In less than two years, Burgerim went from industry darling to horror story. Just before Christmas 2019, Burgerim, a rapidly growing franchisor, announced that it had hired a restructuring manager and was considering filing 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, and one founding corporate officer may have left the country. Burgerim’s hundreds of franchisees were left with expensive new stores, millions of dollars in debt, no corporate support, and no answers.
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 be unemployed workers, empty storefronts, and millions of dollars written off as bad loans.
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.
Burgerim exploited the franchise industry’s practice of celebrating high unit growth rates without examining whether the growth is sustainable or if the franchisees are making a profit. A hundred new units a year is meaningless if the franchisees are losing money.
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?
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.
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’s suspension of Burgerim’s franchise registration may prevent new Maryland franchisees from being defrauded, but it won’t help the seven Maryland franchisees who already invested. One should ask whether state and federal regulatory agencies are using their full powers to prevent franchise fraud and punish bad actor franchisors.
Although Burgerim and its founder are now permanently banned from selling franchises in the United States, the model of focusing on unit sales instead of on unit profitability continues to haunt franchising. If you are considering investing in a franchise, it is very important that you consult experienced franchisee counsel before acting.