Franchisers, the lowest of the low. (Long)

Definition of Terms:

Franchise - A business model which you purchase for an initial lump sum and then a split of your revenues.

Franchisor/Franchiser - The company selling this business model.

Franchisee - The person or company buying the business model.

McDonald’s is a franchiser selling hamburger franchises to willing franchisees.

Also: Long. And contains math. You don’t have to do math, I’ve done it for you, but this one contains numbers.

TLDR: Franchisers prey upon retired military personnel, many times ruining their lives. I go into detail re: one franchise ‘opportunity’, then discuss how US military personnel are especially preyed upon by unscrupilous franchise 'coaches."


This is a bit too much for the mini-rants thread as this story is replicated hundreds, thousands of times every year. Nobody talks about it, especially the victims, and yet this… crime, imho… continues.

Last night a couple I know posted on FB that they were closing their PuroClean franchise after 10 years. I know her better than I know him - part of her responsibilities was marketing their business - we met a few times, had lunch, etc, but I never had need of their services.

PuroClean is a water damage remediation service, kind of like Roto-Rooter. Never had need of their services - San Antonio is pretty dry and when it does flood, I’m on relatively high land: if the water rises to my door, it’s a FEMA-level event.

Let me quote from their Franchise Disclosure Document (FDD), a document I will quote from quite a bit:

Now I’m going to jump ahead a little bit and tell you a shocking secret about franchisers - for the most part, they’re fucking leeches.

There are two types of franchisers:

  1. Those that look to draw every bit of revenue from their franchisees.

  2. Those that look to draw every bit of revenue from their franchises.

The first are parasites, imposing upon the franchisee such a bevy of fees, rebates, and conditions that it is almost impossible to make money off of the businesses. At best, you buy yourself a job.

The second are actual businesses who understand that their long-term interest is in helping the franchisee succeed, thereby enriching the franchisee so they can buy more franchises.

Puroclean (PC)? PC’s FDD is chock full of charges, fees, royalties, and the worst of all, they admit to getting kickbacks from required purchases! Even payroll! Definitely a type-1 operation.

Check this shit out…

(Disclaimer: My friends agreement is 10 years old and may not match this in the particulars. This is from the Purosystems 2021 Franchise Disclosure Document downloaded from the State of Wisconsin Franchise Disclose Download page. Type in “Puroclean”, click on the one button which appears, then click on “Download” on the next page. You’ll download “Document.pdf”. All information comes from the document found on this site, 2-20-2022. He sez for the lawyers.)

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The implied business model is this: Your customer gets a flood. In a panic, they call you, you come in and mitigate the services (stop the flooding and vacuum up the water). You then get to bid on reconstruction services (but you don’t have to), which generates even more revenue for you, given you are the clients already trusted PuroClean expert. (I can hear the pitch now, lol)

You get to pay Puroclean 10% of your first $250k in mitigation services revenues, this scale sliding down to 3% @ $1.75 million. You also have to pay a flat 3% on your reconstruction services revenue.

And this is fine - while these percentages are high, pretty much all franchisers get paid a percentage of revenues. It’s just how they earn after they sell the franchise.

It is the other stuff which is a moral and financial abortion. For starters, they have a minimum royalty which needs to be paid regardless of business levels:

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The total of this minimum… assuming a 3% CPI… is $670,000. And they must pay this even if they do not recognize a single dime of revenue.

But again, a royalty is fine. I just wonder if someone ever put together a spreadsheet for my friends and said ‘here’s what this chart means’:

CPI 3%
Royalty Minims
Year Per Month Per Year
1 $400 $4,800
2 $1,000 $12,000
3 $1,500 $18,000
4 $2,500 $30,000
5 $2,500 $30,000
6 $2,575 $30,900
7 $2,652 $31,827
8 $2,732 $32,782
9 $2,814 $33,765
10 $2,898 $34,778
11 $2,985 $35,822
12 $3,075 $36,896
13 $3,167 $38,003
14 $3,262 $39,143
15 $3,360 $40,317
16 $3,461 $41,527
17 $3,564 $42,773
18 $3,671 $44,056
19 $3,781 $45,378
20 $3,895 $46,739
$669,506

So just by signing this thing, they are already in the hole $850,000 (rounded) including start up costs and royalty commitments.

And this is the OK news!

So we read beyond that, and we come to this chart, misleadingly entitled “Start up Costs”. And I say ‘misleadingly’ because a few (parts of 6, and 12-13) are continuing operations items and not what I would consider true startup costs, as the notes make clear. Other items… the training, for example… are part start up (initial training), part continuing operations (refresher training).

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Footnotes:

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So… I’m going to add that insurance and computer systems to the ‘in the hole’ chart above, because there is additional language elsewhere stating they are responsible for making these payments regardless of level of business:

CPI 3%
Royalty Minims Insurance Software Restoration Mgt Software
Year Per Month Per Year Per Year Per Year
1 $400 $4,800 1500 1935
2 $1,000 $12,000 1500 2580
3 $1,500 $18,000 1500 2580
4 $2,500 $30,000 1500 2580
5 $2,500 $30,000 1500 2580
6 $2,575 $30,900 1500 2580
7 $2,652 $31,827 1500 2580
8 $2,732 $32,782 1500 2580
9 $2,814 $33,765 1500 2580
10 $2,898 $34,778 1500 2580
11 $2,985 $35,822 1500 2580
12 $3,075 $36,896 1500 2580
13 $3,167 $38,003 1500 2580
14 $3,262 $39,143 1500 2580
15 $3,360 $40,317 1500 2580
16 $3,461 $41,527 1500 2580
17 $3,564 $42,773 1500 2580
18 $3,671 $44,056 1500 2580
19 $3,781 $45,378 1500 2580
20 $3,895 $46,739 1500 2580
Column Total $669,506 $30,000 $50,955
Grand Total $750,461
Est. Start Up Costs $150,000
IN THE HOLE $900,461

Pretty fucking sly how they hid $51,000 of “restoration management software” fees in a “$0” line item using the “Startup Costs” chart & a footy! Gotta give it to them, and then to do the same damn thing with their insurance software… $30k referenced as “$375”, just a :cook:'s :kiss: of misdirection.

(Oh, these FDA’s are not regulated, btw. There’s no state department of franchises auditing these things.)

And we haven’t gotten to the enraging thing yet. It just keeps getting worse.

There is this page, such a cesspool of financial chicanery that I color-coded it:

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Yellow (top): We expect about 15% of your COGS to be filtered through our system.

Green: We get kick backs! In other words, our suppliers overcharge you and then send us 2.5% to 20% of what we forced you to spend with them! Remember how we told you you had to spend 2% of your revenue on marketing? Some of that (2.5% to 20%) just goes directly into our pockets! Thanks!

Purple: LOLOLOL, we get a kickback on your payroll. Think your franchise is doing well, want to decrease profits by paying yourself more? LOLOLOLOL, we’re smarter than you and we have already arranged it with ADP so that you get to pay about $11,000 for every $10,000 of pay received by you. If you pay yourself $100,000, you get to pay us up to $17,000 for the privilege!

Blue: Yeah, Bill had a great idea… he said “What if we restrict vehicle purchases to some far-flung outfit in God Knows Where, owned by Who Knows Or Really Cares, Right?.. and then we charge our franchisees a flat $500 for the right to buy the truck we require of them… but we arrange it as a rebate and disclose this ONLY in the footnotes?”

Fuck, Bill, just what if you did that? It’s not like the franchisee needs that $500 - they’re already In The Hole for $900,000, what does another $500 really matter?

Yellow (bottom): Yeah, we can do this with anyone. And we’re not really concerned that ‘you can buy better stuff for cheaper’, so just stuff the talk. We. Don’t. Care.

Let me clarify this, in case I didn’t make it clear: These rebates are extra costs added to various supplies and services solely to pass through extra cash to the franchiser via collections by third-party entities and you see them in hundreds of FDD’s. Therefore, if you bought or leased a $40,000 van, you were charged $40,500 with $500 going directly to PuroClean. And you agreed to this.

So how much is stolen from the franchisees via these agreements? Well, the aggregate is given as $673k on page 20 of the FDD. PuroClean elsewhere admits to having 227 franchisees, so we’re looking at $2,964 per franchisee, per year in rebates. And over 20 years, that’s another $59k In The Hole.

A million down. Before the first dollar of revenue comes in. Not an impossible situation, not over 20 years, but it sure makes succeeding a helluva lot harder. Couldn’t Puroclean be happy with… $500k over 20 years?

So who signs these things? And, no: not “idiots”.

I don’t know how my friends became involved in this franchise, but upon learning about it back in 2016-17, I became interested in the topic of franchises and did a fair amount of research into these FDD’s, seeing what made for successful franchises and ‘troubling’ franchises*.

And I also saw an ad. For a “franchise expert” giving a lecture at UTSA about franchising and the military. It was free, so I decided to join and attended this “class” one morning.

I walk in, about 12 people there by the time he started. He immediately wanted to know who was military, asked if any of us had any franchise experience before, and he went into his ‘lecture’.

He starts off with a slide show about the great, wonderful world of franchises, with all the charts showing growth, Growth, GROWTH, here’s a picture of Ray Kroc of McDonald’s, look at all these famous brands, famous because of the miracle of franchising.

Already my suspicions were raised. Then he continued in a speech so stupefying that I haven’t forgotten it since 2017, when I first heard it.

You know, I never had the pleasure of serving, but my brother, Joseph, did. Served in the Navy, was in the Persian Gulf for both Iraqi actions, retired after 20 years. And he and I were talking and he told me this:

“Dave, the hardest thing about civilian life is that there is no Civilian Book like there is a Navy Book. In the Navy, you know that if you did things by The Book, you would have a good career, and there were many times when, faced with a decision, I went by the Book… and was never, ever disciplined for that. Rewarded even. And now… I’m on my fourth job in 7 years, and I just wish there was a Book.”

Ladies and gentlemen, that’s why I do this – to help people like my brother Joseph. Because there is a Book for how to succeed in the civilian life, and companies like Subway, McDonald’s, and others have perfected it. You invest in a franchise and you invest in a Book of Success, winning both the military and the civilian lifestyles.

He slowed down the pitch after this, saying because he was in a University he couldn’t go on too much (nudge nudge) but feel free to take down his contact information (wink wink) or just wait for him to reach out to you via the contact sheet you innocently signed when you entered the room (nod nod)

For someone who is feeling lost in the Bookless civilian world, such an appeal is quite powerful. Get to be a boss by following the Book and enforcing the Book? “Own” a business, the sine qua non of American capitalism? Where do I sign up? I’ll always have my pension!

5 months after seeing this con artist, my neighborhood HOA gets into a fight about some auto repair franchise being built next to our neighborhood. The principal franchisee was, again, a military veteran with absolutely no P&L experience (I know because I asked. I then had to explain what I meant by “P&L” (Profit and Loss.))

The garage went belly up after 3 years. Both he and his wife were working there full-time and I bet this, a business where she and her husband were putting in a combined 100+ hours, was not what she signed up for.

And my friends? Also ex-military. Also, probably, with no P&L experience, possibly being pitched this franchise after being “scored” and “evaluated” for the “best” franchise by one of those franchise brokers, a person getting his cut of that lifelong $1 million “In The Hole” amount.

It’s a goddamned tragedy. And I know of four veterans who have fallen into this trap, not to mention the ones who just convince themselves to start a drywall company or similar trade. But the drywall guys are in a much better position than the preyed-upon franchisee – they can close their business with no future obligations whatsoever. A franchisee effectively just throws $200,000 and more… to buy a thriving business at best, a job at its most typical outcome, and financial ruin at worst.

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The franchisee is sucked dry, even if they served this country. Especially if they serve this country. While 7% of all US adults are veterans, according to the Census Bureau, 14% of all franchisees are veterans according to Vetfran.org. And the most current studies have franchise success rates between 62-80% after five years[/url], meaning… at best… 1 in five fail, and 1 in 3 at worst. (Unfortunately, not finding statistics which break this down by military status.)

In researching this article, I found another one! It’s the same story – he doesn’t know anything about the business, but he found a ‘franchise coach’ who was willing to help him make a decision. He loves the structure given by the franchise, and he is starting his 20-year journey in, effectively, buying himself a job.

I feel like reaching out to this guy saying “No! Stop! Didn’t you read about the rebates?” And the beauty of it is, he also is doing this in San Antonio, in the wealthier areas around Boerne and Comfort. So, Puroclean lost a military franchisee and picked up a military franchisee. They got theirs: the game continues.

Anyway, I just wanted to rant about this totally predictable disaster. I hope they didn’t come out of it too damaged: these are good people, they didn’t deserve this. And while I understand the “they’re adults and signed the agreement, etc” argument, the fact remains that human beings who serve our country are specifically preyed upon by these craven businesses via having their fears, dreams, and desires weaponized against them, many times to their impoverishment. And it’s about time somebody, even some rando on a message board, took notice.

JT

*An aside too important to throw out: You can identify worthless franchises rather easily via two simple FDD metrics: (1) How many franchises are owned per owner? (You want 3 franchises per owner, minimum) and (2) how lengthy is the section detailing lawsuits in relation to the size of the franchiser? (You have some company you never heard of with 5 pages of lawsuits, just throw that shit away. If McDonald’s just has 5, it’s probably a quiet year.)

Dude - you’re killing me. A humble request: could you do a tl:dr version and then link to the long one, or hide it and let folks click to see it?

Franchisers are duping vets by hiding start up and operating cost deep with in the paper work. Nobody seems to be talking about it; this is bad.

I agree with the OP.

I’m going to keep checking back, because if anyone can edit this to a three paragraph version, I’d love to read it.

The topic fascinates me, but I just don’t have time for the “(Long)” version… or the ability to read something of that length.

Honestly, I didn’t think it was that long. But here goes:

PuroClean is a flood remediation company that sells franchises to individuals. They charge upfront fees to buy into the franchise. They also claim a percentage of the gross revenues of the franchise. They also charge ongoing monthly “royalties” which are fixed and are due even if the business has 0 revenue. They also charge ongoing fees for various franchise services. They also require some supplies to be purchased directly from them at a substantial mark-up over prevailing market prices. They also require some other supplies be purchased from designated suppliers, which also charge a substantial mark-up over prevailing market rates, and kickback a significant percentage of that mark-up to PuroClean. They even receive kickbacks from the payroll service they require you to use, based on the salary and wage amounts being paid, so they get a piece of the salary you pay yourself as the franchise manager.

Over the course of a 10-year contract, you might be looking at owing PuroClean hundreds of thousands of dollars, even if your franchise never makes a profit, even if it never even has significant gross revenues.

Much of this is hidden in deliberately obscurantist terminology and footnotes in the contract paperwork. And the franchise contract is for 10 years, so even if you realize you’re losing money and want to close the franchise, you still owe them ongoing fees and royalties for the full duration of the contract.

And this franchise “opportunity” is specifically pitched to recent military retirees.

Thank you.

Yeah, thanks, that was great!

You might have a future writing books like “Another gdave Classic™: A Tale of Two Cities in Two Pages

Seriously, 3000 words (and charts) to 250… that’s a superpower. Use it wisely.

Without going into a whole lot of backstory, the Jack in the Box restaurants in this town were all corporate-owned until 2011, when they got sold to a franchisee.

For the decade before that sale, the Jumbo Jack was $1.29 ($1.69 if you wanted cheese).

After the sale, the Jumbo Jack was $3.99.

That’s the kind of overhead a franchisee has to tack on to the price of its products in order to make a profit.

I don’t get the complaints here from some posters about “too long”. Geez, folks, this is a well-researched, well-written piece of investigative journalism that would be fitting for a major media publication. I had no difficulty getting through it, and found it quite informative. I’d rather that outfits like CNN did more of this kind of thing and less about the Kardashians.

The only comment I would make is that many of the criticisms seem more appropriate to what @JohnT classifies as “Type 1” franchisers: “Those that look to draw every bit of revenue from their franchisees”. Surely they are not all as crooked as the cited example?

For instance, I suspect (without evidence) that McDonald’s is probably at least somewhat more ethical. The only thing I know about it is that the cost of entry is high – I happened to see an ad for a franchise opportunity in a small town (like, really small) and the minimum required up-front investment was around $250,000, and this was many years ago – so long ago that at that time, this was significantly more than the price of a nice suburban house. And the McDonald’s near me is notable for its extremely high traffic volume – the drive-through is almost always backed up in two lanes. Those guys must surely be making a fortune! And the great mystery of it all is that there are at least three burger places within a stone’s throw that are far superior by any objective standards, so to the extent that they’re benefiting from McDonald’s name and advertising it sure seems worth it.

I agree with the general thrust of your post. I will note that the fees quoted for IICRC AMRT training and Xactware licenses are quite a bit cheaper than what I’ve seen in the past (I worked for a different water damage mitigation franchise for 13 years).

IICRC is the de facto industry certifying body and it looks like PuroClean wants its franchisees to take the WRT (water damage restoration technician), ASD (applied structural drying technician), and the AMRT (applied microbial remediation technician).

Xactware (specifically, Xactimate) is also a heavily-used software in the industry, especially by insurance companies which cover these claims. The way it’s all set up, insurance companies can manage ‘price lists’ for all the different line items one might use (remove x feet of trim, x hours of water extraction, etc.) and will only approve estimates submitted via Xactimate using the approved price list.

The required purchase of a restoration software isn’t unique to PuroClean (doesn’t make it okay) but in my experience insurance companies were also playing a hand in requiring this. I wasn’t able to get a cost comparison with other software on the market (like Mica from Nextgear).

It can play out like this.

Some insurer is covering policies in the area. They want to make sure that if there are claims, they are acted on quickly and without exorbitant costs. If claims take too long to complete, the insurance adjusters in the area will not be able to meet the workload and this can lead to dissatisfied customers. This can also increase costs of things like hotel stays if the house is unlivable or lost business if that’s covered under a policy. The insurance company will take steps to accomplish their goals, namely by requiring any vendor that wants to receive a claim assignment from the insurance company to meet their guidelines. These can include:

  • Use of approved estimating software (like Xactimate)
  • Use of approved restoration software
  • Employees are IICRC-certified to some level (typically at least WRT, sometimes with at least one ASD ‘supervisor’ and AMRT for mold damage claims)
  • Use of approved mitigation techniques (which are not always taught during WRT or ASD training)

There’s no denying that most franchisers have this goal of providing a nationwide ‘image’ but perhaps the unusual thing here that PuroClean and its competitors are not just trying to appeal to homeowners (call us!) but also to insurance carriers (give us claims!). Unfortunately for the homeowners (and the poor franchisees), since it’s the insurance companies that pay the overwhelming share of claim costs, they get the most attention and the most sway in how things go. A lot of the way “things are done” in the industry often boil down to what insurance companies will pay for.

I agree that PuroClean is doing a poor job expressing how expensive it actually is to start up a franchise and clearly explaining all their fees. I don’t think I saw a line item in your OP that showed the cost of drying equipment… maybe that was the “equipment and supplies package.” Suffice to say, drying equipment and metering kits will set you back tens of thousands of dollars, require ongoing maintenance and replacement, and you’ll be continually buying more as your company expands or you learn that insurance companies will no longer pay for what you’re deploying and now want you to use some new dehumidification technology.

Well, I got fed up with it all enough that I left the industry and went back to college. I don’t regret it.

Have you read about the issues with McD’s ice cream machines always being down? Essentially, franchisees are forced to buy the machines exclusively from one company (which IIRC is partly-owned by McD’s), the machines are designed to be almost entirely non-user-serviceable to the point where you can’t even diagnose most problems without the technical manual (which isn’t for sale), and the franchisees are required to only get the machine serviced by techs from that same company, who charge egregiously for the privilege.

No offense to the OP, whose heart I think is absolutely in the right place and whose message is important, but … do you actually subscribe to “major media publications” like The Atlantic, Harper’s, or The New Yorker? I subscribe to all of those publications and scarcely a day goes by that I don’t read at least one article they’ve published. I assure you, those “major media” features are presented in a much more readable, engaging fashion.

I think it would be terrific if @JohnT took the raw material in his OP and turned it into an article that could be published in a widely read periodical.

No, I didn’t hear about this before. Not to defend McDonald’s in any way (I think their food is crap) but after a quick Google this claim sounds like a combination of hyperbole and misinformation. There are two (not one) manufacturers of the ice cream machines, and the reliability problems appear mostly to be due to the nightly heating cycles that are supposed to disinfect them. I’m sure that no one – neither McDonald’s nor the franchisees – are happy about the unreliability.

ETA: Sorry, I forgot a link to one of the articles I was looking at:

The thing is that almost all franchisees wind up taking the problematic Taylor machines, because the only permitted alternative - Carpigiani - is based in Italy and replacement parts ship internationally.

I don’t recall what brand our milkshake machine was at Jack in the Box, but it almost never required a technician to come out to work on it - maybe once or twice in the six years I worked there. The nightly washing and sanitizing, disassembling and deep-cleaning, and reassembly was a fairly streamlined process that took less than an hour as long as it wasn’t busy or we ran out of petroleum jelly and had to send someone to 7-Eleven to buy a jar of Vaseline.

Oh, FFS! :face_with_monocle: Can you deal with a small amount of hyperbole? No, I don’t subscribe to the Atlantic but I’m very familiar with it and I do read it online occasionally, and I am absolutely a huge fan of the New Yorker, and have emphatically said so on this board on a number of occasions. What I’m really saying is that @JohnT has done a great job of investigative journalism that is far and above what anyone would reasonably expect on a message board, and with more fleshing out could become a mainstream piece of investigative journalism in a mainstream publication. Anyone who wants to whine about it needs to show that they themselves have done better (I don’t mean you, I mean those who feel that there’s so much information there that they can’t be bothered to read it).

All “hyperbole” and related antics aside, I doubt we significantly disagree. My take is that JohnT has done the legwork for a good story, and with appropriate polishing it would make an utterly fascinating, meaningful article for a major publication. I suspect you agree with that, no?

We probably do disagree on what “appropriate polishing” means in this case. I think the OP needs a helluva lot of work before a serious periodical would consider publishing it. YMMV and evidently does.

Correct, we do not significantly disagree.

Yes, I agree.

I don’t know why you would think I disagree. The New Yorker has very high standards: written, unwritten, and subliminal. Sometimes it goes too far, though – the pretentious bastards once rejected one of my own submissions! :grinning:

You’re ahead of me, then. I haven’t even submitted to them, only thought about it.

I don’t have a problem with the way these franchisers do business.

Feudalism worked fine for centuries, why can’t we go back to the good old days?

My first question is why do these people sign contracts they don’t understand? I can’t imagine why anyone with an IQ higher than room temperature would sign a contract for big of a cash layout without it being looked over by a lawyer or business advisor of some sort.

I don’t think it’s asking too much of an adult to take proper precautions when signing contracts. There’s nobody out there that’s going to check your math for you thru all the financial decisions in your adult life. That’s why you pay experts to figure this stuff out for you.

Also, being a veteran, I really don’t think we deserve any special sympathy for making bad decisions in our lives. We should do like anyone else, acknowledge we messed up, deal with it the best we can and then move on.

As for JohnT’s writing, it’s not exactly my style, but that shouldn’t matter to him. How he writes is how he writes, and apparently he’s had some success, so thumbs up! About the only complaint I have is all the contrasting styles you use in your posts. You must have 3 or 4 different font sizes. Just streamline things a bit, it sometimes comes off as rushed or as a lack of care on your part.