject. Have a nice day.

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