“Making It Work” is a series about small-business owners trying to navigate the tough times.
When Kenneth went to California to meet Laskin Along with the executives at Bergarim, a start-up chain of restaurants, they were made to feel not just like another potential franchisee, but like part of a family.
Company officials, he said, made a point of highlighting their common Jewish faith by praying with them in Hebrew one evening.
At the time, in 2017, Mr. Laskin believed he was being offered a plum deal. He paid $50,000 for the rights to open as many Burgerim’s franchised restaurants as he wanted in Oregon. “I got the whole state,” Mr. Laskin recalled.
Today, Bergrim is in trouble, leaving behind financial problems, a lawsuit Extensive regulatory scrutiny by the Federal Trade Commission and whether the protections are adequate for franchisees like Mr. Laskin.
The challenges highlighted by Bergrim point to franchising as the way people are choosing to start small businesses.
There is growing concern about whether franchisees need more protections in their contracts with franchisees. she’s got anxiety A sympathetic ear in the Biden administration and several state legislaturesand has resulted in a number of proposed limits on the powers of the franchisor.
Lastly, Mr. Laskin opened only one Bergarim restaurant in Eugene, Ore., which closed in 2020 during the pandemic. Since then, Mr. Laskin has been spending his savings to pay the bills.
Burgerim, which claimed to be inventive high-quality burgers, was criticized by former franchisees. Making tall promises and making poor disclosures about business risks. Of the more than 1,500 franchises Bergrim sold, most never opened, the commission said in a lawsuit the agency filed last year in US District Court in California against the company and its founder.
Peter Bronstein, a lawyer for Oren Loney, who was the company’s chief executive in the United States, said that Bergrim made some business mistakes but that he was often trying to help his franchisees be successful. According to court files, both the parties are in mediation.
Even though the pandemic was still waning, the number of franchise establishments in the country is expected to grow by 2.8 per cent in 2021 and 2 per cent in 2022. This year that number is expected to grow an additional 2 percent, with a total of 805,436 franchises. latest data released by the International Franchise Association, an industry group.
As the franchising network expands, so does its contribution to the wider economy. Franchises employed 8.4 million people last year, up 3 percent from 2021.
According to the International Franchise Association, there is historical evidence that it was the first American franchise. meets ben franklinwho formed a network of printing partnerships.
Today a basic symbiotic business model operates: Franchisees pay an upfront fee to a franchisor, such as Dunkin’ Donuts or Applebee’s, which gives them access to all of that brand’s suppliers, advertising and technology. The franchisee can depend on these established systems to get their business up and running faster than starting from scratch. And the franchisor, in addition to regular royalty payments from the franchisee, receives a franchise fee, typically thousands of dollars.
“Franchising has always been the on-ramp for the middle class to open their own business,” said Charlie Chase, chief executive officer of First Service Brands, a franchisor of home renovation and painting services.
Over the years, Mr. Chase, who has served on the International Franchise Association’s board of directors, said he has helped hundreds of successful franchisees get their start. He said, ‘We have created a lot of crorepatis.
Still, Mr. Chase said he is concerned about how some franchisees are being pushed into businesses without understanding all the risks.
He attributes some of this to aggressive Internet advertising (Mr. Laskin learned about Bergarim from a Facebook ad, for example), and also to a network of third-party brokers who often sell potential franchisees one at a time. Motivates many to buy franchises.
Federal Trade Commission, headed by Leena Khan, looking wide On industry practices including disclosure and on issues such as unilaterally changing the terms of an agreement with a franchisee.
“Franchising can be a good business model, but it can also do a lot of damage,” said Elizabeth Wilkins, director of the commission’s policy and planning office. “We are concerned about instances where the promise does not match reality. We believe there is a significant gap that deserves our investigation.”
In the case against Bergarim, Federal officials said company executives told franchisees they would refund their franchise fees if their businesses did not open, but many never received their money back. Mr. Bronstein, Mr. Looney’s lawyer, said that offering refunds was “not the best way to run business.”
In the years following the 2008 financial crisis and mortgage meltdown, regulators have strengthened protections for consumers by improving disclosures by banks and placing restrictions on some of the fees they can charge. But small businesses, including franchises, haven’t benefited from the same extensive regulatory scrutiny.
“There is a view in the world of consumer protection that small businesses don’t get the same level of protection as other consumers,” said Samuel Levine, director of the FTC’s Consumer Protection Bureau. “Yet, 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 into how to enforce laws such as 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 was not looking to become a millionaire but to build a stable middle-class life.
They opened their only Bergarim store in Oregon in September 2019.
But the problems started soon after their grand opening, Mr. Laskin said. Bergrim had not established a reliable food delivery system in Oregon, he said, forcing Mr. Laskin to fend for himself to supply his restaurants. Mr. Bronstein said that in an attempt to help get the new locations off the ground, the company never charged royalties from franchisees, which limited its ability to support its restaurant network. Still, he said, there are many burgrim restaurants that operate successfully.
Mr. Laskin kept the business running during the pandemic by offering take out. But he couldn’t find people to work during the lockdown, which meant he and his wife ran the entire operation themselves.
Mr. Laskin, who has severe back pain from years of restaurant work, expressed hope that a franchise would give him the opportunity to delegate work to employees and spare his back.
But some days, Mr. Laskin would return from the burger restaurant at night unable to walk the last few yards of his driveway because of the pain from standing on his feet all day.
Mr. Laskin said, the Bergrim leadership did not provide any assistance during the pandemic.
He closed his restaurant in May 2020 and moved to Florida. Mr Laskin, 57, said his back problems had limited the type of work he could do and it had been difficult to find work after his burger business closed.
The struggles of former Burgerim franchisees were brought to light in 2020 by the publication Restaurant Business, which focuses on the food service industry. In a series of articles.
Some franchisees say that improving disclosures or increasing regulations on fee structures will not be a panacea to root out troubled actors from the industry.
“Transparency is a great thing, but I’m not sure more disclosure is going to change any results,” said Greg Flynn, founder and chief executive of Flynn Restaurant Group, the largest franchisee in the country with 2,400 locations and 73,000 employees. Brands like Taco Bell, Pizza Hut, and Panera.
“There are too many stories of franchisees buying into a system and then it turns out badly for them,” he said. “I would just suggest that they can have a similar experience outside of the franchise system.”
Mr. Laskin says that bad timing or circumstances alone are not to blame. “The system has fundamentally broken down,” he said. “There is too much secrecy. it should not be this hard.