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Q: FRANCHISE DUE DILIGENCE ( No Answer,   2 Comments )
Category: Relationships and Society > Politics
Asked by: cjkc-ga
List Price: $25.00
Posted: 18 Oct 2006 16:00 PDT
Expires: 17 Nov 2006 15:00 PST
Question ID: 774842
If UFOC disclosures do not clearly REVEAL THE RATE OF FAILURE OF THE
FRANCHISE BUSINESS PLAN, how do the state governments  and our federal
government justify these circulars and the federal warning in the
front of the circulars as full disclosure that protects the American

Discussion:  It appears that government justifies this failure to
THE FRANCHISOR as a subsidy of the franchise industry that is good for
the American economy and good for the American people.  When
government permits disclosure and condones disclosure without "sales
figures" and without requiring disclosure of  sales figures upon which
franchisees can be successful and also allows the franchisor to
obscure the failure rate of the franchise business plan,  what is
this? How are prospective franchisees protected and how can they
perform "due diligence" in the purchase of a franchise when government
fails in its duty to the citizen to require the franchisors to fully
disclose the risks involved.
The majority of the investment in franchised businesses is made by
citizens who are looking for ways to support themselves after they
have lost good jobs in the private sector because of a slowing economy
and/or because of the global vision of American Corporations that has
resulted in an exodus of good jobs from this country. Most of these
franchisees are American Middle Class citizens who are looking for a
job that will allow them to support their families and to pay taxes to
support the American way ----the American dream. They have a little
money saved,  they have their houses and their personal assets, and
they have the confidence that they can earn their way if given the
opportunity. A franchise looks like a good American opportunity to
achieve from the results of their own good work ethic, their own
money, and a "brand name" that has the respect and recognition of the
public. Government is pushing "small business" and will happy to loan
them the money to start their  own business ----to be part of the
American Dream.
Franchising IS good for the American Economy and the Global Economy. 
However, government has allowed bad franchisors to operate with
immunity  and to hide their failure rate and churning practices by not
legislating and  enforcing  disclosure of the risks to the franchisee
who puts his life and life savings at risk to purchase a franchise
---to buy a job.  Instead of realizing the American Dream,  the failed
franchisee realizes the American Nightmare.

Under UFOC disclosures,  the franchisors are permitted to obscure the
actual percentasge rate of the failure of their frasnchised business
plans through the reporting in the circular of statistics such as
"terminations" and "sale-transfers" or "transfers" but the reasons for
the terminations and sale transfers are not revealed.  In reality, 
almost all terminations and sale-transfers of franchises are business
FAILURES.  The franchisee has generally lost almost all of his
investment and often has been thrown into both business and personal
bankruptcy ----personal bankrupcy because of the personal guarantees
that were mandatory in the purchase of the franchise and the
negotiation for a lease in which to house the franchise.
While the SBA subsidizes the franchise industry to include the
franchisee with guaranteed "start-up" bank loans,  these guaranteed
loans generate healthy business and profits for the banks and lending
institutions of this country. and also enable franchisors to sell
their brand names  to franchisees who will rent these private brand
names to use in their "own" businesses that are made possible because
of government guaranteed loans.
This is a good thing and there are lots of successful franchises on
the American and global scene.  These franchises provide jobs and
profits and an asset that can be sold for retirement by the franchise
owners if they are lucky and survive until the end of the franchise
However, this government-corporate alliance to help the small business
person permits the bad franchisors to use the alliance of the
government and the banks  to  adopt business practices to perpetuate
the appearance of a healthy franchisor by exploliting the failures of
their franchisees----And the franchisees are not warned of the failure
rate or the devasting effects of failure in the "one-sided" and
"adhesive" agreements  that are dealt with as contracts under contract
law by our courts.  Bad franchisors develop practices and customs to
indirectly acquire the benefit of the assets and the lease
imnprovements and the good will built up by their failing frnchisees
for pennies on the dollar.  They "churn"  an appearance of success by
encourasging sale-transfers to third parties (usually other
franchisees) who can pick up these failing businesses  for almost
nothing because of the co-terminus default  term of the lease and the
franchise agreement and who will continue to pay royalties on the
sales that were built up by the failed franchisee while working to
bring the business to "break-even" at a very low investment cost.
The banks,  because of the SBA guaranteed loans,  apparently are
willing to re-loan on the assets of the failed franchise  business to
a new franchisee and the franchisor is not involved except for the
"right of first approval" (hardly every used) or the  option for  the
"approval of the sale-transfer".  When the franchisor approves
the sale transfer and the asset agreement of the failed franchisee and
the new franchisee,  they  demand as a condition of the sale from the
failing franchisee a "confidentiality" promise that covers the terms
of the sale,  as well as the confidentiality of terms of the
relationship of parties involved. and a general release of liability
to the franchisor and the new franchisee.
When  the small offer made for the assets of the failed franchisee is
accepted by the bank who holds the guaranteed SBA loan and they give
the third party,  the new franchisee, clear title to the assets,  the
bank can then collect on the guarantee of the SBA loan and, of course,
 some bank or maybe the same bank continues to earn interest, etc.. on
a new approved SBA Bank loan on these assets from  the new franchisee. 
The SBA state that they do not track the default rate of franchise
loans because these loans are made at no cost to the American
taxpayers because of the "premiums" paid on the loans, etc...
The franchisee is the only entity to really suffer terrible
consequences in the failure of a  franchised business and he can be
sure that his assets will go on to serve the franchisor one way or the
other -----either in a sale-transfer or even in a termination when his
assets are sold off to others in the same line of business.  Ir is not
surpriseing that the franchisor usually gets to set the Fair Market
Value of these assets in both a sale transfer and a termination.
It is for this reason that government should reign in these bad franchisors,
 who have high failure rates and who prey on the American people, by
making them disclose their "churning" and their high failure rates.   
 They should not be allowed to use the resources of government to
feather their nests and to provide an appearance of viability that is
false and that  depends on "churning" and the exploitation of their
failing and failed  franchisees as well as  the Small Business
Administration that belongs to the American people.
The FTC should investigate these bad practices and encourage Congress
to pass laws that protect the American people from the greed of
corporate predators who knowingly sell flawed busines franchise plans
in contemplation of their own gain.


Request for Question Clarification by pinkfreud-ga on 18 Oct 2006 16:06 PDT
It's not clear to me what you're expecting in an answer. Are you
looking for a Google Answers Researcher's evaluation of your opinions,
or for links to material on this subject, or something else???

Clarification of Question by cjkc-ga on 18 Oct 2006 19:16 PDT
I guess I am looking for opinion based on fact.  That is,  as a
researcher,  do you agree and find  that the failure rate of 
franchise businesses are  not clearly  disclosed in  offering
circulars under UFOC and federal rules? Do you find as a researcher
that the franchise failure rate is not clearly disclosed and in fact
is obscured under the rules of the offering circulars and the federal

Is the failure to disclose the failure rate of a franchise business
plan a failure of government regulation that harms only the failed
franchisee and not the franchisor or the banks,  the SBA, or rhe

Are the weak disclosure laws  and the SBA Loan Program a government
subsidy of the franchising industry based on the belief that
franchising is good for business and what is good for business is good
for the economy and what is good for the economy is good for the
American people?  That is, are the benefits of weak disclosure laws, 
the lack of meaningful federal government oversight of franchise
business plans,  and the easy access to SBA guanteed bank loans for
franchisees a subsidy of the franchising  and the banking industry
that best serves the interests of the American people even though many
failed franchisees are misled, sacrificed and exploited by the
franchisors. This becomes possible because  of the lack of full
disclosure of the risks of failure at the time they purchase their
franchises and because of the government guaranteed bank loans that
guarantee that even in failure the assets of failed franchisees will
generally  continue to work for the franchisors and the banks as the
result of fire sales to  third party franchisees or as a result of the
removal and sale of the assets to other franchisees within the
franchisor's network. Is it fact that the SBA guaranteed loans permit
the  churning and perpetuation of franchise networks that would not
survive if the actual failure rate of their franchises were  disclosed
to the public?
There is no answer at this time.

From: myoarin-ga on 19 Oct 2006 05:45 PDT
Greetings cjkc-ga,

 You are probably not going to like my comment, but it is free.

I believe that anyone considering going into business for themselves
as a franchisee should have enough business acumen to read the fine
print of the contract and understand it or recognize that s/he need
professional advice before deciding to sign.
It is the government's job to protect people against fraudulent
activities, not against their own inadequacies.  I suppose there are
franchisors that prey on people who probably don't know what they are
getting into, people who probably shouldn't attempt to establish any
kind of  business for themselves, but such persons also probably would
not recognize what a more detailed disclosure suggests  - AND there
are people who do make a success as franchisees within those networks.

A researcher may be able to find information that presents arguments
against the present situation, but maybe also in support of it.

Regards, Myoarin
From: research_help-ga on 20 Oct 2006 06:15 PDT
I have been evaluating franchises and I have not had trouble
evaluating failure rates.  The UFOC lists all franchisees who have
left the system with their contact information.  You are free to
contact them and ask what happened.  Also, franchisors are allowed to
include sales data or not include any, and the reluctance to include
any should be one of the many factors that a potential franchisee
considers.  If a person is not capable of doing the due diligence
based on what is in every UFOC, then that person probably should not
be running their own business anyway.

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