What franchisors don’t tell you

For franchise buyers, the record of past franchisees is one question they should spend some time getting franchisors to answer. “The question to ask when faced with enormous claims of success,” Mr. Herman says, “is how many franchisees it has had in those units and what became of them.”

The Globe and Mail
October 23, 1995

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What franchisors don’t tell you
John Southerst

Imagine you’re taking a Caribbean cruse, eager to soak up the sun and luxury pictured in the cruise line’s brochures. Fifteen people fall overboard between the Virgin Islands and St. Martin, but the ship takes on another 15 in Antigua and continues on its voyage.

As you disembark at your final destination, the captain counts the same number of passengers as he left with, and proclaims the cruise a success.

“From the perspective of the lost passengers and their families, it’s not much of a success,” Washington franchise lawyer Mario Herman says.

Mr. Herman says franchisors claiming high success rates among their franchisees often hold the same blinkered viewpoint. He says they label any franchise that’s still in business a success, leading to claims that franchisees succeed at the rate of 95 per cent or higher.

The practice ignores franchises that have been seized by the franchisor and resold, as well as money-losing stores sold by frustrated franchisees to other buyers or propped up by franchisees’ personal funds or new loans.

Mr. Herman represents a group of about 30 U.S. franchisees of Mail Boxes Etc. who will go before the Superior Court of San Diego next February alleging that the franchisor misrepresented success rates and otherwise misled them. They are suing to recover losses of about $4.5 million (U.S.) plus punitive damages.

“Mail Boxes Etc. had touted success rates of 95 per cent since the late 1980s,” Mr. Herman says, “although they’re not using them domestically in the U.S. anymore.” The lawsuit seeks to prove Mail Boxes’ franchisees actually succeed at a rate of 80 per cent or lower.

The postal service and communications franchisor says it didn’t mislead franchisees. It suggests the franchisees should have asked how success rates were calculated, and that the methodology conforms to standard industry practice. That is, a franchise must be closed to be considered a failure.

Plainly, would-be franchisees could be misled by this definition of success. Some U.S. jurisdictions and Alberta’s newly published disclosure regulations acknowledge the potential confusion by requiring franchisors to list the names, addresses and phone number of franchisees who were terminated, sold their units, or whose franchises were reacquired or not renewed.

Prospective buyers would be able to call those departed franchisees and to discover, in their view, what happened. There are good reasons for other provinces to follow Alberta’s lead in requiring such disclosure.

Franchisors correctly say it’s not fair to regard all franchise transfers – walk-aways, repossessions, sales and so on – as evidence of failure. Still, giving prospective buyers the option of contacting former franchisees equips them with the same information that’s in the hands of franchisors.

Most franchisors probably wouldn’t balk at the idea. With 150 franchisees, Mail Boxes Etc. Canada says it’s on solid ground when it says nearly 100 per cent of its franchises have succeeded since the Canadian startup in 1988. CEO Michael Martino says the franchisor has terminated only one franchisee and therefore has little to disclose in the way of failures.

Mr. Martino acknowledges that franchisees leave the system periodically for different reasons, one of which is a perception that the franchise is underperforming.

But he says that Mail Boxes already practices full disclosure, with no information that a franchisee requests held back. “Anything they want to ask, we tell them.”

But Mr. Martino says Mail Boxes Etc. Canada does not disclose information about its operations up to the standard required in the United States (although it is registered in Alberta and will soon comply with that province’s new regulations).

The reason? “Because there’s no requirement,” he says. “Up to now, there’s no need to do it.”

Perhaps a standard disclosure document for all franchisors would put everyone on an equal footing.

Even Mr. Martino favours full disclosure because “it answers a lot of questions that you spend a lot of time answering otherwise.”

For franchise buyers, the record of past franchisees is one question they should spend some time getting franchisors to answer.

“The question to ask when faced with enormous claims of success,” Mr. Herman says, “is how many franchisees it has had in those units and what became of them.”


Risks: Survivability (franchisee and franchisor), Can’t talk to media, Necessary illusions, Success rate of 95 per cent, Disclosure laws: 10 per cent solution, Credibility, Cruelest lies are often told in silence, Talk to former franchisees, Canada, 19951023 What franchisors

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