Last November, PlanetHopper Inc. unveiled plans to auction franchises on Internet auction site eBay. Though the future of this program is currently up in the air, PlanetHopper's announcement raises significant questions. Can franchises be auctioned online? Or, more important, should they? And how would auctioning franchises online affect the future of franchising?
To address these issues, Franchise Zone spoke with franchisor advocate David Kaufmann of the law firm Kaufmann, Feiner, Yamin, Gildin & Robbins LLP; and Robert L. Purvin Jr., chair of the board of trustees for the American Association of Franchisees & Dealers. Kaufmann and Purvin were eager to share their opinions on this potentially touchy subject.
Franchise Zone: What are the benefits to franchisors and franchisees of selling franchises online?
David Kaufmann: The obvious-indeed, probably the only-benefit of auctioning franchises over the Internet is the ability to address vast numbers of prospective franchisees at minimal expense. However, there is a world of difference between auctioning franchises on eBay and otherwise legitimately selling franchises over the Internet as part of a franchise marketing protocol.
Wise franchisors, whether they are start-up or mature, know that selling franchises to the highest bidder is not the way to proceed. Instead, such franchisors prudently calibrate their initial franchise fees to take into account anticipated returns on investment; a new franchisee's anticipated econometric curve (if the initial fee is too high and the resulting franchisee debt load is too heavy, the franchised business is virtually doomed to fail); the demographics, concept penetration and potential profitability of franchised territories; and competitive circumstances. Most franchisors actually try to keep their initial franchise fees as low as possible, such that it merely recompenses the expenses of marketing the franchise and does not cripple a franchisee's financial prospects from the start.
Conversely, a franchisor seeking to make its money from initial franchise fees rather than from ongoing fees, such as royalties that attach to a franchisee's operating business and rise or fall with the success of that business, is suspect and likely to end in failure.
You must remember that the federal and state disclosure laws, rules and regulations governing franchise sales activity apply in full force to Internet franchise sales. The federal government and several states have Internet-specific regulations regarding the subject. The Uniform Franchise Offering Circular guidelines still pertain and, as always, require a franchisor to set forth either its fixed franchise fee or, if that fee is variable, the circumstances under which the initial franchise fee varies. And the last time I checked, "We will sell our franchise to the highest bidder" has never been accepted by any federal or state government authority as an acceptable rationale for initial fee variation.
Robert L. Purvin Jr.: Buying a franchise is an important investment, which often involves the life savings of the prospective franchisee. Completing the purchase of a franchise on the Internet, or at an auction, is frankly unthinkable and almost certainly illegal under current disclosure requirements. If a franchise opportunity is offered on the Internet, it is almost certainly being offered contrary to prevailing law, and this offer, if only for this reason, should be avoided and reported to appropriate authorities.
On the other hand, the Internet can be of great value to prospective franchisees performing the research necessary to make an intelligent decision. But beyond doing research, an Internet purchase is antithetical to the building of a long-term relationship that requires personal communication, meetings, understandings and community building.