Fast food franchisees raked over the coals, alleges FTC

For many Americans, owning a fast food franchise seems like a promising way to secure their financial future. Hamburger chain franchisor Burgerim sold more than 1,500 franchises, pocketing tens of millions of dollars from would-be entrepreneurs. But according to a lawsuit the Department of Justice just filed on behalf of the FTC, the defendants served up a double decker of deception and Franchise Rule violations.

The complaint alleges that California-based Burgerim and CEO Oren Loni pitched their franchise as a “business in a box,” promised to pave the way for franchisees to become thriving business owners, and assured them that the company’s “training, branding and operations protocols” are designed to “support them in operating successful and profitable Burgerim stores in their communities.” The defendants also promised to help franchisees “customize your location, hire a small team, and generate wealth.” According to promotional materials, “All you need is the will to succeed.”

How can prospective entrepreneurs cut through sales pitches like that to evaluate the risks and benefits of a franchise opportunity? That’s the primary purpose of the FTC’s Franchise Rule and at the heart of the Rule is the Franchise Disclosure Document. But according to the FTC-DOJ lawsuit, the defendants’ Franchise Disclosure Document left out key pieces of required data, including (among other things) contact information for current and former franchisees. Why is that information important? So people thinking about signing on the dotted line can learn about the unvarnished experience of others.

In addition, the complaint alleges that the defendants made financial performance claims to prospective franchisees, but failed to put those statements in the Financial Disclosure Document, as the Franchise Rule requires. What’s more, the FTC and DOJ say Burgerim made claims in the disclosure document that contradicted things they said to prospective franchisees.

While Burgerim franchises cost about $50,000, that doesn’t include the usual costs of opening a restaurant – getting a location, building out the facility, and other expenses that could set Burgerim franchisees back more than $600,000. The lawsuit alleges that the defendants violated the FTC Act by falsely representing that they would refund the franchise fee of franchisees who weren’t able to get financing or a restaurant location. Indeed, of the more that 1,500 franchises Burgerim sold, the overwhelming majority never got off the ground. The lawsuit alleges that hundreds sought to cancel their franchise agreement, but the defendants didn’t honor their refund promises. Particularly troubling was Burgerim’s practice of targeting military veterans with a discount program that encouraged them to buy multiple franchises, but often left them burdened with massive debt.

Filed in federal court in California, the complaint seeks injunctive relief, consumer redress, and civil penalties. Even at this early stage, the case offers important advice for those on both sides of a franchise transaction.

Franchisors should focus on clear communication about the commitment that prospective franchisees would be undertaking. That includes straight talk about the risks involved and accurate information on the Financial Disclosure Document. Your starting point: a refresher read of the FTC’s Franchise Rule Compliance Guide and Amended Franchise Rule FAQs.

What can prospective franchisees learn from the filing of this action?

• Take it slooooow. Buying a franchise is a major financial commitment incompatible with fast talk, high pressure, and quick decisions.
• Take a deep dive into the Financial Disclosure Document. As you carefully read through the Financial Disclosure Document, ask yourself if the franchisor, a franchise representative, or anyone else has made claims that are contradicted in the document or aren’t mentioned at all. For example, did the franchisor or a franchise representative say things about financial performance or refunds that don’t appear in the Financial Disclosure Document? That’s a sign to walk away.
• Seek out franchisees and ask the tough questions. Contact the franchisees (or former franchisees) included on 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 got them to sign a non-disparagement agreement – a contract that may prevent them from speaking freely about the risks or downsides of the business?
• Get advice from someone who doesn’t have a financial incentive. Before buying a franchise, discuss the offer with someone you trust who has no connection to the franchisor. Consider reaching out to successful businesspeople in your community. Their years of experience may alert them to risks you hadn’t considered.

Franchisees, have you spotted a questionable business practice the FTC should know about? Report it at ReportFraud.FTC.gov.

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