May 31, 2023

“Making It Work” is a series about small business owners striving to get through tough times.

When Kenneth Laskin flew to California to meet executives at Burgerim, a start-up restaurant chain, made him feel like he was not just a potential franchisee, but part of a family.

Company executives, he said, made a point one night to emphasize their shared Jewish faith by praying with him in Hebrew.

At the time, in 2017, Mr. Laskin that he was offered a plum deal. He paid $50,000 for the right to open as many Burgerim franchise restaurants as he wanted in Oregon. “I have a whole state,” Mr. Laskin recalled.

Today Burgerim got into trouble, leaving a trail of financial problems, a lawsuit by the Federal Trade Commission and broader regulatory oversight of whether protections for franchisees like Mr. Laskin are adequate.

The challenges highlighted by Burgerim come as franchising continues to grow as a way people choose to start small businesses.

There is increasing concern about whether franchisees need more protections in their contracts with franchisors. Those concerns have found a sympathetic ear in the Biden administration and in various state legislatures, and have resulted in multiple proposed limits on franchisors’ powers.

In the end, Mr. Laskin only opened one Burgerim restaurant, in Eugene, Oregon, which closed in 2020 during the pandemic. Since then, Mr. Laskin has exhausted his savings to pay the bills.

Burgerim, which prided itself on having high-quality, inventive burgers, has been criticized by former franchisees making big promises and poor disclosure of corporate risks. Of the more than 1,500 franchises Burgerim sold, most never opened, the commission said in a lawsuit the agency filed against the company and its founder last year in California’s U.S. District Court.

Peter Bronstein, an attorney for Oren Loni, the company’s chief executive in the United States, said Burgerim made some business mistakes but often tried to help its franchisees succeed. According to the court file, the two sides have been in mediation.

Even with the pandemic still raging, the number of franchised locations in the country grew by 2.8 percent in 2021 and 2 percent in 2022. That number is expected to increase by another 2 percent this year, bringing the total to 805,436 franchises , according to the latest data released by the International Franchise Association, an industry group.

As the franchise network grows, so does its contribution to the wider economy. Franchises employed 8.4 million people last year, up 3 percent from 2021.

There is historical evidence, according to the International Franchise Association, that the first American franchise dates back to Ben Franklin, who established a network of printing partnerships.

Today, a fundamental symbiosis drives the business model: Franchisees pay an upfront fee to a franchisor like Dunkin’ Donuts or Applebee’s, giving them access to all of that brand’s suppliers, advertising, and technology. The franchisee can lean on these established systems to get their business up and running quickly rather than having to start from scratch. And the franchisor, in turn, receives the franchise fee, usually tens of thousands of dollars, in addition to a regular royalty payment from the franchisee.

“Franchising has always been a stepping stone for the middle class to open their own businesses,” said Charlie Chase, the CEO of FirstService Brands, a franchisor of home renovation and painting services.

Over the years, Mr. Chase, who has served on the board of directors of the International Franchise Association, that he has helped hundreds of successful franchisees get started. “We’ve created a lot of millionaires,” he said.

Still, Mr. Chase said he was concerned about how some franchisees were pushed into businesses without understanding all the risks.

He blames aggressive Internet advertising for some of this (Mr. Laskin learned about Burgerim through a Facebook ad, for example), as well as a network of third-party brokers who often push potential franchisees to buy multiple franchises at once.

The Federal Trade Commission, headed by Lina Khan, is looking broadly at industry practices, including disclosure and issues such as franchisees unilaterally changing the terms of a franchise agreement.

“Franchising can be a good business model, but it can also lead to a lot of harm,” said Elizabeth Wilkins, the director of the commission’s Office of Policy and Planning. “We are concerned about cases where the promise does not match the reality. We believe there is a significant gap worthy of our investigation.”

In the case against Burgerim, federal officials said company executives told franchisees they would refund their franchise fees if their businesses didn’t open, but many people never got their money back. Mr Bronstein, Mr Loni’s lawyer, said offering refunds “wasn’t the best way to run a business.”

In the years since the 2008 financial crisis and the collapse of the mortgage market, regulators have strengthened consumer protections by improving bank disclosures and banning certain fees they may charge. But 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 Samuel Levine, the director of the FTC’s Bureau of Consumer Protection. “Yet consumers and small businesses, including franchisees, face many of the same challenges. That is something we are trying to address.”

As part of that effort, the Federal Trade Commission is looking into applying laws such as the Robinson-Patman Act, an antitrust law that prevents large companies from using discriminatory pricing to take advantage of small businesses. The agency has also proposed a rule banning non-competition clauses in employment contracts and may consider limiting the use of non-compete clauses in franchise agreements.

When Mr. Laskin bought a franchise, he didn’t want to become a millionaire, but to build a stable middle-class life.

In September 2019, he opened his only Burgerim store in Oregon.

But trouble started shortly after its grand opening, Mr. Laskin said. Burgerim had not established a reliable food distribution system in Oregon, he said, leading Mr. Laskin had to fend for himself to stock his restaurant. In trying to get new locations off the ground, the company never collected royalties from the franchisees, limiting its ability to sustain its restaurant network in the long run, Mr. Bronstein said. Still, he added, there are many Burgerim restaurants that have worked successfully.

Mr. Laskin kept the business going during the pandemic by offering takeout. But he couldn’t find people to work during the lockdowns, which meant he and his wife ran the entire operation themselves.

Mr. Laskin, who has severe back pain from years of restaurant work, hoped a franchise would give him the chance to delegate work to employees and save his back.

But on some days, Mr. Laskin came back from the burger restaurant at night and couldn’t walk the last few feet of his driveway because of the pain of standing on his feet all day.

Burgerim’s leadership, Mr Laskin said, was not supportive during the pandemic.

He closed his restaurant in May 2020 and moved to Florida. Mr Laskin, 57, said his back problems limited the type of work he can do and it was difficult to find work after his burger shop closed.

The struggles of the former Burgerim franchisees were brought to light in 2020 by the publication Restaurant Business, which focuses on the food service industry, in a series of articles.

Some franchisees say improving disclosure or increasing fee structure rules won’t be a panacea for weeding out the industry’s troubled actors.

“Transparency is a great thing, but I’m not sure more disclosure will change the results,” said Greg Flynn, the founder and CEO of Flynn Restaurant Group, the largest franchisee in the country with 2,400 locations and 73,000 employees. brands like Taco Bell, Pizza Hut and Panera.

“There are a lot of stories of franchisees buying a system and then it goes bad for them,” he added. “I would just suggest that they may have had a similar experience outside of a franchise system.”

Mr. Laskin says it’s not just bad timing or circumstances that were to blame. “The system is fundamentally crippled,” he said. “There is too much secrecy. It shouldn’t be that hard.”