Want to Franchise Your Business? Do Your Homework First.
October 23, 2007 by Sean Kelly
Filed under BARISTA'S DAILY GRIND (RIP), x Franchise 101, xBuyer Beware, xFranchise Graveyard
(FranchisePick.Com) Yesterday, I posted a story (He Put the Con in Franchise CONsultant) about a couple who thought they could franchise their business for $2500 and, within three months, be on their way to owning the next McDonald’s or Subway franchise empire. I concluded (rather insensitively) that if they had actually sold franchises before acquiring a clue of what franchising entails, they would be out a lot more than the $2500 they sent to the consultant.
Just ask Kearney, Nebraska’s Steven Sickler and Cathy Mettenbrick. Their attempt to franchise their popular Barista’s and Friends coffee concept without first doing their homework cost them everything.
Michael Webster (The Bizop News) reports in his post (FTC Stops Coffee Shop Franchisors) how the FTC came down on Barista’s and Friends, Inc. for selling franchises with woefully inadequate franchise disclosure documents, and for providing earnings projections in violation of the legally required procedures:
…According to the FTC, Barista’s and Friends, Inc. sold at least 18 franchises for $40,000 each. For the fee, the franchisees got the right to use the Barista’s trade name and sell their authorized products. The FTC charged that the disclosure documents that defendants furnished to prospective franchisees lacked many of the items of information required by the Franchise Rule, including:
* audited financial statements, including a balance sheet and an income statement;
* a cover page that among other things advises prospective franchisees to discuss the franchise offering with an advisor such as a lawyer or accountant and advises prospective franchisees to reporter anything wrong or anything important that’s been left out;
* the names, addresses, and telephone numbers of: the ten franchised outlets nearest the prospective franchisee’s intended location, all franchisees of the franchisor, or all franchisees of the franchisor in the state in which the prospective franchisee lives or where the proposed franchise is to be located;
* the business experience of the franchisor, including the length of time the franchisor has conducted a business of the type to be operated by the franchisee; and
* the business experience during the past five years of the franchisor’s current directors and executive directors.
Barista’s Steven Sickler and Cathy Mettenbrick blame the local law firm that drafted the faulty franchise agreement. A story on local news blog The Kearney Hub reported that the attorney has been charged in the Nebraska Supreme Court with violating his oath of office and provisions of the Code of Professional Responsibility:
In 2002, Sickler and Mettenbrink hired Orr to assist them in franchising their coffee shop concept. Orr told Sickler and Mettenbrink that he had experience in franchising businesses and that he was competent to do so, the complaint says.
“In reality, (Orr) had never set up a franchise but had merely reviewed the franchise documents presented to him by other clients who were interested in purchasing a franchise,” Frobish wrote in the filing.
Barista’s closed its two Kearney locations at 4402 Second Ave. and 2400 Central Ave. on July 5, about four months after Sickler and co-owner Cathy Mettenbrink defaulted on loan payments and lost ownership of their properties to Kearney State Bank & Trust Co. in a foreclosure.
Orr also drafted documents for Mettenbrink and Sickler that allowed them to begin selling Barista’s franchises.
Those documents, Friday’s filing with the Supreme Court alleges, did not comply with Nebraska or federal laws and exposed Sickler and Mettenbrink to corporate and personal liability from suits filed by franchisees, as well as state and federal authorities.
Few new franchisors can sell 18 franchises right out of the gate, especially with a $40,000 franchise fee. Barista’s and Friends was obviously a promising young chain, one that had the potential to make its mark as one of franchising’s new success stories. While the founders can blame the attorney and blame the bank all they want, but the fact remains that, had they done their homework both on franchising and on those they hired, they might be one of the success stories being touted on Top New Franchises or FranBest Coffee, instead of another cautionary tale on FranchisePick.
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Research is one of the most important first steps one must take before starting something new. Unfortunately, many of us get caught up in the excitement of a new venture or a new opportunity that we dive in head on without really practicing caution. While they could have avoided this mess by doing research, I can’t really blame Barista’s and Friends either because they did consult with someone in their local law firm. Unluckily, the attorney steered them in the wrong direction.
Jen:
Thanks for your comment. I agree that entrepreneurs tend to rush in boldly and many see what they want to see… They want to believe their local attorney is qualified because he says he is. It’s sort of like agreeing to a high risk, life threatening operation without getting a second opinion. Blame ends up being kind of irrelevant when the outcome is this devastating. On the other hand… I’ve seen people miss huge windows of opportunity because they overanalyzed ’til it closed. But at least spend some time on the franchise blogs so you understand what you’re getting in to. Lots of free info to be had.
Anyway, welcome Jen Chan, who blogs at http://www.surefirewealth.com/blog/. Check it out.
Greetings,
I get calls all the time from folks who want to “franchise” their business. Whoever thinks they can spend under $100k to do it right, PLUS marketing costs when they finally launch it is well… either naive, or cheap!
Franchising a business is amazingly hard work, and full of risk. but, if it is the right concept, it could be a Home Run…
Joel Libava
The Franchise King Blog
Joel Said:…Franchising a business is amazingly hard work, and full of risk. but, if it is the right concept, it could be a Home Run…
Sometimes a Grand Slam… Pinkberry… $27.5 Million in 2 years… Ulp… [scratches head, needs drink...] I’ve got a sudden urge to freeze something nasty, sour and half-spoiled, tell everyone Paris Hilton loves it (photochop a few celeb pics), charge $6 bucks a cup and call up Howard at Starbucks. If he doesn’t bite, Cold Stone will buy it to co-brand with Cereality or Soup Nazi.
Incidentally, if Barista’s or their lawyer had read Joel’s post on the Top 5 Items in the UFOC at The Franchise King blog, they might be busy spending franchise fees and legal retainers (respectively) rather than planning each other’s demise.
http://thefranchiseking.typepad.com/the_franchise_king/2007/10/top-5-items-in-.html
In response to the article, as the owner and developer of the Barista’s Franchise we did our home work with the information we could find in 2001. We visited with several law firms regarding the franchise concept, we chose the Jacobson Orr lawfirm as they were advertising on the world wide web that they specialized in franchise and franchising. We set up an interview with the firm and were told they took the Buckle public, worked on Quizno’s, Thirsty’s and several others. We put our trust with this law firm to guide us in the right direction, what a let down! At a later date we were getting feedback from lawyers in other states indicating there was a problem with the documents. We then approached and e-mailed the Jacobson Orr firm a memo that we wanted a second opinion regarding the compliance of our documents. The Orr firm then hired legal council from Omaha representing themselves as specializing in franchise law to redraft the documents on our behalf. These also turned out to be errant and noncompliant, after hiring yet a third lawfirm, it was discovered that neither firm involved with drafting had experience in franchise or franchising. Both firms held themselves out has having franchise experience to the point they advertised as such. A friend of mine is a foot doctor, would he ever advertise that he specializes in heart transplants? What would be his liability if he performed a heart transplant and his client later died becasue he didn’t know he was supposed to reattach all of parts?