Research paper: Franchising

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Outline

Introduction - introduces the problem to be discussed in the paper
Franchising and franchise fraud problem - defines what franchising involves and explains in depth the problem of franchising fraud
Solutions to franchise fraud - analyses the solutions of the to the problem of fraud in franchising
How effective the solutions are - this section evaluates the effectiveness of the solutions analyzed.

Introduction

Franchising business has grown tremendously to become a very critical part of the United States economy. The franchise businesses have evolved over years and have grown exceedingly in the international arena and in the online world. By 2009, franchise establishments provided more than 11 million jobs to people in the U.S and had "an output of more than $880 billion". According to the International Franchise Association (IFA), 61% of franchise businesses operate internationally, with more and more adopting online strategies (Gillis, McEwan, Crook, & Michael, 2011). The franchising form of business is much more mature in the U.S. yet despite this the number of franchising fraud cases are still prevalent. Though the law has tried to solve most of the problems that arise with franchising, the advent of online business and the expansion of franchising into the international realm has give fertile ground for more franchise scams to breed. This paper analyses the problem of franchise fraud, discussing possible solutions for the problems and analyzing whether these solutions are effective.

Franchising and franchise fraud Problem

As noted above franchising is currently one of the popular means by which people their own businesses through out the globe. This type of business which started from France in the 18th century is one in which an entrepreneur or innovator, the franchisor, grants the rights of usage of his/her technology or intellectual property to another local entrepreneur, a franchisee, for a fee (Inma, 2005). In legal terms this relationship between the franchisor and the franchisee is often on contractual basis. A major problem in franchising is the lack of fair and full disclosure concerning the franchising agreements and expectations which either result to the franchisee being scammed or the to agency problems between the franchisor and the franchisee (Burke, & Abel Ii, 2003). Though full disclosure legislations have been put in place in order to guide the business relationship between the franchisor and the franchisee, the problem of exactly knowing the legitimate franchisors from the those who operate under false pretences has been a major problem for potential entrepreneurs. This is especially so with the continued growth of the franchising form of business.

Franchise fraud otherwise referred to as pyramid or chain referral scheme by the FBI report on fraud cases, is defined as investment or marketing frauds where a person is offered the rights to sell or distribute particular products by the maker of the product, where the profits for the maker of the product is not the sale of the products by the distributors but rather the sale and offering of distributorships to as many as possible distributors to a point where the number potential investor distributors is exhausted and the whole franchise arrangements fall (The FBI, 2012). Often this happens because the emphasis by the franchisor is often put on the sell of franchises rather than the product.

One of the largest profit centers for franchisors is the fees that they get from selling the rights to usage of their products or intellectual rights, and therefore for those who are fraudulent once the contract is signed and the franchisee fees paid, they end having no concern whatsoever exactly how the franchisee operates or whether they are making a profit or not. If the franchisee fails, they simply sell it again to another potential entrepreneur (Herman, 2011). Even with prominent companies, potential franchisors can end falling victims to franchise fraud, as can be clearly noted in the sandwich chain Quiznos which was recently accused of franchise fraud where the company kept more than $75 million in franchise fees from franchise entrepreneurs who were never able to get their business started (Mencimer, 2009). For some businesses, calling themselves franchises has been nothing but a license to defraud and steal from others.

In most instances the victims of the fraud may be subjected to misleading promotions and testimonials, fictitious sales projections and exaggerated benefits where the victim is urged to take advantage of the franchise opportunity. Once transactions on the sale of the franchise is completed, the franchisor may either disappear ...