| Licensing, Technology Transfers, |
When you finally figure out that you have been had, that you bought a bozo
franchise and that you are going to be cheated even more by the scoundrels who
sold you the deal, the first things that you will do will be the wrong things.
It never fails. People who won’t spend money to obtain competent help on deal
due diligence before they invest, who only want to spend a few hundred bucks to
have some bozo lawyer “read the contract”, usually – in fact almost always in
the case of the newer franchises these days – wake up one morning realizing that
they have been royally screwed.
Before continuing, I think I need to explain the term “bozo lawyer”, as I know I
will get a lot of angry feedback from certain circles in the legal profession if
I don’t explain it. A bozo lawyer is a lawyer who wants so much to make a few
hundred dollars doing something inadequately and incompetently, that a small fee
will be accepted rather than honestly saying to the client that the scope of the
project is beyond their ability and helping the client find a resource who knows
what to do. A bozo lawyer will take the small “read ‘em the contract” fee rather
than tell the client that the project requires business and financial and
franchise, as well as legal due diligence and experience with how
representations are skewed in the franchise industry. Any lawyer who will “read
you the contract” and not do the other things I have suggested in the Franchise
Fraud Symposium Tutorial articles is a bozo lawyer. And, as I have said in those
Tutorials, even that is sometimes not enough. Fraud is sometimes blatant and
often subtle. If you don’t have the training or experience to do the job right,
you have a fiduciary duty to the client to direct them elsewhere and help them
get what is needed to do the job competently.
If you don’t do this you are a bozo lawyer and deserve to be sued for
malpractice. It breaks my heart when I realize that almost everyone who comes to
me after they have already been cheated hired a lawyer before they bought the
franchise who only told them that the franchise contract is very one sided and
that usually there is no opportunity to negotiate individual terms, and maybe
also that it looks like a good deal if all the claims are true. I just want to
scream that there are not militant seminars to teach so-called business lawyers
about how to do franchise purchase due diligence in a hot zone of intense
franchise investment fraud.
The due diligence on a new franchise has to be as intense, if not more so, than
the due diligence on the acquisition of an up and operating business. There is
less actual information available on the new franchise proposition, because
there is no actual operating history for the store that the client will operate.
This makes it easier to fabricate the appearance of financially positive
prospects. Ferreting out that scenario’s warts calls for more intense cynicism.
Because the work is more complex and costs substantially more to do it properly,
prospective clients are often reluctant to spring for The Full Monty. The client
is presold and, at the moment of your first meeting, the job will be to disabuse
him of the enthusiasm for the proposal. But if, after you have told him the
risks of skullduggery, there is still unwillingness to pay for doing the job
right, taking the smaller version of counseling is simply an invitation to
disaster. If the client won’t pay for doing the job right, the only intelligent
course is to show him the door. Oh, you can write a fee agreement that limits
what you will do for the small fee, but if you have ever heard that kind of fee
agreement dealt with in trial of a malpractice case, you probably will never do
it that way.
You’re not a professional if you lack the ethical substance to tell a
prospective client that you can’t help them. Usually those resources have to be
multi disciplined. They have to be capable of spotting fraud, spotting “tricks”
always used by franchise sales people, knowing where to look for the “stuff”
that isn’t obvious on the surface, parsing the financial substance of how the
proposed business relationship will really work, and differentiating between
what is communicated in the sales and marketing process and how – if at all –
that is reflected in the franchise agreement and accompanying disclosure
documents.
You have to be capable of graphic portrayals of the defects that the client has
no idea are hidden within the documents provided by the franchisor. The client
believes that the people that are on the opposite side of the proposed
transaction are really trying to help out rather than fleece him. If the
prospective client doesn’t want to pay for that level of assistance, the only
smart thing to do is to decline the retention and let the victim go take his
lumps. That way the victim won’t have you to blame/sue when the worst happens
after the sale is closed.
Filled with anger, loathing and hatred, these victimized franchisees initiate a
campaign of name calling, send emails and letters and make telephone calls
whining about something that they thought they had a right to that is not being
performed by your franchisor, or about something the franchisor is doing that
they said they would never do in the sales pitch – but not in the franchise
agreement itself. They also get on the phone and discuss it angrily with their
fellow franchisees, some of whom will – of course – report to the franchisor
that you are calling around bad mouthing the organization, hoping that by
ratting you out they can suck up and maybe avoid the same treatment.
Then the victim will spend the next two years whining and complaining, and
usually making no money or far less than he was led to believe – almost no one
makes the projections – even if they make the sales they don’t make the profit
numbers. All this time the victim will be miserable. His net worth will
decrease. His ability to handle financial obligations will get steadily worse.
And the statute of limitations will be running toward the extinction of any
fraud and misrepresentation claims that he may have and does not assert in a
proper forum. Since he wouldn’t spend money to get competent help with the due
diligence before he bought the franchise, he resists spending money to get
competent assistance on what to do about the situation now. If he is really
stupid, he will wait until his financial condition is so bad that he can’t
afford competent help anyway. One thing is certain. If the franchise he bought
is a fraud, one of the franchisor’s goals is that when he figures out what
happened to him, he will be too poor to do anything about it. He may already be
beyond help. If he delays further, his chances of being beyond help increase
rapidly and dramatically.
That’s what most folks do in this situation.
There are two rational solutions to having just learnt that you’ve been had. And
the earlier on that you chose one and get on with its execution, the better off
you will be. Life is tough. You have to be tough or it will devour you.
The ability to sue the lawyer who failed to provide competent guidance in
counseling you about doing the deal in the first place is probably subject to a
two year statute of limitations. The statute of limitations on any franchise
fraud claim is probably going to run out in three or at the most four years from
the date you signed the franchise agreement. There may be an even shorter
contract limitations period. YOU CAN NEVER ASSUME THAT STATUTES OF LIMITATIONS
GIVE YOU THE AMOUNT OF TIME THAT I HAVE JUST SUGGESTED. YOU HAVE TO CHECK THE
SPECIFIC STATE STATUTE FOR YOUR PARTICULAR SITUATION IN EVERY INSTANCE. YOU MAY
NOT HAVE AS MUCH TIME IN YOUR SITUATION FOR ANY NUMBER OF REASONS. You may
stupidly have given away your right to jury trial and your right to collect most
categories of damages when you singed the franchise agreement, and damn few
courts are going to be willing to give those rights back to you under any kind
of unconscionability rationale. You need to get yourself into the hands of a
competent business fraud trial lawyer as soon as you believe you have been
cheated. You need also to avoid any communication whatsoever about your
situation until you and your new lawyer have sorted out what you options are and
in what priority you are going to exercise them. Don’t send the angry emails and
letters. Don’t make the angry phone calls. Don’t talk about the situation with
other franchisees. Shut up until you have a battle plan. Everything you say or
write before you get the battle plan sorted out is more likely to hurt your real
interests than help.
One of the first and most important options you will have is simply to get out
of the business by putting your franchised business up for sale. It probably has
some market value. If you think you would rather just sell the business than
spend money fighting your franchisor and/or your original lawyer, you will need
not to have created a difficult situation by bad mouthing anyone or anything.
You will have to deal within yourself with the question of how you will feel
about dumping the deal you wish you had never bought onto someone else. That’s
your call, but the option is there and you need to consider it. You may well not
realize total recovery of your investment. What you can get has to be measured
against what you would have to spend and to risk in order to go to war over
having been cheated.
Contingent fee lawyers only get paid if they win something, so if you insist on
a contingent fee arrangement for your new lawyer, expect a recommendation to
fight. Solutions that don’t produce cash recoveries don’t provide funds to pay
contingent fees. If the contingent fee agreement states that it will apply to
any sums you receive, expect the lawyer to claim a percentage of the price you
get from selling your business. Business brokers are cheaper in percentage of
sales price than anything you will find in a contingent fee agreement.
Contingent fee agreements frequently take 30 – 50 % of the recovery from any and
all sources. Do you want to go that way? Probably not. If you want competent
legal assistance and don’t want to pay that kind of fee, you have to pay the
lawyer by the hour and not on a contingency. If you pay by the hour you will
also get more attention paid to alternatives that do not involve having to fight
for a litigated recovery. There is no free lunch!
Do not expect that your fellow franchisees are going to come to your aid. They
almost certainly will not. They will in all likelihood gossip amongst themselves
about what you tell them. Promises of confidentiality are totally useless. Some
of these folks will tell the franchisor everything that is said in hopes of
getting some favorable treatment for themselves. Even if what happened to you
also happened to them, do not expect assistance. They would rather lie in the
weeds and see what you get on your own than stand with you and assist in the
attainment of a better result for everyone. That’s how the world works and how
it has always worked.
See the Tutorial entitled “WHO DO I NEED? WHEN DO I NEED HIM? GETTING THE RIGHT
LAWYER AT THE RIGHT TIME” in the roster of Specialized Tutorials on this web
site. Ask the tough questions of the lawyer you are thinking of hiring for due
diligence work. How many of these proposed transactions have you vetted? Have
you followed up on any of them regarding how well or poorly they did? What were
the main problems that contributed to the difficulties of those franchisees who
had difficulties? Can you identify the point at which the due diligence work may
require the participation of a financial advisor in addition to a legal advisor?
If so, do you have someone who is available to assist with that work, and what
should I expect that to cost?
And don’t forget that a reality mode appreciation of the terms of the franchise
agreement is also part of the mix. You really do have to understand what the
contract says and, more importantly, how that works when it comes into play and
why it is configured the way it is. If you the lawyer can’t appreciate the
intertwining of Integration and Acknowledgement clauses, and the intertwining of
covenants not to compete and liquidated damages clauses, and you are unable to
portray to the prospective client how those work together and why they are in
the contract, you aren’t ready for this work at any level. If you lack
sensitivity for the differences between the sales and marketing brochures and
the substance of the Duties Of The Franchisor provisions of the franchise
contract, and how to go about accounting for them, plus the oral statements made
by franchisor representatives, you may be a RedNeck, as Jeff Foxworthy says, but
you aren’t ready for prime time when it comes to counseling about franchise
purchases.
Copyright 1997 - 2008 || Richard A. Solomon
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