Franchise Forum - Franchise Information

When franchisors present a prospective buy with an FDD (Franchise Disclosure Document), they often say with stern pride, "This is required by federal law", and they lead you to believe that, therefore, you can have 100% trust in the veracity of the FDD. That's false. In fact, franchisors can tweak what they put into the FDD to make things appear better than they really are.

Several franchisees have sued franchisors an attempted to use the FDD as proof they were lied to, but courts have forbidden the use of the FDD. So, insofar as franchisee protection goes, the FDD is worthless.

The Ohio legislature has taken steps to protect franchisees. They've passed legislation which:
- Allow suing for falsehoods in the FDD
- Makes the state of Ohio the place where legal action may occur and whose laws apply.
(Most franchise agreements let the franchisor dictate in what state legal action will occur)
- Makes the state of Ohio the venue for any mandated arbitrationi.
(Again, most franchisors' contracts give them the right to determine where arbitration will take place.)

Let's hope more states follow Ohio and pass laws protecting franchisees from unscrupulous franchisors (and there are plenty of them out there).

source:
nuwireinvestor.com/articles/new-ohio-law-empowers-franchisees-60493.aspx

Quiznos franchisees are again suing Quiznos, charging that Quiznos made hundreds of millions of dollars by forcing them to buy overpriced equipment and supplies, while Quiznos franchisees went broke. They say Quiznos increased corporate profits by issuing coupons which increased sales and which forced franchisees to buy more supplies from "approved suppliers". Those approved suppliers provided kickbacks to Quiznos and the franchisees say Quiznos got rich while franchisees went broke, the number of franchisees dropping from 5,000 to 1,500.

The lawsuit has been filed in Denver district court and at least 10 franchisees have filed.

The story is reported at Blue Mau Mau:
bluemaumau.org/12415/franchisees_fire_legal_attack_quiznos_ongoing_fraudulent_scheme

Springfield, VA - An independent hardware store open for 60 years went franchise -- rebranding itself as Ace Hardware. Now, the owners say, they say they may be forced to close in 3 or 4 months and they're suing Ace, accusing Ace Hardware of "fraud and deceit". [Fraud and deceit in franchising? Who'd have thunk it?]

The current owners bought Fischer's Hardware three years ago, after Ace convinced them it would quickly turn a profit as an Ace Hardware. [What? Someone selling a franchise promised quick profits? Who'd have thunk it?]

The owners say Ace falsified documents and inflated revenue projections. [This probably sounds familiar to many franchise buyers.]

The allegedly falsified documents and revenue projections were used to obtain an SBA-backed $1.8 million loan. [So now they're deeply in debt, the case for many franchisees.]

The owners say the store immediately began hemmorhaging cash because of Ace's inventory system:  “We had $200 items walking out the door priced at $2".

The owner discovered the situation was not unique: “A lot have failed. A lot of people are suing. There is a pattern”

And, indeed, there's a class action in the works which could grow to representing 50 Ace franchisees, according to an attorney working on the case.

The story

There's a myth out there -- a lie -- that franchises have a better chance of success than non-franchise startups.

It is a lie.

It is a lie.

It is a lie.

Yet from time to time someone who's ignorant of fact promotes that myth.

The latest example I've happened across is at HuffingtonPost, where Jerry Chautin, who is identifed as a member of the Small Business Administration's S.C.O.R.E. ("Service Corps Of Retired Executives"), has posted an article indicating that non-franchise restaurant startups have a higher failure rate than franchises, during the first two years.

Jerry Chautin, in doing so, is perpetuating the lie about franchising in general (that franchises have a greater chance of success).

1. He only looks at the first two years. Many struggling and failing franchisees will do anything they have to to try to stay afloat. They'll pile up credit card debt, obtain loans, borrow against their homes. They're desperate because (a) they've invested so much and (b) their franchise agreement may very well mean they have to pay even MORE money to get out of it -- money they may not have.
2. It has been reported by several sources, even the SBA itself, that the myth is false.