| Licensing, Technology Transfers, |
Psychic transactions are exchanges of mutual validations through the observance of social customs.
If we acknowledge the mutual value of each other, no matter the facts on the ground, our relationship is supposed to proceed in positive directions to our mutual social and economic profit.
“I’M OK – YOU’RE OK”.
When we participate in group activity, at work, socially, in church, the formula works fairly well. I don’t question your positions and you allow me to participate in your group, for a price. The price may be psychic, as in your place of employment, or it may be psychic plus currency of the realm, as in church and in other organizations to which you belong.
The consequences of compliance with that protocol have, in the experience of most people, been positive – tenure, promotions, raises, bonuses, other stroking.
The result of years of that impacting upon the persona of a potential franchise investor is that it leaves one totally open for financial assault leading to the investor’s inevitable ruin.
Inasmuch as the psychic transaction process has worked positively in your life up to the point at which you consider making a small business ownership investment, you expect its reliability to continue. After all, it has proven itself to you for many years.
Those who would defraud you know that about you. Selling is about the most manipulative “science” on earth. Accordingly, they contrive to present you with the appearance of what you are used to and comfortable with. They counterfeit the trappings of authority and reliability. They do it through props, like offices, cars, jewelry and the like. They also do it by using the outward appearances of “success” to convey to you an aura of established reliability that is mostly cosmetic and not readily subject to objective quantitative or qualitative verification.
The materials provided for you have the “look” of authenticity. The language used is the same for the really bona fide business investment opportunity as it is for the fraudulent opportunity. In both you see references to belonging to a family. You see promises of “support”. You see reassurances of “proven systems”. You see representations of economic power, as in the instance of group purchasing. These are probably all the positive attributes of organizations with which you have previously been affiliated, and they make you feel comfortable.
Just as you would not have stood up in a meeting in your previous employment and demanded of the chief executive that he prove the truth of what he has stated, you wouldn’t think of doing so here. If you were even to suggest that you might appreciate some documentation, a look of “how dare you” appears, and if verification appears, it too is not subject to qualitative or quantitative testing. For example, if you were handed a financial statement, you would not also be provided tax returns against which to compare what you were handed. You would at best be handed a pre-prepared piece of fluff calculated to embarrass you into not requesting more information for fear of being down right offensive.
The significance of this discussion is that your many years corporate experience have simply not equipped you to deal with the vicissitudes of business investment misrepresentation, and misrepresentation in franchise sales is at this particular point in time a real epidemic.
The most well known brands in some systems are populated by franchisees who for the most part have never reached break even. If you go talk with them in connection with your pre investment inquiry, you will probably not be told the truth. These people are on the brink of bankruptcy and fearful of retaliation by their franchisor if they are suspected of saying things about the franchise relationship that are not positive. They may also, in many cases, be hoping that you might buy them out from under financial ruin by taking over their store. The information you are given on franchise retail business store resales is of far less reliable quality than even what you get from the franchisor. I know. You don’t believe that people are like that. They are like that. When people are facing total failure, they will do anything to escape. The ethics of the successful (such as they may be) are not the ethics of the desperate.
If you are provided with pro forma financial information there are two problems with it. First, it is not accurate. It is at best, even if honestly prepared, a statement of a composite model. Secondly, it does not provide you with insight into cushion risk issues. What, in this business you are considering, are the directions of line item income and expense risks, and how much risk in which line items can you absorb without producing negative income/cash flow?
It is not enough for a business lawyer to explain the meaning of contract language. Most business lawyers who don’t have a great deal of experience in franchising have no idea how contract language options are used by franchisors to have an immediate impact on franchisee bottom line financial performance. You cannot obtain competent guidance in the vetting of franchise investment opportunities unless you are working with a very experienced franchise lawyer who also has command of the relevant financial analysis issues. Your expectations that you will receive competent assistance by following the advice provided by the FTC on the front page of the Franchise Disclosure Document are not reliable. You need much more. The risks are too many and too great. The risks are at that level of seriousness due in great measure to the prevalence of outright fraud in the sale of franchise opportunities today.
Franchise investment due diligence today needs to be at forensic fraud cross examination levels. If you don’t do it that way, the unfortunate probability is that you will find yourself in desperate circumstances from which bankruptcy is the only escape. It can’t be done without someone, acting for you, getting “in the face” of the information and being able to show you where the risks are, how great each risk is and how far off the mark you are in your business plan if you were actually to invest in this particular franchise.
One of the most destructive mistakes in doing franchise due diligence is the low quality of due diligence that the investor does on himself. The customary reasons to justify making a franchise investment decision tend to short change the “Am I suitable?” part of the investigation you must perform on yourself.
Many review employment history and their family balance sheet, coupled with and influenced by the personal decision that now is my moment because of job changes, company merger or downsizing and so on. They come up with a quantitative picture. Do I have enough money/access to enough money? That leaves out a great deal of important information.
Things need to be sorted out like “What do we have coming in that will be stopped/reduced if I make the decision to buy a franchised business opportunity?” That has to be asked about in terms not only of money, but also in terms of such things as insurance coverages and the transferability of insurance coverages, plus the cost of the coverages in your new non-employee mode.
What is the state of your health and of the health of your spouse and children? Are there special needs the provision for which will be compromised if this decision is made?
What is the attitude of my spouse regarding buying a franchise/this particular franchise? Most of the time, the concerns and stress of a non wage earning spouse are given little weight/consideration, and spouse stress escalates, affecting the investment decision, family harmony, and the quality of critical home relationships.
What is the situation/needs profile of my children and how might that be affected by this decision. What sacrifices need they make and what do they know about it other than in vague, general terms?
The family financial plan needs to be vetted in terms also of checking to see what if anything might have been wrongly assessed because assumptions about it were made without verification of the assumptions.
Franchise investment due diligence calls for cocooning mentorship by the person/lawyer who is trying to assist in making the investment decision on realistic terms. A mere technical sorting out of numbers information without family counseling being part of the care put into client counseling ignores/neglects stresses that can materially affect the quality of the investment decision itself. I have often been told by clients that the family is on board, only to learn when I pull the spouse into the loop that spousal fear and stress is really at extremely high levels. While a spouse may dutifully express confidence that the new venture can be done well by my client, when I get the spouse into the loop and start bringing out those feelings in greater truthfulness, what I often find is someone asking me to please advise against the investment. A client’s assessment of real spousal support for making the investment decision is more often misplaced than accurate.
Your franchise investment advisor really must have the sensitivity to delve gently into the intangible factors of family preparedness. He can’t just do numbers crunching and legal mumbo jumbo contract explaining, give you a slap on the rump and send you off into the abyss. The counseling, investment vetting process, if properly done, tends to produce more personal friendships, because in the end there is great appreciate of what the advisor saved the client and his family from because the advisor went beyond just being a lawyer or just being an accountant.
It is after this searching for the truth about you that one begins the in your face, forensic fraud due diligence on the franchise investment itself. If your advisor can’t provide all those things, you are working with the wrong person. The process can take days, weeks or months, especially when the first opportunity being considered turns out not to be suitable and there is a search through numerous others trying to find a right fit investment opportunity. The language describing the business is so terribly off the wall misleading, that finding out after contracts are signed that you are working a menial job for slave wages and not really an entrepreneur at all is quite frequently the case.
By way of illustration, in most janitorial franchises the pitch is that the franchisor goes out and gets you your first building maintenance contracts so that you hit the ground running, followed by your following their system and getting your own additional building maintenance contracts while the revenue from the first few that have been provided for you keeps you afloat during this growth spurt. That is sheer fantasy!
Those first few building maintenance contracts are below market priced just to get the deal signed up. You don’t make any profit on them. They are bad buildings anyway. You can’t make payroll on the contract revenue. Your help leaves because you can’t pay them and you end up cleaning halls and toilets yourself all night long, too tired in the morning to get yourself together and go out selling building maintenance services to really good prospects. Moreover, the really good prospects usually have established building maintenance contracts that are extremely difficult to get them to break. You might get it done by charging a negative net revenue for your services, which turns that customer into another loss operation, and just more toilets for you to clean all night long.
This illustration is exactly how the janitorial service franchise industry works. In fact there are many more awful scenarios in that business. In most of the rest of the franchise opportunity business descriptions, there is a similar level of misrepresentation about what it is really like to be the franchisee. For instance, you can sell the world’s best sandwich or bowl of soup, but not possibly hit break even, not matter what. If you like the taste of the soup or sandwich, buy a bowl of soup or a sandwich, not a business that sells them. Consumer appreciation of the product does not mean that the franchisees are going to make any money. Very few new franchise investors are capable of making this distinction. They invest in the sizzle. They engage in magical thinking, not real thinking. While it sounds rather an obvious analytical capability, no one seems to do it when they are vetting franchise offerings. Some of the best known brand names are now no longer able to get good financing because of the abject failure of the investment quality of the deal and of the inability of so many franchisees to pay the debt back. Don’t be fooled by the play acting in the franchise offering documents. Those are snake pits of misleading information, and there is no effective government regulation of it, despite the claim that there is. In practical terms, the regulation is a charade.
If you are unwilling or unable to make the commitment to get the kind of investment advice that can save your bacon, you aren’t financially or mentally ready to make the investment. It’s that simple. In comparative terms, you spend a small amount of money to save hundreds of thousands of dollars. Do it right. Don’t let yourself save a bit on investment vetting fees only to end up at the door to the bankruptcy court.
Copyright 1997 - 2010 || Richard A. Solomon
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 | Licensing, Technology Transfers, |