Entry into the Middle Class or False Promise? Franchises face scrutiny.

Entry into the Middle Class or False Promise?  Franchises face scrutiny.

“Making It Work” is a series about small business owners struggling to navigate tough times.

When Kenneth Laskin flew to California to meet with executives at Burgerim, a start-up chain of restaurants, he was made to feel not just like another future franchisee, but like part of a family.

Company executives, he said, made a point one night to highlight their shared Jewish faith by praying with him in Hebrew.

At the time, in 2017, Mr. Laskin believed he was getting an excellent offer. He paid $50,000 for the right to open as many Burgerim franchised restaurants as he wanted in Oregon. “I have a whole state,” Laskin recalled.

Today, Burgerim has problems, leaving a trail of financial problems, a lawsuit by the Federal Trade Commission and broader regulatory scrutiny of whether protections for franchisees like Mr. Laskin are adequate.

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

There has been growing concern about whether franchisees need more protection in their franchise agreements. That concern has found sympathetic ears in the Biden administration and several state legislatures, and has resulted in several proposed limits on franchisee powers.

Ultimately, Laskin only opened one Burgerim restaurant, in Eugene, Oregon, which closed in 2020 during the pandemic. Since then, Mr. Laskin has been running out of savings to pay the bills.

Burgerim, which boasted high quality and creative hamburgers, was criticized by former franchisees for make big promises and misdisclose business risks. Of the more than 1,500 franchises Burgerim sold, most never opened, the commission said in a lawsuit the agency filed last year against the company and its founder in US District Court in California.

Peter Bronstein, lawyer for Oren Loni, who was the company’s chief executive in the United States, said that Burgerim made some business mistakes, but that it was often trying to help its franchisees succeed. The two sides are in mediation, according to the court file.

Even with the impact of the pandemic, the number of franchised establishments in the country grew by 2.8% in 2021 and 2% in 2022. This number should increase by another 2% this year, bringing the total to 805,436 franchises, according to the latest data. released by the International Franchise Association, an industry group.

As the franchise network expands, so does its contribution to the broader economy. Franchises employed 8.4 million people last year, up 3% from 2021.

There is historical evidence, according to the International Franchise Association, that the first franchise in the United States dates back to Ben Franklin, who created a network of printing partnerships.

Today, a fundamental symbiosis drives the business model: Franchisees pay an upfront fee to a franchisor like Dunkin’ Donuts or Applebee’s, which gives them access to all of that brand’s suppliers, advertising, and technology. The franchisee can rely on these established systems to get their business up and running quickly rather than having to start from scratch. And the franchisor, in turn, receives the franchise fee, usually tens of thousands of dollars, plus a regular royalty payment from the franchisee.

“Franchises have always been an on-ramp for the middle class to start their own business,” said Charlie Chase, chief executive of FirstService Brands, a franchisor of home improvement and painting services.

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

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

He blames some of this on aggressive Internet advertising (Mr. Laskin learned about Burgerim from a Facebook ad, for example), and also a network of third-party brokers who often pressure potential franchisees to buy multiple franchises at once.

The Federal Trade Commission, under the leadership of Lina Khan, is broadly reviewing industry practices, including disclosure and issues such as franchisors unilaterally changing the terms of an agreement with a franchisee.

“Franchises can be a good business model, but they can also do a lot of damage,” 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 investigating.”

In the case against Burgerim, Federal officials said company executives told franchisees they would refund their franchise fees if the business didn’t open, but that many people never got their money back. Bronstein, Loni’s attorney, said offering refunds “wasn’t the best way to run a business.”

In the years since the 2008 financial crisis and the mortgage meltdown, regulators have tightened protections for consumers, improving disclosure by banks and banning certain fees they may charge. But small businesses, including franchisees, have not benefited from the same extensive regulatory scrutiny.

“There is a view 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 Bureau of Consumer Protection. “However, consumers and small businesses, including franchisees, face many of the same challenges. This is something we are 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 a franchise, he wasn’t looking to become a millionaire, but to build a stable middle-class life.

He opened his only Burgerim store in Oregon in September 2019.

But the problems started soon after it opened, Laskin said. Burgerim has not established a reliable food distribution system in Oregon, he said, forcing Laskin to fend for himself to supply his restaurant. In trying to help new locations take off, the company has never charged franchisees royalties, which has limited its ability to sustain its chain of restaurants over the long term, Bronstein said. Still, he added, there are many Burgerim restaurants that have operated successfully.

Mr. Laskin kept the business running during the pandemic by offering takeout. But he couldn’t find people to work with during the lockdowns, which meant he and his wife ran the entire operation themselves.

Laskin, who suffers from severe back pain from years of working in restaurants, hoped that a franchise would offer him the chance to delegate work to employees and spare his back.

But some days, Mr. Laskin would come home from the diner at night, unable to walk the last few feet to his driveway because of the pain of standing all day.

Burgerim’s leadership, Laskin said, has not provided support during the pandemic.

He closed his restaurant in May 2020 and moved to Florida. Laskin, 57, said his back problems limit the kind of work he can do and it has been difficult to find work after his hamburger business closed.

The struggles of former Burgerim franchisees were brought to light in 2020 by the publication Restaurant Business, focused on the food service sector, in a series of articles.

Some franchisees say that improving disclosure or tightening regulations on fee structures will not be a panacea for rooting out problem actors in the industry.

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

“There are many stories of franchisees who buy a system and then it goes bad for them,” he added. “I would just suggest that they may have had a similar experience outside of a franchise system.”

Mr. Laskin says it’s not just bad timing or circumstances that were to blame. “The system is fundamentally crippled,” he said. “There is a lot of secrecy. It shouldn’t be so difficult.


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