F.T.C. Public Comment 37

The bottom line is that contract provisions and company policies can appear harmless on the surface, but they can be intertwined into a deceptive web that can limit the value of a business for a franchise owner…Placing unreasonable restrictions, designed to steal equity or to discriminate, should be expressly forbidden in the new Franchise Rules.

FTC.jpg

U.S. Federal Trade Commission
April 22, 1997

Public Comment
Robert Chabot, franchisee

Request for public comment on possible revisions to The Franchise Rule.

Comment #37

RAM Pizza, Inc.
Domino's Pizza
2087 Westminster Drive
Riverside, California 92506

April 22, 1997

RE: 16 CFR Part 436

Federal Trade Commission
Room 159
Sixth Street and Pennsylvania Avenue, NW
Washington, DC 20580

Dear Sir or Madam:

I understand that the FTC is proposing to revise its Franchise Rules, the provisions that protect the rights of those who have not yet purchased their franchises. I would like the FTC to consider protecting the rights of those who already are franchisees.

Franchises are expensive. The majority of people who buy franchises are risking a large part, if not all, of their net worth. They are willing to trade a sizable amount of cash and pay ongoing royalties for the dubious assurance that their prospective business will be successful.

I have been a franchisee for fifteen years and have spoken to several attorneys about franchising. All have told me that they would never recommend to anyone that he sign a franchise contract. The consensus is that franchise contracts are horribly one-sided documents. With a little more confidence, most people do not need a franchise. Again, people are willing to trade a lot of money for a little peace of mind. The details are frequently unimportant when you just need to make money.

Accepting that any franchise contract is bad going into the arrangement, they only get worse with each renewal. My current contract bears little resemblance to the one 15 years ago. I was powerless all long to prevent the disintegration of my rights.

I have eight stores each with a different anniversary date. My contract says I can have no other outside business interests. (Isn't this illegal-?). If I want my income to grow, I must reinvest in Domino's Pizza. Each contract is worse than the preceding one. At renewal time, I have little choice but sign the then current contract. Or, I can walk away from one-eighth of my investment and open my area up to encroachment by other franchisees or corporate. Should I choose to walk away, I would have to accept the company's buy-out offer. The company undervalues the stores by contract and by company policy. Walking away is an impractical solution in protest to a franchise contract.

A franchisor has the power to determine arbitrarily the value of your investment. Our franchisor limits the market for store sales by- first requiring that all franchisees be internally grown. (ie: They must work in a store for a minimum of one year). There are no outside investors who have controlling interest in a store. There are not many pizza store employees with the assets to purchase a business that on the open market would fetch up to five-times cash flow.

Additionally, there is a company policy which states that all franchise owners must live within fifty-mile radius of their store. If you want to sell your store, you must first find someone with money. That person must also live within fifty miles or be willing to relocate.

April 28, 1997

Domino's maintains the right of first refusal on store sales. Should Domino's want your store and you happen to find a buyer willing to pay what Domino's would consider a high price, you could still have problems. The potential buyer must be approved by Domino's. Domino's has been known to withhold such approval on very flimsy grounds. If you want out bad enough, you will take what Domino's wants to pay.

With potential buyers so scarce, our company has developed a "formula price" to determine store value. It is an arcane formula that works out to about two-times cash flow, minus the "cost to bring the store to then current standards." With Domino's the only viable entity for buying or selling stores, the formula works out very well for them.

The bottom line is that contract provisions and company policies can appear harmless on the surface, but they can be intertwined into a deceptive web that can limit the value of a business for a franchise owner.

As a franchise owner I have taken the risk of operating a small business. I assume the responsibility for failure and bankruptcy. I reap the rewards of an above average income and cash flow. I do not, however, have equity in my business. Without equity, a potential franchisee does not purchase a business, although he assumes the responsibility thereof. He purchases a job.

Franchisors should not have the right to limit the sale or resale of stores to qualified investors. Placing unreasonable restrictions, designed to steal equity or to discriminate, should be expressly forbidden in the new Franchise Rules.

Sincerely,

Robert Chabot

For Review, see FTC “Table of Commenters”
http://www.ftc.gov/bcp/franchise/comments/tabcomm.htm


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Risks: F.T.C. Public Comments, United States, 1997, Franchise agreements: Masterpieces of deceptive wording and artful omission, Renewing contract much tougher, Must work only as a franchisee, Encroachment (too many outlets in area), Re-sale value set by franchisor, right to buy outlet before anyone else, Franchisor must approve new buyer, Resale permission unreasonably withheld, Renting a business, Buying a job, Deception, United States, 19970422 Comment 37

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