Lessons for New Franchise Investors
This is a tough love tutorial. If you can’t handle the play, stay out of the game! If this is too tough for your tender sensibilities, feel free to call me names. It won’t bother me one bit.
There is a business investment formula you do not want to use. For years new franchise investors used this awful approach and thousands are now bankrupt as a result. The terrible investment formula is:
Ignorance + Incompetence + Arrogance = Scammed and Broke
Ignorance refers to the fact that if you have never before vetted a franchised small business investment proposal, you simply do not know how to go about doing that.
Incompetence includes the fact that you are incapable or sorting out truths from fictions in the information that a franchise seller is presenting to you. It makes no difference that it may come in a slick brochure or in a formalized Franchise Disclosure Document package. Most of what most franchisors say about their propositions is simply untrue, and you can’t tell what is from what is not. You also are unable to know when you call existing franchisees for a reference when you are hearing truthful responses and when you are hearing untrue responses from people fearful that you might just be a predatory franchisor’s spy looking for franchisees who are badmouthing the system so that you can retaliate. When thieves give you references, the references are unreliable.
Arrogance is the insistence that despite your lack of experience, you refuse to hire expert pre investment deal and legal due diligence assistance and decide to go it alone or with only a lawyer to explain the contract documents. You save fees doing that, but you sign up in total ignorance of deal quality. Once you have signed you are toast, as only very expensive lawyers can try – with little chance of success – to get you out of your deal. It could be said – since the resources you need to keep from being cheated are readily available – that you have only your own stupidity to blame for your predicament. Stupidity and arrogance are just different shades of the same color.
If you go on the Internet to some of the blog sites relating to franchise problems, you will encounter squads of cheated franchisees telling you all about the evils of franchising and how they lost everything they owned in the world due to crooked, abusive franchisors.
They will also tell you that the problem is not of their making, but attributable to a failure of the government to regulate franchising in such a manner that they are bullet proof and cannot be cheated or abused by their franchisors.
If you suggest that their problems are that they signed deals knowing nothing about what the risks really were, they call you names and accuse you of holding all franchisees to be stupid. They refuse to accept any responsibility for their failures.
Is that a group that you want to join? Of course not. Do you have to join that group? Of course not. How do you manage not to be cheated in franchise transactions?
For God sake, educate yourself before you sign away everything you own and can borrow on a crooked franchise deal that has no hope of being successful for you. It may be very successful for the franchisor, but the real question is, despite hundreds of franchises being sold, whether it will be successful for you as a franchisee of one of those companies.
There are generational differences amongst broke franchisees. Many of them bought bad franchise deals many years ago before competent legal and deal due diligence was widely available. In many instances they may not have had a realistic place to turn for help. At least within the last five years, however, that is not so. Now there is no legitimate excuse for signing bad franchise deals.
The government is not going to make franchise investment safe in the sense that there are no serious investment risks other than your own mismanagement of the business causing it to fail. Those who want franchises regulated like securities are regulated won’t accept that many people also get cheated in securities frauds. The Bernie Madoffs and similar folks out there in the world of bozo securities are not deterred because of the securities laws. Similarly, cooked franchisors abound in the system as it now exists in franchise regulation and would continue to exist were the regulation made tighter. No political solution has ever succeeded in eliminating crooks.
These same dreamers also want the government to legislate the rewriting of bad franchise agreements they signed to make the terms less one sided. But governments and courts won’t dilute the dynamics of any free markets to impose terms of dealing that the parties to agreements did not themselves insert into those contracts. Court after court has refused to do that. Congress has time and again refused to do that.
The Australian Parliament has played a smoke and mirrors game to make it seem like that is what they did, but the Australian remedies are essentially useless. When you are broke and can’t afford legal representation to handle your case, the result is the same as if the rights were not there in the first place. The truth is that it is almost impossible to find a competent trial lawyer to take on a franchise damages case on a contingent fee. There is too much uncertainty about recovery. Some dummy lawyer might do it, but anyone who doesn’t know what he is doing isn’t likely to get you the result you seek.
It is extremely important that your franchise network have a competently managed independent franchisee association that is very widely supported and has enough money in the till to do what may need to be done. Predatory franchisors make money from the abuses they impose and cannot simply be talked out of it because you don’t like what is being done or because it is “wrong”. A competently managed franchisee association can deal with this scenario. A social club franchisee association cannot.
The reason you won’t get judicial or legislative relief is that it appears very clearly that you don’t need it. When you sign up for a franchise investment you agree in writing, signed by you, that you are financially and experientially capable of assuming the risks of the investment. You acknowledge that you were not told anything that is not in the disclosure package the franchisor gave you, and that if you were, you did not rely on it in making your investment decision. You agree that there are no promises made to you except what is specifically promised in the written contract. You personally guarantee your performance of the agreement. You often agree that if the business closes – for any reason at all, regardless of fault, you are liable for a lot of damages and that in closing you caused serious injury to the franchisor. You may waive jury trial. You may agree to arbitration and not have any access to any court for any reason. You agree to waive claims for punitive and exemplary damages, no matter what.
When the courts and Congress see what you agreed to there is no perceived need for additional relief in your favor. You just agreed that you are far better than you really are, so why the hell bother? If you don’t even know the truth about yourself – which is exactly what I have just described – everyone knows that you can’t fix stupid – not through the courts and not through legislation. The answer is not to be stupid in the first place. Recognize your limitations and get help where you need help. Then you won’t be stupid and you probably won’t get cheated.
This is the lesson about franchising that all potential franchise investors need to learn. If you don’t learn it, you will most likely join the ranks of the thousands of others who believed lies and signed unbelievably abusive agreements with crooks and predators. There is no middle choice. Either do it competently or suffer the consequences.
About the author: My websites are FranchiseRemedies.com and FranchiseeAssociationManagement.com. Look at the articles about franchise fraud, franchise relationship
management through franchisee associations and the myths and realities
of franchise fairness. If you don’t
like me or my manner, then hire someone else. Use the no charge
information to educate yourself before you make the investment from
which you cannot escape except through bankruptcy or through losing
everything you invested and releasing the crooked franchisor you
invested it with.