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Exposé

The unseemly side of franchising during its Wild West days


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Before UFOCs became FDDs and the FTC Rule became law, franchising carried a stigma perpetuated by crooks and con artists.

The late Ray Burch, chairman of the International Franchise Association in 1973, had worked as a marketing executive for Schwinn Bicycles in Chicago. Burch once told Franchise Times that CEO Frank Schwinn wanted to franchise his company in the mid-1950s, but some anti-trust problems took 10 years to settle. “By then,” Burch said, “there were so many franchise abuses and scare stories in the newspapers, Mr. Schwinn wanted nothing to do with franchising and took the word ‘franchise’ out of his dealer agreements.”




Country singer Minnie Pearl put her name on a chicken franchise in the Wild West era.

 

After decades of steady growth, franchising had entered its Wild West era. Franchising was an unregulated industry and, in the 1960s and ‘70s, it was infiltrated by people who saw selling franchises as a slick way to get rich.

Several promoters used celebrities to attract franchisees, usually with disastrous results. In Nashville, attorney John Jay Hooker and his brother Henry talked country singer Minnie Pearl into lending her name to a fried chicken concept. Pearl, born Sarah Colley Cannon, came from an affluent family “and the public would think it believable that her family had a good fried chicken recipe,” John Jay Hooker said.

When the brothers had one restaurant open, they began to sell franchises, and when they had five open, they went public and their stock soared from $20 to $56. But the Hookers had no restaurant experience—“The chicken was horrible,” said Tom Murphy, of Littleton, Colorado, then the publisher of Continental Franchise Review, a bi-weekly newsletter that covered franchising—and the Securities and Exchange Commission claimed the financial statements in the Hookers’ stock prospectus were fraudulent because they stated future franchisee fees as income, even though the restaurants weren’t open and the fees had not been paid. The company’s stock price collapsed and most of the restaurants closed.

In Texas, Mickey Mantle’s Country Cookin’ went public in 1969 with only one corporate and one franchised chicken and dumpling restaurant open. That venture fell apart after the SEC learned that one large “investor” was actually the company itself, using a different name. Luckily, Murphy said he had sent a letter to Mantle before then “telling him I thought the franchise program was phony. He wrote back and said he had resigned. I still have his letter on my wall.”

In the 1970s, two New Jersey men, Gerald M. Cuthbertson and Paul Gorrin, sold franchises for their restaurant concept, Wild Bill’s Family Restaurants, by renting two Rolls Royce sedans and promising prospective franchisees that they, too, could afford luxury cars if they bought a franchise.

In 1978, Mike Wallace of CBS did a “60 Minutes” report on Wild Bill’s. Wallace’s exposé showed that the men had been selling franchises out of an office that looked like a movie set, but no buyer had ever opened a restaurant. Cuthbertson, Gorrin and their partners were eventually indicted on charges of conspiracy and fraud.

At least Wild Bill’s didn’t go public. The Minnie and Mickey fiascoes were part of a May 1970 front-page article in The Wall Street Journal that said, “Once considered the darling of Wall Street and the savior of the small businessman, franchising today is spurned on Wall Street and cursed on Main Street.” The article went on to say, “Some business greenhorns have sunk all their savings into franchises only to see everything evaporate.”

Back then, “there was no way for prospective franchisees to know what they were buying,” said John Tifford, partner at Plave Koch. “A franchisor would present whatever was needed to make a sale. The prospective franchisees didn’t know what questions to ask.”

Across the country, attorneys, journalists and IFA members advocated for some kind of franchise regulation. In an award-winning paper, “The Modern Myth of the Vulnerable Franchisee: The Case for a More Balanced View of the Franchisor-Franchisee Relationship,” William Killion, a partner of Faegre & Benson, said that by 1969 California had the largest number of franchisees of any state and the most franchisee complaints. In 1971, that state’s legislature passed the California Franchise Investment Law, requiring presale disclosure similar to that required for a new stock offering. A handful of states passed similar laws and in 1979 the Federal Trade Commission adopted the FTC Rule and assigned Tifford, who had been with the agency since 1975, to manage it. “The Rule laid everything out in one document, the Uniform Franchise Offering Circular,” Tifford said, “including how much money you had to invest, franchise fees, training, format, etc. Now you could listen to five different sales pitches, put five documents side by side and compare them.” The UFOC, now the Franchise Disclosure Document, didn’t solve all abuses, he said, “but now you have to put everything into print and memorialize your dishonesty. Compared to its wild decades, “franchising today is relatively mellow,” Tifford said.

Remnants of franchising’s Wild West days live on. Internet auction sites are selling chairs from Mickey Mantle’s Country Cookin’ restaurants for up to $500. Worthless stock certificates for another vanished celebrity chain, Joe Namath’s Broadway Joe’s, sell for $50. In the early 1980s, the owners of Wild Bill’s Family Restaurants sued CBS for segments of Wallace’s interviews that didn’t get on the air, to use in their criminal case defense. They lost, and the verdict is still cited in litigation involving journalists’ rights. And claiming income before it’s been realized is now known as “Minnie Pearling.”

 

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