As unaccustomed as I am to public speaking…
The free rider problem manifests itself in two principal ways within franchising.
One, franchisees can free ride (rip-off) the franchisor by taking the benefits of being within the system but not paying the price (royalties, ad fund, margin on COGS, etc.).
Two, franchisees can cheat by ripping off their peers; other franchisees within an independent franchisee association, IndFA. This, again, is done by taking the benefits (business & legal research, franchisor attention) while not contributing their fair share.
- The single most factor in a franchisee’s investment is a professionally managed and adequately resourced IndFA. Without an IndFA, franchisees are hopelessly helpless in a competition of competence with the most half-baked franchisor.
Incentives must be created to encourage franchisees to support early, co-operate and hold their counsel. Many small businesspeople initially think of an IndFA as a type of union which needs to be overcome.
Franchisees often too narrowly define their business relationships.
- They start looking at the franchise agreement when the first storm clouds appear and, poof, they become a 20-year franchise law expert. Sorry folks: the business wags the law, not the other way around.
- An IndFA starts with an embryonic leader and informal executive which needs to be supported ($ and sense). There is a lot of work to do in researching the characterisitics of each trademark system and that needs to be done by a competent expert. [Think of it as a one-time information capital cost: Very cost-effective as a % annual sales.]
- Modern franchising would never exist if the industry only was made up of franchisees and franchisors. Without a banker, neither could exist. Without the law, the same. Any industry stakeholder should be invited to the table: Otherwise, they’re free riding [making money without contributing].
- Traditional and non-traditional suppliers to franchisees are an important, but hidden revenue-generation source for an IndFA. A shrewd executive starts looking as far down the road as the franchisor does.
- Most franchisors will not welcome the formation of an IndFA with open arms. There are some defenses to a short-sighted franchisor response and the greatest is the integrity of the executive and its advisors.
Keeping your nose to the grindstone [without binding together] didn’t work then. And it doesn’t work now.
William Wise has little to smile about these days.
Canadian-born, self-admitted bankster says in Ex-Raleigh banker pleads guilty to Ponzi scheme:
William Wise, 62, pleaded guilty to 12 counts of mail fraud, three counts of wire fraud and one count each of money laundering, conspiracy to commit fraud and tax evasion. He will be sentenced in March, when he faces up to life in prison and millions of dollars in fines.
Wise operated Millennium Bank from a west Raleigh office. He billed it as a unit of a Swiss bank based on the Caribbean island of St. Vincent, but he admitted in federal court in San Francisco that it was merely a front for a Ponzi scheme. Millennium promised investors a 16 percent return on certificates of deposit, but Wise and co-defendant Jacqueline Hoegel used investors’ money to repay earlier investors and fund lavish lifestyles for themselves.
There is often a blond involved.
As we noted in our April 20th post: the other banks were 100% complicit.
John Lorinc wrote the book on franchising from a franchisee’s investor viewpoint.
I’m glad to see it is still available to buy online and is in many Canadian libraries.
The hidden banking side is revealed in Chapter 4, The 90% Solution: Franchise Economics, some of which I excerpted in a WikidFranchise.org post.
What did the business press have to say about Lorinc’s work?:
- National Post: Opportunity Knocks: The Truth about Canada’s Franchise Industry, is an impressively researched look at the myriad of franchises that mushroomed across the country in the past decade. An award-winning magazine journalist, Lorinc has produced an engaging account that charts both the spectacular successes of some franchisers and the utter failure of some franchisees. How franchises seduce those with the most to lose, Jennifer Lanthier, November 2, 1997
- Globe and Mail: At its worst, Lorinc says, franchising is a haven for the unscrupulous who prey on the unwary – typically recent immigrants willing to labour long hours in dreary businesses, unaware that those operations have little chance of prospering – using them as pawns in a shadowy real estate game. Rather than reflecting an insatiable consumer demand, he inquires acidly, is it possible that all those new doughnut shops may reflect a quiet understanding between landlords and franchisors that the best way to fill fallow commercial property is to sell franchises to credulous investors? Franchise book of interest to anyone who pays taxes, Ann Finlayson, November 1, 1997
Finlayson strikes a cautionary note, specifically about the hinted at misuse of the Canada Small Business Financing program, CSBFP:
Does all this matter to you? Yes, it does. In 1993, in the wake of vigorous complaints by small-business owners that Canadian banks were reluctant to finance them, Ottawa raised the ceiling on loans guaranteed by the Small Business Loans Administration to $250,000 and its guarantee rate from 85 per cent to 90 per cent, sparking a bank lending rush to franchisees and shifting the risk of franchise investments onto taxpayers’ (your) shoulders.
The Risk: Only a fraction of the Liars’ Loans are ever claimed by the banks, thereby grossly understating Industry Canada’s default statistics (Franchised v. Non-Franchised loan performance). The franchisee thinks he signed a government-backed loan but it never gets registered as such. As their bankruptcy, loss of life savings, marital and family breakdown escalate over the life of their 12 to 18 month franchise career, the franchisee NEVER looks to Box 9 of the CSBFP loan application form (Projected Sales ) as the source of their trouble; where the lie is put into the “Liars’ Loan”. The proceeds of these engineered-to-fail loans is split upfront by the franchise banker with the bank, banker, franchisor and sales agent. If questioned, the bank shreds the paperwork and waits for the lawsuit.
And, seriously, how many of these Immigrants as prey losers could or would ever sue a Schedule 1 chartered bank?
- Only one I know of: a father and son PhD/B.Eng. team I worked with. The Oudovikines (pronounced: ou-doe-VEE-kin), RCMP Commercial Crime Unit affidavit, Country Style, CIBC, lawsuit
The Return: Smashing quarterly earnings goals, record profits, high turnover in the small business division of each of the banks, and making franchise lending the most lucrative form of commercial lending in Canada. Private gain/public loss enabled by a criminogenic environment, moral hazard, regulatory capture…
Lorinc carefully mentions the “windfall profits” in this arrangement of churning:
What’s more, some banks and franchisors have put the SBLA program [predecessor government guaranteed loan program] to questionable use during foreclosure actions against franchisees, says one former owner who has been through the process. When a bank calls a loan against a non-performing franchisee, the 90% guarantee effectively relieves the bank’s receiver from trying to get the best possible value while disposing of the owner’s assets. With most of the loan covered by the Canadian taxpayer, the assets – fixtures, kitchen equipment, inventory, etc. – can be sold quickly at a deep discount, possibly below market value. This allows the franchisor too step in and buy back the property at better-than-firesale prices, thus generating a windfall profit when the store is later re-sold to another franchisee.
An important work that, depressingly, is as relevant in 2012 as it was in 1995.
The broker disarms and then steers the unsophisticated potential franchisee to the dirty franchise banker’s branch office.
It mentions Subway specifically but any Canadian mom-and-pop coffee, deli or donut tradename will do. Spot on for the United States and fundamentally accurate for Canada and any other country.
- Nice touch mentioning the veterans’ franchise program scams (VetFran) though.
- As a RCAF brat, I like that.
For more details on how franchising welcomes home military veterans, see Little Caesars: Ist U.S. discount program Imported for Canadian military veterans, January 2009 post on FranchiseFool.com.
Cross posted from FranchiseFool.com.
Today’s Ottawa Citizen reports in Royal, TD bank report higher profits, bump up dividends:
Royal Bank said it is raising its dividend as the bank says earnings increased 73 per cent in the third quarter, marking its highest quarterly profit ever.
The bank says its quarterly dividend will increase by five per cent to 60 cents per share. The bank had already boosted its dividend earlier this year, by six per cent in the first quarter.
Good year for all the banks overall:
Canadian banking net income was a record $1.127 billion, up $239 million compared with last year.
That would be a year-to-year increase of 26.9 per cent. Not bad.
I was told on Bay Street that franchise lending was the most lucrative form of commercial lending, bar none. When I asked if it was so because the banks’ liar loans were redeemed the loan guarantee program, he just smiled.
What the hell are they thinking?
- TD Bank closing customer accounts as part of Iran sanctions, National Post, July 6, 2012
- TD Bank discriminates against Iranians, says family, The Province, July 11, 2012
- Iranian-Canadians fume as TD closes accounts, CBC News, July 11, 2012
- Iranian-Canadians furious over closure of TD Bank accounts, Toronto Star, July 12, 2012
- Still no word from TD Bank, say Iranian-Canadian customers affected by sanctions policy, Ottawa Citizen, August, 16, 2012
- Iranian-Canadians protest in front of TD Bank, Toronto Star, August 25, 2012
- Condemn TD Bank in their Treatment of clients with Iranian Background, Facebook page