Government Regulation: Success Rates

Guest wrote: Personally, not being an accountant, I think a franchisee's declaration under notarized signature at the time of the transfer-sale of their assets to the third party, the new frnchisee, would do the trick. Franchisees do not transfer their assets and NOT kKNOW whether or not this transfer-sale of their assets was make at loss or a gain on their investment.

The question of whether and how to disclose the profitability of an existing franchise to the purchasing zee is one which recurs on this board, as it does within the franchise industry. In the interests of avoiding off-topic discussion on the other threads, I would invite those interested to post here.

A starting point would be to note that in the sale of any existing business, the prospective purchaser may ask to see financials (audited or non-audited), including tax returns or P&L statements. A purchaser may demand that the seller sign a Form 4506. Hey, you could even demand he sign an 8821...

Of course, sellers will be exceedingly reluctant to give information, particularly in writing. Among other things, a seller does not know how serious the buyer is (a lot of tire-kickers out there), nor in many cases who the buyer really is: the "buyer" could be a competing franchisor (I've seen that) or an IRS agent checking to see if the seller is going to show a duplicate set of books (that happened in the 90's).

For a lot of legitimate reasons, the current owner will not want to give a lot of detailed financials, including the legal matter of reliance and being subjected to a suit from a buyer who changes his mind. And if the prospective buyer feels that there is insufficient ability to conduct due diligence, he can simply walk away.

I would take issue with Guest in that I do not believe that an accountant is necessarily qualified to value (let alond judge the merits of) a business transaction, although in one of the odder developments I have seen the Subway sandwich franchisor is now requiring purchasers to get an accountant to certify that the purchase price is "fair" and even has a format letter in which the accountant is supposed to recommend that the parties proceed with the transaction (yes, I'm not kidding). Now, any accountant who is giving a seat-of-the-pants valuation deserves to be sued if the client loses money; but the bizarre practice instituted by this large franchisor illustrates both the difficulty and the perils of venturing into the question of the financial status of the seller.

Don't believe a seller who claims to show you a second set of books or any such shenanigans. Personally, I'd say that with a franchise you are best advised to get the sales data from the franchisor records (the selling zee should provide this) and that is likely a good guide. Although some zees artificially inflate sales immediately prior to selling, this is not done that often and not for any great length of time since the zee is paying royalties, ad fund contributions, and sales tax remittances on the gross sales. Another source is to look at raw materials invoices, but those can be misleading, and can lead to an over-estimate of the true sales.