The Coming Franchise Investment Bloodbath

Tens of thousands are exiting companies due to tough economic conditions. They have poor job prospects. They have access to half a million dollars and more in liquidity. They are considering small business ownership as their next move.

Whatever their prior experience, none has ever done pre investment due diligence on any small business investment, and none has ever done pre investment due diligence on franchise investment. Despite their education and experience, they are fish out of water.

They are also targets of crooked franchise scams that now abound in this target rich environment. The scams abound mainly in new/recently minted franchise pseudo concepts and in over the hill concepts whose past history of success does not describe their current present tense prospects. Both are being touted as the way to a secure financial future as your own boss. Both will use slick professional looking documents and well rehearsed dog and pony shows called “discovery day” in which the victims are smooth talked with lies that they agree in the franchise contracts they were never told because the franchisor disclaims oral representations and anything else that is not specifically stated in the FDD material; the franchisee acknowledges that no such oral representations were ever made; and the franchisee also agrees that if any pregnant representations were in fact made, he did not rely upon any of them in making his investment decision. Neither the victim nor the incompetent lawyer who advised them will spot that language trap or be able to appreciate what that does to them in many courts and in arbitration hearings. Both types of franchise investments are nothing more than assured visits to bankruptcy court after a significant period of intense suffering during which the franchisee who got ripped off is unable to imagine how he got taken advantage of. By then it will be too late to remedy for the following reasons.

The franchisee will be broke and unable to afford legal representation to go get his money back. The franchisee will have waited too long to take aggressive action and the statute of limitations will have run on his best claims. The franchise agreement will contain a cleverly written mediation/arbitration provision that places dispute resolution into an unlevel playing field in which arbitrators are drawn from large law firms that represent/hope to represent and pander to franchisor interests and fear not getting franchisor or future arbitrator business if they find in favor of aggrieved franchisees in arbitration proceedings. The franchisor who ripped them off will have gone broke or be otherwise incapable of repaying all those whom it cheated. Competent lawyers will not agree to represent the franchisee on a contingent fee arrangement because of the reasons just stated. Competent lawyers will agree to represent substantial groups of franchisees on contingent fee arrangements, but the odds will be against recovery for the reasons just stated – or – recovery will be successful but the contingent fee percentage, plus expenses, will consume most of the recovery.

Very few of these suckers will have had the smarts to hire competent killer pre investment due diligence representation and pay for it. They will, for the most part, decide to pay incompetent lawyers small fees to READ THE DOCUMENTS for them. This useless exercise will not competently inform them of the investment risks they assumed without understanding anything about them.

By way of an easy illustrative example, Item 7 of the FDD they will have been given will disclose, usually in great understatement, their total initial investment. Among other deficiencies, Item 7 will not disclose that they need to have sufficient additional funds to live on and finance the business operations to potential break even that is often three years away if it ever gets there at all.

Nothing in the FDD adds up the ongoing risks of having to personally be on the hook for the following obligations - - a personally guaranteed lease agreement for the entire term of the franchise, without option to terminate for reasons of lack of business success, and that limits business operations to the operation of a business that is the business of that franchise using that franchise name - - a business loan that must be repaid over time or all at once if the balance is accelerated for reasons of default – a liquidated damages provision in the franchise agreement that purports to obligate the franchisee to pay upwards of $ 100,000 in the event of termination of the franchise, regardless of reason (the franchisee is automatically in default under this provision, regardless of the circumstances). This arithmetic will account for several million dollars of ongoing financial risk that is not disclosed in the FDD and that the incompetent lawyer they use for pre investment counseling will have no appreciation of.

Most of these folks don’t even have the smarts to go on a search engine and type in the words franchise pre investment due diligence lawyer. Most of these folks don’t even have the smarts to go on a search engine and type in the words franchise lawyer – and then call each one on the first two pages of the search results and ask them the following questions:

  • Do you focus on advising franchise investors concerning pre investing due diligence counseling?
  • Do you do franchise investment due diligence counseling that focuses on both the legal and the financial/business issues/risks?

Without YES answers to both those questions, you are not talking with the person you need. If you think you are going to get the level of work you require out of a

$ 500 fee lawyer, you would do getter not to have any lawyer at all, as the fact that you went to see “a lawyer” before investing will be used against you in any claim that you were swindled. You need to be prepared to pay a legal fee in the range of $ 3,000 to $ 5,000 for competent due diligence, but you can expect due diligence assistance on numerous potential investments for that fee if the first one you think you like turns out not to be suitable.

As most of those coming out of large company melt downs won’t follow this advice, there will be a sea of dead franchise fish stinking up the franchise world for many years to come in the near future. That is really sad.

Profile picture for user Richard Solomon

Comments

Franchise Investment Due Diligence Counseling

Richard,

I was surprised that you didn't respond to the person looking for franwhack services—franchise investment due diligence counseling—the other day.

There seem to be two different people realizing they need help in sorting through the b.s. and franchise traps. Here's one query.

Due Diligence - Lawyer Help

 And another.

candy bouquet franchise

Just slip me the regular royalties when we gather at Muldoon's.

Re: Franchise Investment Due Diligence Counseling

... maybe tired of all the free self-promotion producing no results?

Franchise Purchase Investigation

Richard, and every attorney trying to assist prospects, faces the same problem: psychological lock-in by the prospect who decides to consult an attorney 14 days before closing.  

There is literally nothing to be done for these people by way of serious due diligence. 

Fortunately, the internet now lets us intercept these individuals before lock-in and provide them with a review of what the FDD reveals. 

It is in the legitimate franchisor's self-interest for this process to work as it provides a better stream of qualified candidates. 

Michael Webster, a franchisee attorney in Toronto, Ontario, who publishes a website on business opportunities and franchises, called "The BizOp News" 

I tried to respond, but the site wasn't letting me do it

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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

it the

Having enough smarts

"Most of these folks don’t even have the smarts to go on a search engine and type in the words franchise pre investment due diligence lawyer" - RS

I know what you mean. Most buyers obviously don't think like an attorney. Almost all do not have the smarts to search, "franchise license tortalitious pre-investment due-diligence disclosure document exploratory attorney consultant"

If you do search this, remember to put the hyphen in "due-diligence" and in quotes, otherwise you get a lot of results for "due". You can also leave out the tortalitious if that's hard for you to remember.

Re:..Having enough smarts

You're right. Isn't it amazing that one person can so blatantly promote a personal agenda? Probably believes that he is very clever.

"Most of these folks don’t even have the smarts to go on a search engine and type in the words franchise pre investment due diligence lawyer."

Indeed, the word string is the guy's little mantra so weaved as to show his 'google'genius - NOT. Google fool is more like it, as though someone is going to telepathically respond to this crap, especially after he puts down prospective clients as nothing but fools.

What a flake.

Guest Nonsense

Interesting that it is two "guests" who attempt to derail Richard's services which provide serious pre-purchase investigation to prospective franchisees.

Be nice if "guests" had the guts to step up and identify themselves, and make clear their own agenda.

Of course "guests" would rather deal in ad hominems than deal with serious argument. 

Michael Webster, a franchisee attorney in Toronto, Ontario, who publishes a website on business opportunities and franchises, called "The BizOp News" 

Many of the people hurt in franchising

were not brought up with computers. Their not stupid. It was when I got into real estate I had to learn how to use a computer. I was too busy to know how valuble google was. You may call me stupid. I am not. It was in our franchise that I discovered google. It opened a new world to me. It truly amazes me how much knowlege I can get on google. A member showed me how to do it. It depresses me to know all the knowlege I had before me.
Now whenever I want to know about anything I google it. Is it so hard for people to understand that many baby boomers or people older than baby boomers have not had the time to learn what my children do without thinking about it. It is not stupid. We are not stupid. Not everyone is Solomon who is a very smart and wise. Just uninformed.
A good example is my Golden Retriever has problems with anal sacs. I googled it and took care of it. It saved me $200 taking care of it myself. Gross but it saved me money. Then you learn that the problem can be taken care of with an operation. The vet does not disclose this to you willingly. I wonder why?

Buying Process

There are certain things in the buying process that affects us like beer. And as we look, this is what our desire and the process does:

Moral of the story: Think with a clear head!

Drinking and buying!

Darn,
I new I shouldn't have been drinking before I signed on the dotted line! Things just look so much better with the beer goggles on.

Drinking and buying!

Darn,
I new I shouldn't have been drinking before I signed on the dotted line! Things just look so much better with the beer goggles on.

Not like the '90s

Richard:

Even though our economy is going through a white-collar contraction similar to the last blip in the 90's, what is different this time around is the lack of credit being offered to ANY start-up business. While we'll likely see a similar peak of interest from the parachutes, I think very few deals will be consummated compared to the last go-around.

You are likely to see an influx of interest in "low entry cost" options - where credit will be avoided in favor of all-cash deals...then you'll really have a hard time justifying the$5k legal expense to someone who thinks the entire investment is only x...

Not like the '90s

Richard:

Even though our economy is going through a white-collar contraction similar to the last blip in the 90's, what is different this time around is the lack of credit being offered to ANY start-up business. While we'll likely see a similar peak of interest from the parachutes, I think very few deals will be consummated compared to the last go-around.

You are likely to see an influx of interest in "low entry cost" options - where credit will be avoided in favor of all-cash deals...then you'll really have a hard time justifying the$5k legal expense to someone who thinks the entire investment is only x...

Finding Investment Money

Dan Maizner writes, "what is different this time around is the lack of credit being offered to ANY start-up business. While we'll likely see a similar peak of interest from the parachutes, I think very few deals will be consummated compared to the last go-around.

Maizner brings up an important point, money is hard to come by. There are much fewer loans for the growing number of the unemployed to borrow. Their own 401k retirement funds have been decimated by the melt-down on Wall Street.  And their own net equity has dropped significantly with the dropping of the value of their home price.

It seems to be taking franchisor brokers a little time for that to sink in. FranNet's Jeff Elgin a few days ago in Entrepreneur opines on how buyers can get capital during this financial crisis.

Elgin writes, "Despite what you hear on the news, money is available. There are institutions and individuals who haven't been affected by the housing market and still have money to lend."

Judging from Elgin, if lenders aren't focused on home loans, they should be fine. I'm not sure what he bases that on, but nonetheless he says it. Elgin also says there are three good funding sources to buy a franchise.

  1. Franchise funding specialists such as FranFun and Guidant. In contrast to Elgin's comment, there have been several news stories of large franchise funding specialists that have announced dramatic cut backs on their lending.
  2. Cash is king. Hard to disagree with Elgin here. If you have a million dollars in cash, you can buy quite a number of franchise concepts. You can also buy homes undergoing foreclosure.
  3. Or Patriot Express. This is where the SBA will guarantee to your lender your loan. It is to be used for Veterans who want to buy a franchise. But, the SBA says that its lenders have significantly stopped using SBA guaranteed loans (see SBA Loans Sink), along with conventional loans.

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Related reading:

risk money wants adequate reward

I would disagree. Money is easy to come by these days. The trouble is that money will want to flow to investment, and that means the reward will need to be commensurate with the risk ensued. My opinion is very firm, over the years the capital markets have been manipulated and fewer and fewer opportunities are undertaken in terms of being evaluated as investments. Many hopeful proprietors are simply not willing to give the terms an investor would seek. The problem has compounded by a Government that attempted to fill in the voids in the capital market and made it easy for marginal concepts to thrive and poor concepts to exist and masking the true valuations of risk capital.

FuwaFuwaUsagi

"Never underestimate the power of stupid people in large numbers." 

Community Banks

Agree with Fuwa, below.

There are a lot of community or local banks which are flush with deposit money - fleeing the larger banks. 

Michael Webster, a franchisee attorney in Toronto, Ontario, who publishes a website on business opportunities and franchises, called "The BizOp News" 

Is money hard to find?

Who's right?

There's money: Attorney Michael Webster says there's money. He states, "There are a lot of community or local banks which are flush with deposit money."

Less money: Bob Seiwert, Sr. Vice President of American Bankers Association's Center for Commercial Lending and Business Banking observes, “Bankers are pricing for the perceived level of risks and they are getting it today because there is less supply of funds that can be loaned.”

There's money: Fuwa, a business consultant, says, "Money is easy to come by these days."

Less money: Roger Bloss, CEO of Vantage Hospitality Hotels says, "I will tell you that it is extremely difficult to find. It is difficult to qualify. But conventional loans are out there."

No money: C.K. Patel, a franchise owner of hotels, says, "The banking industry is not giving any money to hotels. I'm a good customer for them and I'm having a difficult time."

There's money: Jeff Elgin, franchise broker, says, "money is available."

Less money: Randy Jones, partner at Funding Solutions, LLC, a loan broker for franchises, thinks that amidst the grim credit crunch news right now, there are pockets of loans that are available. “These examples [Bank of America, GE Capital, SunTrust and others] are probably not Small Business Administration loans,” Jones says. New franchise buyers without major property purchases tend to take on SBA loans. “SBA lenders are more active right now," he observes. “SBA loans have tightened less than conventional loans, where little is getting done.”

Less money: But the SBA has just reported that its number of government-backed loans to small businesses sank by 30 percent.

Who is Right?

Bob, my guess is that everyone you cited is correct.  Each person is commenting on the availability of funds from a particular source. Private lending and community banks have money to lend.  Big banks, large credit organizations are too worried to lend.

Here is a story about community bank  lending. 

Michael Webster, a franchisee attorney in Toronto, Ontario, who publishes a website on business opportunities and franchises, called "The BizOp News" 

Re: Who is Right?

I believe Michael has it correct, it is a matter of perspective. I was chatting with some business acquaintances today, between the 4 of us we have a a bit of capital we would like to see productively employed and were lamenting the dearth of investment quality opportunities. I also know my local bank has a great deal of capital to lend. They have always been a business bank that did little in the way of homeowner loans, and they are finding it harder to find the investments they like as globalization is really eliminating the local plants they historically lent to.

There is a local company that serves the luxury auto market several of us have wanted a piece of. The owners are always running at capacity during the good times but not even close to saturating their natural market. If they expanded now they could get equipment and build out very cheap. But they did not manage their capital well and cashed it out. So several of us would like to give them the funds for expansion in exchange for an equity share. But like so many they do not want to share the profits of their baby. My guess is next up swing in the economy they will bemoan the fact they cannot readily expand their operation to meet demand and once again turn away orders. They will try their best to work 3 shifts again only to have labor constraints bite them again and equipment breakdowns plague their operations. Anyways, I know their business fairly well, and it is a shame they are too much the car buff and not more the businessman. There is money to made here and plenty for all. Instead, next upturn, they will opt for a interest rate loan and pay top dollar for equipment if they can find a shop to make it for them, they will not be able to expand because the warehouse space will be converted again into retail, and if they go to where they can afford the rent they will not be able to get the skilled labor they need. Once again they will mismanage their resources and cash out instead of retaining earnings and will not have the capital available to expand during the next recession.

My point here is, there is money knocking on these guys doors because they have a viable concept. I have never in my life seen a shortage of money available to viable concepts.

FuwaFuwaUsagi

"Never underestimate the power of stupid people in large numbers." 

Yeah, Bob - I agree too

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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

Especially here in Texas, money is plentiful. In addition to commercial sources, in the last two weeks I have been called by two suckers who privately invested in bozo deals with people who were wanting to become franchisees and needed a "partner". So private sucker capital still abounds - at least in Texas, where they write the check; realize the mistake; and only then call a lawyer to see what can be done. Major investment capital may be found in any high class bar in Houston if you dress right and say the magic words.

Funding availability will not deter franchise investment fraud.

Free Offer of Incorporation

There is a free offer, valid for today only, from MyCorporation, an Inuit Company, to incorporate your LLC for free.  

Even if you don't have any immediate plans for an LLC, it is a great way to save $150.

Michael Webster, a franchisee attorney in Toronto, Ontario, who publishes a website on business opportunities and franchises, called "The BizOp News" 

Canuck life is simpler

Webster writes: Even if you don't have any immediate plans for an LLC, it is a great way to save $150.

Not if you are in the US.  Formation of an LLC or incorporation is governed under state laws, which vary considerably.

One of the big problems with these internet services is that they don't cover the nuances of those laws. For example, formation of an LLC in my county would also entail publication in one of certain govt-enumerated newspaters, and filing of affidavits of publication, which runs about $1100-1800 in my county. From what I understand, in PA it is the reverse, with publication required for corps but not LLCs.

The consequences of failure to comply with formation requirements are a matter of state law, but they can be severe including disregard of the entity form and resultant pass-thru of liabilities to the natural person(s). And while a corporate entity is perpetual, an LLC is not and there may be "events of dissolution" which can result in the LLC being dissolved as a matter of law without you intending to dissolve the LLC (or even knowing it has been dissolved).

In addition, there are requirements for annual filings with the Secretary of State, including payment of fees. Failure to comply can result in penalties and dissolution of your entity. Also in my state there is computer database-matching by the Dept of Labor, so even if it is a shelf entity you will likely have to respond to a DoL inquiry as to why you are not registered for W/C and U/I.

With regard to a corporate entity, if an election is made under subchapter "S" there are two documents needed to be filed (federal and state) and if you fail to do so and then commence operations without making the election within certain periods you will be liable for taxation at both the corporate and the personal level. So if you form a corp now and then start doing business next spring, you should pay attention to the time windows for filing your "S" election, and many people forget this when using shelf entities.

I could go on, but the point here is that you should get competent advice and you shouldn't form a corporation or LLC unless you need to do so.

Paul SteinbergFranchisee Attorney, New York City, Ph: 212-529-5400

The Simple Life

Eeck! In Ontario, I can set up a limited corporation for the payment of $400 all in -yes, I will have to file annual tax returns using Quickbooks, and get a tax number.  And yes, failure to file could close the corporation, but if I could save the $400 I would set up a couple corporations instantly.

But, good advice for the unsuspecting.  Consult your local attorney, and use the $149 saving to against their bill! 

Michael Webster, a franchisee attorney in Toronto, Ontario, who publishes a website on business opportunities and franchises, called "The BizOp News" 

Post

Richard,
I would be interested in using some of your content for a blog that I'm working on. Please send me an e-mail if you are interested.
[email protected]
http://www.bfranchise.com

Create Your Blog Here As Well

Guest,

I hope that you might post a blog on Blue MauMau as well. We are set up to accommodate your own franchise-related blog page.

To do so, register on the site (top right hand corner of the page). It's free. And then click the top menu, "Share Info!

You immediately have two benefits for registering. First, you can email Richard privately through the Blue MauMau internal email system instead of having to post messages to him publicly. Second, by being a registered member (free), you can now create your own blog and buying column on Blue MauMau. Cross-posting is welcome.

For example, Mr. Richard Solomon's blog on Blue MauMau can be read here. There is a link to his blog under every one of his articles.

Mr. Solomon is popular here because he is known as a straight talker. Our readership may not always agree with what is written, but they can sense authenticity—when someone posts advice as they really see it. That's rare in this industry, so when the community finds such voices they tend to gravitate towards it.

I visited your blog site.

Who are you? It gives no information about with whom I might be working.

--

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

Re: The Coming Franchise Investment Bloodbath

I have been reading posts on this site for over a year now and posting for about 6+ months. When I first came here, Richard seemed to use more tact when he discussed his pre-purchase due diligents services. But for some people that approach failed to work.

Like my wife often says, ‘ sometimes it requires a large 2 x 4 to your head to get my point across!’ Since posting here does not allow us to shed a lot of light on our individual personalities, perhaps a verbal 2 x 4 approach may be required from time to time.

Re: The Coming Franchise Investment Bloodbath

I have been reading posts on this site for over a year now and posting for about 6+ months. When I first came here, Richard seemed to use more tact when he discussed his pre-purchase due diligents services. But for some people that approach failed to work.

Like my wife often says, ‘ sometimes it requires a large 2 x 4 to your head to get my point across!’ Since posting here does not allow us to shed a lot of light on our individual personalities, perhaps a verbal 2 x 4 approach may be required from time to time.

Bad Smell Increasing or Decreasing?

"there will be a sea of dead franchise fish stinking up the franchise world for many years to come in the near future." - Solomon

What's the status on this? I know the unemployment figures are rising. But are franchise sales increasing or decreasing?

Is there a current rise in angry franchise owners? What do you franchisee attorneys say? Is business for your practice right now good or bad? Rising or falling?

Restaurant Franchise Sales

Having just recently attended the 2008 Restaurant Finance and Development Conference, as well as closely monitoring the restaurant sector, here's the deal:

franchise sales and ease of fully executing deals are down because of overall credit conditions.

restaurant comparable sales are up in only in strong QSR concepts but casual dining operators almost across the board are seeing sales (and profit) decreases.

restaurant chains that are moderaterly to highly over-leveraged will refranchise their company units. But this will be attractive for the larger franchise operators, only, that already have a track record.

there is some money available--but friends and family is the best (maybe only) place to start for single unit operators. Also, think about smaller regional/community banks.

the weakening economy will pose its toll on thr weaker concepts (we all know who those are) and there will be a continuing wave of failures.

as Richard indicated, the industry will target the newly laid off--professionals with a little money--to buy themseleves a job. Potential zees, you've got to do your due diligence !

John A. Gordon
Restaurant Analyst

email: [email protected]

It may make a significant difference in my business if

this new wave of the asset blessed unemployed really do learn that the only thing saving them from bankruptcy is extremely competent due diligence before buying a franchise.

But I have been preaching that gospel for a few years now, and I still get calls for the $ 300 "Read me the contract" special - which I don't do.

Only time will tell. If the due diligence part of the practice doesn't grow, the dispute resolution part won't grow, because they won't have money to pay for competent representation when the scammers are done with them - and the scammers may not have money you can find even if you win.

The issue, as I see it, is that these folks may be so desperate that they will swallow the BS whole and not even think of competent due diligence before they invest.

--

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

Re: The Coming Franchise Investment Bloodbath

Orrrrrr, you pick a franchise system that has proven to work, and is run by honest, hard working people, who believe in a hand shake, and then you don't need to waste time and money on any of this. I know sometimes it's difficult to pry off the cynicism and believe that these people (and systems) exist, but they do. And all you have to do is meet them. Be wary of the scam systems, but that's exactly what a "Discovery Day" is for, and should mean visiting with the *people* running the business. This is far more important and vital than one of these due diligence lawyers, who know nothing of the business and its people other than what they dream up inside their heads behind the closed walls of an overpriced office. Instead, speak with current owners working the system and see how they feel. Meet the people who comprise the home office. Think and decide for yourself. It's the cost of a phone call or a plane ticket and far more meaningful.

Re: The Coming Franchise Investment Bloodbath

Hmmmm, didn't all those Cuppy's zees have a Discovery day? Coffee University? What about Stone Cold Creamery's zees? Quizno's? All the visits, discovery days, etc. won't help the unsuspecting zee if they are being fed false information by the corporate office, brokers or current zees. All the involved parties will put lipstick on that pig in an attempt to sell more fatty bacon.

Quiznos bloodbath

Now the SBA and local banks will no longer make loans to the likes of Quiznos without a substantial down payment.

Sheesh!

"Orrrrrr, you pick a franchise system that has proven to work, and is run by honest, hard working people, who believe in a hand shake, and then you don't need to waste time and money on any of this."

Brilliant! Getting a lawyer is clearly a waste of money at that point you've gone to a "Discovery Day". If at the Discovery Day the franchisor tells you he's honest and his system is proven to work, you should immediately take all the assets you've got and dump them right into this "proven" franchise. What could go wrong?

Discovery Day

Guest,
Are you suggesting that 'Discovery Day' is not plagued with rhetoric and slick sales pitches?

Discovery Day is the same thing as watching an infomercial, just in person.

Visiting other FO's and making inquiries on your own is a must before you sign.

To advise not to waste money on a lawyer for some due diligents is short sighted.

Discovery Day

Guest,
Are you suggesting that 'Discovery Day' is not plagued with rhetoric and slick sales pitches?

Discovery Day is the same thing as watching an infomercial, just in person.

Visiting other FO's and making inquiries on your own is a must before you sign.

To advise not to waste money on a lawyer for some due diligents is short sighted.

Speaking with current owners is no longer reliable

There are several reasons why talking to current franchisees is no longer reliable due diligence. You should do it anyway - just don't take a reassured attitude from having done so.

Very few will give you a peek at the books - almost none.

Most will suspect that you are an agent of the franchisor trying to identify anyone who fails to say positive things about the system - looking to retaliate. That fear is pervasive these days and makes what the franchisees tell you almost worthless.

People looking to sell their franchises and get out are not going to tell you the bad news, if there is any, for fear of diminishing the perceived value of what they may be trying to dump on to some other poor soul.

There are other reasons too.

--

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

re: Speaking with current owners is no longer reliable

if it ever was. In addition to Richard's points, with which I agree, some franchisees may receive (or believe they may receive) special benefits or consideration from their franchisor for speaking well of the system.

Current owners

It was only introduced to Australia last year where franchisors were required to provide contact details for past franchisees.

Apart from the reasoning as to the unreliability of current owners already mentioned, in many bad systems there is real FEAR that the franchisor would find out about any negative response to a prospective franchisee and they would then become a target.  In fact, some franchisors' representatives will anonymously contact selected existing franchisees under the pretext that they are looking to buy in.  "Damage to the brand" is a breach and even where that doesn't follow, life can become hell.

Talking to past franchisees is probably the most important step in protecting what a prospective franchise buyer and family have.  But definatley not the only critical step.  Or ... they stand a very good chance of commercial suicide.

I have talked to former zees

when they were in business said things were great. Now that they are former zees a completely different story. Calling current zees is not the way to go. The only way to killer due diligence is pay a killer franchise attorney to tear apart the FDD. Then find out if he can vet franchise systems.
It has taken me almost a year to understand what the lawyers have been talking about. It took me seven times reading our UFOC to see misleading statements. I bet if I had a attorney like Michael, Paul or Richard they will see more misleading things. The FDD is strictly to protect the zor. They make things sound good and it will take one word of sentence to wipe away the good. Things can be said on one part of the FDD and many pages away the same subject will come up. Example, the lease review in the Area Director's disclosures will say it is for the benefit of the zor. When you read on the zee's itemized disclosures it will say $1450 for a lease review. Nothing is said that it is for the benefit of the zor. Yet pages before it discloses on the Area Director's disclosures the lease review is for the benifit of the zor. How many zee's will remember everything that is stated many pages previously. I didn't. I know many will not. I know one thing the zor knows it.

Absolutely Correct

Yes, yes and yes. Speak to past Franchisees, current ones are protecting themselves, don't do anything other than ask the price of the Investment and then ask for a list of past Franchisees, if they won't give it to you walk away, in fact run away as fast as you can. Better to miss the odd good one than get stuck with the biggest mistake of your life.

Current Owners

I agree with both Richard and Howard, talking with current owners isn't likely to do produce much valuable information.  You need to have a plan that cuts through the marketing bs, the fog of the FDD, and takes advantage of your own skills. 

Michael Webster, a franchisee attorney in Toronto, Ontario, who publishes a website on business opportunities and franchises, called "The BizOp News" 

Bad Advice from Orrrr

Our guest writes: "Be wary of the scam systems, but that's exactly what a "Discovery Day" is for, and should mean visiting with the *people* running the business."

I couldn't disagree with this more.  By the time you are at Discover Day, you are no longer a skeptic, you are a wanna be franchisee.

Richard, Howard, Paul and I are not attorney who know nothing of franchising, their systems and their problems.  We know a great deal about how people come to fool themselves into believing that they are just about to live the American Dream large.  

We know the limits of litigation first hand, and would rather spend time making sure that people avoided those litigation traps.  As Richard says, this is not a "read the contract" for me problem. 

Michael Webster, a franchisee attorney in Toronto, Ontario, who publishes a website on business opportunities and franchises, called "The BizOp News" 

Zees That Have Left The System.

Isn't the UFOC supposed to have the contact info for all those that have left the system, or is this a state by state requirement? These are the ones to contact for the truth.