My Signature, My Decision, My Result
Franchisees choose to sign contracts but does that leave them entirely at fault and entirely responsible for the cost? I would suggest that often it does.
There is an ongoing debate on whether franchisees should take full responsibility for the poor commercial decisions that led to their failure. From a franchisee’s perspective the debate tends to focus on one aspect of franchisee failure, depending on which side of the fence the commentator sits and in the case of those that may have a slightly more distant perspective, they tend to focus on one single set of presented circumstances that may have led to a failure. But that would not typically cover the complexity behind the franchising industry's failure rates. It is a massive over-simplification.
In my experience we tend to see these categories of franchisees;
- Those that performed a killer level of due diligence with the assistance of professionals and are successful. And are never heard from. Financial success tends to vary depending mostly on the performance of the franchisee.
- Those that failed to perform any adequate level of due diligence but were successful. They are never heard from. Similarly, franchisees tend to determine their level of return.
- Those that sign into a good or bad system and fail to comply with the Operations Manual and therefore the Contract and are then terminated. They were not scammed but they complain.
- Those that sign and fail because they did not perform effective due diligence on a system that was flawed. And that can include that they took lousy advise from a ‘cheap’ ‘professional’ that knew almost naught about franchising and/or they were not suited to franchising and/or the industry. They complain.
- Those that performed killer due diligence, signed into a good system but didn’t realize their efforts would be central to any success. You don’t download even a quality system and sit back and expect it to work without a serious effort. Quality front line operators are needed to make any business a serious success. However; these franchisees complain.
- Those that did not perform serious due diligence, signed into a good system but expected the system to provide everything for naught … and it didn’t and their negativity caused failure. They get what they deserve but they still complain. They should have known before signing what they were in for.
- Those that signed into a good/bad system and were terrorized by unconscionable power-obsessive conduct by the franchisor. Yes; even good concepts and systems can be driven by psychopaths. These franchisees were scammed and they do complain.
- Those that signed into a system that was designed to drain them, get rid of them and on sell to the next idiot. Oh … how they complain.
- Those that signed into a good system that encountered financial difficulties within the contract term and where the franchisor chose to gouge the franchise network to survive. They were ultimately scammed but they signed the contract. They were scammed and they complain.
- Those that bought into a quality system and the system was sold into the hands of an abusive franchisor that destroyed the viability of the system. The scam was out of their control. They complain.
- Those that were provided with inaccurate disclosure and did not perform an effective level of due diligence. They were deliberately scammed by the franchisor but they hold much of the responsibility. They rightfully complain but they could have known better.
In my experience we tend to see three major categories of franchise systems;
- Good – Very Good
- Borderline
- Disasterous
Vocal international exponents in franchising seem to suggest that the’ Very Good’ are vastly out-numbered suggesting that way too many franchisees can at least share culpability for their outcomes with their franchisor. And probably tens of thousands were simply scammed. This is after all a big world and a big industry that has been operating for many decades.
Due diligence must include research into the quality of expert advisors, the suitability of the franchisee, the financial well-being of the franchisor, the worthiness of the franchisee financial model, the longevity of the concept, the terms of the Contract, the accuracy of Disclosure Documents, reports from existing and past franchisees and the historical behaviour of the franchisor toward the power of the Operations Manual.
When franchisees have completed killer due diligence and then get scammed they may still have reason to complain and seek remedy.
Franchising is a tricky business. Stupid people need to blame someone … else. People legitimately complain and no one really listens. Then comes the time for even harder decisions ….. walk away if they must or litigate if they can?
Not many franchisees get expert advice on the way to ‘too late’. Many dig an even deeper hole for themselves and their families by not getting expert advice before they sign, during the period where they realize they have a problems and/or before they stick their foot in their mouth.
Those that cannot pursue an affordable remedy tend to pursue a ‘public’ justice system in the age of social media and the age of exposing the scams. God love ‘em.
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Ray,
You seem to be saying that franchisees can provide 100% informed consent when they sign. All of the risks can be calibrated by a "reasonable person".
On products pedalled to consumers, the marketer of the product is responsible for the toxicity (knew or could have been reasonably been expected to know).
But the black/white arguments certainly shifts attention away from some parties in Dr. Emerson's two-step.
Les Stewart MBA FranchiseFool :: WikidFranchise
that way then I have not done my job. I would suggest that the vast majority of this blog warns people that they will be held accountable if they sign into a franchise contract and it turns to siht for whatever reason. I would suggest that it is at least an attempt to counter those who argue that franchisees are totally at fault and infer scams do not exist. Perhaps I could have written more into this blog but typically that results in few comments from people wanting to expand on the topic and in so doing; warn the suckers.
Emerson and friends may get away with their crap yet again but it is far from over.
Australian Franchise Opportunities, a common sense approach to franchising
I still don't believe anyone selling anything should be allowed to lie, steal and cheat people. Something needs to change. Enducing people into signing an agreement with misrepresentations is wrong. It is basic contract law that a contract can be unenforceable, if misrepresentations is proven. Just because a contract has different interpertations and says we did not rely on anything orally implied, but is on their advertising that a fact was indeed a misrepresentation should deem a contract unenforecable. Especially if everyone in the franchise was enduced the same way.
I have to agree. There were a number of reasons to post this blog. One thing for sure; no one is denying that the scams exist and no one has challenged the imbalance of scams compared to quality systems.
People just need to either work out which category of zee they are or those that whine about whiners should accept that they haven't had their life torn apart deliberately. Whether they should have seen it coming or not does not exclude the culpibility of the scamers. And it certainly does not justify people sitting back and doing nothing to warn future zees to learn from the experience of those who learnt the hard way.
Australian Franchise Opportunities, a common sense approach to franchising
Enducing people into signing an agreement with misrepresentations is wrong.
So if a woman freely and frequently gives sex to a man before marriage and then reduces the frequency after marriage should the man be able to simply walk away? After all he was seduced into a deceptive relationship based on the appearance of frequent sex.
I would say that women lure men into signing an agreement based on misrepresentations all the time and they should be protected by the Government.
here there is not law that states how much sex a man or woman is entitled to during a marriage. In fact one could say that it is a standing joke and therefore common knowledge that a man recieves less during marriage.
There is however laws set in place to stop people taking advantage of others during the contract process. Its having those laws enforced that is the issue.
There is however laws set in place to stop people taking advantage of others during the contract process. Its having those laws enforced that is the issue.
That is exactly my point. Women take advantage of men to induce them into entering into a marriage contract through deception. They make the victim (the male) think he is going to get sex by showing him goods he is never going to be access, and the promise of fulfillment he is seduced into believing he will get never happens.
So I guess when you women start rallying about the sad state of men, trapped into marriage by unscrupulous, predatory women then I'll begin to care about the alleged deceptions that your franchisor may or may not have committed.
But we have a clear case, where millions upon millions of men are preyed upon by women on a daily basis, forced to work and labor for a increasingly infrequent and meager reward.
I periodically find my way to this site to receive updates on franchising stories and this one hit a cord. I agree with Les' comment that the writer appears to place sole blame on the franchisee. There are too many poor (scam?) franchises out there that successfully sell many multiple sites over years for it to be that easy to uncover the "realities" each specific franchise system.
If the marketer does in fact know where the lies exist then it is easier to both distract attention away from the problem areas and manipulate that data to make the sale.
I didn't come to BMM to make people feel good about how they were scammed. I came here to expose that scams exist in greater numbers than people imagine and people better be bloody carefull.
Every day people sign documents they do not read or do not understand. We know that as fact. Mostly they don't get burned or burned too badly. But a signature on a franchise contract is potentially a whole new world of pain.
Read the blog again and just read the bits that you prefer.
Australian Franchise Opportunities, a common sense approach to franchising
You sign a contract saying that you take on the risk of your own free will and after choosing your own competent representation. You are an investor. Marketing scams are for consumers to gripe about, not investors.
Who (set aside class action) sues Bank of America for not meeting their revenue targets when you invest in stock? Is it a scam to overshoot your earnings potential? Do you go to court to gripe about it or do you understand that buying a stock in a company you know nothing about is a risk?
Therefore, it is the franchisees fault in 99% of the cases if they make an investment as due diligence could have prevented 99.9% of the faulty investment into scams.
When purchasing a stock it is understood that the market fluctuates due to economic and other factors. However, you do have FULL disclosure regarding financials which in most cases is a legitimate picture of the company's health.
The franchisor has years of historical information based on numerous openings of their franchise to know what a first year franchise will produce. The franchisee has no way of obtaining that information and goes into the transaction believing they are purchasing "a proven, successful business model" (just ask anyone in franchise sales) when, in fact, what is "proven" (and known by the franchisor) is that the franchisee, in most cases, will not make money for several years, if ever. No wonder why general release forms are "de rigueur" for franchisors.
What you fail to understand is that you can buy many franchises that make earnings claims.
Earnings claims provide numbers for all franchisees - newly opened all the way thru those open for 10 years and more. Since there are more sites open for 2-10+ years than there are new ones, the revenue numbers are skewed up. These longer term franchisees are those that made it. First year franchisee earnings for each year (i.e.first year sites for 2006, first year sites 2007 etc) will show the new franchisee what to really expect when opening a franchise (because ALL first year zees including those that don't make it will be in the revenue numbers)- including whether they are properly capitalized given what first year revenues they can expect.
Your method as you've described won't work and some franchisors do show unit history over time in various formats. I suggest franchise buyers select from franchisors that Item 19 Financial Performance Representations in their FDD.
That item 19 discolsure offers gross revenue information, and is not really a P&L analysis. Add that to the fact that no one audits item 19...if you hang your hat on that disclosure you will surely end up in my franwad boat.
Item 19 can take the form of any financial data that the franchisor wishes. Hoteliers might put out only room occupancy, restaurant franchisors might put out their full P&L, but only on restaurants that have operated over 5 years. I read one the other day for a QSR chain that was only on the top half of restaurants in operation for over five years. Wow! How useful is that info? Not very......
And they are not audited, you are right. The problem comes when the franchisor is sued by a franchisee, and they look into that data. Then the franchisor has to back up the numbers. That is when they will potentially "get into trouble". When reading financial representations, all I can say is read the fine print several times so that you know what data you are looking at.
Great article Ray. Very thought provoking.
>>Due diligence must include research into the quality of expert advisors<<
I don't believe that there is such a thing as a quality expert who can accurately identify franchise scams from fabulous successes. Anyone have proof that such a thing exists?
Is there an expert who has stuck out his or her neck in publicly recommending buys so that we can judge their skills?
That's what I thought.
Ha at first I thought the other guest was being a real dick with his comments, but judging by the responses it seems he is not the wanker he seemed, rather spot on. So instead of the loudly touted and braggadocios ones coming across and throwing out a few names of franchises they have already analyzed you get the expert tap dance of "feed my meter" and I won't tell you what to do, only I will run the meter while you figure it out with my guidance. Funny how if you hire a financial adviser they give you a financial plan, they do make actual recommendations of what you should buy, and they often will implement it for you and they will take into account your lifestyle, your age, your family circumstances. You go to your CPA and they will help you set up your business, many will advise you on the form of ownership to take, they will plan your taxes, in other words do more than just advise. But your franchise adviser, oh well I won't make a recommendation, I won't tell you of good franchises, I’ll just run the meter over every one you bring to me. Man what a racket this is.
prospective franchisees reading your illogical interpretation of a common sense approach to decision ownership are not fooled by these scamming clowns that seem determined to have people walk into a business without specialized franchising advice. There are alterior motives afoot and it is becoming even more obvious.
I'm not sure who operates their business but it is possoble their CPA does. And if anyone is going to grow a business typically a CPA would be the last person to involve in anything other than financial structure.
Australian Franchise Opportunities, a common sense approach to franchising
The CPA was just an example of another business professional like a Financial Planner who gives specific advice in his area of expertise and takes in consideration your individual circumstances. It was meant to contrast with the "due diligence" experts position on what they will and will not do.
to the decision making process, perhaps you haven't found a good one yet - or the right one for you.
Plenty of times the advice I give - based upon my understanding of the client's needs, experience, family commitments and financial position is "don't do it". When I do consider a franchise to be a viable proposition I cannot give an assurance that the business will be profitable - both my magic wand and my crystal ball ran out of batteries a long time ago.
Any adviser foolish enough to recommend a franchise system without qualifying their advice is simply a lawsuit waiting to happen.
Don't mistake a qualified approval by the adviser for a particular franchise proposal as some sort of cop out. An adviser only has access to limited information and in most cases has only known the client for a short period of time.
To put this in perspective - although it seems ludicrous to some - purchasing a Quizno's franchise could be a viable decision for a prospective franchisee. An experienced adviser will know the pitfalls and problems but unless each case is considered individually there is little value in giving a blanket endorsement or rejection of any franchise system.
For most franchisees it is what they don't know that hurts them down the track - they thought they knew what was going on and so never obtained advice. Then they got caught out by technicalities that they never saw coming or weren't aware already existed.
Many franchisees never get caught out by the problems lurking in their franchise systems, but that is more good luck than good risk management. Think swimming in a pool full of sharks and beleiving that because you haven't been bitten the sharks are harmless (or don't exist).
It is only when franchisees encounter the inherent problems in the system that they come to appreciate the weakness of their position and why many rue that they did not get good due diligence advice from the outset. Fools rush in where angels fear to tread is never truer than in franchising.
I hope that you are one of those franchisees that never has reason to look back and regret the due diligence that was conducted. Perhaps you don't need it, but the overwhelming majority do.
to understand in a context that is serious.
CPA's , unless they are actually doing an audit (which has specific rules) never go beyond what is handed to them. They are not by nature investigative recources.
They are often used by those of us who do due diligence on investment opportunities, but even in that role they report to us on specific findings in response to our instructions to them about what we want them to look for. Illustratively, they are always used in the acquisition of publicly held companies, but they are dealing with telling us about the accounting and tax treatment choices the target company management has made and what that means as well as what we might change in those discretionary treatments were we the owners of the company. They may also inform us of the quality of the audits that the tareget company's CPAs did. But they also don't make the investment decision when they are working in due diligence projects. Nor do they give investment advice for the same reasons that most lawyers don't give investment advice - lack of E&O coverage.
Your personal CPA may have a relationship with you in which you are relying upon him for more advisory services, and that is OK if you are happy with it.
The important issue is for you the investor to decide what you want from the professional resources you hire. If you like working with a CPA rather than a due diligence investigation attorney, that's fine. It's your money and your decision. I was holding off on responding to your earlier post because of its obvious hostility. But in a more rational mode, it is really important that you do what suits you best while otherrs do what suits them best.
Your not liking to work with due diligence specialists does not make us evil or dishonest. That's just your personal preference. From the mood of your first post, however, I appreciate that you are not working with me. I have no patience for hostile behavior directed toward me and our relationship would very quickly come to an end.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
franchise investments. Experts are careful not to get into recommending franchises, as that makes them more like salesmen than expert resources for due diligence.
Due diligence is the process of finding flaws that would make an investment inadvisable. The positive investment decision is always left to the investor.
A due diligence expert may say that he has failed to find sufficient flaws to make a negative recomendation, and that may be accompanied with a list of unanswered/vaguely answered questions that the investor should take into account in making the investment decision.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
to give a positive endorsement of a franchise; there are too many variables that cannot be properly factored, including the future efforts of the franchisee.
At best, an adviser should be raising a series of questions for the franchisee to answer to guide them to making a better decision about whether a particular franchise suits their needs and expectations. Sometimes it is the quality of the questions that count, rather than the answers.
Of course there are always the 'red flag' franchises that an adviser would never recommend to their client. In very rare and exceptional occasions a sow's ear can be made into a silk purse becuase of the interest, dedication or skill of the franchisee and that is why a categorical recommendation one way or another is a dangerous thing.
An adviser is just that; we should not presume to be the ultimate decision maker - but time and again people make poor decisions becuase they did not have someone to act as their para-professional (in the true meaning of that term) at the critical time.
people forego expert advice then I have to suggest you are nuts. I will admit that there are few but that is not the biggest problem. People have to understand the need to pay for people with industry experience as well as business and legal expertize. Apparently that is an investment cost that the vast majority are too stupid to appreciate. Hence; there are too few real experts. Charlatans are so much cheaper and get you to 'too late' so much faster.
Australian Franchise Opportunities, a common sense approach to franchising
when seeking expert advice the expert is NOT at the sales pitches and the meetings. This means that certain types of franchisors can tout whatever crap they like and the expert has little hope of finding the inconsistencies in the agreement. If you then consider operations manuals form part of the agreement, if you can not get a copy of it during due dilegence then you are relying again on the franchisor to competently disclose what they expect of the franchisee. Neither the expert or the prospect can find the problems that may occur becasue the sales pitch could be different to the ops manual. You then have a franchisor in contorl of what chnages are made to the ops manual during the term. They can and some do make multiple changes and do not tell the franchisee. This means that a seemingly compliant franchisee may check the manual every few weeks and not realize that something that was compliant a week ago may not be now. Thus giving a franchior the ability to churn you out or fine you for breaches you were unaware of. the excuse is then made it is up to the fanchisee to check the manual. BUT if you are in business and working, why should you have to keep re-reading a document that could be hundreds of pages long looking for any small changes that may or may not be made.
Back on entering with due diligence, I had a freind look at a franchise and she was told that she could not have her solictor attend the sales pitches. As I learned more about franchising it became very clear as to why they did not want her solicitor there. The sales pitch did not reflect what was in the agreement.
preinvestment franchise due diligence is about. When your resource is competent to do deal as well as legal due diligece, what is said to you/presented to you in sales pitches and on discovery day is accounted for.
If the person you used failed to accomplish that, that is the personal shortcomingt of the person you used, not a commentary about what real due diligence is all about.
I'm starting to think that it might be worth while for me to start teaching people/lawyers/accountants/fiancial planners and advisors how to do real franchise preinvestment due diligence. All I need is someone to do the marketing for the seminars. Any volunteers for that marketing job?
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
I thought due dilegence would be about making sure the franchise agreement complys with the law, (I saw one agreement that refered to clauses that were not even in the document, not mine) and how the agreement and business impacts on you and what you are commited to doing to remain complaint throughout your term. Finding out as much as you can about your franchisor and their experience and speaking to existing and exited franchisees to determine if you think you are suited to that particular business and franchise system.
I would not have thought it would have consisted of having to confirm everything that is said in a sales pitch as truth, However as you just pointed out, clearly I am mistaken.
I think your seminar would be fanstastic. A preivestment due diligence seminar could do alot for franchising and armed with the correct information and questions, it could potentially slow down rogue franchisors and save many people alot of heartache.
I have taken your comments about marketing the seminars seriously: Have you considered webinars and conference training calls, that way people from all over the world can learn. I see you are based in another country to me so if you were running them local I would miss out :( however I have attended conference traing sessions with people from all over the world and it can be done at low cost, they are fun and informative. Not only that, you can have them recorded and archived for future downloads for your member/students etc
a lot of franchises in Australia, especially the operations manual.
If you are going to roll out a education program, sign me up for the Oz tour.
sign me up too.
wrote regarding the influence of the ‘sales pitch’ where an advisor was not present and where abusive changes to the Ops Manual and practically everything in this thread so far reinforces the need for an expert’s involvement in serious due diligence.
Only an expert will be aware of the potential influence of this particular type of ‘sales’ bullsiht and only an expert can interpret certain behaviours. One of which is a history of similar or same abuse of the power of the contract. An ahole will normally start or end up having a ball with the Ops Manual just as they often end up playing magician with advertising funds.
Inexperienced an uneducated people advising about anything ‘franchising’ are dangerous. No matter how many letters they have behind their name. The choice is expert or dangerous advice or toss a coin when signing a contract on any franchise [any business].
And Richard if you are planning a visit bring a large net. We all know franchisees are too busy. On the other hand why not start in Canberra at the closing of Federal Parliament.
Franchisor education may attract more and the franchisees pay anyway. [cic]
Australian Franchise Opportunities, a common sense approach to franchising
I made the mistake of thinking I knew what I was doing
Having looked at setting up my own fracnhise a few years before I bought one. I was under the misguided belief I had a good idea about what I was reading and what was happening. Boy was I wrong, The biggest mistake was judging my franchisor on my own values and assumed he was as honest as me, hmmm wrong there too. However having a clear head I looked at what was happening and less than a year later had realized the error of my ways and learned all the lies. I assumed I had an asset that I could sell. Unfortunately I was very wrong there too, I was terminated on made up chrages and then the franchisor sold my business weeks later.
I like the idea of the course, it could have saved me over 150k and years of my life (since the saga is still going on 4 yrs later)
how to organize and market it.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
know just the person. I'll get back to you in private.
Australian Franchise Opportunities, a common sense approach to franchising
there is a marke?. For lawyers figure about $ 1,200 (USD) for an all day seminar in a resort locale on a Thursday or a Friday.
After expenses I weill split the take with you. You wanna do the marketing? Figure a target of 150 people.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Crocodile Borradale gleams forth - a herald of instruction on the catechisms of franchising.
I for one am extremely grateful.
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School