Furthermore, while most brokers represent the seller there should be a ethical duty to disclose everything and put forth a deal that both parties are happy with – that is what builds long term viability in this industry.

Sincerely
Carl Grimes

I worry about the VETS and their family members who have been made targets of the franchisors because of THE PATRIOT EXPRESS LOAN initiative passed in mid 2007, and pushed to the Congress and the SBA by the big franchisors and the banks and lenders as a means of lessening the coming deep recession.

The recent 90% SBA guarantee really puts VETS and family members at risk when the material risk factor of past performance statistics of units within a franchisor’s system do not have to be disclosed under current regulation by the seller of the franchise. The “onerous” contracts are routine when selling to Mom and Pop Franchisees and, in my opinion, the deception in regulation is a national disgrace.

This government subsidy of franchisors and the banks and lenders is invisible to the average buyer of a franchise who believes that the SBA wouldn’t guarantee loans for franchises that have low or no-profitability experience for founding franchisees and a high failure rate of founding franchisees.

I’m not opposed to franchising if the SELLER, who profits, is responsible for disclosure of material risk statistics in their possession to the buyer of the franchise. I realize and understand that the rationale is that the winners in franchising must not be taken down by the losers — the rationale of the public good — the greatest good for the greatest number of people. But, I believe that the “lie” of the FTC Rule in 1979 was unneccesary. In really free markets, franchisors should have to compete for the cheap labor and cheap “venture” capital of franchisees by disclosing the odds of material risk of the investment in the franchise to the new buyers.

The tainting of our courts is an unfortunate consequence of the hidden subsidy of the franchisors and the other special interests who profit from franchising because of the the dishonest and ineffective regulation that is apparently condoned by The Congress and the Executive.

Honest attorneys like Richard Solomon, a Texas attorney, advise that the White Collar Mafia are at work using their contracts to lie, cheat, and steal the life savings of innocent and naive middle class Americans.

Good that there are honest attorneys like you and many others who are willing to blow the whistle on bad regulation and bad franchisors and inform the public. I especially appreciated the article published by The American Business Law Journal, 01 Jan 3003, available on the All Business Site, entitled “Franchising Fraud –the Continuing Need for Reform” which dealt with the “inducement” problems of current regulation and federal and state regulatory policy that is upheld by our courts.

In the Arkansas case I described, franchising was involved on two levels: the business that was sold was a Subway franchise and the Sunbelt business broker that assisted with the sale of the Subway franchise was also a franchise operation.

The business brokerage was a franchise, which sets franchisees up with a “system” for portraying themselves as competent business brokers, regardless of the franchisee’s abilities and character. Someone who is comfortable with purchasing a franchise might be somewhat blind to a franchise business broker’s lack of expertise, giving too much credence to the form of the presentation materials and not giving enough scrutiny to their substance.

I wouldn’t recommend purchasing a business without independent professional advice from a CPA, a lawyer and an insurance specialist, all familiar with the type of business being purchased. Advice from commissioned salespeople may be good or bad or in between, but I wouldn’t rely on it.

As Carol’s comments suggest, franchising is a big deal, and her take on it is that the franchisors have the upper hand with one-sided contracts and the protection of the legal establishment, including the American Bar Association and the Federal Trade Commission.

The franchise agreements that I have reviewed, mostly for the food and lodging industry, are indeed onerous. Generally, I have reviewed them when the franchisee comes to me wanting out of the agreement. I agree with Carol that the cards are stacked against the franchisee when the business is unsuccessful. When it is successful, the franchisee sometimes wants out because of the belief that the franchise fees are too high for the benefit of being associated with the franchisor.

Though many franchisees are successful, franchise ownership is certainly not for everyone.

Franchisees will not win fraudulent inducement/concealment cases in arbitration or the courts because under contract law, if they were made whole, this could threaten the entire franchise system. Public policy apparently deems that franchisees are calculated sacrifices to the industry of franchising.

It is apparent that franchising was regulated by the FTC in 1979 to prevent fraudulent inducement to contract claims against franchisors, and brokers, who, apparently, under the FTC Rule have no legal obligation to disclose MATERIAL proprietary performance statistics concerning units in the system to new buyers, or to investors in the franchise systems.

This is unique treatement when the seller, who profits, doesn’t have to disclose to the buyer. Perhaps this is why the FTC, instead of the SEC, regulates the retail franchise sector, where most franchisees operate on an intrastate basis.

Unfortunately, ineffective and captured regulatory policy as is demonstrated in the FTC Rule governing the sale of franchises invites intentional torts and fraud. The franchisors and other interests, however, know that the law protects them from fraudulent inducement/omissions in the sales process and this insulation from fraud invites fraud.

The courts, of course, use their discretion to determine “reliance” and in the instance above, we see that they protected federal regulatory policy which is to protect the franchisor and his franchisees who survive from those who fail and feel they were fraudulently induced to contract. The big franchisors like Subway have a blank check that extends to their franchisees who sell and transfer their units only after the franchisor approves the sale to the new franchisee.

Maybe this protection of franchising could be justified if prospective buyers of franchises had access to the material facts of unit profitability and unit failure of the system BEFORE the contract was signed.

Apparently, the ABA is happy with the FTC Rule and doesn’t want any changes to franchise regulation that would negatively impact their interests.