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. I
f 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.

Profile picture for user Richard Solomon

Comments

Hire a teacher

Solomon offers an interesting concept in buying a franchise. His sites should be renamed Hire a teacher.com He's not a broker. He's not a business consultant that tells you how to improve operational returns. For a price, this legal litigator will teach you and provide quizes on how to buy a franchise. You complete his homework. Read his assignments and articles. You tell the teacher what you've found out in your franchise investigation.

He'll tell you where your answer and reasoning are less than 100%.

He is confident that if you follow his process diligently that you will do your due diligence right. B and C students may not receive as strong a level of confidence from the attorney.

Although he has never run an independent franchisee association, he also wants franchisees to seek him out on how to set one up.

Hire a teacher

Solomon offers an interesting concept in buying a franchise. His sites should be renamed Hire a teacher.com He's not a broker. He's not a business consultant that tells you how to improve operational returns. For a price, this legal litigator will teach you and provide quizes on how to buy a franchise. You complete his homework. Read his assignments and articles. You tell the teacher what you've found out in your franchise investigation.

He'll tell you where your answer and reasoning are less than 100%.

He is confident that if you follow his process diligently that you will do your due diligence right. B and C students may not receive as strong a level of confidence from the attorney.

Although he has never run an independent franchisee association, he also wants franchisees to seek him out on how to set one up.

A good teacher and a big stick

I don't know what better law and regulation any government can come up with but if they produce some minor positive that works for me.  While I stand with the people with goals to create change I agree that ultimately people must save themselves where law and regulation will never protect the foolish.

Once there were only related laws that influenced franchising and then more relevant laws were introduced and then over the years they were refined and added to.  It can be said that the laws and refining have done nothing much to get the result that franchisees need however; if franchisees believe that any law will dissolve their duty to themselves then they should book into the nearest rehab centre.

I see this in 2 parts.  One being the possibility to produce better laws to restrict and deter scams as governments have in other industries and I would suggest finance and stock broking are good examples.  And in doing so they have made people more aware that caution is needed.  There is no serious notion of caution espoused in franchising [except here and at a few other sites].

I have said it before but I see it as true. We live in an age when people sign contracts regularly for many things.  And typically most of the population don’t read or understand what they sign.  Some get a little burned and some not at all but rarely do they get as seriously ripped as when some sign a franchise contract. 

I am suggesting the foolishness of signing franchise agreements without serious due diligence is related to the propensity of a lazy society to sign anything if there is something with apparent glitter to be had.

AT BMM there is a dimension of tragic stories from those who have been burned for whatever reason.  They are merely the tip of the iceberg and that is the truth.  Those looking into franchising should reflect on whether the effort and expense to be confident in a franchising decision is preferable to joining that club and losing ‘all’.

Franchising is very complex and the newbies simply don’t know what to investigate or how to interpret the information.  The problem is they think they do.  BMM offers great reading on areas of due diligence never considered by prospective franchisees but they should not be fooled; there is an art in interpreting the right information when trickery always looks, smells and tastes like the real deal.

Note: ‘All’ is too often ALL someone owns and cares for and a debt into a miserable future if a mistake is made.

The real problem...

We have been Zees for 15 years.  We don't make as much as a lot of people in the community thinks we do, but we make more than 90% of the households in the US.

The real problem is most often (NOT always) that people who inplicitly know that they don't have the combo of knowledge, skills and courage to launch their own independent business, will put everything they own and can borrow into a crappy franchise under the delusion that it is a "proven system".

In many, many cases if they knew a dog danmed thing about the industry they were getting into, they would recognize it as a scam without even needing to hire Solomo, Esq.  But instead of taking 6 month of their time and a bit of a pay cut to gat a job as a management trainee in that industry for half a year, they prefer to spend hundreds of thousands of $ and sign a multi-year agreement ti get 2 weeks of training (and the "proven system").

Often what they pay in fees is more than a year's tuition at Harvard, and for this they get 2 weeks training.  If it is a "proven system", how many have been operating for 5 years and how profitable are they?  Instead too often people jump for the latest "fastest growing" and/or "hot concept".  Look up some prior year's fastest growing.  Then follow up a few years later.  How many of one year's fastest growing were the next year's flash in the pan, and a few years later were closing units or even in litigation?  Crispy Creme, Boston Market (before MCD bought the carcass), etc.

The only way to do this without hiring all these consultants to tell you what to do, is if you ALREADY know the industry better than those consultants.

The 6 Month Test

GB writes: "In many, many cases if they knew a dog danmed thing about the industry they were getting into, they would recognize it as a scam without even needing to hire Solomo, Esq.  But instead of taking 6 month of their time and a bit of a pay cut to gat a job as a management trainee in that industry for half a year, they prefer to spend hundreds of thousands of $ and sign a multi-year agreement ti get 2 weeks of training (and the "proven system)"

Richard and I, and many others, have constantly made this point: 6 months working in a franchise system is a better education than you can buy from any consultant.  Indeed, this is one of my first recommendations - work in the system for 6 months and come back to talk with me then.  

AMEN! This advice has been on my web site for 14 years - no one

follows it. It is the single highest quality due diligence you can gtet. That's why I call it the Ultimate Due Diligence.

But there is no fixing stupid.

Buyers should work in franchise first

Solomon says, "But there is no fixing stupid."

I struggle with this excuse. I know that there are people out there who are inept. But I also know that this is used too commonly as an excuse to clean the accuser of any blame for the failure. It's a convenient excuse. What is unsaid by the statement is this: "My consulting and system is flawless. The only reason this person failed is because he is an idiot. And there is no fixing stupid."

When I hear it, red flashing lights go off about the person saying it.

On the other hand, I understand what Solomon is saying is that entrepreneurs are a hopeful bunch. Some potential franchise buyers will blind themselves to harsh reality, despite it being in front of them by working for a franchisee for six months before they sign a franchise agreement and buy a franchise.

Being "hopeful" is simply not an acceptable explanation for the

decision to risk everything you have without competent risk evaluation. Being hopeful is - in my mind at least - another way of being stupid. Hope is not an adequate substitute for investigation, and hope is strictly limited to the crap table. Hope is not competent investment investigation substitute. Using hope as an excuse is stupid per se.

I am a bit amazed that you would even think of excusing stupid by calling it hopefulness. That is way too politically correct for me. I aint Leo buscaglia, and Leo Buscaglia approaches to franchise victimization risks won't be coming from me. That is why I went to the trouble to say if you don't like me or my manner, please go elsewhere with your franchise problems. I have little sympathy for those who refuse to use risk reducing resources when they invest everything in one shot.

14 years?????

Internet records show that your site came online in June of '98, as in 11 years ago. So, 'full of shit' might be good term.

While you posture here in pretend school, remember that hundreds of thousands are actually making a living in franchising.

You may be right. I may be full of shit, just as you say.

Mistakes like that are sometimes used as the basis  for claims that I am nuts/stupid/crooked/perverse/gender ambiguous and free thinking.

You are very astute to have pointed that out and to have called me names for having made a mistake like that.

Thanks you very much for your attentive assistance.

Obviously the guest is an Anti-Solomonite

May God smite him with his best smiting club.

6 Months In a Store Will Tell a Buyer About a Store

Working in a franchise for six months and regularly communicating with a franchise owner regularly is not enough. One doesn't necessarily get a feel for the chain and the industry. The guard at the information gate is the limits of one franchise owner-operator and their staff.

The franchise buyer must reach outside the store to get a sense of what's happening in the sector as well as the chain as a whole. That's not easy. Solomon nor Webster can help with that.

Buyers need to have access to reliable information that give them an accurate 30,000 foot level view. Industry reports from trustworthy sources (costing a few hundred to over a thousand dollars) help. Buyers need a reliable mentoring system that they will have to construct in a way that can give them the perspective they need. They need to participate in trade groups and connect with specific sector consultants to help pull the franchise candidate outside of the day to day running of a store. They need to understand not only the health of the franchise system that they are in but also of the long-term trends in the industry. That's part of the reason why franchisee associations, if done right, are so important.

Researching an industry and a potential franchise investment is not easy. It's costly and time consuming.

6 Months In a Store Will Tell a Buyer About a Store

Working in a franchise for six months and regularly communicating with a franchise owner regularly is not enough. One doesn't necessarily get a feel for the chain and the industry. The guard at the information gate is the limits of one franchise owner-operator and their staff.

The franchise buyer must reach outside the store to get a sense of what's happening in the sector as well as the chain as a whole. That's not easy. Solomon nor Webster can help with that.

Buyers need to have access to reliable information that give them an accurate 30,000 foot level view. Industry reports from trustworthy sources (costing a few hundred to over a thousand dollars) help. Buyers need a reliable mentoring system that they will have to construct in a way that can give them the perspective they need. They need to participate in trade groups and connect with specific sector consultants to help pull the franchise candidate outside of the day to day running of a store. They need to understand not only the health of the franchise system that they are in but also of the long-term trends in the industry. That's part of the reason why franchisee associations, if done right, are so important.

Researching an industry and a potential franchise investment is not easy. It's costly and time consuming.

Ignorance + Incompetence + Arrogance = Broke Rusty Oldsword

Rusty do you see yourself in Solomon's mirror or will you perpetuate your denial. Do you see how you were complicit in your own franchise demise?

Awakenings

Guest, do you realize you are the worst advertisement for franchising at BMM?  And while doing that you antagonize not only Oldsword but most of us who wish to stay on topic.  You may not have strayed as yet but no doubt your intention is to with your following commentary where you focus on the man rather than the issue.

The subject here is mostly to warn prospective franchisees to be cautious and get educated and you would not like that.  One of the great frustrations through all the information available at BMM is that quality franchisors don’t seem to get that they have nothing to fear and in fact; they would better prosper when people make better decisions and sign into their better systems. 

Only the scams that you seemingly represent have a problem.  You come across as a brain-washed small time franchisor employee without the capacity to distinguish good from bad and therefore the franchisee responsibility must absolutely override everything else. Whatever system you represent it has a problem where your focus is on the power of the contract and the responsibility of the franchisees rather than the health of a developing system.  I would suggest you know little about your front line business; or care. 

You never answer real questions but I have one for you anyway.  What are the most common obligations for a good franchisor with a long term plan?  This is your big chance to share something concrete with prospective franchisees.

Guest, do you realize you are the worst advertisement for franchising at BMM?  No; It seems apparent your IQ is far too limited to have worked that out.

Mr. Ray actually

I believe that people can choose to follow a path of sober due diligence and have reasonable expectations, unfortunately most do not.

People can avoid bad or unsuitable franchise investments, but it takes effort and knowledge. If you do not possess the knowledge it can be purchased from able practitioners and many candidates are too shortsighted to make the investment.

What we mostly have here on BMM are people that think it's better to curse the darkness than light a candle. The audience on BMM is quick to accept the protestations and indictments from failed franchisees with little to no evidence and at the same time demand more government intervention and increased franchise regulation. Franchising can never be made safe by government, however franchise investors can change their behaviour in how they investigate and select franchise concepts.

Re: Actually Ray

Now that's good  ... thank you

Who ever you are Guest -

Who ever you are Guest - bottomline, in the end, you are trying to justify screwing over good people. You are wrong for ever doing this and all the people that do these things are wrong and they all should be held accountable. I would like to see then hung by their ####s. Jail is to good for them.

All the comments about how everyone should have known better at the beginning (ignore the fact that they are actively being tricked and lied to) is just a (mental way of alleviating yourself from ethical responsabilities.
It is continually preached here by certain people that derive revenue from that discovery part of the sale. They (the lawyers) want to feel that they alone have the magic pill and for gods sake never cure the disease.

(If you ask a snow plow salesmen if its gonna be a bad winter what do you think he's gonna say? Is he gonna tell you there is not going to be any snow?

I'd vote for increased franchise regulation in a split second. So would and increasing number of people. All who can see through the BS. Just to much evil intended white collar corruption lately, people are jsut sick of it.

Re: Who ever you are Guest

I am for people taking responsibility so they do not get screwed. I support Mr. Solomon's blog. Fraud of any kind is deplorable and can be avoided.

Lighting a candle

"What we mostly have here on BMM are people that think it's better to curse the darkness than light a candle." - Guest

How about it start with you, dear guest. Rather than cursing others, how about you lighting a candle?

Let me start off the lighting of the candle by asking this: What are the first things that a franchise buyer should look at in the disclosure documents to decide if the investment is right for them?

#2: Who out there has the best credentials in teaching buyers on what to look for and turns of the road to avoid? Should you go to a lawyer or a business consultant? Or both?

Re: Lighting a candle

Masahige,

Franchise searches do not begin with FDDs.

They begin with self-assessment of resources, experience and temperament. Once you assess the above you can look for channels of business (franchise or independent) that begin to meet your resource audit. You need to know about industries generally before you can evaluate franchises or independent businesses specifically. As you acquire information through research you can build an investment criteria model, for example if you want to be a restaurant owner you should pay to join the National Restaurant Assoc. and buy their "Restaurant Industry Operations Report" for $60.00 member $125.00 non-member.

I am going to stop right here and say my initial advice above is useless to the vast majority of people buying franchises because they are too lazy, too cheap and irrationally illogical to conduct anything that resembles due diligence and research. In fact many of these people spend more time selecting a new car than they do when investing in a franchise. So I ask you what can the government do to fix these problems with franchise investors?

re: guest

So I ask you what can the government do to fix these problems with franchise investors?

enforce their own laws. that way you can narrow thw gaps for rogue zors.

re: guest

So I ask you what can the government do to fix these problems with franchise investors?

enforce their own laws. that way you can narrow thw gaps for rogue zors.

Re: re: Guest

Isis - You should read more carefully before commenting

"So I ask you what can the government do to fix these problems with franchise investors?"

Franchise investors = the folks that are too lazy, too cheap and irrationally illogical to conduct anything that resembles due diligence and research.

I still stand by that statement

Franchise investors = the folks that are too lazy, too cheap and irrationally illogical to conduct anything that resembles due diligence and research

problem is that most people get dumped into that category whether they did basic to nil DD or killer DD. everyone has there own opinions as to what enough is DD.  Unfortunately many will dump people into the ignorant category before even learning exactly what the story is.

It is the easiet way for a francisor to lay blame solely on the fracnhisee and for the regualators can use it as an excuse to nit help/

I still stand by that statement

Franchise investors = the folks that are too lazy, too cheap and irrationally illogical to conduct anything that resembles due diligence and research

problem is that most people get dumped into that category whether they did basic to nil DD or killer DD. everyone has there own opinions as to what enough is DD.  Unfortunately many will dump people into the ignorant category before even learning exactly what the story is.

It is the easiet way for a francisor to lay blame solely on the fracnhisee and for the regualators can use it as an excuse to nit help/

Everyone's Guilty of Not Enough Due Diligence

"Franchise investors = the folks that are too lazy, too cheap and irrationally illogical to conduct anything that resembles due diligence and research" - Guest X?

That should include not just franchise buyers but also franchisors; namely, start-up franchisors. There are a lot of new franchisors who are too lazy, cheap and irrational to conduct anything that resembles due diligence and research in regard to franchising and the business that they are franchising.

These comments can be summed up with my example:

Hire a due diligence team on the front end (lawyer/business consultant, accountant) for $6k or so OR...

end uP losing $140k, face a $200k demand letter, and be prepared to find another $100k in legal fees on the back end like I did?

I am the one who got myself into this. I look back at what I signed and why I signed it and what I threw money at and my rationale I am convinced I was possessed by the demons of stupidity.

Yes I was frauded...but I LET IT HAPPEN.

6k sounds like dollar menu pricing in context.

You can weed out the bad franchisors from the good ones. Hire a due diligence expert.

As much as I could try, I will never know about franchising half of what Solomon forgot.

Re: These comments can be summed up with my example

Mr. Guest, please read the following quotes:

"sorting out truths from fictions in the information that a franchise seller is presenting to you"

"Most of what most franchisors say about their propositions is simply untrue"

"you might just be a predatory franchisor’s spy"

"When thieves give you references, the references are unreliable."

"C(r)ooked franchisors abound in the system as it now exists"

"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"

"the thousands of others who believed lies and signed unbelievably abusive agreements with crooks and predators."

These are quotes from the very man that you said "As much as I could try, I will never know about franchising half of what Solomon forgot" Guess what, you are right. He does know more so you may want to really analyze what he said.

My argument is simple. This is an industry rife with thieves, liars and scammers. It refuses to police itself and actually goes above and beyond to make sure no laws are enacted that will stop abusive practices. Even a well vetted system has the option to change the original document to make it more predatory.

WHY would anyone subject themselves to this industry? If even the experts in the industry claim that 70-80% of all systems are crooks and the leaders in the industry just laugh at the scamming (and actually help perpetuate it) why would anyone want to tie their families life savings to this? Mr. Solomon goes so far as to state unequivocally that you need to have an association that is capitalized well enough to go toe to toe with the franchisor if need be. Really? This is what one gets for investing tens of thousands of dollars and offering up their family's assets?

Buying into franchising the way it is currently established is like signing a contract with the devil (my words but the experts' belief). The franchisee must always look over their shoulder waiting to see how the franchisor is going to try to get their hands on the franchisees assets. If you don't believe me, see DD's for details.

Congress must act and shut down franchising!

It must be done now before one more undiligent franchise buyer signs an unprotected unbargained unfair uncertified ungauranteed unhealthy franchise contract.

We could add it the health care bill!

My friend owns 2 Paneras and is a millionaire

Just depends on the franchise you buy. Granted, he was already well off and as they say the rich get richer. I think you need to be in the millions in cash to buy Panera?

Someone else I know is making a 100k+ living with one of those bounce house gigs.

Vaguely generalizing that franchises are scams is stupid. Some provide really good cash flow - just depends on the investment.

Anti-Solomonites should stone the guest that speaks of success

in franchising for franchisees. It cannot be true! Stone him!

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Yes, Mr. Guess, your comments above that I am replying to make as much sense as the subject line on this note does to the actual story that I posted here.

A year ago I might have agreed - In fact I often spoke of Panera

as an example of a good franchise.

Now, however, I have seen three Paneras close to here close within a year.

The changes in market health can affect even the best model. The Paneras that are still in business here are all positioned cheek by chowl with heavy traffic magnet malls. It is the other Paneras that are closing up.

Buy while investment cheap or profits high?

Regarding Panera and others, is the best time to buy a franchise when the investment cost at its cheapest because of a bad economy and low profits, or when the market is rip roaring away and profits assured?

One size does not fit all. What we are learning about Panera is

that only the best locations have the staying power to make it through a slow economic period, even in a major market like Houston. The concept itself is not strong enough to outlive the vicissitudes of mediocre location choices.

Questions must be answered about the reasons why the price is low. Each situation is different, and each market is different. For example, you probably wouldn't want any franchise opportunity in a place like Detroit, even if the frachise fee were waived in total and the store was already built out for you and all you had to do was lease it on very attractive terms.

And that is for the best deals out there. Anything less that the best you wouldn't want in a bozo market - not even for free.

Re: Lighting a Candle

"You need to know about industries generally before you can evaluate franchises or independent businesses specifically." - Guest

Nicely put. The Nation's Restaurant Association has some good industry research. For the restaurant industry, Technomic, Inc. also offers well regarded surveys and reports that give insights into trends and problems.

But buyers aren't the only ones who should be using research reports.

Existing franchise owners need to be more plugged into these reports and journals to better understand the forces playing out in their industry and to keep their inner entrepreneur alive, fed and informed. Company reports and inside buzz only goes so far.

Frankly, I'm surprised that more franchisors and franchisee associations aren't providing such information to their members.

Summing up Lessons for New Franchise Investors

I have read and reread this article several times and am a bit confused. I have pulled out a number of quotes from here and from an article by Mr. Webster that Mr. Solomon directed us to earlier today (plus Mr. Solomon’s comment). My comments appear at the end:

1) 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.
2) 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.. . . 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.
3) 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.

4) . . .you will encounter squads of cheated franchisees. . . 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.

5) Now there is no legitimate excuse for signing bad franchise deals.

6) 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. . . No political solution has ever succeeded in eliminating crooks.

7) 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.

8) The reason you won’t get judicial or legislative relief is that it appears very clearly that you don’t. . .

9) 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. . .

From Michael Webster’s “While most franchise systems don't have a proven business method, franchisors typically berate the money losing franchisee as "not following the business model".”
10. For some major decisions, buying a house or car, if we are wrong we can sometimes sell and recover a large part of our investment.
11. While most franchise systems don't have a proven business method, franchisors typically berate the money losing franchisee as "not following the business model".
From Mr. Solomon again:
12. Sound familiar? You thought I made it all up, didn't you?
This aint fiction.
The psychodynamics of franchise due diligence is a tortuous trail of (d)elusional information that has to be parsed.
What you see/think you see, because of what you heard/thought you heard usually isn't so - especially in franchising.

Mr. Solomon, you made a great case that franchising is nothing more than a scamming method. Most lawyers, according to you, can’t figure it out (which means an individual has a snowball’s chance in hell of doing so) and it is impossible for anyone but a few true experts to determine where the bodies are buried (which, given the sheer numbers of franchisees you claim have been hurt this is the largest mass grave in human history). No one questions the stated statistic on this site – made by many of you – that 70-80% of franchise systems are frauds. Even Mr. Webster in #11 seems to agree. Why would anyone want to roll the dice on a franchise system knowing that they have better odds at a craps table then selecting a "good" one. Your entire article is based on the fact that most franchisors are scum, the IFA doesn’t care, and, in fact, franchisees should be spending most of their time fearing the next shoe to drop – be it in some unforeseen clause OR having the FDD rewritten on them after the signing in a way that changes the profitability of the system that they thought was originally good – DD’s anyone?

As a friend once told me, the FDD is written purposely so that no one can follow it to the letter. Ask a DD’s franchisee. If the franchisor wants to find you in default of the agreement they can. Now the franchisee has an option – fight, which will cost 6 figures for legal representation and, IF you win, you now get back ownership of a system that, in most cases, only offers a small return of income anyway. Hell, after 3-4 years you will at least have made back your attorney’s fee, right? Oh, that's right, at least before taxes. A plus for franchising.

As for getting the government involved, I have a question. If you have figured out how and what to look for in your “due diligence” then why can’t something be put in place legislatively to make sure all franchisors follow a system that makes the information more readily available? You know where to look, right? So, there is a “system” that can be used to make this more open.

But that won’t happen because: franchisors lobby Congress to have laws written (or be exempted from – arbitration anyone) to free them from liability and continue almost unfettered scamming that can only be determined by a handful of professionals. But franchisors and the IFA have the franchisees at heart, don’t they. Another plus for franchising.

As for securities laws, at least the fraudsters go to court and (hopefully) go to prison. In franchising, from what I read here, the laws are so feeble that franchisors are allowed to throw out “squads of cheated franchisees” that are in the “ranks of the thousands” with no repercussions. Bernie, as you so aptly brought up, however, is sitting in jail Mr. Solomon and has lost all of his belongings (yes, even his Mets jacket - which I am sure he gladly gave up).

As for Michael's comment regarding cars and houses (#11), while there should be no legal remedies when buying in a housing bubble, if the construction is defective or the original homeowner failed to provide important information there are laws to work with. And, yes, there is a lemon law for cars and consumer fraud laws that, again, seem to ignore franchising. Another plus for wanting to give franchisors access to your assets.

You’ve made an excellent argument for potential franchisees to run, not walk, away from franchising. You can go to the casino and get better odds given that 70-80% of franchises are crap and the other 20-30% still have failures on their rosters not to mention, again, the changes franchisors can make (after the fact) in the FDD’s that make life a nightmare.

Perhaps the Guest who spoke of “lighting a candle” was referring to “votive candles” lit at church following an offering. From what you have written here, Mr. Solomon, those potential franchisees better light a “hell” of a lot of them for protection.

While no one wants to join the “ranks of the thousands” it seems highly questionable that you, or anyone, can guarantee that a new franchisee will not invest in a scam if nothing else the gauntlet has now been thrown down by you and franchisors will want to test your skills. You state in # 5 “Now there is no legitimate excuse for signing bad franchise deals.” I guess you have just given your clients’ a “Get Out Of Jail Free” card with that one. Since there is no excuse, should any of your clients get involved in one there is now no one to blame but you – unless, of course, you require them to sign a General Release form for your services (you did say you have learned a lot from reading these documents – good for you).

Guest it's settled...Franchising should be avoided at all costs

Guest - Your imperceptable commentary is underwelmingly compelling. FDDs are most assuredly bound to confound the witless and while you don't mention franchise agreements I bet they may be a cause for concern as well.

Again best to avoid franchising entirely. Maybe we should outlaw its practice in the United States, well at least we should protect the feeble minded from themselves in some way?

G.G. Guestly

So it's clear

So...It's clear. There really is nothing in it for the litle guy. Franchisors will always be in charge, don't even bother?

WRONG! My clients don't get any get out of jail cards - They

don't go to jail in the first place.

That's the point. You don't get scammed going in,

You'll never get than from any government. And - compared to the cost of not doing it - it's cheap at twice the price.

If you look at most of the dissenters from my views in here, you will see that those are by and large people for whom it is already too late. They didn't get competent due diligence and got scammed. They want someone to tell them that what they didn't do simply can't be done. That would - if it were true - let them off their own emotional hook. But it isn't true. The truth is that you don't have to be scammed and fleeced.

Like so many of them, I have made a lot of mistakes in life. Fortunately none of them was investing in a bozo franchise. Life became a lot easier when I came to recognize that there was never any problem that I ever had that wsn't my own fault. Once you recognize your own fault in a bad situation, you may not be able to rectify it, but you can go on from there with your head in the right place. That saves you from beating your head against a wall for years blaming others and the government for what you yourself could have avoided if your head wasn't up your arse.

Getting on with your life requires a lot of emotional energy that you can't afford to waste in years of mourning past mistakes. Have your rant and then move n. A lot of folks in here just seem to want to be perpetually ranting about how everyone else if to blame for their past ignorant decisions. When/if they acquire the insight to enable them to shut up and move on with their lives, they may find the successes they missed the last time around. 

Having all these victims in here ranting every day is good for my business, but it isn't helping them. Why me, oh Lord? Now how does that help? Supposedly it worked for Job, but look at what he had to put himself through. And supposedly the reason Job got relief was that he got the Lord to admit that he was wrong to have messed with Job in the first place. You will never get anything like that in your own real life experience.

Being PC won't help anyone to acquire franchise investment insights. Many have done that number, and the carnage continues. My tough love approach gets me many detractors for my supposedly unsympathetic attitude about the suffering of the thousands of franchise victims. But franchising will start to clean up when the crop of suckers starts to dwindle - and not before.

I live in Texas where we have all sorts of wing nut right wing so called conservatives, so I hear a lot of wierd stuff. But yesterday I heard something said about Washington that could really apply to franchising. Some west Texas rancher to whom what happens outside of west Texas could not possibly have any impact, decided that what we need is for him to be in government. He is gonna run for Congress. His slogan fits franchising, even if it doesn't fit Washington. According to him, "We need more John Wayne and Jesus."

Soloman, you are so wrong about this.

"If you look at most of the dissenters from my views in here, you will see that those are by and large people for whom it is already too late. They didn't get competent due diligence and got scammed. They want someone to tell them that what they didn't do simply can't be done."

Such BS. and such a weak over generalization.

Even if DD can somehow be done. (it's stupidly difficult and expensive to do for what is specifically sold to people as "proven workable business system") No other product in history is as purposefuly deceptive as this.

Richard, when are you just going to face the fact that Franchising is insanely corrupt to the F-n bone, it needs to be massively changed. Your law office cant be the outpost with the magic pill. "To hell with everyone else they are all idiots anyway for not calling me".

Many of the people that stay connected to BMM (yes they likely were scammed) also want to see a profound change in franchising.

Why? because its Fn wrong! It's not about our own situation. It's about the next lamb to the slaughter. You're just way too self interested to understand that. (but thats typical lawyer types) me me me. Does it line my pocket.

I tell new prospects right away about the crap that my franchise does even if it hurts my resale value. Why because its Fn wrong.

Another saying, I think its from lovely Texas if it looks like Cow ShXt and smells like cow ShXt. Guess what it is?

Re: Soloman you are so wrong about this

Guest, my comments to Mr. Solomon were based on his own words. Why would anyone enter franchising knowing that the vast majority, if not all, are playing "Catch Me If You Can"? Even the leadership in the industry, the IFA, continually fights to prevent laws with teeth to enter the fray.

While Mr. Solomon may have the best interests of franchisees at heart (and if you view his website and read his articles I believe he truly wants to educate the public), he has established here the very reasons why not to enter franchising (except, maybe, as a franchisor): the system is adversarial and bent on subjegating the franchisee as opposed to developing a partnership.

Having to go to these great lengths to determine whether the system is a scam, knowing the vast majority are, hearing how the leading organization (IFA) has no interest in laws that protect an individual and his/her family from scams, understanding that your franchisor can change many of the terms of the contract even after everything is signed and knowing there is little to no recourse makes franchising a very stupid and foolish undertaking.

It appears that only the very expensive franchises, those that have established some credibility in the marketplace, are at best the ones to consider - and even then you'll have better luck flipping a coin.

So True,

Whoever you are, I agree with everytyhing you say. I appreciate Richard's efforts if he really wants to educate people. He needs to stop viewing franchisees as unwilling to investigate or spend money. I personally have done my share of both.

He does makes some good points along the way.

However, he really needs to get off his, high horse.

Better laws could make things better.
He makes many incorrect assumptions. Generalizations.

Richard is far more right than wrong about this.

Perhaps you are an exception to the general rule, but most pre-purchase franchisees I meet have already bought the franchise in their own mind--no matter how ill conceived the franchise is--and far more never hire an attorney to look at the offer in the first place.

Better laws will not be self-executing.  I'm sure every franchise attorney here meets people who have good cases under existing laws and no money to pursue those cases with.  Franchisees, in general, will run out of money before seeking help.  So whether it's unwillingness or inability to spend money, they're doa by the time we meet them a huge percentage of the time.

Re: Richard is far more right than wrong

Mr. Morrill, why is "killer due diligence" even necessary? As I wrote here from the beginning, Mr. Solomon and others have clearly stated that franchisors, by and large, are scammers. As you continually repeat the mantra of "due diligence", what should be repeated is "why does this industry make this necessary"? Lying to the public, according to Mr. Solomon and now you, is allowed in franchising - hence the due diligence requirement and the statements that 70-80% of systems are full of it.

So, what is the difference between real laws and the bullshXt that passes for franchise laws? Ask Mr. Toussie who is sitting in jail for supplying phony family income information on HUD loans to get his HUD clients loan approval. Speak to Mr. Madoff sitting in jail (awaiting trial) for scamming investors. How about Mr. Michael Milken of junk bond fame? Need I go on? These were CRIMINAL cases, sir. Prosecution was not dependent upon an (already broke) individual's net worth to bring the case to court.

It is unjustifiable to consider investing in an industry that purposely creates a system where creative means to find the truth are always necessary. AND, if you find out beforehand they are lying, there are no repercussions to the business. Nothing can be done. Only pray and hope that the next sap is capable of figuring it out before they buy into it.

Every lawyer here is, whether advertently or inadvertently stating that franchising is not only buyer beware but, after the purchase, you better have additional capital to protect your ass for when the franchisor either changes the game or tries to take over your site by finding some minor "default" with your business.

"Mr. Morrill, why is "killer

"Mr. Morrill, why is "killer due diligence" even necessary?"

In most cases it isn't necessary because most franchise offerings obviously make no economic sense to begin with.  KDD is for the remainder in my opinion.

"Every lawyer here is, whether advertently or inadvertently stating that franchising is not only buyer beware but, after the purchase, you better have additional capital to protect your ass for when the franchisor either changes the game or tries to take over your site by finding some minor "default" with your business."

I would put it differently.  I would say every franchisee should have a "stop loss" line that is a lot higher than $0--but most don't.  And every franchisee should have an exit plan before he enters into the deal.

I strongly believe Howard's view

Stop loss is what every zee in a dire situation should do.  If it means closing the doors three weeks after you open, you need to do it. 

Being prepared for the worst case scenario means having money put away for at least a year living expenses and legal fees.  What person would even consider signing on the dotted line, if they thought for a second they would end up in court.  Unfortunately ending up in court is the worst case scenario.  Therefore one needs to put that money away.  In many cases that would stop many from signing on the dotted line.   

Buying a franchise is NOT like buying a stock

Jorgensen wrote:

Stop loss is what every zee in a dire situation should do.  If it means
closing the doors three weeks after you open, you need to do it.

Morrill correctly notes that at some point you need to throw in the towel. However...if that point is 3 weeks after you open, then you should not have purchased the business in the first place (and I doubt Morrill was considering a 3-week scenario).

This is NOT stock investing, folks. All this CNBC-speak about "due diligence" and "stop loss" sounds real nice, but it perpetuates the dangerous myth that buying a business (franchised or otherwise) is like buying a really expensive stock.

Leaving aside liquidity issues, when you buy a stock (even on margin) you know the limits of your loss and the government (thru Reg T requirements) protects you from your own stupidity.

...well, unless you go "naked" and you have to be very wealthy to do that. Or Canadian.

Many people who sign a franchise agreement

and a lease will not see the gouging of the zor until they open the doors.  When I speak of stop loss I am talking about if the start up cost end up costing three times more than expected you need to act and close the doors.  You can call it stupidity but I call it smart.  I know of one zee who closed her doors four weeks after she opened.  She was able to project her numbers and see she was not going to make it due to lack of funds to do so.  I say she was brilliant . She stopped the loss and probably is better off for it. 

Paul of course people who have to close in a few weeks should of never done it.  Unfortunately when desperate zees see it, often it is too late.  They are totally screwed.  When the stories are consistant with more than one zee in the system you know it was a conn.