THE BIZOP NEWS

Image via Wikipedia

One of the major myths of franchising is about be tested in a Colorado Court room The myth is that when you are buying a franchise, you are buying a proven business system.

For many franchise systems, this is false.

There is no proven, there is only the inevitable slogan: "In business for yourself, but not by yourself."

But now there is an important case discussing whether franchisors have some legal duty to have a proven business system.

As reported by Janet Sparks, at Franchise Times, the case of 

Colorado Coffee Bean, et al. v. Peaberry Coffee, et al. filed in 2006 in the district court of Denver [raises important issues]

In this case, the experts are weighing in on age-old issues, what most executives would consider the basics of franchising:

When is a company ready to be franchised?

And, what disclosure should be made to properly assist prospects in buying a franchise? 

I believe that the law in this area will turn out to be, in essence, that you can franchise any piece of poo, as long as you "disclose" in tricky legal fashion that you are a piece of poo.

It is of course a stupid law that would protect investors in franchise systems by allowing any old piece of poo to float through the system - but such is the dedication to the power of disclosure laws, much like the efficient market hypothesis, our regulators and legislature will continue to allow indentured servitude as long as it properly disclosed.

The overseer doesn't even have to be competent.

Here is the franchisor advocate of the issue of franchising poo:

"Consultant Michael Seid states in his documents that he knows of "no legal or industry requirement that a franchise opportunity must be tested in any particular manner, or that a franchisor cannot sell a franchise opportunity until it has been proven by prior franchisees."

He writes that the Federal Trade Commission and state regulators have not established a franchisor "Duty of Competence."

Instead, he states, they require franchisors to disclose accurately their experience and history, whatever that may be."

I think that Seid's position is legally correct, even though both immoral and absurd.

But that is the problem prospective franchisees face - any piece of poo wrapped in a franchise agreement, and FDD can be sold for hundreds of thousands of dollars to the unsuspecting public who believe that they are buying a "proven" system.