In less than two years, Burgerim went from industry darling to horror story. It was a rapidly expanding franchisor. Just before Christmas 2019, Burgerim hired a restructuring manager and began preparing to file for bankruptcy. Days later, the International Franchise Association (IFA) revoked Burgerim’s membership. On January 3rd, 2020, The State of Maryland suspended Burgerim’s franchise registration. Meanwhile, at Burgerim’s corporate headquarters, emails were bouncing, phones were unanswered. One founding corporate officer may have left the country. Burgerim left hundreds of franchisees with expensive new stores, millions of dollars in debt, no corporate support, and no answers.
Sold over 500 franchises in two years, an industry darling
Between 2016 and 2018, Burgerim sold more than 500 franchises. The franchisees drained their retirement savings, took out loans, signed leases, and hired employees. When the Burgerim system failed, many of those franchisees had to close their stores, default on their leases and loans, and file for bankruptcy. The result was unemployed workers, empty storefronts, and millions of dollars written off as bad loans.
Collected over twenty million dollars in franchise fees in one year
In contrast, Burgerim’s corporate owners collected twenty million dollars in franchise fees in 2018 alone. How did one franchisor make millions in revenue while costing franchisees, landlords and taxpayers tens of millions of dollars? Burgerim did it by exploiting systemic weaknesses in the franchise industry.
Focus on the number of units rather than their profitability
Burgerim exploited the franchise industry’s practice of celebrating high unit growth rates. It did so without considering whether the growth was sustainable or if the franchisees were profitable. A hundred new units a year is meaningless if the franchisees are losing money. Burgerim is a prime example of how to go from industry darling to a horror story in just a couple of years.
Failed to provide financial performance information
Burgerim took advantage of the FTC Franchise Rule, which does not require franchisors to disclose financial performance information about their franchises. Would regulations requiring franchisors to disclose first-year sales have given prospective franchisees clear warning signs? Very likely.
Promoted its industry organization memberships
Burgerim promoted its membership in industry organizations, such as VetFran, the IFA, and the Franchise Registry, implying that these organizations had given Burgerim a seal of approval. In reality, none of those organizations vet their members.
Exploited Small Business Administration registry
Burgerim exploited its status as an SBA-approved franchisor to imply SBA approval of its offering. Many bad actor franchise systems have promoted SBA loans as a way for franchisees to finance their investment. When those franchisees fail, the SBA and taxpayers are liable for millions.
Maryland stopped the behavior but could not help the franchisees
Maryland’s suspension of Burgerim’s franchise registration may have prevented new Maryland franchisees from being defrauded. However, it could not help the seven Maryland franchisees who already invested. One should ask whether state and federal regulatory agencies are exercising their full powers to prevent franchise fraud and punish bad-actor franchisors.
Franchisors continue to focus on unit sales instead of profitability, risking more horror stories
A federal court permanently barred Burgerim and its founder from ever selling franchises in the United States. More details here from Restaurant News. Unfortunately, the model of focusing on unit sales instead of unit profitability continues to haunt franchising. If you are considering investing in a franchise, it is very important that you consult an experienced franchise lawyer before buying a franchise, opening a unit, or incurring liabilities.