Franchise Ethics and Problems

[BobStewart]

Franchises are great things and many people develop a good business through this route. The success rate of franchises is higher than for individuals who 'go it alone'.

However, as with all walks of life, there are good ones and some that are less ethical.

If you re considering buying a franchise, the franchisor is likely to point you towards some of the examples of success in their network of franchisees.  You should take up their offer, but definitely do not stop at that point as this will not give you the full picture. You should visit and talk to other franchisees within the same network to get a balanced view of the franchisor. You will need to take a view of any negative comments.  For example, a failing franchisee may blame the franchisor for their own deficiency in business acumen. So look at any negative comments and view them in the context of the real causes and effects.  That is a judgement call that you will need to make for each case.

I held a franchise and I have a horror story to tell that you may gain some insight from.   

MRINetwork also known as Management Recruiters International or MRI Network is a global recruitment franchise. They have a track record of misrepresenting the truth. For years they falsely portrayed someone as a regular franchisee who had no valid franchise agreement and who was not paying them royalties. This got so bad that he eventually owed them more than ?170,000 UK Pounds or approx. $300,000 US Dollars in unpaid royalties. MRINetwork continued with this deception for years and fooled all real franchisees and clients alike. Read the facts about this and more questionable business practices by MRINetwork and their owners at http://www.cdicorp.info

Specifically read about:

The years of misrepresentation by MRI Network http://www.cdicorp.info/mrimisrepresentation.html

MRINetwork Breach of Franchise Contract http://www.cdicorp.info/rogerhballou-damage-to-mrinetwork.html

Joseph R Seiders affidavit misstatements made under oath http://www.cdicorp.info/josephrseidersaffidavit.html

Roger H Ballou misstatements to shareholders http://www.cdicorp.info/rogerhballou-denial.html

Sarbanes-Oxley concerns - was the debt correctly written-off? See why Roger H Ballou is so coy about clarifying his legal obligations under SOX rules http://www.cdicorp.info/rogerhballou-denial.html

Steve Mills denies responsibility http://www.cdicorp.info/stevemillsdeniesresponsibility.html

Read the facts and form your own opinion on their ethics and actual business practices of MRINetwork and their owners CDI Corporation.

[dr]

Mr. Stewart,
I am truly sorry you had such a bad experience and I hope that by posting you can attain some sense of healing.  I also hope that by sharing your experience the rest of us can learn.  It seems simple that in whatever endeavor, personal or professional, we all must be careful, seek the facts and form our own judgement.  The internet has really provided a forum for healing considering the proliferation of ex-lover bashing sites.  I hope you will have positive experiences to share in the future.  I will certainly be more alert of unscrupulous business practice in the future, whether MRI or girlfriends.

[dr]

A brief follow-up to my previous post. 
The information on your website is astonishing.  I hope to read input from others familiar with MRI.
Best wishes
 

[Les Stewart MBA]

Bob,

Your assumptions about franchising being less risky than non-franchised, is not substantiated by any academic work.

Actually, Tim Bates and Scott Shane's work point in the opposite direction:
* franchises have a lower ROI,
* franchises fail faster (and with a bigger total loss) and
* franchisors have a very high failure rate.

I would encourage anyone to check out the relevant risks at WikidFranchise.org.

 

[dr]

Has(ve) any study(ies) been done on the differences between those who choose franchising vs. independent business?  One could imagine or suppose that the majority of prospective franchisees are "sold" on the concept of a "less-risky" business opportunity as opposed to solid understanding of the franchise fundamentals.  Many franchise "opportunities" seem to target investors rather than actual aspiring business people.  If this is the case, I would expect the failure rate of fanchises to be greater than independents. 
I'm sure there are reputable brokers who work for the interests of clients looking to invest in a franchise.  It seems that any request made for information results in excessive sales pitches.  I would welcome any suggestion for brokers who take pride in matching prospective franchisees with reputable franchisors concerned with the long-term success of the concept.  This seems to a neophite like myself to take place in the case of the established francises, the 800lb gorillas and investors of great net worth.

[FuwaFuwaUsagi]

dr writes:

I'm sure there are reputable brokers who work for the interests of clients looking to invest in a franchise.

My reply:

In theory yes, in practice I have yet to run across one.  I have met several who purported to work for the best interest of their client, but a review of past recommendation showed that they were either ignorant of sound business practice or disingenuous.

If you do run across an ethical one, let me know as it would be of interest. 

FuwaFuwaUsagi

[Joe1000]

I'm sure there are reputable brokers who work for the interests of clients looking to invest in a franchise. 

Well, franchise brokers typically are paid by their compensation by franchisors. Therefore the franchisor is the client, the prospective franchisee is the customer and if you want to be a client you have to buy a fiduciary relationship as you would an attorney or CPA. Franchise consultants/brokers/coaches/advisors that sell franchises for franchisors have a disingenuous habit of portraying to prospective franchisees that they work on their behalf and the truth is they do not.

[Do Diligence]

It took me 16 months to fully understand how many franchise systems do business.  It is just like in any business there are good and bad.  My conclusion after much research is people need to study the FDD with the help of a good franchise lawyer.  There is alot more information out there that tell you what red flags to look out for.  Remember you are only buying a system that may or not be battle tested.  That is why people need to take it slow before they sign on the dotted line.  Do not believe advertisements or magazines that say franchising is safer. Be leary of franchise systems that say you do not need business experience or they will be there for you.

[Franchise Pundit]

...Be leary of franchise systems that say you do not need business experience or they will be there for you.

I am sure all franchisors say they will be there for you 

[FuwaFuwaUsagi]

I am sure all franchisors say they will be there for you

So did most guys first wife!

And we have all seen how well that turned out.

LOL!

FuwaFuwaUsagi

[FuwaFuwaUsagi]

My conclusion after much research is people need to study the FDD with the help of a good franchise lawyer. 

IMNTBMFHO you do at least a minimum vet of the business in the context of the industry, overall business climate, micro and macro economic influences, legislative impact, profitability, and the innate value of the franchise before you even consider utilizing  lawyer to review the FDD.  In addition you should have a firm, demonstrable answer to the questions of: What is the USP for this concept?

I have now heard the sad tales of far too many people who have entered into franchising agreements and end up blaming the franchisor for an allegedly unfair business practices or an allegedly unfair contract, when if they even remotely followed the above guidelines they never would have gotten far enough to need to engage a lawyer in the first place. 

FuwaFuwaUsagi

[Franchise Pundit]

Franchises are great things and many people develop a good business through this route. The success rate of franchises is higher than for individuals who 'go it alone'.

However, as with all walks of life, there are good ones and some that are less ethical.

If you re considering buying a franchise, the franchisor is likely to point you towards some of the examples of success in their network of franchisees.  You should take up their offer, but definitely do not stop at that point as this will not give you the full picture. You should visit and talk to other franchisees within the same network to get a balanced view of the franchisor. You will need to take a view of any negative comments.  For example, a failing franchisee may blame the franchisor for their own deficiency in business acumen. So look at any negative comments and view them in the context of the real causes and effects.  That is a judgement call that you will need to make for each case.

I held a franchise and I have a horror story to tell that you may gain some insight from.   

MRINetwork also known as Management Recruiters International or MRI Network is a global recruitment franchise. They have a track record of misrepresenting the truth. For years they falsely portrayed someone as a regular franchisee who had no valid franchise agreement and who was not paying them royalties. This got so bad that he eventually owed them more than ?170,000 UK Pounds or approx. $300,000 US Dollars in unpaid royalties. MRINetwork continued with this deception for years and fooled all real franchisees and clients alike. Read the facts about this and more questionable business practices by MRINetwork and their owners at http://www.cdicorp.info

Specifically read about:

The years of misrepresentation by MRI Network http://www.cdicorp.info/mrimisrepresentation.html

MRINetwork Breach of Franchise Contract http://www.cdicorp.info/rogerhballou-damage-to-mrinetwork.html

Joseph R Seiders affidavit misstatements made under oath http://www.cdicorp.info/josephrseidersaffidavit.html

Roger H Ballou misstatements to shareholders http://www.cdicorp.info/rogerhballou-denial.html

Sarbanes-Oxley concerns - was the debt correctly written-off? See why Roger H Ballou is so coy about clarifying his legal obligations under SOX rules http://www.cdicorp.info/rogerhballou-denial.html

Steve Mills denies responsibility http://www.cdicorp.info/stevemillsdeniesresponsibility.html

Read the facts and form your own opinion on their ethics and actual business practices of MRINetwork and their owners CDI Corporation.

I mentioned MRI in a couple of blog post.  Type MRI in the search box on the home page franchisepundit.com.

[franchiseinsider]

I think another contributing factor is that there are franchisees out there who think that buying into a franchise is going to be easier than starting their own business, that less work is involved and the franchisor will keep people coming in with advertising dollars.

I would suggest the following for prospective franchisees:

- Speaking to other Franchisees in the system
- Speaking to ex-Franchisees by looking them up in the Franchisor's Disclosure Document. People don't often think to look at ex-franchisees but they can often be more critical and tell you how the Franchisor will treat you during the tough times.
- Accountant / Lawyer's / Business Advice
- cash flow analysis / business plans
- spend a few days in store - if the vendor is keen to sell and has nothing to hide this shouldn't be an issue
- speak to the business manager / consultant who will be managing your proposed store to get an idea of their communication skills, willingness to help etc

[Dinesh]

The best way to do diligence on a franchise is to talk to their existing franchisees.  They have to disclose that in the UFOC.  You should not purchase any franchise unless you've talked to at least 15 franchisees.  Once you've had these many conversations - you'll uncover any big issues.

[FuwaFuwaUsagi]

The best way to do diligence on a franchise is to talk to their existing franchisees.  They have to disclose that in the UFOC.  You should not purchase any franchise unless you've talked to at least 15 franchisees.  Once you've had these many conversations - you'll uncover any big issues.

You need to factor in that many zees are terrified of the zor, in the event they spoke the truth.  In addition it is against their own best interest to diminish the concept.  That being said, they truly are the ones who can give you the insight, just think of what is being said and how it is being said very, very carefully. 

One thing that works fairly well is to ask a zee what competitor he wishes he was affiliated with.  I have been surprised a number of times by the responses I get to that query.  It adds a different dimension and tells you, perhaps what you might not think, but it certainly gives you some idea why so many zees fail.

FuwaFuwaUsagi