International Law

Stop the Franchisor Madness

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Here is a description, from BMM, of the perfectly wrong franchise system:

"Assumptions:

1. The franchisor thinks the franchisees are stupid and can't walk and talk at the same time.

2.The franchisor has only one sole-source supplier.

3.The franchisor holds lease.

The scenario:

Most franchisees are failing and those that are making money are being disenfranchised for minor infractions.

And, since the franchisor holds the lease, the franchisees are turning in the keys to the franchisor (and thus getting the store for free).

The franchisor just started a second corporation just to accumulate these stores.

I suspect he will then sell them as a franchise and thus the second corp. is making a small mint."

Suppose this scenario is true. How could you find clues about it reading the UFOC or FDD?

Well, there are 4 clues.

First, read the item 20 disclosure. How many locations have changed hands? If over 10%, you probably have a big problem.

Remember, in item 20 disclosure you are looking at the total amount of transfers over each year, and dividing by the number of open locations. Over 10% is a huge warnings sign.

Second, you can easily tell by reading the franchise agreement whether you will be on the lease as a tenant or subtenant. Generally, you want to be the head tenant - you have no advantage being a subtenant, and many disadvantages.

If your franchisor balks, then try to get your attorney to negotiate a conditional assignment: you are the head tenant, but if you default on your franchise agreement, the lease is assigned to the franchisor. Otherwise, walk.

The trouble with being a subtenant is that the franchisor can threaten a default on the franchise agreement, which because of the cross-default clause is a default of lease - then they lock you out.

Very bad negotiating corner to be in - don't do it.

Third, look at pacer, the litigation disclosure and the amount paid for legal fees in the franchisor's financial statements. What does it show -an aggressive franchisor intent on using its bargaining power to churn stores?

Fourth, do an extensive corporate search on all the entities and officers of the franchisor. In the US, most corporate searches can be done for free. But take the time to research every officer and every state - you can learn wonders this way if you take the time.

Full post as published by Misleading Advertising Law on July 22, 2008 (boomark / email).