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Subway Franchisee Upset

Source: http://www.stuff.co.nz/4599872a13.html

Keely Clements also says her repeated pleas for support from Subway management were ignored, despite telling them her Northlands Mall store was losing money.

That franchise was closed on Monday, after mall management terminated the lease, because it was owed $164,000 in unpaid rent.

Clements also stands to lose her second store, in Kaiapoi, after Subway served her with papers to terminate her lease on July 1, meaning there was no way for her to on-sell the store and recoup capital.

Clements has been protesting outside Subway stores in Christchurch this week to highlight her situation. Christchurch has 23 stores, one for every 16,000 residents.

Clements worked at Subway before buying a franchise in Kaiapoi in 2005 for $480,000. After the success of that store, a year later she bought a second franchise at Northlands Mall for $410,000.

About Ryan Knoll

Attorney and advisor with an interest in franchising. Feel free to email me comments and questions on the "Contact Us" page.

13 comments

  1. The saturation of markets by predators like Subway and Quiznos to always retain and gain market share means that many franchisees can’t survive and are destroyed when black swans appear in the ponds of economies.

    But, the very “nature” of franchising in which the risk of owning and operating the physical units is passed off to individual franchisees ensures that franchisors do usually survive the bad times and survive the recessions.

    Franchise chains do beat the statistical risks of operating and financing the small businesses that wear their names. This, no doubt, is why governments are not involved in any oversight of the sale of franchises, no doubt, and consider that the “greater good” is served when franchisors can sell their franchises at any rate of risk of failure or unprofitability to new prospects.

  2. Be aware that opinions of Carol Eblen, aka Carol Cross, are the opinions of a senior citizen with no formal business training, no formal education in finance, economics, management, marketing, operations, statistics or any business other discipline. She has no relevant business experience. The closest she has been to a business is, as she admitted, sleeping with a failed ex-franchisee.

    By searching on her name you can read her many opinions on all sorts of topics. What comes out is that she is a socialist liberal who believes in the expansion of Government’s role in our daily life. You might want to remember that and consider her not so hidden agenda when you read her postings.

  3. The Watcher is always out there watching and trying to undermine the truth that I write about franchising. The watcher always attacks the messenger and not the message, and with half truths at that. I will admit to being a senior citizen with a business school diploma who trained to be a court reporter. I will admit to sleeping with a failed franchisee —-for over a half a century before he became a failed franchisee of The UPS Store.

    Read NOLO’s TEN GOOD REASONS NOT TO BUY A FRANCHISE that appeared in Forbes.com, AND read Professor Scott Shane of Western Reserve University, Cleveland, Ohio, who on April 28th, 2008, said, in an Internet Blog on Small Business Trends, the following:

    I’m writing today’s blog in the hopes of getting accurate information on new business failure rates out into cyberspace in a way that the search engines will find it quickly. There is a huge amount of misinformation on the Web about new business failure rates that gets cited and reproduced all over the place and that’s a problem for a host of reasons.”

    Do a Google Search on Franchise Failure Statistics or search http://www.smallbistrends.com/2008/04/startup-failure-rates.html/ and write to Professor Shane.

    It strikes me that the premeditated MALICE of demanding ten and fifteen-year contract terms on many franchises and leases that have little chance of surviving these long terms, or even the first coulple of years, is beyond belief and should be STOPPED.

    Apparently, however, this conduct is encouraged under FTC Regulatory Policy and the FTC Rule that must be follwed by the State regulators. I’m just “watching and waiting” and “posting” ——–

    Carol

  4. [quote comment=”227049″]The Watcher is always out there watching and trying to undermine the truth that I write about franchising. The watcher always attacks the messenger and not the message, and with half truths at that.

    I will admit to being a senior citizen with a business school diploma who trained to be a court reporter. I will admit to sleeping with a failed franchisee —-for over a half a century before he became a failed franchisee of The UPS Store.

    Read NOLO’s TEN GOOD REASONS NOT TO BUY A FRANCHISE that appeared in Forbes.com,

    AND read Professor Scott Shane of Western Reserve University, Cleveland, Ohio, who on April 28th, 2008, said, in an Internet Blog on Small Business Trends, the following:

    I’m writing today’s blog in the hopes of getting accurate information on new business failure rates out into cyberspace in a way that the search engines will find it quickly. There is a huge amount of misinformation on the Web about new business failure rates that gets cited and reproduced all over the place and that’s a problem for a host of reasons.”

    Do a Google Search on Franchise Failure Statistics or search http://www.smallbistrends.com/2008/04/startup-failure-rates.html/ and write to Professor Shane.

    It strikes me that the premeditated MALICE of demanding ten and fifteen-year contract terms on many franchises and leases that have little chance of surviving these long terms, or even the first coulple of years,

    is beyond belief and should be STOPPED.

    Apparently, however, this conduct is encouraged under FTC Regulatory Policy and the FTC Rule that must be follwed by the State regulators.

    I’m just “watching and waiting” and “posting” ——–

    Carol[/quote]
    Ridiculous statements Carol, just plain ridiculous. Going into business or franchise is choice people make freely. It is important that the franchise agreement and the associated lease is coterminous.

    Additionally if a short-term lease is entered into and the business is successful once the lease comes to term the tenant is at the mercy of the landlord to renew at the landlords pleasure and new rates which could put the franchisee or business owner out of business.

    You simply don’t know what you are talking about.

    Joe1000

  5. No Carol theWatcher is not trying to “undermine the truth that I write about”, theWatcher is pointing out that you do not have the slightest clue what you are talking about. You do not speak the truth because you are incapable, due to your lack of education and relevant experience, of understanding the issues.

    Look above, Joe1000 just makes the point. Anyone, with any successful business experience would instantly understand the truth of his words. A short term agreement means that while you can exit quickly you also are at the mercy of those who have almost perfect knowledge of your market, and will draft the renewal to their benefit and your detriment.

    But you do not see this, because you have zero relevant experience and zero education. And anyone reading your posting has a right to consider the source. Most people who post their opinion have RELEVANT EXPERIENCE, such as Joe, you do not.

  6. For almost thirty years, since the promulgation of the FTC Rule, franchisors have been able to withhold unit performance statistics and to opt NOT to even make earnings claims in the UFOC/FDD’s. The majority of franchisors make use of their legal option NOT to make earnings claims or to disclose unit performance statistics in the UFOC/FDD and they reside in the safe harbor of the contract that protects them in the courts from franchisee post-sale charges of fraudulent inducement to contract through the hiding of the failure rate/profitability of the franchise or the misrepresenting of the success of the franchise.

    The status quo of the law and regulation has permitted franchisors to hype and sell their franchises as “valuable” and “profitable” without providing any proof of the value or the profits to new buyers of their franchises in the mandated government disclosure document, the FDD. The package of the FDD together with the actual franchise agreement acts as a constructive fraud, in my opinion, to bring the “marks” — the unsophisticated franchisees, to sign the boilerplate contracts that they believe are not negotiable. If this is not the intent of federal regulatory policy, this is the effect of federal regulatory policy. And, , attorneys within the franchise industry have indicated to the
    FTC in public comments that this was the real purpose of franchise regulation promulgated in the late 1970’s.

    It is against the law, the FTC Rule, for a franchisor to provide any earnings claim outside of the FDD. But, just HOW do franchisors bring prospects to buy franchises and sign long-term franchise agreements wherein they are exposing themselves to hundreds of thousands of dollar in startup costs and lease commitments that are personally guaranteed unless the franchisor or his sales agent has convinced the franchisee OUTSIDE of the contract that the purchase involves little risk and will return great profits?

    In terms of the revealing research on Startup Failure Rates of franchisees and franchisors by respected researchers like Professor Scott Shane, the long-term contracts and the long-term leases demanded by franchisors are generally just premeditated malicious legal traps designed by the franchise industry to provide cheap labor and cheap “venture” capital on which franchisors can try to build their pyramid of gross sales while reducing their risk of financing, building, and operating corporate physical units to wear the brand names.

    The truth is hard to refute and inconvenient if you are in the business of pushing franchise sales. Therefore, you continue to attack me, personally. I’m sure Ryan Knoll will bar me from this topic, as I am barred from other topics on Franchise Pundit, if you ask him to do so. I was surprised to see that I could post today on this topic and apparently it was just an oversight.

  7. This is a blatant exaggeration. If a system does not provide financial performance representations but suggests, whether directly or indirectly, that as a zor you would be profitable, this is a violation of federal and many state laws.

    If there is constructive fraud, then substantiate it. You state that most zees believe that franchise agreements are non-negotiable. For the most part, they likely are. The zors have some valid reasons not to negotiate.

    Your statement regarding long-term contracts demanded by zors is also ridiculous. Zors would likely benefit from shorter contracts, in that they could continue to adjust the royalties and other financial obligations on a more frequent basis, as opposed to being locked into a stated percentage or amount for an extend period of time. If a store is profitable, the ability to modify the royalty rates is obviously a tempting option for the zor. Additionally, obviously it makes sense to ensure that the lease and franchise agreement duration are in synch. If the prospect fails to do so, then they are setting themselves up for disaster.

    Again you are overlooking a fundamental flaw in your argument – nothing makes a prospect join any particular system, be they a retiree, veteran or portly midget. Your arguments are not truth. It is not even a well conceived opnion. When asked to substantiate your arguments, you consistently refuse to do so. Your arguments are predicated on the belief that one’s failure to protect themself somehow triggers the need for increased governmental supervision or otherwise is indicative of a scheme or conspiracy by numerous three letter acronymned governmental agencies and franchisors to defraud the public at large. Your only support for these claims are statements such as “the previous poster knows X but…” or “As Richard Solomon/Paul Steinberg/Michael Webster always says…” or “it is obvious that…” or “in this article from the 70s…” or to PeRioDicalLy CapiTaliZe cErtAin woRdS foR drAmaTic eFfeCt.

    In order for people to start taking you seriously, you need some cold hard facts. Webster and others have already shown you how and where to begin – your refusal to do so reasonably leads me, and likely others, that you are either too lazy to show us that you are in fact correct, or you are afraid that the evidence does not support your claims.

    In your response, please be sure to mention “Bubba logic” and “Bubba knows that the FTC Rule kills small kittens” at least two or three times. It makes me feel warm and cozy on the inside.

  8. Truth in Franchising

    Bubba that was quite a rant! Is PETA aware of the FTC practice of sacrificing kittens?

    TIF

  9. Bubba Logic —-I already mentioned that “profitable franchises would prefer the shorter 5-year term, as explained several months ago on Blue Mau Mau by Richard Solomon of Franchise Remedies fame.

    But the point here, Bubba, is that in the case of immature and new franchises, the odds of either the franchisor or the franchisee surviving for ten years is somewhat remote and everyone knows this, except the prospective buyer.

    The point is that the requirement for ten-year contracts and the ten-year leases (with co-terminus default terms) that are personally guaranteed IMPLY profitability and survival to prospective buyers — but the explicit terms of forfeit in the language of the contracts are intended to give the franchisor the full advantage in early termination of the contract when the franchisee fails to thrive and attain breakeven status.

    In early termination, the franchise agreement acts as a malicious legal trap that has been hidden from view of the average unsophisticated franchise buyer who enters into the contract in great good faith and trust in his franchisor. The franchisee is naive and believes that the franchisor can’t and won’t thrive unless he does!

    Apparently, you and Joe want to ignore the statistics in Professor Scott Shane’s “Startup Failure Rates —The REAL NUMBERS” that can be accessed by a Google Search on Franchise Failure Rates as seen by me on http://www. smallbiztrends.com/2008/04/startup-failure-rates.html/ 6/28/08.

    I think Prof. Shane was talking about you, Bubba and Joe, when he said “There is a huge amount of misinformation on the Web about new business failure rates that gets cited and reproduced all over the place and that is a problem for a host of reasons.”

  10. I am highly disappointed you did not mention anything about the FTC killing kittens. I did not think that was unclear.

  11. Ryan,
    Nice to read about another happy Subway franchisee.
    GEEZ!
    Have a great 4th!
    Joel Libava
    The Franchise King Blog
    {I know, I know… I have not guest authored for awhile….}

  12. First, losing everything because a franchise failed is not a matter that should be taken lightly. From what I have experienced I can tell you Carol is right on the money. I do not care how old she is, I do not care what her education is, I don’t care what her real name is. I do however care about the facts. And this is where Carol is right on. The facts are Franchisors are not required to disclose important financial information that would shed light on the potential success of a franchisee. Franchisors do not take responsibility or any risk for the failure rate of their franchisees. I do not want more government involvement, and in my view, neither does Carol. What everyone should want is to identify, then verify and then stop franchisors from perpetuating frauds and untruths. Business is about the numbers, prospective franchisees should be able to get verifiable non-biased data. Carol addresses this issue, among others.

    I also think establishing targets is a great idea, I have targeted Pirtek, if you have questions concerning Pirtek I think I can shed some light on the many bankruptcies, failures and Terminations and litigation that Pirtek struggles with and provide real numbers. Carol may have a different target, I do not know, but certainly franchising in general is ripe with opportunities to attack. My theory is most of the used car salesmen moved into franchising. A good business has good numbers, it sells itself, and in general has good growth and franchisees that own multiple units. Of course what “good” means is relative. I hope Carol continues to post and stay focused. I hope more people speak up about all the discrepancies surrounding franchising. Maybe if we stick together we can stop some crooked franchisors. Good luck. Scott, 813-318-1258

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