“Making It Work” is a series about small business owners struggling to survive difficult times.
When Kenneth Ruskin flew to California to meet As an executive at upstart restaurant chain Bergerim, he was made to feel more than just a prospective franchisee, he was part of the family.
He said company executives decided to pray with him one evening in Hebrew to emphasize the common Jewish faith.
Back in 2017, Ruskin believed he was being offered a plum deal. He paid $50,000 for the right to open as many Bergerim franchise restaurants in Oregon as he wanted. “He got the whole state,” Ruskin recalls.
Today, Burgerim is in trouble, with a trail of financial problems and lawsuits. It will be subject to extensive regulatory oversight by the Federal Trade Commission and whether the protections for franchisees like Ruskin are adequate.
The challenges Bergerim highlights come from people choosing franchising as a way to start a small business.
There are growing concerns about whether franchisees need additional protections in their contracts with franchisors. This concern has resonated with the Biden administration and several state legislatures, leading to several proposed restrictions on franchisor powers.
In the end, Ruskin opened just one Burgerim restaurant in Eugene, Oregon, which closed in 2020 during the pandemic. Since then, Ruskin has been using his savings to pay the bills.
Bergerim prides itself on serving creative, high-quality burgers, but has been criticized by former franchisees. Make grand promises and poorly disclose business risks. Of the more than 1,500 franchises it sold, most never opened, the commission said in a lawsuit filed in California federal district court last year against the company and its founders. .
Peter Bronstein, a lawyer for Oren Roni, who was the company’s chief executive in the United States, said: Bergerim said he made some business mistakes, but often tried to help franchisees succeed. According to court documents, the two parties are in mediation.
The number of franchisees in the country increased by 2.8% in 2021 and 2% in 2022, even though the pandemic was still under control. That number is expected to increase another 2% this year, bringing the total number of franchisees to 805,436.of Latest data released By the International Franchise Association, an industry association.
As the franchise network grows, so does its contribution to the broader economy. Franchisees employed 8.4 million people last year, up 3% from 2021.
According to the International Franchise Association, there is historical evidence that the first US franchise took place. Dating back to Ben Franklincreated a network of printing partnerships.
Basic symbiosis drives the business model today. Franchisors pay an upfront fee to franchisors such as Dunkin’ Donuts and Applebee’s, giving the franchisee access to all of the brand’s suppliers, advertising and technology. Franchisees can take advantage of these established systems to get their business up and running quickly rather than starting from scratch. And the franchisor receives franchise fees, typically in the tens of thousands of dollars, in addition to the usual royalty payments from the franchisor.
“Franchise has always been a gateway for the middle class to open their own business,” says Charlie Chase, chief executive of First Service Brands, a franchisor of home improvement and painting services.
A long-time board member of the International Franchise Association, Chase said he has helped hundreds of franchisees succeed. “We have created a lot of millionaires,” he said.
Still, Chase said he is concerned that some franchisees are being pushed into business without fully understanding the risks.
He attributed this in part to aggressive internet advertising (Ruskin learned of Bergelim from a Facebook ad) and third-party franchises, which often pressure would-be franchisees to buy multiple franchises at once. They blame their network of party brokers.
The Federal Trade Commission, under the leadership of Rina Khan, looking wide Issues such as industry practices, including disclosure, and unilateral changes by franchisors to terms of contracts with franchisees.
“Franchising can be a good business model, but it can also do a lot of harm,” said Elizabeth Wilkins, director of the commission’s Policy and Planning Division. “We are concerned about cases where promises don’t match reality. We believe there are significant gaps worth investigating,” she said.
In the case against Bergerim, Federal officials said company executives told franchisees they would refund their franchise fees if they were unable to reopen, but many did not get their franchise fees back. Loni’s attorney, Bronstein, said offering a refund was “not the best way to run a business.”
Since the 2008 financial crisis and mortgage failure, regulators have stepped up consumer protection by improving disclosure by banks and banning certain fees banks can charge. However, small businesses, including franchisees, have not benefited from the same extensive regulatory scrutiny.
“There’s a perception in the consumer protection world that small businesses don’t get the same level of protection as other consumers,” said FTC Consumer Protection Director Samuel Levin. “But consumers and small businesses, including franchisees, face many of the same challenges.
As part of that effort, the Federal Trade Commission is looking at ways to apply laws such as the Robinson-Putman Act, an antitrust law that prevents large companies from setting discriminatory prices to take advantage of small businesses. are doing. The agency has also proposed rules banning non-compete clauses in employment contracts and may consider restricting the use of non-compete clauses in franchise agreements.
When Mr. Ruskin bought the franchise, he wasn’t aiming to become a millionaire, but to build a stable middle-class life.
He opened his only Burger Rim store in Oregon in September 2019.
But the problems started shortly after the grand opening, Ruskin said. Bergerim didn’t have a reliable food distribution system in Oregon, so Mr. Ruskin had to support himself to feed the restaurant, he said. In helping new restaurants get off the ground, Bronstein said the company never collected royalties from franchisees, which limited its ability to support the restaurant network long-term. It says. Still, there are many well-run burger restaurants, he added.
Ruskin kept the business going during the pandemic by offering takeout. But he couldn’t find anyone to work for him during the lockdown, so he and his wife ended up running all the operations themselves.
Ruskin, who suffers from severe back pain after working in restaurants for many years, hoped the franchise would give employees the opportunity to offload work and ease his back.
But on some days, Mr. Ruskin would return from a burger restaurant at night and be unable to walk the last few yards of the driveway because of the pain from standing all day.
According to Ruskin, Bergerim’s leadership offered no support during the pandemic.
He closed the restaurant in May 2020 and moved to Florida. Ruskin, 57, said his back problem limited the types of jobs he could do and that he had trouble finding work after the burger joint closed.
The struggles of the former Bergerim franchise were brought to light in 2020 by Restaurant Business, a publication focused on the restaurant industry. in a series of articles.
Some franchisees argue that better disclosure and more regulation of fee structures won’t be a panacea to eradicate troubled players in the industry.
“Transparency is great, but I don’t know if more disclosure will change the outcome,” said Flynn Restaurant Group, the country’s largest franchisee with 2,400 restaurants and 73,000 employees. Founder and CEO Greg Flynn said. Brands such as Taco Bell, Pizza Hut, and Panera.
“There are many stories of franchisees having negative impacts after purchasing the system,” he added. “I would suggest that they may have had similar experiences outside of the franchise system.”
Ruskin says it’s not just bad timing or bad circumstances. “The system is fundamentally dysfunctional,” he says. “Too many secrets. It shouldn’t be that hard.”
