In buying a franchise, beware of the lies, damned lies and statistics–about 90% success rates, among other things. At some point in the process of buying a franchise, someone will probably tell you that 90% of all franchises succeed. That person is lying. Years ago, the Department of Commerce produced a “study” with that statistic and unscrupulous franchisors and franchise brokers have been relying on it ever since.
At least weekly we hear from a franchisee, after buying a franchise, that “I should never have bought it.” That realization stings. It signals that the honeymoon has ended and the spell cast by the sales consultant has worn off. Frequently, it signals the impending economic death of the franchisee-and the ultimate “death by a thousand cuts” of the franchisor.
Almost every franchisee, when buying a franchise, is asked to sign a document containing false statements–in order to be “awarded” a franchise. No franchise or other business opportunity is worth signing something false to get it.
With jobs scarce for college students and new graduates, college students should beware of an increasingly active predator-the franchise sales person. They haunt job fairs and campuses with tantalizing “opportunities” to start your own business by buying a franchise; opportunities to be free of the lines for every job opening. What they are offering, unfortunately, is indentured servitude that can be hard to escape.
On June 21, 2012, the Superior Court for the District of Montreal, Quebec, Canada entered a judgment for $16.4 Million against the Canadian Dunkin Donuts franchisor in favor of 21 former franchisees. The court held, among other things in a new court decision, that the franchisor breached an express or implied contractual obligation to protect and enhance its brand.
Two new court decisions, in March and in June of this year, out of Massachusetts raise the issue of what is the line between a franchisee and an employee. Acknowledging that Massachusetts has some unique laws regarding classification of employees and that at least one state (Georgia) has given franchisors an exemption, the decisions in those cases are worth some thought by every franchisor–and franchisee.
In a continuing effort to highlight important new court decisions, this time regarding vicarious liability of a franchisor for the actions of its franchisee, you need to be aware of Patterson v. Domino’s Pizza. In the Patterson case, which had been dismissed by the trial court, the California Court of Appeal reversed, saying: “a franchisor’s actions speak louder than words.”
Franchise site BlueMauMau just released a list of the 25 worst franchise investments-without even asking the question of whether such extraordinarily bad results give rise to a duty to disclose high failure rates to those who are buying a franchise.
Every franchisee, at the beginning, goes through a “honeymoon” period that can last a few years. That phase can have a very dangerous side-effect of causing you to be unable to successfully make a claim if the franchisor did something wrong. It is very important when buying a franchise that you watch the statute of limitations.
Franchisors are not required by the Federal Trade Commission or by most state statutes to provide prospective franchisees with information about how well their current franchisees are doing financially or how well their company-owned outlets are doing.
