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Restaurant chain franchises under FTC review

by SuperiorInvest

“Making It Work” is a series about small business owners trying to get through tough times.

When Kenneth Laskin flew to California to meet with executives at Burgeri, a fledgling restaurant chain, felt like not just another potential franchisee, but part of the family.

He said the company’s executives made it a point one evening to emphasize their shared Jewish faith by praying with him in Hebrew.

At the time, in 2017, Mr Laskin believed he had been offered a plum trade. He paid $50,000 for the right to open as many Burgerim franchise restaurants as he wanted in Oregon. “I have the whole state,” Mr. Laskin recalled.

Today, Burgerim got into trouble, they left behind traces of financial problems, a lawsuit The Federal Trade Commission and broader regulatory scrutiny of whether protections for franchisees like Mr. Laskin are adequate.

The challenges Burgerim highlighted come as franchising continues to grow as a way people choose to start small businesses.

There is growing concern that franchisees need more protection in their contracts with franchisors. This concern was found a sympathetic ear in the Biden administration and in several state legislaturesand resulted in several proposed restrictions on the powers of franchisors.

Mr. Laskin ended up opening just one Burgerim restaurant, in Eugene, Oregon, which closed in 2020 during the pandemic. Since then, Mr. Laskin has been draining his savings to pay the bills.

Burgerim, which prided itself on having inventive high-quality burgers, was criticized by former franchisees for grandiose promises and poor disclosure of business risks. Of the more than 1,500 franchises sold to Burgerim, most of which were never opened, the commission said in a lawsuit the agency filed last year against the company and its founder in U.S. District Court in California.

Peter Bronstein, Oren Loni’s lawyer, who was the company’s CEO in the United States, stated that Burgerim made some business mistakes, but that he often tried to help his franchisees succeed. According to the court filing, the two sides were in mediation.

Even as the pandemic continued to diminish, the number of franchise locations in the country grew by 2.8 percent in 2021 and by 2 percent in 2022. That number is expected to grow another 2 percent this year, bringing the total number of franchises to an estimated 805,436 .a latest published data by the International Franchise Association, an industry group.

As the franchise network expands, so does its contribution to the wider economy. Franchises employed 8.4 million people last year, which is 3 percent more than in 2021.

There is historical evidence, according to the International Franchise Association, that the first American franchise it goes back to Ben Franklinwhich created a network of printing partnerships.

The business model today is driven by a basic symbiosis: Franchisees pay an upfront fee to a franchisee like Dunkin’ Donuts or Applebee’s, which gives them access to all of that brand’s suppliers, advertising and technology. A franchisee can rely on these established systems to get their business off the ground quickly rather than having to start from scratch. And in return, the franchisee receives a franchise fee, usually in the tens of thousands of dollars, on top of the franchisee’s regular license fee.

“Franchising has always been the way for the middle class to open their own business,” said Charlie Chase, CEO of FirstService Brands, a home improvement and painting services franchise provider.

Over the years, Mr. Chase, who served on the board of the International Franchise Association, said he helped hundreds of successful franchisees get started. “We’ve created a lot of millionaires,” he said.

Still, Mr Chase said he was concerned about how some franchisees had been pushed into the business without understanding all the risks.

He blames some of this on aggressive Internet advertising (Mr. Laskin learned of Burgeri through a Facebook ad, for example), as well as a network of third-party brokers who often push potential franchisees to buy multiple franchises at once.

The Federal Trade Commission, headed by Lina Khan, searches widely in industry practices including disclosure and issues such as franchisors unilaterally changing the terms of a franchisee agreement.

“Franchising can be a good business model, but it can also lead to a lot of harm,” said Elizabeth Wilkins, director of the commission’s Office of Policy and Planning. “We are concerned about cases where the promise does not correspond to reality. We believe there is a significant gap worth exploring.”

In the case against Burgeri, federal officials said company executives told franchisees they would refund their franchise fees if their business did not open, but that many people never got their money back. Mr. Bronstein, Mr. Loni’s lawyer, said offering a refund “was not the best way to run a business.”

In the years since the financial crisis and mortgage meltdown of 2008, regulators have strengthened consumer protections by improving disclosures by banks and banning certain fees they can charge. But small businesses, including franchisees, don’t benefit from the same extensive regulatory scrutiny.

“There’s a perception in the consumer protection world that small businesses don’t get the same level of protection as other consumers,” said Samuel Levine, director of the FTC’s Office of Consumer Protection. “Yet consumers and small businesses, including franchisees, face many of the same challenges. That’s something we’re trying to address.”

As part of that effort, the Federal Trade Commission is looking at how to enforce laws like the Robinson-Patman Act, an antitrust law that prevents large corporations from using discriminatory pricing to take advantage of small businesses. The agency has also proposed a rule banning non-compete clauses in employment contracts and may consider limiting the use of non-compete clauses in franchise agreements.

When Mr. Laskin bought the franchise, he didn’t want to become a millionaire, but rather to build a stable middle-class life.

In September 2019, he opened his only Burgerim store in Oregon.

But problems began soon after its grand opening, Mr. Laskin said. Burgerim had not established a reliable food distribution system in Oregon, he said, forcing Mr. Laskin to take care of supplying his restaurant himself. In an effort to help new locations get off the ground, the company never collected royalties from franchisees, which limited its ability to sustain its chain of restaurants over the long term, Mr. Bronstein said. Still, he added that there are many Burgerim restaurants that have operated successfully.

Mr. Laskin kept the store going during the pandemic by offering takeout. But he couldn’t find people to work during the lockout, which meant he and his wife ran the entire operation alone.

Mr. Laskin, who has severe back pain from years of working in the restaurant, hoped that the franchise would offer him the opportunity to delegate work to employees and spare his back.

But some days Mr. Laskin would come home from a burger joint at night and couldn’t walk the last few yards down the driveway because of the pain from standing on his feet all day.

Burgeri’s management, Mr. Laskin said, provided no support during the pandemic.

In May 2020, he closed his restaurant and moved to Florida. Mr Laskin, 57, said his back problems limited the type of work he could do and that it was difficult to find work after his burger shop closed.

In 2020, the Restaurant Business publication, which focuses on gastronomy, brought the struggles of former franchisees to Burgeri. in a series of articles.

Some franchisees argue that improving disclosure or increasing regulation of fee structures will not be a panacea for eliminating problem players in the industry.

“Transparency is a great thing, but I’m not sure more disclosure will change any results,” said Greg Flynn, founder and chief executive of Flynn Restaurant Group, the nation’s largest franchisee with 2,400 locations and 73,000 employees. brands like Taco Bell, Pizza Hut and Panera.

“There are many stories of franchisees who buy into the system and then things go wrong for them,” he added. “I would just suggest that they might have a similar experience outside of the franchise system.”

Mr Laskin says it’s not just bad timing or circumstances to blame. “The system is fundamentally crippled,” he said. “There are too many secrets. It shouldn’t be that hard.”

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