The Moron's View of Franchise Investment Risk, Fleecing the Sheep
Year in and year out, people who understand almost nothing about small business investment risk and how to identify and assess it sign long term draconian franchise agreements, putting everything they have or will have on the line in impossible propositions.
One of their many miscalculations is an assumption that government regulations at federal and state levels are in place to protect them from being defrauded and to provide relief for them when/if they find they are in way over their heads and have been had.
Eventually they come to realize that there is no self executing relief from their predicament and that the way out – even without recovering the losses – costs a fortune; requires releasing all claims against the people who robbed them; agreement that they will not continue in the business under any other name as an independent; agreement that they will never say anything bad about those who screwed them (non disparagement clauses); and agreement that everything about the entire situation, start to finish will never be disclosed or discussed by them (confidentiality clauses).
The alternative is to hire a lawyer – which they no longer are able to afford – to seek redress. If they do have enough money for a lawyer, they often discover that (1) they waited too long to assert their claims; (2) the claimed misrepresentations were of the prospects for future financial performance and fraud is limited to misrepresentations about presently existing facts – not future predictions – and – very importantly, the misrepresentations about future financial performance ere not actually made in the FDD, but in sales and marketing materials and presentations on discovery day; (3) that they hired a cheap ass lawyer who failed to see that in their franchise agreements they were agreeing that they were never told the things they later claim to have been told that were false, and that they also agreed that if they had been told any porkies they did not rely on them in making their investment decision.
Frequently they signed agreements containing arbitration clauses, losing their potential rights to jury trial and agreeing that their “case” will be heard by a lawyer as arbitrator and that they are not allowed to ask the arbitrator if his practice or business includes doing business with franchisors whom the arbitrator expects to continue serve and would never find against in any dispute. You could ask the AAA to pose such bias clearing questions to arbitrator candidates under its Commercial Rule 16, but the AAA won’t do it. Your lawyer doesn’t even know in most instances to ask anyway as the refusal may give you an avenue of attack on an adverse award under the Federal Arbitration Act – which, by the way, does not provide as a basis to attack an arbitral award that the arbitrator failed to follow applicable law and even that the arbitrator’s rulings are contrary to controlling law/manifest disregard of applicable law. Manifest disregard is not even listed as grounds for vacating an award in the Federal Arbitration Act.
If these absurd, arrogant people had any snap at all, they would have accepted that in almost every instance none of them had ever evaluated a small business ownership investment opportunity, and therefore had no idea whatsoever how to go about sorting out the risks. They ridiculously believe that their “business plan” is a serious document and not some hoax cooked up to get a business start up loan approved. They would – before, not after subjecting themselves and their families to ruinous losses - have sought help from people who vet not only the legalities of franchise propositions, but also the business risks of franchise investing. They ignorantly assume that any business lawyer will do that for only a small fee, but in reality the small fee lawyer vets only the contract and disclosures from a compliance with rules perspective and won’t go near the business risks. They don’t have malpractice coverage for business risk analysis and wouldn’t know how to do that if they had to. When the bozo client asks the lawyer “Hey, do you think this is a good deal?” the response they are taught to make is “Well, it could be if what they told you is correct.”
But it is the business prospects quality of the transaction that puts you in the poor house, not whether someone said what a rule required him to say. DUH!!! Leaving that incompetently vetted is what kills you. Occasionally some of them may call a lawyer who does both the business and the legal analysis in a pre investment due diligence consultation, but when they find out that this level of assistance costs several thousand dollars while the bozo lawyer consult costs less than $ 1,000, they usually opt for the cheap seat.
They also listen to such absurdities as claims that lawyers should only give legal advice and stay out of giving business advice. Lawyers with many years of industry specific experience acquire great insights into the business issues, and their clients who recognize the value of that do not resent paying for it. Of course, it is also true that many who oppose lawyers vetting the business risks of franchise investment don’t want people to see a light shined brightly on defects that they never would have spotted without expert help. They are very vocal against lawyers with a lot of business experience dispensing those insights to potential franchise investors. Those insights have great value and the lawyers who do have that level of experience and insight charge for it accordingly. But if you resent that, you are free to put yourself and your family at risk any way you like without the higher level of assistance.
Later, when they realize that for a few thousand dollars they could have avoided losing everything they have in the world, they refuse to accept the responsibility for their stupidity and blame the government for not providing the protection they think they deserve. Some of them even go on the Internet and criticize the lawyers who charge the bigger fees for the complete pre investment work.
They demand to know why it is that franchisors can comply with what is essentially a consumer protection rule and rob hundreds of people blind with no fear of prosecution. They demand that the government provide them the protection that is provided for those who robbed them, and they don’t understand why it is that there is no equality before the law in small business investment.
The IFA has a political action committee (FranPac) that spends millions on lobbyists and spreads money and favors around legislators and enforcement people so that what appears to be a solid and effective prohibition against franchise fraud and abuse is in reality just theater, utterly transparent in its impotence. That costs money. The head franchise guy at the Federal Trade Commission used to work for the IFA and for a large franchisor law firm and expects to be welcomed back there when his stint in “government service” is done. When he is gone someone similar will replace him. If not such a person, then some academic who is so mired in theory and policy that nothing ever gets done. And in the end, if he wanted to do anything, he has no adequate enforcement resources to do it. Occasionally the FTC will act against some small fry crooked franchisor that lacks money to fight back and just rolls over. It never goes after anyone who can afford good legal representation.
Not that long ago – at least in my frame of reference – Congressman LaFalce (perfect name for this story) convened hearings looking at something called the Small Business Franchise Act, a numbers trick/charade in which the central plot was to bring good faith and fair dealing to franchising. Since franchisees failed to pony up appropriate levels of financial support and the IFA ponied it up in substantial quantities, nothing happened. It was a case history example of franchisee failure to understand government and how to participate constructively in government theater to protect franchisee interests.
People who make fortunes in apparently – but not actually – regulated business activity pay for these charades. In the first quarter of 2010 more than $ 900 million was spent on lobbying the federal government. At this rate, 2010 will end up as a banner year with $ 3.5 Billion spent on lobbying the feds. www.opensecrets.org .
One would think that franchisees would organize and build their own political and legal war chest to go out and buy the kind of protection that franchisors get. They won’t do that. They demand for free what the franchisor community has paid many millions to get. You can see them ranting and cursing on www.BlueMauMau.org and other franchise blog sites almost every week. There is an army of screwees ranting and whining about how badly they were mistreated and why doesn’t the government do something about it because that would be the right thing to do.
Government rarely does anything because it is the right thing to do. What you were taught in high school civics class and in your make believe political science courses in college is mostly fantasy. Government runs on money, not on morality. If you want something from the government you buy it, just like everything else in this world.
It isn’t your fault that governments work the way they do, and franchising isn’t the only area in which everyone thinks there is effective control when in truth there is only theater. The oil well disaster in the Gulf of Mexico is another perfect example of the appearance of effective controls under government agencies charged with assuring competent back up systems in drilling for oil and gas in that area. During the Bush administration, despite many warnings, the enforcement staff of the SEC was downloading porn on their government office computers while the sub prime securitized mortgage disaster, the Bernie Madoff disaster and the Stanford Financial Services disaster unfolded. And the list is much longer than this. Things aint what they seem.
But if you invest in a high risk activity without availing yourself of competent protective resources, that is your fault and that is your problem.
Since it is highly unlikely that franchisees will ever get together to buy themselves some government, their only practical resort is to buy really competent pre investment due diligence that vets the deal as well as the legalities. That is really the only alternative. But you are, of course, free to roll the dice with everything you have in this world and see what number comes up. Good luck.