Does This Old Due Diligence Tip Work?

When looking to buy a franchise calling franchisees within a chain is not useful and mostly a waste of time, largely because of information asymmetry and confirmation bias.  But, if so, then why do "experts", including the SBA and FTC,  keep repeating this as a critical component  to due diligence?

For example, writing on his "Franchise King" blog site, broker (seller) Joel Libava declares that there are three critical steps in performing pre-purchase due diligence.

1. Request the FDD {Franchise Disclosure Document.}. This used to be called the UFOC.
The FDD is the document that the franchisor will be giving you to review. This is the most important thing that you will be receiving from the franchise company that you are investigating. It may come in the mail, but most likely you will be given an access code to use on the franchise company's website in which you can access the FDD at your convenience.The FDD has all the data about the franchise company.

2. Read the FDD, from cover to cover. Boring stuff. Really boring stuff. Really important that you read it from cover to cover. Write questions down as you go. It is ok to write on it. {If you read through this rather large document, and have no questions, then you should be afraid. Very afraid.

3. Commit to calling 10-12 franchisees of the franchise company that you are interested in. Calling this many franchise owners will enable you to find happy ones, and unhappy ones. The most important question you need to ask: "If you could do this all over again, would you invest in this franchise?"

I have no problems with points one and two, although I would suggest that Joel give a little more insight above these standard utterings. He could give guidance on how to get a free and immediate franchise disclosure document from Caleasi, Open Fran, or other disclosure provider.  He could also note that sometimes it is not obvious who owns the trademark, making it hard to know what company to search for when wanting to look at a franchise system's FDD.

But the third point immensely bothers me. Although often repeated by franchise attorneys and salespersons, it is flatly false.

1. Cold contacting franchisees, especially in a faltering or failing system, will produce little or no valuable information. Franchisees will be suspicious that it is really the franchisor calling, perhaps looking for a good territory to encroach upon.

2. Knowing that someone with ten years in the system but wouldn't buy a franchise again may be utterly meaningless for your situation.

3. One cannot legally rely on the information gathered, which is presented outside the FDD.  

4. There is an easier way to calculate franchisee sentiment. Look at Item 20 in the FDD and do this simple test. Treat all transfers as business failures, and then calculate your chances of success.  Anything north of 10% is likely to be too risky for most.

Why is the falsehood of cold-contacting franchisees continually repeated by experts and sellers? One reason is that they may have not actually done due diligence themselves in purchasing a franchise so they have not yet figured out the limitations of calling franchisees.  

But I think that there is a more sinister reason.

Experts know that a prospective franchisee is not going to be able to fully carry out this task. There's always a question they didn't ask or follow-up on. Always a type of franchisee that should have been approached but was passed up. When the franchisee falls short, the expert can cover any fall out to themself by replying, "I told you to do x, which you didn't do sufficiently."  

Since contacting franchisees seems reasonable, the failed franchisee will once again have been told by experts that it was the buyer's fault in doing such shabby do diligence. This is the role of many experts and regulators, in my view, to innoculate the fallout of a poor franchisor. They falsely misdirect blame on the franchisee, making sure that the entrepreneur believes they have failed because they didn't sufficiently follow the plan. In that way, nobody squawks too loudly and disrupts the goose that lays the golden franchisor eggs..