Weak Links Seen in Opening of Chain Outlets : Franchises: The industry is booming, but complaints from entrepreneurs feeling pressure from their licensers is causing regulators to reassess laws.

Sports writer Cary Koegle had spent more than half his life working for someone else, but the newspaper journeyman from Bellflower had always wanted to be his own boss.

So in 1991, Koegle retired early from the Pasadena Star News, cashed in his employee savings plan and went shopping for a business. At a franchise trade show in Anaheim, the Sign-A-Rama booth caught his eye. After investing $30,000 in a franchise, Koegle and his two sons opened a sign-making outlet in Orange.

But Koegle’s dream faded as the business faltered. His financial woes worsened, and he was forced to sell his home.

Last January--on moving day--Koegle had a heart attack. Two days later, the 48-year-old entrepreneur was dead. His son places partial blame for Koegle’s death on stress generated by the failed business. “He knew he had been naive,” Charles Koegle said last week. “He felt very depressed.”

Koegle’s story is one of many unhappy tales in the booming franchise industry. The complaints have grown so loud that state and federal regulators are considering an overhaul of franchise laws that in many cases haven’t been updated in more than a decade.

State Sen. Steve Peace (D-Chula Vista) on Monday will introduce a franchisee-protection bill that would allow California-based franchisees to sue their out-of-state franchisers in state courts rather than file in the franchiser’s home state.

Newcomers to the business aren’t the only ones with complaints:

* Richard L. Cohn, a Chicago businessman who has owned Taco Bell franchises since 1983, alleged in an August lawsuit that Taco Bell engaged a corporate spy in an attempt to drive him out of business. Taco Bell denies the allegations and says it hopes to prevail in a Chicago courtroom.

* Also last summer, a frustrated Carl Karcher Enterprises franchisee sued the company for willfully misleading him on the value of a dozen Carl’s Jr. restaurant franchises in Arizona. What made the suit unusual was that the plaintiff was Frank Karcher, the company’s former vice president of franchising and a brother of founder Carl N. Karcher. The suit was eventually dismissed.

* In a closely watched case with nationwide implications, longtime Coca-Cola distributors in New York have been told that their soft-drink routes--some dating back 30 years--will not be renewed in 1995, when company employees will take over distribution.

* A frustrated Taco Bell franchisee in Missouri maintains that the fast-food giant is withholding additional licenses from him as punishment for joining a franchisee organization not sanctioned by Taco Bell.

Franchisers offer their own litany of complaints.

Many companies argue that longstanding franchisees won’t acknowledge a dramatic change in consumer-buying patterns.

“This whole industry has changed,” said Jonathan Blum, spokesman for Taco Bell, which is alienating some franchisees by selling its Mexican-style fast food through a growing array of unconventional outlets, including kiosks, carts and grocery stores.

Other franchisers argue that agreements signed decades ago are woefully out of date. “We’re trying to ensure that we don’t become tomorrow’s Hula Hoop, and (franchisees) aren’t willing to help,” fretted one franchising executive.

Legislators and regulators beyond California are seeking ways to settle the feud.

U.S. Rep. John J. LaFalce (D-N.Y.) has introduced three federal franchise bills that would force franchisers to make full financial disclosure and bolster protection for franchisees.

Maryland legislators last week joined the growing ranks of those reviewing a groundbreaking law passed last year in Iowa that established what proponents call a “franchisee bill of rights.”

A federal court struck down part of the Iowa bill of rights, and franchisees lost a hard-fought battle last year for similar protection in Texas.

But “franchisees tasted blood in Iowa, and they’re going after the same protection elsewhere in the country,” said Susan Kezios, president of the Chicago-based American Franchisee Assn., a newly formed group.

Franchisers argue that self-policing is better than added regulation, which could result in “both sides throwing stones at each other or having the attorneys shoot it out,” said Michael Sawitz, 46, a Lake Forest franchiser and co-founder of the 2-year-old California Franchise Assn.

“What we need is more talking, more communication between franchisers and franchisees,” Sawitz said. “When you look at it, there’s just one bottom line here: a growing, healthy franchising industry. . . . If franchisees are unhappy, I’m going to be unhappy.”

While legislators consider new laws, franchising continues to flourish, especially in the retail, restaurant, and home and office service sectors. The nation’s 542,496 franchise units accounted for $803.2 billion in retail sales during 1992, according to the International Franchise Assn. in Washington. Total franchise sales are projected by the trade group to hit $1 trillion by the year 2000.

While franchising is changing the way Americans eat and shop, it is also changing the nation’s workplaces. Franchising is an especially appealing alternative for people who have lost jobs with big companies--or who start businesses on the side in anticipation of being laid off.

Franchising is also attracting employees tired of playing the corporate game, said Sawitz, who ended a successful career to open his small but growing chain of AIM Mail Centers.

There’s no shortage of opportunities.

The cover of Entrepreneur magazine’s January issue boasts that in California alone there are “over 777” different franchise opportunities. The magazine is chock-full of advertisements that promise financial security, big money and unlimited income.

The variety is staggering. For example, a Mississippi-based company offers franchisees with $599 entry to the “$12-billion a year untouched market (for) renewing tennis shoes.”

Everything, it seems, can be franchised, including love.

Franchises are being sold for matchmaking services and wedding planning guides. Franchisees will arrange receptions and honeymoons. Franchisers also are packaging services for when the honeymoon ends--everything from maid service to the collection agency that chases deadbeat ex-spouses for child-support payments.

Companies are bombarding potential franchisees with print advertisements, computer programs and videos that promise everything from exclusive territories and comprehensive training to high profits and low start-up costs.

This weekend, more than 6,000 Southern Californians are paying $7 each to attend a trade show at the Long Beach Convention Center, where more than 100 franchisers have booths.

The show is one of 90 to be put on nationwide this year by Santa Barbara-based Spectrum Blenheim Shows, which expects total attendance to top 100,000. Thousands more--many from Europe, Asia and South America--will attend the company’s international exposition in Washington in April.

But franchising’s dramatic growth is generating controversy.

Complaints filed with the state Department of Corporations “have definitely been on the uprise in the last couple of years--partly because of the proliferation of franchise trade shows that target all the people who have been laid off from work,” said Judy Hartley, a lawyer for the department.

“The shows have a lot of start-up companies still trying to get a base established, as well as fly-by-nights there to grab someone’s initial fees and run to the next state.

“There needs to be more federal regulation, but it’s the states that can regulate the day-in and day-out activities of these businesses.”

Spectrum Blenheim Shows, which counts the International Franchise Assn. as a co-sponsor of its weekend expos, urges consumers to “do their homework, to check with lawyers and accountants,” said Andy Trincia, an association spokesman. “We are always telling people that if it seems to be too good to be true, then it probably is.”

Still, franchisers are “casting a wider net, and they’re catching people who don’t have any business getting into franchising,” said Douglas Carden, a Los Angeles franchise law attorney.

Carden also encounters disreputable franchisers intent on making a quick buck by selling worthless licenses, then disappearing. “We see people who have lost everything because they didn’t investigate carefully,” Carden said. “The venture goes south, the franchiser dissolves, and they’re left holding the bag.”

Dean Sagar, economist for the U.S. House Committee on Small Business, notes that “a whole franchise industry developed in the mid-1980s--enormous chains were set up merely to sell franchises. Unlike the established franchisers, such as McDonald’s, these new franchisers (don’t) have a proven concept.”

Some established franchisees, dealers and distributors also are grumbling about what they perceive as shabby treatment from their longtime corporate partners.

A growing concern is encroachment on a license holder’s territory by other franchisees--or the company itself.

Kentucky Fried Chicken franchisees maintain that parent company KFC Inc., owned by soft-drink giant Pepsico Inc., set aside longstanding agreements and opened competing restaurants that are stealing their revenue. “All of a sudden, the franchiser has become the franchisees’ worst competitive nightmare,” said Andrew Selden, a Minneapolis attorney who is representing 650 KFC franchisees in a class-action suit.

Yorba Linda resident Danny Stone, who operates a Snap-On Tools franchise, complains that the company has shrunk his territory in recent years. “It’s like having a gym floor that takes one guy an hour to sweep--you could hire three more guys, cut everyone’s salary, and get the job done in 15 minutes,” said Stone, 42.

“Snap-On doesn’t care if it’s hurting the dealers. . . . It’s just looking for ways to make more money for itself.”

Tommy Clark, Snap-On’s director of franchise operations, defended the Wisconsin-based company’s decision to cut back Stone’s previous territory to 225 customers from 300. “If you call on your customers once a week, there’s no human way you could service more than that,” Clark said.

Irvine-based Taco Bell, which has alienated some franchisees by expanding its distribution system to include kiosks, carts and products for sale at supermarkets, believes its expansion is good for consumers. “We put our customer first,” said Taco Bell spokesman Jonathan Blum. “Their lifestyles have changed . . . and we’re trying to meet their expectations about where and how they can purchase our foods.”

Taco Bell is inviting franchisees to share in the growth of its less-conventional distribution points but is not soliciting franchisees for new restaurants. Instead, the company will run any new restaurants itself, Blum said.

Change also is in store for 350 soft-drink distributors in New York City who have been advised by Coca-Cola Bottling Co. of New York that their contracts--some dating to the 1960s--won’t be renewed when they expire in 1995.

The company has offered to pay distributors a fee for their businesses, but distributors said the offer falls far short of the fair market value of their routes. They have gone to court to force Coca-Cola to pay “fair market value” for the distributorships, spokesman Ron Edelman said.

Newly militant franchisees are banding together to exchange information and lobby legislators. Two new trade associations for franchisees have sprung up in the past 18 months alone.

One of them, the Chicago-based American Franchisee Assn., has been in existence just over a year and already claims 13,000 franchised locations under its umbrella. The association counts among its members the holders of some of the nation’s best-known franchises, including Taco Bell, Dunkin’ Donuts and Jack in the Box.

Another organization, the San Diego-based American Assn. of Franchisees & Dealers, says its charter is “providing a counterbalance in the franchising industry.”

The emergence of those groups hasn’t gone unnoticed by the International Franchise Assn., long the industry’s dominant trade group. Last year the IFA took the unprecedented step of inviting franchisees to join the organization.

The 33-year-old IFA, which represents most of the biggest franchise names, also created a voluntary dispute resolution program and crafted what its officials describe as a tough professional code of ethics.

“By and large, the vast majority of franchisees are happy and making money, but there are some who aren’t happy, and there’s enough dissension that the (IFA) board of directors recognized that it’s time for more teamwork,” IFA spokesman Trincia said. “There’s no room for the ‘us and them’ mentality that’s sprung up.”

But officials at the newly formed franchisee organization question whether the IFA’s invitation to franchisees is sincere. “I think that’s a pretty hysterical move, after 30 years of representing the franchisers,” American Franchisee Assn. president’s Kezios said. “I think their decision to admit franchisees is a testament to how effective the AFA has been in just 18 months.”

Flexing its newfound muscle, the AFA announced that it will hold its first national meeting in Las Vegas in February--on the same days that the IFA has claimed for its own annual meeting.