| Licensing, Technology Transfers, |
It is unfortunate that so many people risk everything they own and may earn in
the future, unless they go through the bankruptcy process, on franchise
investments that are unsound and that fail. Every week someone comes to me with
the problem of being totally wiped out, asking what can be done. The most
important lesson from this regularly occurring disaster is that, instead of
coming to me after you have been fleeced, you should have come to me before you
made the investment so that there might have been a good chance that you
wouldn’t have been fleeced in the first place.
Most of these folks lack the financial resources to put up a fight, even if they
had something to fight about. Being broke when you decide you’ve been had is
really the crooked franchisor’s best defense. If you have any money left when
they are done with you, they haven’t done their job correctly.
Not every new franchise is run by thieves. Many are. Many more are run by
relatively honest people, but are failed business models because their owners
were unable to recognize that they had no potential for successful franchisee
ownership and lacked the ability to make changes in the model that might have
given it a chance at survival. Many of these were ill advised by franchise
consultants who told them that their business was perfect for franchising and
sold them a bill of goods on fortunes to be made by letting them show you how to
franchise your business. These guys end up broke and in bankruptcy too. People
who tout themselves as franchise consultants on the subject of how to franchise
your business never tell anyone that their business is not suitable for
franchising, because telling them that it’s perfect for franchising is where the
big money is. It makes no difference to the crooked franchise consultant that
the franchisor may fold after the first twenty or so franchises are sold. The
fees earned for that are really quite substantial. New franchisors get cheated
too.
No matter which it might be, thief or incompetent, the result for the franchisee
is the same. Most fail and are bankrupt and without effective remedies.
What that tells you about franchising is that subsequent lawsuits are not the
answer to the problem of being ripped off. The answer to that problem lies only
at the front end. Obtaining the competent deal and legal due diligence that
informs you of the truer nature of the risks than the sales and marketing
brochures and UFOC packages provide is the only – yes, the only – truly
effective protection against financial ruin. Once you sign the contract and
write the check, you are toast!
While there are occasional instances in which established franchisors are
fleecing investors through misrepresentation of the quality of the deal (usually
through “pump and dump” schemes), for the most part it is the newer franchisors
who present the highest investment risk of fleecing. While they themselves may
not know how to be smooth about robbing you, they can hire franchise
marketing/sales groups – many of which call themselves counselors and franchise
investment advisers and pretend they are helping the franchisee investor. These
folks only get paid if the franchisee prospect buys a franchise. The franchisor
pays them a commission on the sale. The franchisee investor is usually so
unaware of the realities that it does not occur to him that someone who gets
paid by the franchisor if they buy a franchise isn’t really working for the
franchisee investor, no matter what they may say. DUH!! They all work for the
franchisors.
If you go on franchise industry discussion forum web sites, what you find is a
lot of folks who lost everything complaining that the government needs to
protect them. One has to be kind, as these folks are desperate and destitute. If
you budget for competent due diligence, not just superficial contract
explanations, you have a much better chance to avoid a lot of the risks of being
cheated. Competent due diligence on a franchise investment will cost from $
3,500 - $ 5,000. If you don’t have enough money to handle that with relative
ease, then you don’t have sufficient investment capital to assume the risk of a
franchise investment. Wait until you can afford to get good help in trying to
avoid being robbed blind. Franchisors never put such an item in their list of
total initial required expenses, because they don’t want you to invest in
competent deal due diligence. The thieves want you to go into the deal blindly.
If you think that you can afford to roll the dice with everything you have in
this world, don’t later complain that the government isn’t protecting you from
risks you could have protected yourself against. The reality is that the
government isn’t your nanny and you have to protect your self. What you think
ought to be simply isn’t. You have to very quickly become aware at least of the
fact that you have to go out and find the due diligence assistance that works
for you and not for the company that wants you to buy their franchise. Moreover,
the due diligence has to be competent deal and legal due diligence. Just having
a lawyer “read the contract” is utterly worthless because it doesn’t inform you
of the quality of the investment risk. If your lawyer or other advisor lacks the
ability to vet the whole deal for you, you are no better off than had you simply
gone to Las Vegas and bet everything on the roulette wheel. Your MBA degree and
twenty years corporate business experience have not prepared you to do what is
required to vet a franchise investment opportunity. Disengage your ego and
accept that in the presence of seasoned thieves, you are just so much fresh
meat.
You will probably start looking for due diligence help about the time that you
decide you have found the franchise investment of your dreams. You will call up
and ask for help vetting that particular franchise. If the due diligence
resource is competent, they will tell you that you need to be prepared for a
negative recommendation and to be willing to continue looking. The retainer
quoted for the due diligence work will take into account that the deal you walk
in the door with probably isn’t right, and that you will have to look further.
That will have been built into the retainer, and you should not be charged a new
retainer for every possible investment you come in with. Good due diligence
franchise investment vetting always starts with the expectation of having to
sort through a number of frogs before the one you kiss turns into the handsome
prince.
In my experience it is usually the third deal that is the one that turns out to
be the right deal, as by then the client knows better what we are looking
at/for, and has been better at picking investment candidates. If the third deal
isn’t right either, the client usually decides to step back from franchise
investing and take a breath and look around for something to do that doesn’t
involve a franchise. A third bad deal in a row tends to leave a bad taste in
your mouth and you don’t want to continue for a while. Buying a franchise
because you are worried that you may not have anything to do for a while is a
really bad decision. The value of not losing your investment and of avoiding
continuing obligations on leases, loans and franchise contracts, many of which
you will have personally guaranteed, far outweighs the burden of having to make
do for a while. Owning your own business requires so much coping ability that
people with the requisite skill set can find ways to make due while they give it
further thought.
You have to keep vividly in mind that with a newer franchise, you are asked to
sign a contract that no normal person would ever sign unless the reality of the
opportunity were simply the most marvelous thing you could possibly imagine. No
newer franchise opportunity can ever be like that. It is unproven. It might turn
out to be the best thing since sliced bread, and then maybe be worth accepting
the terrible contract terms. But it isn’t there now. On a broad policy level,
these shenanigans will stop when people stop signing terrible contracts on
unproven propositions. But that won’t help you in making you investment decision
now. The way things stand today, if you’re too smart to accept a pig in a poke
on awful terms, there will always be some sucker on the phone in a few hours who
can be fleeced and who won’t do what is required to obtain protection. I’m a lot
less interested in policy questions than I am in seeing to it that my clients
don’t get fleeced today.
When they first come to me, they have bought the sizzle. Sizzle is never
trustworthy in the sense that sizzle is not susceptible to extrinsic
verification. Finding a franchisee who is successful does not constitute
verification of sizzle reliability, even though most folks think that is the
proof you need. If you believe that finding/being steered to successful
franchisees is a reliable indicator of the truthfulness of what you are being
told, you are not ready for prime time in this game yet. There is no potential
return on investment when you invest in the sizzle. Lots of things sizzle in the
presence of heat. Damn few of ‘em are steak. Among newer franchises, even what
is not sizzle is frequently untrue when exposed to harsh and critical analysis.
For example, a lot of what you are told that is true is simply irrelevant to
your investment decision. A sales technique of which you are probably not aware
is to make a lot of statements that, while irrelevant to your investment
decision, are easily verifiable. That presents an aura of truthfulness that
facilitates convincing you that the untrue materials are worthy of your
reliance. Of course, if you or your lawyer really did read the franchise
contract, you will find that in it is a clause in which you agree that you did
not rely on any information not specifically stated in the UFOC and the
contract. That is intended by the crooked franchisor to be a license to lie to
you in all the sales and marketing brochures and presentations. Did you know
that? Did you recognize that that was what was happening when you read it? Did
your local lawyer recognize that dynamic? This aint Sunday School.
That is just a small example of how franchise investment deception works. There
are more deceptive techniques than anyone could possibly encompass unless fraud
analysis was what you did for a living. Even then, the mind of a crook is always
fertile and new deceptions arise every day.
Franchising has been wonderful for many investors for a very long time. It is
just plain awful that it is so abused by dishonest people and that innocent,
ignorant investors are so easy to fleece. The government won’t rid the industry
of fraud in franchising any more than the government had rid the securities
industry of fraud. Due diligence before you invest is the only way – yes, the
only way – to critically reduce the risks of being fleeced. Even with the best
due diligence there is no guaranty of success. No expert can get everything all
the time. But when you consider what the risk is when you don’t get the help you
absolutely have to have, the answer about what to do and how to go about it is
obvious.
Copyright 1997 - 2008 || Richard A. Solomon
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