Franchise failure a lesson
M@sk investors seeking redress
SRIWIPA SIRIPUNYAWIT
In mid-December last year, The M@sk, a franchised kiosk operator offering mobile applications and accessories, prepaid cards, books and other IT products, was named Franchise of the Year by Manager newspaper. Two weeks later, most of its outlets began to close as the business unravelled.
Today, the offices of M.F.S. Enterprise, the operator, are closed and the salaries of 60 employees remain unpaid. The franchisees have been left high and dry and some are taking the company to court.
Jiradej Poonmanothum, the founder, chairman and chief executive officer of M.F.S. Enterprise, has been keeping as low a profile as possible.
Sad but true. Though the failure rate for franchises is nowhere near that of conventional business startups, things can still go terribly wrong.
For The M@sk, it was a case of too much, too soon, says a former M.F.S. executive who asked not to be identified.
The executive said the company had a sound financial footing and clear direction when it began two years ago as a provider of mobile stock market information. Building on the response, The M@sk made its debut in February 2004.
But instead of launching a handful of branches to test the market, Mr Jiradej advertised and sold as many kiosks as possible under a closed-system operating concept, said the executive. “He wanted the volume to be huge because he believed that was the means to gain significant purchasing power over suppliers.'’
The company soon became short of money owing to overspending on expansion and promotion. Each franchisee had paid 400,000 baht for one kiosk which included the franchise fee, operating costs, products and expertise.
By September, the company was in serious trouble. “Promises were all broken,'’ said Punnapa Kiratiadul, 31, who had put 600,000 baht into her M@sk operation.
“Most franchisees started to feel suspicious since sales volumes were never disclosed, dividends were never received, meetings were never held, the IT system was never put in place.'’
Ms Punnapa heads a group of 50 franchisees _ at its peak there were more than 100 M@sk outlets _ who are pursuing legal action against Mr Jiradej, alleging fraud and unethical business practices.
“We were promised dividends every three months and told that the investment would return 400% within less than a year through the closed-system franchise operation,'’ she said.
Many asked for their money back but no one has been repaid to date.
“The only thing Mr Jiradej said was that he had no money and so was not going to pay us back a penny or be responsible for anything,'’ Ms Punnapa said.
The former M.F.S. executive said the company’s employees were equally in the dark about finances and began to question where the money was going.
In a brief telephone interview, Mr Jiradej maintained that he had been in touch with most franchisees and had shown up at every meeting. However, he declined to comment further for legal reasons.
Mr Jiradej, The M@sk and M.F.S. Enterprise have been sued for failure to act according to the business agreement made with the franchisees, according to Surapol Sintunava, the founder of Surapol Sintunava Law Office, who is representing the franchisees.
The law firm has also filed a criminal complaint against Mr Jiradej, alleging fraud committed with franchisees’ money.
The first testimony is scheduled for June with 16 franchisees as plaintiffs initially. Another group of 20 franchisees is expected to follow afterward. The total compensation being sought is about 30 million baht.
According to Mr Surapol, if a judgment in such a case is entered against a defendant and he resists paying or taking responsibility for the loss, the court has the power to file bankruptcy charges and confiscate his assets.
He said there had been similar cases involving franchises in the past, which underscored the need for would-be franchisees to carefully examine the background of franchisors and their executives.
And as with most investments, franchisees need to understand that the money they commit should be disposable income beyond what they have set aside for basic obligations or emergency use.