How Franchise Scams Work & NYC Bagels Franchise Founder Goes to Prison

Shady franchise salespeople can make up to $100,000 a MONTH ripping off buyers. Hundreds of buyers over the years lost their money to the NYC Bagel franchise. How did the scam work and what can you do to protect yourself? Today on Franchise City.

This scam happens over and over again and its basically a way to print millions of dollars for fraudsters. I covered this scam in my worst-selling book "The Dark Side of Franchising"

Most franchise scams have a similar pattern and we will use NYC Bagel as an example today of how bad franchises rip off inexperienced buyers.

Over the past decade over 160 NYC Bagel franchises were sold in various states. Millions of dollars were collected over the years, often from people who were never even able to open a store, and of the stores that opened almost all of them closed and the owners subsequently lost all their money.

We kept an extensive file on NYC Bagel for almost a decade, and one simple free phone call to Franchise City would have revealed everything that we knew about the brand, which was a lot including illegal selling of franchises in registration states, fraud claims, online complaints, cease and desist orders and more.

There are three stages to the franchise scam the first is the
lead generation. In the case of NYC Bagel they ran hundreds of ads on Craigslist making highly exaggerated claims that underestimated the money buyers would need and overestimated the profit they could make. Once the prospective buyer reaches out to the company from the lead page next comes the misleading information. Franchise salespeople can make a lot of money lying to people, often half of the franchise fee which in the case of NY Bagel was $30,000.

Because they know exactly what to say and do to stay out of jail, they will generally be able to keep doing this for years. Remember, when you actually sign the franchise agreement, you agree that you were told nothing outside of what is in the agreement. If you think you will just go to the press, your lawyer will tell you that you also signed an NDA subjecting you to financial penalty if you reveal anything about the franchise.
Some people are more cautious before they invest and for those people the franchise will employ
Third party validation tactics to gain credibility and trust. NY Bagel was listed on the SBA lender registry, which is a list of government "approved" franchises that qualify for fast track financing guaranteed by the government. Shady companies will suggest only vetted franchises make the list which is absolutely false. Being on the SBA list is no guarantee of quality in fact many franchises on the list have high failure rates. NYC Bagel was also included on the 2017 Franchise 500 list from Entrepreneur magazine as one of the top 500 franchises in the USA.
In addition watch out for appeals to your situation, like heavily pushing how a franchise is "veteran friendly" or "minority owned" as these techniques are employed to make you feel comfortable. We did a video on the scam behind "veteran friendly franchises" as well that link is also above and at the end of the video.
And keep in mind despite dozens of complaints to regulators and multiple lawsuits for which judgements were simply ignored, this scam went on for over a decade. As far back as 2011 a buyer sued for having his money taken and won judgement but was never able to collect. Once you are ripped off it is very hard for the franchise buyer to seek relief and very slow for regulators to respond if they respond at all. Finally after years of scamming people both Joseph Smith the founder and Dennis Mason the salesperson finally got 3+ years in jail. Note however the charges were tax evasion and wire fraud you have to wonder if the government didn't get ripped off themselves if they ever would have cared enough to do anything.

So a buyer could be forgiven for investing after seeing all of the information that adds up. The #1 bagel franchise in the world, fake statistics of how easy it is to operate and how much money you can make, third party validation by inclusion to the SBA registry and the prestigious Franchise 500 list, a refund guarantee, and great media stories on the growth of the franchise. Everything looks good to an inexperienced buyer.

There are great franchises out there, but it can be hard for buyers to tell the difference. A qualified broker group like Franchise City can help

Franchise City Brokers https://www.franchise.city/our-services
Veteran Franchise Scam https://youtu.be/crteEW9T6SA
Franchise 500 https://youtu.be/4iBOusezuLw

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