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Do You Have a Bozo Lawyer?

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When you finally figure out that you have been had, that you bought a bozo franchise and that you are going to be cheated even more by the scoundrels who sold you the deal, the first things that you will do will be the wrong things. It never fails.

People who won't spend money to obtain competent help on deal due diligence before they invest, who only want to spend a few hundred bucks to have some bozo lawyer "read the contract", usually - in fact almost always in the case of the newer franchises these days - wake up one morning realizing that they have been royally screwed.

Before continuing, I think I need to explain the term "bozo lawyer", as I know I will get a lot of angry feedback from certain circles in the legal profession if I don't explain it.

A bozo lawyer is a lawyer who wants so much to make a few hundred dollars doing something inadequately and incompetently, that a small fee will be accepted rather than honestly saying to the client that the scope of the project is beyond their ability and helping the client find a resource who knows what to do.

A bozo lawyer will take the small "read 'em the contract" fee rather than tell the client that the project requires business and financial and franchise, as well as legal due diligence and experience with how representations are skewed in the franchise industry.

Any lawyer who will "read you the contract" and not do the other things I have suggested in the Franchise Fraud Symposium Tutorial articles is a bozo lawyer. And, as I have said in those Tutorials, even that is sometimes not enough.

Fraud is sometimes blatant and often subtle. If you don't have the training or experience to do the job right, you have a fiduciary duty to the client to direct them elsewhere and help them get what is needed to do the job competently.

If you don't do this you are a bozo lawyer and deserve to be sued for malpractice.

It breaks my heart when I realize that almost everyone who comes to me after they have already been cheated hired a lawyer before they bought the franchise who only told them that the franchise contract is very one sided and that usually there is no opportunity to negotiate individual terms, and maybe also that it looks like a good deal if all the claims are true.

I just want to scream that there are not militant seminars to teach so-called business lawyers about how to do franchise purchase due diligence in a hot zone of intense franchise investment fraud.

The due diligence on a new franchise has to be as intense, if not more so, than the due diligence on the acquisition of an up and operating business. There is less actual information available on the new franchise proposition, because there is no actual operating history for the store that the client will operate.

This makes it easier to fabricate the appearance of financially positive prospects. Ferreting out that scenario's warts calls for more intense cynicism.

Because the work is more complex and costs substantially more to do it properly, prospective clients are often reluctant to spring for The Full Monty. The client is presold and, at the moment of your first meeting, the job will be to disabuse him of the enthusiasm for the proposal.

But if, after you have told him the risks of skullduggery, there is still unwillingness to pay for doing the job right, taking the smaller version of counseling is simply an invitation to disaster.

If the client won't pay for doing the job right, the only intelligent course is to show him the door. Oh, you can write a fee agreement that limits what you will do for the small fee, but if you have ever heard that kind of fee agreement dealt with in trial of a malpractice case, you probably will never do it that way.

You're not a professional if you lack the ethical substance to tell a prospective client that you can't help them. Usually those resources have to be multi disciplined.

They have to be capable of spotting fraud, spotting "tricks" always used by franchise sales people, knowing where to look for the "stuff" that isn't obvious on the surface, parsing the financial substance of how the proposed business relationship will really work, and differentiating between what is communicated in the sales and marketing process and how - if at all - that is reflected in the franchise agreement and accompanying disclosure documents.

You have to be capable of graphic portrayals of the defects that the client has no idea are hidden within the documents provided by the franchisor. The client believes that the people that are on the opposite side of the proposed transaction are really trying to help out rather than fleece him.

If the prospective client doesn't want to pay for that level of assistance, the only smart thing to do is to decline the retention and let the victim go take his lumps. That way the victim won't have you to blame/sue when the worst happens after the sale is closed.

Filled with anger, loathing and hatred, these victimized franchisees initiate a campaign of name calling, send emails and letters and make telephone calls whining about something that they thought they had a right to that is not being performed by your franchisor, or about something the franchisor is doing that they said they would never do in the sales pitch - but not in the franchise agreement itself.

They also get on the phone and discuss it angrily with their fellow franchisees, some of whom will - of course - report to the franchisor that you are calling around bad mouthing the organization, hoping that by ratting you out they can suck up and maybe avoid the same treatment.

Then the victim will spend the next two years whining and complaining, and usually making no money or far less than he was led to believe - almost no one makes the projections - even if they make the sales they don't make the profit numbers.

All this time the victim will be miserable. His net worth will decrease. His ability to handle financial obligations will get steadily worse.

And the statute of limitations will be running toward the extinction of any fraud and misrepresentation claims that he may have and does not assert in a proper forum.

Since he wouldn't spend money to get competent help with the due diligence before he bought the franchise, he resists spending money to get competent assistance on what to do about the situation now.

If he is really stupid, he will wait until his financial condition is so bad that he can't afford competent help anyway.

One thing is certain. If the franchise he bought is a fraud, one of the franchisor's goals is that when he figures out what happened to him, he will be too poor to do anything about it. He may already be beyond help. If he delays further, his chances of being beyond help increase rapidly and dramatically.

That's what most folks do in this situation.

There are two rational solutions to having just learnt that you've been had. And the earlier on that you chose one and get on with its execution, the better off you will be. Life is tough. You have to be tough or it will devour you.

The ability to sue the lawyer who failed to provide competent guidance in counseling you about doing the deal in the first place is probably subject to a two year statute of limitations.

The statute of limitations on any franchise fraud claim is probably going to run out in three or at the most four years from the date you signed the franchise agreement. There may be an even shorter contract limitations period.

YOU CAN NEVER ASSUME THAT STATUTES OF LIMITATIONS GIVE YOU THE AMOUNT OF TIME THAT I HAVE JUST SUGGESTED. YOU HAVE TO CHECK THE SPECIFIC STATE STATUTE FOR YOUR PARTICULAR SITUATION IN EVERY INSTANCE. YOU MAY NOT HAVE AS MUCH TIME IN YOUR SITUATION FOR ANY NUMBER OF REASONS.

You may stupidly have given away your right to jury trial and your right to collect most categories of damages when you singed the franchise agreement, and damn few courts are going to be willing to give those rights back to you under any kind of unconscionability rationale.

You need to get yourself into the hands of a competent business fraud trial lawyer as soon as you believe you have been cheated. You need also to avoid any communication whatsoever about your situation until you and your new lawyer have sorted out what you options are and in what priority you are going to exercise them.

Don't send the angry emails and letters. Don't make the angry phone calls. Don't talk about the situation with other franchisees. Shut up until you have a battle plan. Everything you say or write before you get the battle plan sorted out is more likely to hurt your real interests than help.

One of the first and most important options you will have is simply to get out of the business by putting your franchised business up for sale. It probably has some market value. If you think you would rather just sell the business than spend money fighting your franchisor and/or your original lawyer, you will need not to have created a difficult situation by bad mouthing anyone or anything.

You will have to deal within yourself with the question of how you will feel about dumping the deal you wish you had never bought onto someone else. That's your call, but the option is there and you need to consider it.

You may well not realize total recovery of your investment. What you can get has to be measured against what you would have to spend and to risk in order to go to war over having been cheated.

Contingent fee lawyers only get paid if they win something, so if you insist on a contingent fee arrangement for your new lawyer, expect a recommendation to fight.

Solutions that don't produce cash recoveries don't provide funds to pay contingent fees. If the contingent fee agreement states that it will apply to any sums you receive, expect the lawyer to claim a percentage of the price you get from selling your business.

Business brokers are cheaper in percentage of sales price than anything you will find in a contingent fee agreement. Contingent fee agreements frequently take 30 - 50 % of the recovery from any and all sources. Do you want to go that way? Probably not. If you want competent legal assistance and don't want to pay that kind of fee, you have to pay the lawyer by the hour and not on a contingency. If you pay by the hour you will also get more attention paid to alternatives that do not involve having to fight for a litigated recovery. There is no free lunch!

Do not expect that your fellow franchisees are going to come to your aid. They almost certainly will not. They will in all likelihood gossip amongst themselves about what you tell them.

Promises of confidentiality are totally useless. Some of these folks will tell the franchisor everything that is said in hopes of getting some favorable treatment for themselves.

Even if what happened to you also happened to them, do not expect assistance. They would rather lie in the weeds and see what you get on your own than stand with you and assist in the attainment of a better result for everyone. That's how the world works and how it has always worked.

See the Tutorial entitled "WHO DO I NEED? WHEN DO I NEED HIM? GETTING THE RIGHT LAWYER AT THE RIGHT TIME" in the roster of Specialized Tutorials on my web site.

Ask the tough questions of the lawyer you are thinking of hiring for due diligence work. How many of these proposed transactions have you vetted? Have you followed up on any of them regarding how well or poorly they did? What were the main problems that contributed to the difficulties of those franchisees who had difficulties? Can you identify the point at which the due diligence work may require the participation of a financial advisor in addition to a legal advisor? If so, do you have someone who is available to assist with that work, and what should I expect that to cost?

And don't forget that a reality mode appreciation of the terms of the franchise agreement is also part of the mix. You really do have to understand what the contract says and, more importantly, how that works when it comes into play and why it is configured the way it is.

If you the lawyer can't appreciate the intertwining of Integration and Acknowledgement clauses, and the intertwining of covenants not to compete and liquidated damages clauses, and you are unable to portray to the prospective client how those work together and why they are in the contract, you aren't ready for this work at any level.

If you lack sensitivity for the differences between the sales and marketing brochures and the substance of the Duties Of The Franchisor provisions of the franchise contract, and how to go about accounting for them, plus the oral statements made by franchisor representatives, you may be a RedNeck, as Jeff Foxworthy says, but you aren't ready for prime time when it comes to counseling about franchise purchases.

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About this Entry

This page contains a single entry by Richard Solomon published on April 28, 2013 6:45 PM.

When Are You Exempt from the FTC Franchise Rule? was the previous entry in this blog.

Why Win-Win Negotiators Lose in China is the next entry in this blog.

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