Turning on The Light, Pre-Investment Risk Management

Why is it that franchisees who had no clue how to conduct pre investment due diligence insisted on making investments they couldn’t figure out and betting everything they own in the world on that incompetent decision?

So many of them proceeded to lose everything, ending up in bankruptcy and sometimes in suicide. They were taught things that simply are not so, and they persist to this day in believing that nonsense should be reality – that government is there to protect them from impropriety and that they are entitled to rely upon such nonsense.

I think of it as approaching a mountain in an old car that hasn’t been tuned up in many years. The car probably can’t make it up the mountain. Do you bulldoze the mountain, or do you fix the car? If you aren’t an auto mechanic, you have to hire someone who knows how to make the car get up the hill. Or, like franchise investors, you can get out of the car at the bottom of the mountain and offer up a prayer that some unseen power will enable a broken down car to climb a very steep mountain.

Of course that won’t work, no matter how fundamentally you believe in unseen powers or how many books you read about it. If books could make you competent, anyone could buy an auto manual and fix any automobile problem. It’s the same with vetting a potential franchise investment.

Financial analysts, accountants and lawyers all start at the same point – a willingness to take what is presented to them at face value. The problem with franchise investment information is that taking it at face value is usually the road to disaster – certainly for all but the most experienced, deep pocket investors. What is usually presented to induce a franchise investment is unreliable or outright dishonest. How you approach evaluating the risks associated with dishonesty and unreliability is not included in the educational training of lawyers, accountants or financial analysts. All of them are often victims of franchise fraud, because they don’t have a clue how to conduct franchise due diligence.

Over the years I have provided tutorials on franchise investment abuse, gratis, on my website, FranchiseRemedies.com. Many have read them. Those tutorials don’t/can’t make you an expert in franchise investment risk analysis. They are to point out the inordinate risks and teach the lesson that you need an expert to help you decide. The most frequent feedback from those tutorials include accolades for having placed them there for everyone to read, coupled with the lament “If only I had hired you to help me sort this out before I made the dumbest investment of my life and lost everything.”

There really isn’t much more I can do than present what I present in the hope that it will help people understand what they are up against. But, since I am an incurable optimist, I keep offering more insights. Here is the insight tidbit for this week.

People think of picking a franchise by looking for the stated benefits. That keeps your eye on the lie. Franchise investment analysis is a lot like picking a trial jury. In picking a trial jury, you can’t pick people who you think agree with your case position, or people who seem like they are somewhat like your client and from whom you can therefore expect a sympathetic ear. That is jury picking lore. The jury picking rules have changed over the years.

Today you probably get a couple of hours. You get a set of documents that contain the jurors’ answers to the juror questionnaire – questions that lawyers, judges and law professors believe will enlighten you about each juror. What is most important about the juror questionnaires is what they omit. Sure, some of them have affirmatively disclosed information that helps you make up your mind. But you can never just take the disclosed information and pick your jury from that unless you want your head handed to you. You must cross examine the information. You must question the juror. You must ascertain the juror’s animus. What does this juror want at this moment that is not disclosed openly and up front?

So how do you pick a jury? You don’t! You unpick a jury. The rules allow you to try to select a sympathetic panel by eliminating the worst, not by including the best. Out of a panel of perhaps fifty potential jurors, you have maybe three peremptory strikes, unlimited challenges for cause – and challenge for cause is extremely restrictive. After you have struck the three worst, and challenged a few for cause – usually because they can’t hear or don’t comprehend English or state that they have medical conditions that will probably affect their ability to serve, you are left with about 35 or so folks (accounting for both sides going through that exercise). Of those 35, the first 12 (or sometimes 6), going by juror number, will be your jury.

If you think of pre investment franchise due diligence in that manner, you may have a light go off in your head about how really unlikely it is that you will be able to make any investment selection by giving attention to the stated benefits. You have to find the faults. That is an exercise in detective work, not lawyering, not accountancy, and not financial analysis based upon the information presented. You have to find a resource who can cross examine the information, unless, of course, you are yourself an expert in doing that.