Deal and Legal Due Diligence

FRANCHISE DUE DILIGENCE RETENTION ISSUES, FOR FRANCHISEES

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, as a practical matter, 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.          

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 capital 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.