Franchising war stories: that time I had to terminate a contract with the Yakuza | Global Franchise
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Sunday 5th February, 2023

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Franchising war stories: that time I had to terminate a contract with the Yakuza

Insight

Franchising war stories: that time I had to terminate a contract with the Yakuza

Anyone involved in franchising knows that it’s a profession that’s far from humdrum. But our writer never expected his role would involve dealing with international crime syndicates

Anyone involved in franchising knows that it’s a profession that’s far from humdrum. But our writer never expected his role would involve dealing with international crime syndicates

I sat across the desk from my boss Big Al. He gave me a stern look and asked: “Is it done?” I responded simply: “Yep. Terminated.” “Did Mr. T go quietly?” I just shook my head. A couple of weeks earlier, Al sent me on an assignment to Osaka in Japan to take care of a Yakuza boss, who was causing problems for our organization. “When it was done, I went straight from the restaurant to the airport,” I responded. “I wanted to get the hell out of Dodge before I was a target for retribution.” People say that when you mess with the Yakuza, they’ll make you cut off your own pinkie finger – or worse. I nervously glanced down at my hands – complete with all ten fingers – and let out a sigh of relief.

It sounds like an excerpt from a bad Mafia novel, but it actually happened to me. Okay, so Al wasn’t really all that ‘big’, and my employer was, in fact, a global business service franchisor, where I served as a young international director. And by terminated, I mean the master franchise agreement for Japan was terminated by the franchisor. But, yes, the owner of the Japanese master franchise was indeed part of the Japanese Mafia, known as the Yakuza.

Uncovering the truth
So how did we discover that our master franchisee was Yakuza? About five years after the launch of the master franchise in Japan, the first master-owned unit was losing money – a lot of money – and they had sold only one franchise. During a support visit to Japan, I met with Mr. T, and he seemed very pleased and content with his current business situation as the master franchisee, bleeding cash, which I found very odd.

I decided to call up Sato, a business school friend of mine in Japan, to get a Japanese perspective. I explained the situation, and Sato asked me: “What’s the owner’s business background?” I answered: “Real estate development.” Sato simply replied: “There’s your problem. Everyone knows that real estate development is controlled by the Yakuza. They buy up legitimate businesses, including franchises, as a front to launder the money from their illegal activities.” Apparently, what everyone knew in Japan, was not widely known by the American franchise executives, who signed the master franchise agreement. With a little detective work, I confirmed that Sato was absolutely right.

“At the end of the meal, I brought out the termination letter like an unexpected dessert”

Taking a contract out on the Yakuza
The restaurant meeting in Osaka to terminate Mr. T was one of the most surreal experiences of my life. I was accompanied by a female Japanese interpreter to help temper this not-so-subtle message to Mr. T. At the end of the meal, I brought out the termination letter like an unexpected dessert, and very politely explained that “things just were not working out for our business relationship”. Mr. T replied – very politely – that this was very regretful and unfortunate news. Keeping a poker face, I endured an escalating litany of politely veiled threats without reacting.

The interpreter became increasingly alarmed and frustrated that I was missing the cues, and she finally turned to me and said bluntly: “He’s trying to intimidate you!” With that, I replied: “I understand, and please inform Mr. T that I regret that I must be going.” I stood up, leaving the termination letter on the table, then bowed politely and departed the restaurant – and took a taxi directly to the airport for my international flight back the U.S.

Yes, after the termination of the master franchise agreement, there was retaliation by Mr. T. The franchisor was supporting one remaining sub-franchisee unit in Japan, which it took on under a new direct franchise agreement. Mr. T arranged for a single Yakuza thug to visit the franchise location daily. The tattoo-covered Yakuza man would simply sit in a chair just inside the door and read the newspaper. Clients would walk in the door, see the tattooed Yakuza man, and would walk right back out. It was subtle but highly effective retribution. To avoid bankruptcy, the local franchisee asked to be released from the franchise agreement and to rebrand as an independent business.

The franchisor agreed, and after re-branding, the intimidation tactics went away. However, the American franchise was never able to re-establish its brand in Japan.

A truly unique story, right? Wrong
The same franchisor that had to terminate Mr.T in Japan was concurrently dealing with frequent shakedowns for “protection money” by the Russian mob, which was targeting the Moscow franchise operation.

Then, three years later, I joined another international franchisor in a different sector, and I was asked to help clean up their situation in Japan. My new boss informed me that they recently terminated their Japan master franchise agreement. Why? Yep, you guessed it: the master franchise owner was caught in illegal activities with the Yakuza. This time it was related to casinos and prostitution.

It doesn’t only happen in Japan and Russia; it’s a global phenomenon. You’ll find similar accounts of organized crime involved in franchising around the world, including the U.S. My business partner, Dan Bish, tells a story about a Mafia franchise encounter in the southern U.S.

Southern discomfort
Several decades back, Dan was working with a photography franchisor that unwittingly awarded a franchise territory down South to a franchisee, who turned out to be in debt to the local mob. The “Godfather” of this organization was, at one time, the most powerful underworld figure in the U.S.

The first signs of trouble emerged at the new franchisee training. A mystery woman showed up with the franchise owner at the training. The franchisee said the woman was the wife of his “business associate”. The mystery woman stuck out like a sore thumb. She showed no interest in the training and spent most of the class time reading a magazine. It was later surmised that she was, in fact, one of the lieutenants of the local mob boss; she was his eyes and ears into the business.

Surprisingly, the franchisee scored an apparent site selection coup with a dream kiosk location in a major mall. The franchise owner signed the lease without consulting the franchisor. Then the terms of the deal began to emerge. First, the base rent was incredibly expensive. On top of this, an additional percentage rent was charged that was outrageously high, compared with other tenants in the mall. Bottom line: the franchisee was way over his head with no hope of reaching profitability.

The truth emerged that the franchisee was part of something the franchisor wanted nothing to do with. The franchisor’s attorney was able to ascertain that the situation had something to do with a debt owed, money laundering or some other sordid endeavor. When the Mafia connection became apparent, the franchisor’s leadership directed their attorney to urgently draft a termination letter with an attached check refunding the franchise fee in full. They then crossed their fingers and prayed that would be the end of it! Thankfully, the franchisee went away quietly with no blow back to the franchisor.

McMafia
Perhaps we should not be surprised by the overlap between the franchise world and the underworld of organized crime. The Mafia and franchising share common business practices, such as exclusive territories, royalties, brand loyalty and a structured network of independent operators under a collective and mutually- agreed system.

These commonalities are not lost on Hollywood and other international studios. Take the example of the organized crime series McMafia, released in early 2018 on the AMC and BBC One networks. The franchise comparison is clear. According to USA Today: “McMafia presents organized crime as a robust global franchise business”. An unmistakable nod to franchising appears in the show’s script, when drug trafficking is compared to fast-food franchises: “The one with the most locations wins”

Of course, we franchise executives must bear in mind that we are not cut from the same cloth as organized crime syndicates, real or fictitious. We need to follow the rule of law, and when the occasional franchisee termination must happen, they don’t end up in the trunk of a car, wrapped up in plastic next to a shovel. Well, perhaps we can fantasize about it on occasion… “Mario, how many times did I tell you to pay your royalties on time!”

HOW TO KEEP CRIMINAL ELEMENTS OUT OF YOUR FRANCHISE NETWORK:

Due diligence for domestic franchisees

+ A simple web search of franchisee prospects may reveal red flags, such as references to legal proceedings and association with shady business activities

+ Before signing a franchise agreement, you might ask the future franchisee to agree to a criminal background check. Explain that your franchise does background checks on all owners to protect the brand and keep out bad actors. Nobody wants a criminal in their midst. If the candidate objects, it’s a red flag

+ Depending on your franchise, you may also require criminal background checks on managers and employees of the franchise. This could be especially important in certain business areas, where privacy and security are imperative

Due diligence for international franchisees

+ If you are an American franchisor, you may ask for assistance from the U.S. Commercial Service to complete an “International Company Profile”, which is a background report on foreign individuals or companies. This is good information to have prior to signing an international franchise agreement

+ To avoid any criminal elements associated with money laundering, drug trafficking, terrorism or other individuals sanctioned by the U.S. Government, you can do a search of the online database of the OFAC (Office of Foreign Assets Control)

THE AUTHOR
Ray Hays is managing partner at FranLaunch USA, a franchise management firm that provides expertise and capital for early-stage growth of international and domestic franchisors in the U.S. market. Ray has never been involved with organized crime, however, he does have a 29-year track record in franchising, including field experience in over 50 countries worldwide

Also read
Q&A: five minutes with… Ray Hays of FranLaunch USA

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