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Proper Franchise Selection Is a Process Not an Event
Making an important decision based primarily on the content of a contract is tantamount to making an ill-informed decision. Organizations that market due diligence assistance as the key to quality decision making, especially when its marketing efforts focus on novices, are not helping people see the ‘big picture’ about life and relationships. Neither franchise agreements, nor prenuptial agreements, nor Purchase & Sales agreements on a house should be the deciding factor on the question of ‘Should I do it?” Those things are merely ‘pieces of information’ and should be treated as such – pieces.
Making a proper franchise decision, like any other important decision, is a process not an event. And of course, franchise selection should also consist of many elements focused on both collecting objective information and subjective insights. It is the melding of both objective information and subjective insights that can result in quality, confident decision-making as opposed to accepting opinions from ‘professionals’ as the ultimate guidance to take a certain path. And make no mistake, discarding or not paying sufficient attention to the ‘subjective side’ of processing because it is viewed as too ‘touchy feely’ will similarly dilute the quality of a decision. The entire concept of ‘FIT’ is based on feeling confident. Another person’s opinion should never take the place of one’s own feeling of confidence; not bravado, but rather quiet confidence.
Now, I am not railing against the vast numbers of franchise attorneys I know that provide contract and disclosure document reviews. The critical analysis they provide should always be added to the process when buying a franchise. I’m also not dismissing some of the inherent problems brought into the mix by the overwhelming number of ‘franchise brokers’, aka ‘franchise consultants’. (Broker involvement brings both positive and negative issues regarding salesmanship and emotional ‘matchmaking’ that sometimes discounts ‘facts’ and best intentions. But that’s another discussion.)
Prospective franchisees, especially first time franchisees, must first understand themselves and what it’s going to take to satisfy their long-term needs and desires. Only when they have chartered a logical ‘personal plan’ can they appreciate and make use of professional examiners.. Until the franchise buyer knows what will fit their life plan, they have no business collecting and paying for the examination of documents that usually hit the circular file as soon as the next ‘hot’ opportunity presents itself.
The actual starting point and ending point for selecting anything is ‘the person’ making the decision, not a legal document or another person’s opinion.
Business First, Contract Second
If the business isn't any good to begin with, the franchise agreement isn't going to make a bad business good. (Though a bad agreement can indeed make a good underlying business not worth getting into.) BEFORE you ask your lawyer to look over the Agreement, decide for yourself if you really want to be in that business. Whether it is making sandwiches, cleaning houses, changing oil, are you ready to live sleep & eat with that business in mind?
There are few really unique ideas. A franchise can give you a head start with a recognized brand. But you still have to execute, each & every day. I doubt there are any franchises around where you can just sit back and count your money. If you want to sell ice cream cones or hamburgers (or both), you don't need a franchise to do it, so what value will you receive in exchange for paying the franchise fees & royalties?
Unless YOU know the answer to that, it's too soon to have your lawyer check the paperwork.
Very insightful GB; I believe that you 'get it'
Your insight into the 'passion' quotient is the essence of the whole discussion, so, thank you.
And, it doesn't necessarily take a stint in the franchisor's kitchen to understand the concept of 'fitting in'. It takes a 'grasp' of the situation and a lot of reflection. In other words ... we need to think before jumping ... into anything.
Nick Bibby is an international franchise consultant and a program developer dedicated to excellence in entrepreneurship.
Real Pre-Purchase Investigation
GB writes: "BEFORE you ask your lawyer to look over the Agreement, decide for yourself if you really want to be in that business. Whether it is making sandwiches, cleaning houses, changing oil, are you ready to live sleep & eat with that business in mind? ... Unless YOU know the answer to that, it's too soon to have your lawyer check the paperwork."
Uh, and how would you make that decision?
How would you know that you wanted to manage teenagers making sandwiches?
How would you know if you are wrong?
How would you know if you were just fooling yourself?
Yes, you could follow my standard advice and work for the franchisor for six months. But you won't.
Yes, you could hire an experience franchise lawyer who can help you investigate these questions. But you won't.
Yes, you could actually read the FDD and figure out whether this is the type of operation you want to be part of. But you won't.
And if you had a lawyer just check the paperwork, you just might be a franwad.
Michael Webster PhD LLB
Franchise News
Nothing new here regarding 'due diligence'. Put it to the test.
Once again, only a small percentage of franchise buyers will engage in serious analysis of the buying process. Why, because people don't want to unravel their dream before the bust.
Anyone serious about franchise consulting/legal services should include due diligence/selection on their menu, but that would be a side note to the overall operation. I do it for one reason: I disagree with franchise brokerage, I've written against it, and I would only be a front if I didn’t offer an alternative to those desiring a very thoughtful, very different approach to selection.
I suggest that personal planning, business planning, and due diligence are ALL essential to making a good franchise buying decision. They simply are not applied by many.
Nick Bibby is an international franchise consultant and a program developer dedicated to excellence in entrepreneurship.
Michael: Ok you have me
Michael:
Ok you have me confused here. Are you stating that you feel most lawyers are qualified to vet a franchise oporutnity other than from a legal standpoint? I understand that some have the requisite skill, but I am speaking in generalities.
FuwaFuwaUsagi
"Never underestimate the power of stupid people in large numbers."
The comment is most definitely confusing.
While FDD analysis by some franchise savvy attorneys may reveal some red flags beyond ‘legal’ contract advice, when did that skill set translate to personal counseling and preparation for business ownership? Those are totally different issues from analyzing a contract (or the back-up disclosure that precedes it), and that is the purpose of the post - at least the intended purpose that I hoped would shine through.
Nick Bibby is an international franchise consultant and a program developer dedicated to excellence in entrepreneurship.
Bibby actually understates
I would not only agree with Bibby, but I would go further and state that the analysis generated by the 2 perspectives are often antithetical in that the legal perspective properly seeks to minimize risk while the business perspective is inherently accepting of risk and is more oriented to a cost-benefit analysis of that risk.
I have disagreed with Solomon on this point, and to a lesser extent I would disagree with Webster's position (though Webster seems to be waffling a bit as to what his position is).
My suggested resolution of the problem is that even if the attorney is qualified to give business advice, that any such advice given by the attorney should explicitly be distinguished from legal advice--and generally I am very wary of attorneys giving business advice to entrepreneurs; the role of the attorney is to tell you all the horrible things that can happen, but your role as an entrepreneur is to mitigate the chance of those horrible events and then decide if you are prepared to take the risk.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
What Pre-Purchase Investigation Really Is
I disagree with this neat dichotomy, and let me explain why.
Many years ago, I was on a search committee to select the next VP Academic for the University of Waterloo.
We had many fine and interesting candidates.
When it came time to decide between them, I suggested that following triparte test.
1. What do you want to do in this job?
2. What is the evidence that you can do that project?
3. Finally, why does the job you want to do, or project, require you being the VP Academic?
This little test has served me well in other areas. Variants of these questions I use in franchise pre-purchase investigation screening.
Nick wants to know : "when did attorney skill set translate to personal counseling and preparation for business ownership?"
I cannot speak for all attorneys, but litigation attorneys are well suited find the holes in people's explanations. Attorneys with some strategic business sense are even better suited for franchise consultation.
Every body wants a franchise for some particular purpose - it is the role of the experienced franchise attorney to figure out that purpose, and investigate with the client the appropriateness of franchising to meet that purpose.
While Paul's view point is the traditional dichotomy between legal/business advice, I find it not useful in the franchising context. Lawyers can speak about counterfactual risks, but experienced franchise lawyers can actually point out what is happening in the markeplace today with that particular franchise system.
Both Richard and I would not hesitate to make critical remarks about the underlying business model. Indeed we have to - it is way too easy to mimic the structure of a real business with a franchise fraud, or franwhack. Just look at all the people who fell for the Cold Stone line of nonsense.
Michael Webster PhD LLB
Franchise News
Actually, Steinberg understates
There are three prongs, not two, required to properly attack the franchise decision issue. They are personal - business - legal and they should go in that exact order.
To only examine two of the three is to leave the buyer off balance from the start.
However, thank you for lending common sense to a very important topic that tends to be beaten for the wrong reasons and with the wrong tools.
Nick Bibby is an international franchise consultant and a program developer dedicated to excellence in entrepreneurship.
Cheryl Babcock agreed
Nick Bibby's point about the personality type necessary to succeed in franchising is well taken.
Some years back I went to an IFE Expo presentation by Cheryl Babcock where she mentioned that while she was a successful franchisee, she sold her franchise because her personality type was too entrepreneurial. She cautioned the audience that the first step before they began serious discussions at the Expo was to consider whether their personality was suited to being a franchisee.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
I know you disagree with what I do primarily on grounds of
specialization by lawyers on legal issues only and for reasons of insurance coverage (I think that covers it), but almost every week now some group of franchisees affiliated with a franchise concept I could and would have saved them from calls me about what to do about their very dire straits. Actually, in many instances, some member of the group is a person who came to me before buying the franchise, but thought my fee was too high.
I don't know any franchise consultant who brings legal and business vetting expertise to due diligence. Where are these folks going to go if people like Michael, Paul and me don't reach out beyond the walls of insurance coverage safety?
If we can't find the investors to make the Franchise Due Diligence Academy possible, and we decide not to take the risk of being business advisors as well as legal advisors, this carnage will not be stemmed.
The government certainly isn't capable of doing it. There is no organization on earth with the ability to render meaningful due duiligence assistance - and I do mean NONE.--
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
Fuwa's Answer
Fuwa asks: "Are you stating that you feel most lawyers are qualified to vet a franchise oporutnity other than from a legal standpoint?"
1. Most lawyer as not even qualified to vet a franchise contract. Solomon has correctly pointed out that a number of franwhacks have FDDs and Agreements essentially lifted from real businesses.
2. Fewer lawyers have the requisite skill to spot bad decision making and can do something about it.
3. Even less can ask you for your personal opinion on a business model and gain from the interaction.
To give adequate pre-purchase advice, you have to go beyond the bounds of what transactional lawyers traditionally do.
Michael Webster PhD LLB
Franchise News
Thanks for the clarification
Thanks for the clarification Michael. You gave the answer I believed you should and expected you to give. It was just, somehow in reading your post it looked like something else might be there. I am glad I was simply mistaken.
FuwaFuwaUsagi
Amen. FuwaFuwaUsagi
Amen.
FuwaFuwaUsagi
Proper Process
Alright, I will bite.
What are we attorneys doing wrong when we review the FDD with the prospect?
Michael Webster PhD LLB
Franchise News
Regarding 'Proper Process'
I read the piece, Mike, to find where I said that lawyers reviewing documents were 'doing wrong', but I didn't find that reference.
Due diligence is a necessary part of buying a franchise, but it's just that - a part.
My experience tells me that franchise selection without a fundamental understanding of where a person 'fits' in the world of entrepreneurship often leads to poor choices and those poor choices lead to failure. It's much the same problem as found in creation of disclosure documents for a franchisor before a strategy is formulated. (And I see that problem routinely.) Does that analogy make sense to you?
Nick Bibby is an international franchise consultant and a program developer dedicated to excellence in entrepreneurship.
Well Said, Nick
I think you're right on the money with this point, Nick. And unfortunately too few people seem to understand it. So much of what is said about franchising is an attempt to turn it into something that it never was and never will be. And many people--especially those who fail after they buy a franchise--are simply not prepared for what it is. Self examination first and foremost is critical--doesn't matter how good the system is, what it is, what it costs, etc. If you're not cut out for franchising you're probably not going to succeed. The unfortunate thing is that many people are interested in convincing everyone that they CAN buy a franchise and succeed when that just isn't true. And it places all the more importance on the prospect knowing what he/she can and can't do. Taking personal accountability for this issue is something that can't be signed away to a consultant, a lawyer, a franchisor, a friend. Before you buy a franchise know what you're doing; and especially know what you're capable of doing. Too many people ignore the advice, then they fail, then they rail against franchising.