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Licensing, Technology Transfers,
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There is an epidemic abroad in our land. It is called "The New Franchisor Scam". Here's how it works.
A small group of unscrupulous people with franchise experience decide to get rich quick by exploiting the inability of franchise investors to identify reality.
They come up with a "concept" that is a complete myth - it simply doesn't exist. Something like it existed in the past and may have had a successful run. That provides an anchor point. Illustratively, Subway and other sandwich franchises provide an historical basis on which a group conjures up a fantasy franchise that they call Dagwood Sandwiches. Dagwood uses an old comic strip character known in the comics as a person who enjoyed enormous sandwiches, but was otherwise a complete imbecile. Dagwood Bumstead was in years past a household word and well known in American culture.
The sales and marketing materials for Dagwood Sandwiches claim that this is a "proven concept" with great "name recognition" that is run by franchise professionals who know how to run a franchise brand system. They manage to convince investors to contribute a capital fund to launch this new franchise brand, and with that nest egg they sell numerous territory development contracts to franchise investment high rollers until they have close to $ 10,000,000. They appear to have financial credibility, and they engage in aggressive sales tactics, telling prospective franchisee investors that "They don't sell franchises. They award them," Sucker after sucker lines up to be interviewed as a franchisee candidate. None of these victims has a clue about how to ascertain if this is real or a complete charade. In a short time, the lack of substance results in the total collapse of Dagwood Sandwiches, leaving all the investors holding empty bags and looking for lawyers to sue the company and the scoundrels. The company has no money by this time. The scoundrels either have no money by this time or have carefully concealed the assets that might be used to satisfy fraud judgments or, in the alternative, these millions might just have gone up their collective nose.
Of the franchise due diligence resources available in the United States, only Franchise Remedies - this law firm - saw through the scam and touted our clients away from this debacle. If this statement is incorrect, the other franchise due diligence resources that touted their clients away from Dagwoods are invited to provide solid evidence that they too saw through this ruse.
The point of this article is to give alarm about the prospect that any group of scoundrels can invent a mythical franchise investment opportunity and clothe it in the trappings of a real business enterprise. They can have real franchise agreement forms and disclosure documents that appear on their surface to comply with state and federal disclosure requirements. They launch a sales and marketing campaign that looks like what a real franchise opportunity might use, and they're off to the races. Suckers appear on their doorstep, write checks and sign draconian franchise agreements that require the investors to agree that things said to them were in fact not said to them to induce them to purchase the franchise. This is now standard language in every franchise agreement, and just this week outlawed in the new FTC Franchise Rule.
In a very short time, the entire project collapses in ruin. All investors lose all of their investment money.
I have been yelling my head off about the indispensability of really expert franchise pre-investment due diligence assistance. This scenario will be repeated dozens of times in the near future, and those who think they are smart enough to see through the scams without expert due diligence help will continue to be their victims. There is no legal remedy that is worth anything after you part with your money. Even if you are correct in your claims that you were defrauded, if the money paid to the scoundrels has disappeared, you can take your judgment and frame it for wall decoration. There are theoretical "remedies" that are not real and practical remedies. You will invest your legal fees in suing these folks in a loser litigation campaign, losing in legal fees as much as you lost in making the investment in the first place.
No one can intelligently decide today to risk upwards of half a million dollars without being willing to pay for competent killer pre-investment due diligence. It isn't cheap, aggregating upwards of $ 5,000. Compared to being fleeced of your entire investment and remaining obligated to repay loans and perform long term lease obligations, not to mention the frequent investor bankruptcies, paying for the killer due diligence would be cheap at twice the price.
If you think you can outsmart professional swindlers all by yourself, you really are not smarter than a fifth grader.
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