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“Making It Work” is a series about a small business owner who is struggling to make ends meet.
When Kenneth Laskin flew to California to meet with executive at Burgerim, a start-up chain of restaurants, which made him feel not just like another potential franchisee, but like part of the family.
Company executives, he said, made it a point during the evening to highlight their common Jewish faith by praying in Hebrew.
At the time, in 2017, Mr Laskin believed he had been offered a plum contract. He paid $50,000 for the right to open a Burgerim franchise restaurant as he wanted in Oregon. “I got the whole country,” Mr. Laskin recalled.
Today, Burgerim is in trouble, leaving a trail of financial problems, lawsuits by the Federal Trade Commission and broader regulatory oversight of whether protections for franchisees like Mr. Laskin are sufficient.
The challenges highlighted by Burgerim come as franchising continues to grow as the way people choose to start small businesses.
There is growing concern about whether franchisees need more protection in their contracts with franchisors. Those concerns have found sympathetic ears in the Biden administration and in some state legislatures, and have led to some proposed limits on franchiser powers.
In the end, Mr. Laskin only opened one Burgerim restaurant, in Eugene, Ore., which closed in 2020 during the pandemic. Since then, Mr. Laskin has been spending his savings to pay bills.
Burgerim, which prides itself on having high quality burgers, has been criticized by former franchisees for it making big promises and poor disclosure of business risks. Of the more than 1,500 franchises that Burgerim has sold, most have never opened, the commission said in a lawsuit the agency filed last year against the company and its founders in US District Court in California.
Peter Bronstein, attorney for Oren Loni, who is the company’s main executive in the United States, said Burgerim made some business mistakes but often tried to help franchisees succeed. Both sides have been in mediation, according to court filings.
Although the pandemic is still in decline, the number of franchise establishments in the country increased by 2.8 percent in 2021 and 2 percent in 2022. The number is expected to increase by an additional 2 percent this year, with a total of 805,436 franchises, according to the latest data released by International Franchise Association, industry group.
As the franchising network grows, so does its contribution to the broader economy. Franchises employed 8.4 million people last year, a 3 percent increase from 2021.
There is historical evidence, according to the International Franchise Association, that the first US franchise started with Ben Franklin, who created a network of printing partnerships.
Today, a basic symbiosis drives the business model: Franchisees pay an initial fee to a franchisor like Dunkin’ Donuts or Applebee’s, who get access to all of the brand’s suppliers, advertising and technology. Franchisees can rely on these established systems to get their business up and running quickly rather than having to start from scratch. And the franchiser, in turn, receives a franchise fee, usually tens of thousands of dollars, in addition to the regular royalty payments from the franchisee.
“Franchising has always been an on-ramp for the middle class to open their own business,” said Charlie Chase, chief executive of FirstService Brands, a franchise of home renovation and painting services.
Over the years, Mr. Chase, who is on the board of directors of the International Franchise Association, said he has helped hundreds of franchisees succeed. “We’ve made a lot of millionaires,” he said.
Still, Mr. Chase said he was concerned about some franchisees being pushed into the business without knowing all the risks involved.
He blames aggressive internet advertising for some of this (Mr. Laskin learned about Burgerim from a Facebook ad, for example), as well as a network of third-party brokers who often push prospective franchisees to buy several franchises at once.
The Federal Trade Commission, under the leadership of Lina Khan, is looking broadly at industry practices including disclosures and issues such as franchisors unilaterally changing the terms of their agreements with franchisees.
“Franchising can be a good business model, but it can also cause a lot of harm,” said Elizabeth Wilkins, director of the Commission’s Office of Policy and Planning. “We are concerned about the occurrence of promises that do not match the reality. We believe there are gaps that are important to investigate.
In the case against Burgerim, federal officials said that the company’s executives told the franchisee they would refund the franchise fee if the business does not open, but many people never returned the money. mr. Bronstein, a lawyer for Mr. Loni, said offering refunds “is not the best way to run a business.”
In the years since the 2008 financial crisis and the mortgage crisis, regulators have strengthened protections for consumers by increasing disclosures by banks and banning certain fees they can charge. But small businesses, including franchisees, have yet to benefit from the same extensive regulatory oversight.
“There’s a perception in the consumer protection world that small businesses don’t get the same protections as other consumers,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection. “However, consumers and small businesses, including franchisees, face many of the same challenges. That’s what we’re trying to address.
As part of that effort, the Federal Trade Commission is looking into ways to enforce laws like the Robinson-Patman Act, an antitrust law that prevents large corporations from using discriminatory pricing to take advantage of small businesses. The agency is also proposing rules banning noncompete clauses in employment contracts and may consider limiting the use of noncompete clauses in franchise agreements.
When Mr. Laskin bought the franchise, he did not want to become a millionaire, but to build a stable middle-class life.
They opened a single Burgerim store in Oregon in September 2019.
But the problem started after the grand opening, Mr. Laskin said. Burgerim has yet to establish a reliable food distribution system in Oregon, he said, forcing Mr. Laskin to supply his restaurants. In an attempt to help new locations get off the ground, the company never collected royalties from franchisees, which limited the ability to support the restaurant network over the long term, Mr. Bronstein said. However, he added, many Burgerim restaurants are successful.
Mr. Laskin kept his business going during the pandemic by offering take out. But he couldn’t find anyone to work during the lockdown, which meant he and his wife did all the operations.
Mr. Laskin, who suffers from severe back pain from working in restaurants, hopes that the franchise will give him the opportunity to delegate work to employees and save his back.
But some days, Mr. Laskin would come home from a late-night burger joint unable to walk the last few yards up the street because of the pain from standing on his feet all day.
The leader of Burgerim, Mr. Laskin, did not provide support during the pandemic.
They closed the restaurant in May 2020 and moved to Florida. Mr Laskin, 57, said back problems limited the types of work he could do and it was difficult to find work after the burger business closed.
The struggle of the former franchisee Burgerim was revealed in 2020 by the publication Restaurant Business, which focuses on the food service industry, in several articles.
Some franchisees say that increasing disclosures or increasing regulations on fee structures will not be a panacea for cracking down on troubled actors in the industry.
“Transparency is a good thing, but I’m not sure that more disclosure will change the outcome in any way,” said Greg Flynn, founder and chief executive officer of Flynn Restaurant Group, the nation’s largest franchisee with 2,400 locations and 73,000 employees, operations. brands like Taco Bell, Pizza Hut and Panera.
“There are many stories of franchisees buying into the system and then it turns out bad for them,” he added. “I’m just suggesting that they might have similar experiences outside of the franchise system.”
Mr. Laskin said that it is not only bad timing or circumstances that are to blame. “The system is fundamentally crippled,” he said. “There are so many secrets. It shouldn’t be this difficult.”
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