FTC says fast food franchises hit hard

For many Americans, owning a fast food franchise seems like a promising way to secure their financial future. Burger chain franchisor Burgerim has sold more than 1,500 franchises, making tens of millions of dollars from would-be entrepreneurs. But according to a lawsuit just filed by the Justice Department on behalf of the Federal Trade Commission, the defendants committed double deception and violated franchise rules.

complaint Claims California-based Burgerim and its CEO Oren Loni promote its franchises as a “business in a box,” promising to pave the way for franchisees to become thriving business owners, They were assured that the company’s “training, branding and operating agreements” were designed to “support their successful and profitable Burgerim stores in the community”. The defendants also promised to help franchisees “customize your location, hire a small team, and build wealth.” According to promotional materials, “All you need is the will to succeed.”

How do potential entrepreneurs evaluate the risks and benefits of a franchise opportunity through such a pitch? This is the primary purpose of the FTC Franchise Rule, the centerpiece of which is the Franchise Disclosure Document. But according to the FTC-DOJ lawsuit, the defendants’ franchise disclosure documents omitted critical required data, including (among other things) contact information for current and former franchisees. Why is this information important? So people considering signing on the dotted line can learn about other people’s real experiences.

Additionally, the indictment alleges that the defendants made financial performance statements to potential franchisees but failed to include those statements in financial disclosure documents as required by franchise rules. Additionally, the FTC and DOJ said Burgerim made claims in disclosure documents that contradicted what they told potential franchisees.

While a Burgerim franchise costs about $50,000, that doesn’t include the usual costs of opening a restaurant – finding a location, building the facility and other expenses that can cost a Burgerim franchisee more than $600,000. The lawsuit alleges that the defendants violated the Federal Trade Commission Act by falsely claiming they would refund franchise fees to franchisees who were unable to obtain financing or restaurant locations. In fact, of the more than 1,500 franchises Burgerim has sold, the vast majority never got off the ground. Hundreds of people tried to cancel their franchise agreements, but the defendants failed to fulfill their promise of refunds, the lawsuit says. Particularly troubling was the fact that Bergrim offered discount programs to veterans, encouraging them to purchase multiple franchises but often leaving them with huge debts.

The complaint, filed in federal court in California, seeks injunctive relief, consumer damages and civil penalties. Even at this early stage, the case provides important advice to both parties in a franchise transaction.

Franchisors should focus on communicating clearly about the commitments potential franchisees will make. This includes talking directly about the risks involved and accurate information in financial disclosure documents. Your starting point: Review the Federal Trade Commission’s Franchise Rule Compliance Guide and Revised Franchise Rule FAQs.

What can potential franchisees learn from filing this lawsuit?

• Take it easy. Purchasing a franchise is a significant financial commitment that is incompatible with fast talking, high pressure, and quick decisions.
• Dig deeper into financial disclosure documents. As you read through the financial disclosure documents, ask yourself if the franchisor, franchise representative or anyone else has made claims that are contradicted by the documents or not mentioned at all. For example, did the franchisor or franchise representative say anything about financial results or refunds that does not appear in the financial disclosure document? This is a signal to walk away.
• Find franchisees and ask the hard questions. Contact franchisees (or former franchisees) included in the financial disclosure document and ask in-depth questions about their experience. If they seem reluctant to talk, ask yourself why. Could it be that the franchisor made them sign a non-disparagement agreement—a contract that might prevent them from speaking freely about the risks or shortcomings of the business?
• Seek advice from people who have no financial motivation. Before purchasing a franchise, discuss the offer with someone you trust who has no relationship with the franchisor. Consider reaching out to successful business people in your community. Their years of experience may alert them to risks you haven’t considered.

Franchisees, have you discovered questionable business practices that the FTC should be aware of? Please go to ReportFraud.FTC.gov to report it.