| Licensing, Technology Transfers, |
Whenever there is turmoil
in the world, the most capable people look for someplace else to go where they
and their families and their assets can be protected and nurtured. Historically,
the United States is always at the top of everyone’s list when it comes to
selecting a new home. We get the cream of the society when uncertainty compels
exodus. We get the intellectuals, the professionals and the best of the business
people. That makes me extremely proud. I love it that the United States enjoys
the respect of foreign nationals in the context of sanctuary. I also derive
enormous personal enjoyment at the diversity that exists here in Houston. That
diversity is the direct result of a world in chaos. I can go into stores and
hear fifty languages in fifteen minutes, as well as enjoy the food, music and
other cultural richness of the people who are now my neighbors – literally my
neighbors. To me that is a blessing.
Since so much of what I
do involves vetting small business investment opportunities for potential
business buyers, I am in a position to observe pernicious patterns of nefarious
dealings, especially by certain franchise companies.
I started to see this
back in the 1970s, when it was possible for someone from another country to get
fast tracked to a Green Card and to US citizenship if they invested in a
business here. Unscrupulous franchise companies deliberately marketed franchise
offerings to potential immigrants with malignant intentions.
The malignancy of the
intentions took two main forms. First was the aggressive misrepresentation of
the likelihood for success if the immigrants invested. These included every
classic form of falsehood that almost everyone now knows about. Everything
positive was overstated, and everything potentially recognizable as being a
negative aspect of the investment was either denied or greatly understated and
dismissed. Secondly, there were a number of franchise companies that were
offering real investment opportunities that were qualitatively excellent, but
the agreements were written so that once the immigrant franchisee achieved
success, it was easy for the franchisor to find incidents that could be claimed
to be breaches of the agreement on the part of the franchisee that allowed the
franchisor to take the business away for little or no money simply by
terminating the franchise. These were usually accompanied by threats that any
resistance would result in the franchisee being reported to the immigration
authorities as undesirables who engaged in dishonesty, and that they and their
families could be deported, losing everything. I represented many of these
people, and while some were so wealthy and sophisticated that they were hard to
assault, many who were also wealthy by then current standards could also be
frightened by threats to assault their standing to remain in the USA.
I saw this with
sufficient frequency to recognize that some franchise companies made it a point
to target immigrants. Immigrants had money. Many immigrants didn’t understand
how the American legal system works. Immigrants could more easily be frightened
and intimidated.
I am seeing this again in
epidemic proportions. The sharks are again thriving in immigrant rich target
environments. Immigrants know less than any other category of potential
franchise investors how to vet these so-called opportunities. They are,
therefore, amongst the most defenseless and easy prey. While fraud is fraud
everywhere, the “styles” of fraud are somewhat different here. Fraud is most
effective when subtle.
One of the first due
diligence issues to note in approaching one of these deals is the
nationality/cultural affinity of the existing franchisee population, and also
whether the franchisor’s principals are from the same culture as the majority of
the franchisees. The notion that people are less likely cheat their own kind is
utter stupidity.
This cultural or national
affinity profile is a huge red flag. It makes the traditional steps of franchise
investment vetting much less reliable. Immigrants are much more fearful of
telling any stranger anything that is not positive. They are accustomed to being
enticed into betraying signs of disloyalty. Whenever someone is apparently
trying to seek unflattering information, or check out the truthfulness of
statements made, they instantly and instinctively smell a rat/sense a trap, and
they clam up. Talking to immigrant franchisees as part of the due diligence in
this kind of franchisee population is almost a waste of time. You have to have a
sense of what sections of the UFOC, when read in light of that franchisor’s
marketing and sales brochures and sales pitch on discovery day, are changed in
their significance by the cultural affinity of the franchisee group. What it
does most urgently is change the mix between what you do with what you can see
and what you have to go and find that simply isn’t there amongst the readily
available information sources.
If you are not of the
same culture/nationality as the majority of the franchisees, your risks go even
higher, because you are really much more thought of as “fair game”. These
franchisees wouldn’t come to the aid of each other in any crisis, and they
certainly wouldn’t bestir themselves for the benefit of some outsider.
This xenophobia obtains
in so many cultures that it is a more extreme issue in vetting a potential
franchise investment when your client is an immigrant and when your client is an
American Anglo Saxon thinking of becoming a franchisee in a system heavily
populated and possibly also owned by foreign nationals. That they may have
become American citizens has no weight whatsoever in this context.
If you are afraid of
being thought politically incorrect and shy away from being harshly cynical in
this kind of situation, you simply are not ready for prime time. Here you have
to call the shots as they are in reality, not as you might think of doing at
some church social with the bishop present. If people are offended by this harsh
insight, that’s just too bad. The job here is to properly vet the investment
risks, not to be fearful of giving offense. In fact, you can expect the
franchisor to accuse you of being a racist pig. And if they do, then you know
you have just hit a home run and that you should strongly advise against
investing in any business deal with any such people. That is so because the
answer to these criticisms is to be forthcoming with facts that are subject to
corroboration to refute the doubt, rather than to call the challenger a racist.
Immigrants have a higher
risk in investing in franchises in America (or anywhere else for that matter).
They have pressure points of vulnerability that citizens of long standing do not
have. Moreover, their perception of their vulnerability is much more acute. And
they don’t know how to/ are afraid to be directly challenging to what they are
told by franchise companies. They are more easily swayed into believing by the
bare number of franchisees, and, in many such cultures, they also believe that
what will happen is really out of their hands anyway. That they were successful
business people in their former homeland also makes them believe that they have
staying power when confronted with difficulty. But they simply don’t have better
staying power when they are fleeced, and they go through bankruptcy just like
everyone else when they have been cleaned out by thieves.
When you represent an
immigrant investor, the due diligence must be far more acutely incisive than due
diligence in any normal situation. The acuity begins with the obligation to
begin to educate your client about how the franchise world works. The client
won’t want to take this tutorial seriously, believing that anything that isn’t
transaction processing to get the deal closed is just a lawyer’s way to job the
file and make more money. Americans aren’t the only ones who distrust lawyers.
The educational process is easier if you have actually been involved in
situation of abuse and can provide actual case history type information. It will
be important that you keep his regular lawyer in the loop, as that lawyer is
probably of the same culture and has more personal credibility with the client
than you do. You need him to vouch for you in this new relationship. Keep also
in mind that the better you treat this lawyer, the more immigrant business you
are likely to get, as immigration issues are probably more of a specialty for
him.
You will be able to
assign less homework to the immigrant client than you normally would to a
potential franchise investor who is not an immigrant. You will have to do more
of the leg work yourself. If you are lucky and the client has children in
college in America, you can bet they are highly computer literate and they can
be a big help in homework assignments. They will also be gaining respect in the
eyes of their parent by pitching in, and that means a lot more in most other
cultures than it does in ours. The quality of their work will probably be superb
with competent guidance from you.
In dealing with
immigrants, it will be extremely helpful if you can find a way not to charge
them for saying hello. If they/their lawyer can feel that they can come to you
with questions without being charged for every phone call, a better job will be
done. Showing respect for their culture goes a lot farther in international
professional relationships. In other words, there are sensibilities that are
called for in representing immigrants that we don’t normally think about when we
are representing Americans.
How you go about telling
an immigrant that a franchisor representative that comes from his
country/district/city/village and speaks to him in his native dialect is trying
to fleece him requires some delicacy. They all have relatives back home, and the
salesmanship here includes calling back home to learn about the investor’s
family, friends and associates, and then using that information to suggest that
there are relationships back home that should be a basis of special trust by the
investor in the bona fides of the franchisor. You must be sensitive enough to
take the initiative to ask specifically about conversations that seemed casual
to your client at the time, but that were part of the “scheme” by a crooked
franchisor.
The manner in which
immigrant investors think about compliance with the rules and regulations that
will touch their interests as they operate their future business is also an area
of concern. The “education” provided by the crooked franchisor on this subject
in the sales pitch must be accounted for, as it is done in a manner – always
oral and always later denied – that suggests the presence of many opportunities
for revenue that will be “off the books”. Those extraneous revenue opportunities
are almost never available, and if the franchisor catches the franchisee
operating extraneous business that is not reported, that will be an opportunity
to terminate the franchise and take over a business should the business succeed.
Having a franchisee take the start up risk, establish the business, and then
taking the business away for very little money is just as frequently part of the
scam as the fraudulent inducement to invest in a franchise that has little
chance for success. This planned takeover aspect of selling franchises to
immigrants is not usually given as much serious concern when vetting a franchise
investment for an American client. It should be, but it isn’t.
Your immigrant franchise
investor client has to be vetted a bit differently also. Vetting your client for
investment suitability is always important, but in the context of someone who
has lived in another place where the rules, customs and expectations may be
quite different, it takes on added significance. While you have to do it without
giving offense, you really ought to put your client through a “discussion exam”
in which he tells you about how things have been done in his life up to now and
you counsel him about what differences have to be expected and about how to
adjust to those differences. For example, there is far more information exchange
in business relationships here, especially in franchising, and the information
is rather formalized compared to most other places. The attitudes about
information exchanges are frequently very different where your client comes
from, and he has to be made aware that a casual attitude toward information
exchanges can cost him his business in a typical American franchised business.
That is only one of many examples of the education you need to provide for the
immigrant client that you wouldn’t give as much attention to for someone who has
lived here all his life. I have seen some real nightmares that have arisen out
of just a different attitude about information reliability – entire very
successful businesses lost. If the business is being purchased as an up and
running business rather than a start up, what the current business owner told
the potential buyer will be absolutely outrageous compared to anything you will
ever see in a UFOC or franchise sales brochure. If the seller is also an
immigrant, you can bet that the discourse between the seller and buyer is right
out of some street bizarre scenario. Although I can’t prove it, I am sure in my
own mind that the franchisees who sell their franchised businesses commit the
most egregious frauds of all. A franchise resale transaction is a minefield of
deception.
The scope of this article
is about representing people who are not born and raised in America when they
are thinking of investing in a franchise. It is by no means intended to be a
tutorial about how to do due diligence from a broader perspective. There are
several other articles on this web site dealing with franchise investment fraud
and how to approach it. Even in their totality they are not encyclopedic in the
subject of due diligence. You simply can’t cover every possible scam tactic, as
the fertile mind of the shyster franchisor keeps coming up with new tricks.
Nuances on old tricks are counted here as new tricks. So much in vetting for
investment fraud is only in the guts of the person doing the vetting, what he
brings to the table based upon the multiplicity of schemes that he has been
exposed to in his career. But these articles are intended to assist general
business lawyers to do a better job for their franchise investor clients. When I
see them – after it’s too late – I always ask whether they went to a lawyer, and
they almost always say yes – and then go into a rant about how incompetently the
job was done. That is the problem I am working on when I publish these
tutorials. If you are not a lawyer, but someone thinking of buying a franchise,
direct your lawyer to this site to read those articles. As it is not politically
correct to point out the fraudulent practices in the franchise industry, your
lawyer won’t find another place to get an education about that subject. Be
advised, however, that reading articles about how to vet franchise transactions
is not really a responsible substitute for experience.
Copyright 1997 - 2008 || Richard A. Solomon
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