How important is the number of franchisees?

“The franchise offering circular should say something about the number of franchises that are up and running. If you’re listing a bunch that aren’t running, that may be a material omission. It would make me wonder if an opportunity had been oversold.”… We argued that when a franchisee purchases a franchise, one of the factors to consider is how many are open and operating and how many have closed. We won that case.”

Franchise Times
May 2009

How important is the number of franchisees?
Julie Bennett

An Internet franchise has claimed to have 1,500 units for the last five or six years. The number of units in operation, however, remains a mystery.

WSI Internet franchising in Mississauga, Ontario is a high-octane marketing machine. Its name and tagline, “We simplify the Internet,” appear in banner ads on scores of franchise-related Web sites. For at least five years, press releases have claimed WSI has “more than 1,500 franchisees in 87 countries.”

About half those franchisees are in the U.S. and the company’s latest FDD, filed in March 2009, reports 652 franchisees here at the end of 2008, down from 872 at the end of the previous year. In a press release dated March 30, WSI president Ron McArthur explained the 220-franchisee loss as a re-focus of the company, moving from Web site development to selling Internet marketing services.

“Some WSI franchisees were not willing to change,” McArthur is quoted as saying. “Some of the franchisees had lost interest. What they had really purchased in a franchise didn’t exist any longer because the franchise had evolved so dramatically. They elected to say ‘no’ and moved on. There was little, if any, animosity from those who left.”

But when Franchise Times contacted franchisees at random, we heard a different story. One woman in the Midwest said, “I stopped working my WSI franchise in 2002 and asked explicitly to be taken off the list (of current franchisees) many times. I had been an independent consultant in IT and I thought an Internet consulting franchise would make sense and that I could profit from the franchisor’s marketing. After I started, I realized that they never advertise to the end consumer. All their ads focus on selling more franchises. I lost $60,000 and appreciate the lesson, because it made me learn marketing on my own.”

Ed Diamond in Arlington Heights, Illinois, said, “When I attended their training class in Canada six years ago, I felt they would sell a franchise to anyone who called them. There were people in my class with no technical or business skills. I felt WSI was in the business of selling franchises, not in doing a great job for their franchisees. They advertise themselves as the leading Internet franchise. But I ‘disenfranchised’ myself one-and-a-half years ago and I don’t recommend the franchise to anybody who calls me.”

WSI’s McArthur said he had worked with legal counsel Ann Hurwitz, a partner with Baker Botts in Dallas, to “cleanse its system” and to remove terminated and cancelled franchisees from its 2009 U.S. roster.

Many of the franchisees contacted from the newer roster were more enthusiastic about the concept. Lynda O’Mara, of Lakewood, Colorado, laughed when told that McArthur said the average WSI franchisee has 20 clients. “If I had that many, I wouldn’t still be in business,” said O’Mara, who launched her franchise four years ago, has 60 to 80 customers and is still growing.

Nancy Vinkler, of Audubon, Pennsylvania, became a WSI franchisee in 2002 and renewed her five-year contract. She said, “The WSI business model is including more and more things we can take into the marketplace.”

Craig Bodner, of Chandler, Arizona, became a franchisee a year ago and said his business “looks good and I am enjoying it.”

Kathleen Ion, of Phoenix, said, “I’m doing well, but I know the failure rate is high. After two years, I’m just starting to pay myself. When I get calls from people looking at this franchise, I’m honest and tell them that it takes a year and a half to two years to earn an income.”

Tapping into the numbers
The 2009 roster contains scores of people we couldn’t call because their phone numbers have been disconnected or reassigned to someone else. Of the 23 franchisees listed in Illinois, for example, nine identify themselves as active WSI franchisees; four phone numbers have been disconnected, one was not accepting calls and five have been reassigned to other parties. Messages left on the voicemail of the remaining four franchisees listed were not returned.

Of the six Indiana franchisees listed, two numbers were disconnected, two reassigned, one was perpetually busy and the sixth didn’t return our call.

In Iowa, Michelle Durand-Adams of Waukee said she has a “good book of business and I’m growing, but the learning curve is steep and keeps getting steeper.” Two of the other three franchisees listed had numbers that were no longer in service; the fourth number had been reassigned.

In Maryland, we found two active franchisees, four numbers no longer in service and two more reassigned. One line was always busy and the message we left on the 10th line was never returned.

Colorado lists 15 franchisees, including seven who are in business, five disconnected phones, one reassigned number and a phone belonging to a man who said, “I haven’t done anything with the franchise since the middle of last year, but I’m still sending in my $300 minimum royalty each month. I know people who stopped sending their money when they stopped running the franchise and WSI is chasing them through collection agencies.”

But in Oregon, another man listed said just the opposite. “Right after I purchased the franchise, I returned to my old company. I never sent them any more money and I never heard from them.” Of the three other franchisees listed in Oregon, two are active, including Dennis Ortega of Portland, who just renewed his five-year contract. The fourth phone number had been assigned to someone else. In total, of the 74 listed franchisees we contacted, we found 26 franchisees, or 35 percent, who were still active.

Does WSI really have “over 1,500 franchises in 87 countries?” Here’s where the situation gets complicated.

When asked for a worldwide franchisee count, McArthur sent a list of 88 countries, including the U.S., with a franchisee number next to each one—i.e. Bahrain – 2; Columbia – 18; French Polynesia – 1. There was no way to find these franchisees or find out if they are active. As for the U.S. franchisees who disconnected their phone numbers and seem to have disappeared, McArthur said, “If we have a five-year contract with someone, we count them as a franchisee. We have some franchisees that have gone dormant and others paying the minimum royalty but not doing any business. The FDD lists the most recent information we have. We’re an Internet company and we don’t telephone our franchisees.”

WSI’s outside counsel, Ann Hurwitz, said, “The FDD roster is a list of franchisees with agreements in place. If a prospective franchisee were going to buy a franchise, he or she can do the same thing you’ve done, and call all the numbers listed.”

A new Illinois franchisee said he did limited research by calling four franchisees provided by WSI and others he found on the Web. “I’m finding business is not as easy as I thought it would be,” he said. The franchisee said he was attracted to WSI because of its pool of 1,500 franchisees. “I was relying on that information. If I had known that many of them were no longer active, I probably would not have bought the franchise.”

Is it legal to include franchisees in an FDD’s roster if they are no longer active? Again, the answer is complicated. Item 20 (5) of the Amended FTC Rule on Franchising has a clause stating that a franchisor must disclose “The name, city and state and current business telephone number, or if it is unknown, the last known home phone number, of every franchisee who had an outlet terminated, canceled, not renewed or otherwise voluntarily or involuntarily ceased to do business under the franchise agreement during the most recently completed fiscal year or who has not communicated with the franchisor within 10 weeks of the disclosure document issuance date.”
Hurwitz said, “My client is complying with the amended Franchise Rules’ requirements relating to the disclosure of unit numbers.The simplest answer is that there are communications that go out; there are default and payments notices under the accounting department that notify them of the minimum royalties due. Like any franchisor, if somebody’s not paying, WSI will notify them of the non-payment. If WSI pursues that or not, it is a business decision. Many times they do not, especially after the evolution of the system.”

But J. Michael Dady of Dady & Garner in Minneapolis said, “The franchise offering circular should say something about the number of franchises that are up and running. If you’re listing a bunch that aren’t running, that may be a material omission. It would make me wonder if an opportunity had been oversold.”

Richard Rosen of the Richard Rosen Law Firm in New York, also questioned the practice of listing franchisees who are out of business or can’t be contacted. In a 2007 case, Dunhill Franchisees Trust v. Dunhill Staffing Systems Inc., Rosen said, “That was one of the issues. When people bought the staffing franchise, they were told there were 120 open and operating, but we discovered that many of those had closed. They still had a phone number, but were out of business. We argued that when a franchisee purchases a franchise, one of the factors to consider is how many are open and operating and how many have closed. We won that case.”

Not all franchisees agree. Scott Robbins, who has been a WSI franchisee in Scottsdale, Arizona, for a year, said, “I knew to some degree that there was a bit of attrition in the system. When I went to Canada for training, I remember calling my wife and saying there were 15 people in my class. I said that if I knew that 14 of them would be out of business in a year, I still would have done it. Because of my background, I knew this franchise was right for me.”

Another franchisee in the Pacific Northwest, who asked his name not be published, said, “WSI has been claiming 1,500 franchisees in 87 countries for at least six years. It was a talking point that was important for me when I started, because if I was going up against someone who does Web sites for fun, I could say, ‘Look at the structure behind us.’ But that turned out not to be the case and the support’s not there. The only time I hear from them is when I’m 10 minutes late paying my royalties or when they want me to pay to go to one of their conferences.”

He added, “WSI markets themselves very well. But you’d think that number would have changed in six years. By now, wouldn’t you think it would be 1,501?”

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