| Licensing, Technology Transfers, |
Everyone loves a surprise, right? WRONG!!! Fifteen years ago I started telling franchisor clients that there ought to be a document that a franchisee could sign just before the franchise contract is signed that would exonerate the franchisor from later fraud claims based on earnings projections. My clients adopted it and, bye and bye, I began to notice that other franchisors had stumbled upon it and adopted it. Now that I have all y'alls attention as we sit here in Muldoon's enjoying our favorite flavors, I thought I'd pass that around along with some other surprise preventers that you probably will want to use. Let's start with the hot flash I just described.
Those of us who have been around the past twenty years have all run into the cocktail napkin pro forma that some salesman used to give out unauthorized and sometimes even false earnings claims which were not included in the offering circular, the UFOC. Later, when a franchisee didn't make it, claiming that he had been given earnings claims, and just having happened to have saved the napkin (now known as Exhibit 1), that chicken comes home to roost. Another version is to have put the unauthorized earnings claims on a blackboard which the franchisee prospects all copied before it was erased (to which event they will all be willing to testify). Another version is for the salesman to have a successful franchisee attend the sales "seminar" and talk about how successful he is (same result, especially when he testifies that he was paid something for each sale that signed up when he gave his little speech). The ingenuity of the human mind is limitless.
A simple document signed before closing the deal saves you from the ravages of this kind of practice. it reads as follows: Welcome to our system. To be certain that we are doing this correctly, it is important to both of us that you please fill out and sign this questionnaire before we sign the franchise agreement.
Did anyone tell you anything about what your sales or profits or cash flow would probably be that is not the same as the information about earnings and sales and cash flow in the disclosure documents we sent you?
Yes ____
No ____
If you answered Yes, what were you told and who told you that?
_____________________________________________________
_____________________________________________________
Did anyone tell you how long it would take for you to hit 'break even'?
Yes ____
No ____
If you answered Yes, what were you told and who told you?
_____________________________________________________
_____________________________________________________
In this way, if there was a defective sales process, you can redisclose and achieve a very high level of quality assurance, or not make the sale and not risk the consequences of an improper practice. As this document will have to be in your UFOC as an exhibit, your sales people, knowing this, are likely to be more circumspect as well. You benefit all around. If, in the instance of your particular franchise, there are other issues that might benefit from this treatment, you can add those issues to the questionnaire also.
I have almost never heard of a franchisor who asked for a litigation/arbitration history from a prospective franchisee. Probably that is because of a fear of it adversely affecting a sale. That's a valid concern, of course, but if the answer to the question is 'None', it probably will not cost you a sale. If the answer requires that the prospect state each instance of a legal proceeding in which he was a plaintiff or a defendant within the last ten years (civil and criminal, including arbitrations), this will save you from later finding out that this is a person who rarely if ever got along with anyone. You can couch it in friendly terms and timing can be different from the initial application. You can point out that you have disclosed to him your past litigation history, as required by law, so it is nothing more than you are providing to him. You might also not put it in the initial sales package with the Franchise Application, but include it as an exhibit to your UFOC with the notification that it must be received by you no later than ten days before the franchise agreement is signed. This gives you time to check it out. If there is improper nondisclosure by the franchisee, he has violated the applicable legal standard through misrepresentation. It is as unlawful for him to misrepresent as it would be for you to do so. In the event of future difficulty with this person, you have a very fine arrow in your quiver.
The 'last call' beverage of this evening is about verification. We are all at one time or another so busy that we tend to 'assume' and to accept what is communicated to us as though it really existed. You can get by doing this most of the time. But when it goes bad, it goes very bad. Due diligence is not just something that lawyers and accountants do for you. You want to do most of your own due diligence by insisting that what is told to you on important matters be confirmed in a letter or memorandum. If there is 'official' documentation in existence, a deed, a contract, a stock certificate, a promissory note, you want to insist upon seeing it and even contacting other parties involved for corroboration. Hearing someone tell you that the promissory note of which you are holding a copy in your hand is either a forgery or has just been paid off and discharged is what you want to hear before you take action regarding it, not later on. I know. I'm just being a picky lawyer. What can I say?
Copyright 1997 - 2008 || Richard A. Solomon
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 | Licensing, Technology Transfers, |