Recently by Richard Solomon

Whatever the nature of any agreement, it is a device to obtain expected value. The parties have usually anticipated the ranges of that value over the life of the agreement.

These are goals.

They are not achieved realities.

Is Someone At Fault?

They sometimes don't work out the way you intended and sometimes there is an element of "fault" associated with its not reaching fruition. What usually happens then? In modern America the first reactions include blaming others (often without knowledge of the true entire situation); self justification (also known as covering one's ass); and reactions in furtherance of those first impulses.

Of course it is upsetting. Being upset is a symptom here, not the problem itself. Upset just comes with this territory.

Usually before calling in the lawyers there is some repositioning, gamesmanship so that when the lawyers arrive they are presented with what is hoped/believed will be the basis to enable them to obtain vindication of your interests through enforcement of terms of the agreement.

Should You Make a Demand?

The emphasis now shifts from sorting out the relationship's remaining useful potential to redressing grievances. The launching missile for this is the "demand" letter, essentially a letter insisted upon by your lawyers putting the other side on notice that you claim a breach by them that caused injury to you resulting in damages.

The other side, aware of the rift, sets roughly the same process in motion for the same motivation. The rationale, according to most lawyers, is that without this initial accusatory letter you risk waiving some important right. Now both sides are adversaries. Wasn't that quick and easy now?

It was quick and easy and most of the time about the worst mistake that you could have made in terms of your ever realizing anything worthwhile out of this situation. You can preserve your rights without this approach.

A Different Approach

Another approach is more positively calculated to produce less injury and damage; a shorter path to amicable resolution of everything present; preserve the most that can be preserved out of this bad situation; and save enforcement costs that today often run into hundreds of thousands and even millions of dollars.

If you want to salvage the most from a deal gone bad, in the shortest time, at the lowest cost, you owe it to yourself to consider the other approach as the first thing you do, not as some afterthought alternative when the well has already been poisoned by following bad legal advice. The legal advice was technically correct but not the best advice and rather immature in almost every instance.

With the better approach you have preserved all your rights and can always go back to warfare if the other side fails to see the potential and reciprocate in kind. The odds are that they will reciprocate, especially if you have not already followed your lawyers into confrontation in which only they end up winners most of the time.

There are usually forces working on you that want to propel you into conflict. They are normal human forces and instincts, but they have to be resisted in favor of a more rational parsing of the values as they now are rather than what you hoped they might be when you entered into the agreement.

Consider, for example, that while the deal may well have been thought out to the point of very high positive probabilities, all deals include risks, many of which are not controllable. No deal entry stage valuations are solid. They are theoretical.

In the best mode you would often have come out with substantially less than expected. Market conditions change.

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Globalization expanded the ranges and sources of risks far beyond what they were ten years ago. If you applied formulae that were effective ten years ago to the entry stage evaluation of this deal, and did not adjust for the enhanced risks, the valuations were never realistic in the first instance.

Don't go immediately to war over expectations! Since the value of expectations is now changed due to the pending break up there is now an element of your doing little more than chasing after sunk costs. Chasing sunk costs is usually considered to be a terrible decision. Reassessment of valuations associated with the deal at the time of its impending collapse ought to provide you with serious attitude revision concerning how aggressively you want to pursue vindication of interests that in retrospect may not have been what you thought and hoped. The present tense value of the deal is now far less, and far less should be expended in cash and other resources trying to resurrect those expectations.

Find lawyers who can live outside contract language and "rights and wrongs". While contract language is very important, how you use it when trouble appears can be more important. Call it finesse if you will, but it usually provides much better, swifter, less expensive resolution.

I believe, based upon 50 years in formal dispute resolution practice, that the way businesses usually go about dealing with major problems is wasteful and unnecessary. I have tried the approach of which I speak in this article in several instances in the past few years and it resulted in extremely satisfied clients every time.

It won't always work. Some situations are inherently more difficult to work in due to perceived leverage advantages and ego issues. Those can sometimes be turned around and sometimes not. But with rights reserved in the interim this value preservation approach to dispute resolution will always be worth trying.

As always, you can call me, RIchard Solomon, at 281-584-0519.

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Are You a Bad Franchisor?

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The best evidence that franchisors are really human beings is that they do the same things that any normal person does when confronted with a panic-inducing situation.

The first response -- which hopefully, but not always, occurs in private -- is just about always to observe the eleventh guard order, 'When in danger or in doubt, run in circles, scream and shout.' Control during those first moments of spontaneous potentiality is a priceless attribute. 'If you can keep your head when all about you are losing theirs' (Kipling) should be on a plaque somewhere conspicuous in the executive suite of your mind.

There are several almost universally practiced actions that are always mistakes and that should never happen.

There are mistakes because they tend to make the achievement of a positive result more difficult to attain.

There are mistakes because they are always obvious emotional statements to which little or no competent thought has been given.

There are always mistakes for the additional reason that they are either totally or in important part, quite untrue. They are untrue because of what is affirmatively stated that is false and because of what is omitted that is true but that may not make your company seem perfect.

There are mistakes because the ploy is so overused by so many people who are really scoundrels, that when you use the same approach, you may seem like a scoundrel also.

Do you want that? Of course not. Can you avoid that? Certainly. Here's how.

In that all companies are simply groups of quite fallible, normal, humans, mistakes happen. Some of the mistakes are of little consequence; some are rather huge; some are the product of over reaching and taking unfair advantage; some are stupid and some are intentional. The important fact is that mistakes, small and large, few and many, will occur.

Those who accuse your company, and sometimes you personally, of wrongdoing are sometimes wrong and sometimes right and sometimes somewhere in between, part right and part wrong. The accusations may be made in good faith, or in bad faith, or may be the product of misunderstanding. At the moment you first hear of an accusation of wrongdoing, you really are not certain of all the facts that may relate to it.

It is simply the worst possible moment to make any response about the merit or lack of merit of the accusations. But, at this precise moment, such statements are usually made.

What should be said in response to the first information that accusations have been made against you or your company is that you are just now hearing about it and have not had an opportunity to investigate the matter fully -- and that when you have made a diligent inquiry you may have a statement to make.

That is such a responsible thing to say that one wonders why people don't say that. Instead they say stupid things like 'That is totally false and we will be shown to have been correct.' -- or some such nonsense. Sometimes -- quite often -- the statement is even worse than that, for it may include a statement that the accusations are frivolously made. Even stupider!

It is important that your company have a protocol that everyone is made very aware of requiring any contact concerning negative information be passed to a designated person without comment to the inquiring party. I ll pass this information along to the appropriate person -- that is the only response to be made. The answer to the question 'Who is the appropriate person?' is always 'No comment!' It is also important that everyone knows that public statements that are not specifically authorized are considered a firing offense. People find it hard to resist being 'interviewed'. They have to be frightened for their employment in order to shut them up. Do it.

Next, the company should call together the most involved person(s) and their legal counsel, gather all files that may relate to the dispute or complaint, promptly evaluate the information, including interviews of everyone who may have been involved, and make a decision about how to respond properly. A proper response may not be a total disclosure of the whole truth, but it will not include statements that are untrue in and of themselves. If you have to lie, you need to rethink! That is a bad mistake. No matter what your PR person or your lawyer or anyone else may say, you need to make only responsible statements that instill confidence in your obvious good faith. People expect you sometimes to be wrong. You don t have to say that you screwed up, but do not insist in this early phase upon your rectitude.

Now, if you are dealing in a forthright manner with the issues presented by the accusations, you will not go to the mat in a losing fight. You settle. You adjust. You correct the mistake as best you can. Losing a trial or arbitration does not enhance your stature. An appeal is most likely to result in affirmation of the trial result, so you would only be reinforcing a negative consequence by insisting that facts are found in your favor when the true facts are really not in your favor.

People incorrectly believe that lawyers, if they are good, can manufacture or change facts. That is practically never true. Sometimes that happens, but the odds are so heavily against it that only fools think they can pay a lawyer and get a result to which they are not entitled.

Sometimes your opponent is represented by a moron and you win by default -- but usually that is also not the case. You should assume in your internal deliberations that you will be dealing with competent opposition.

In fact you should hope you are dealing with competent opposition. A competent opponent will understand when a reasonable settlement is being offered. A moron may not. If you have not called your opponent a scoundrel and his lawyer a shyster who brings frivolous lawsuits, a reasonable settlement may be obtainable and serious mistakes corrected without excessive difficulty and expense. A reasonable result is the best result. Insisting upon total vindication is usually a very bad decision, as no one is perfect and in most instances your opponent may be at least partially justified in taking the position he took. Sometimes, even though you were right in what you did, some dolt in your company mishandled the people involved and a conflict resulted that should never have happened. Such ineptitude should be recognized for what it is and dealt with appropriately.

If he gets away with this everyone will do it is sometimes not a proper rationale for a decision to make a fight of it. Maybe, even if your contract says the opposite, someone could be deserving of an exemption if you screwed up. Owning up to a screw up and making amends to the injured people does not usually cause your whole system to fall apart.

Enforcement of covenants not to compete is the most frequent situation in which stupid decisions are made to fight when the real problem is that your company created the problem and should be dealing with it in a more appropriate manner. Handling such instances with grace instead of bombast will do you far more good than fighting. Your long-term credibility as a fair organization that handles its affairs in an equitable manner may be worth more to you than insisting upon your rights in an unworthy situation.

This approach to what not to do and to what you should do when bad things happen will be the best approach, no matter what the right and wrong of the situation turn out to be. You lose nothing by appearing to be an organization that refrains from making irresponsible statements and taking irresponsible positions. If you really are respectable, then you might as well appear to be respectable. And if you are not, well, let's not go there.

As always, you can call me, RIchard Solomon, at 281-584-0519.

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The Begging Franchise

I think of franchising as potentially useful for everything on earth that involves either commerce or religion. All religious organizations are constructed on the franchise model, with set operating rules and payments upstream by those downstream. Every religion also claims to be unique just as every franchise, good or bad, claims to have a unique selling proposition.

Like religions, commercial franchising requires its own flag. Flag saluters are called upon to subscribe to the "code" of the concept. They face condemnation should they defect. (There is a franchising hell, but for some it begins before you leave the system. Think of Quiznos and Cold Stone Creameries to mention a few.)

Here in Houston, I believe I have identified a new form of franchising directed to the homeless, destitute, drug enslaved, just out of jail/prison, or high school dropout. I noticed it slowly, over time. Its seasonality is not that of spring, summer, fall or winter, but rather day of the week and hours of the day. When traffic density is high, the franchisee at a traffic light controlled intersection has -for a moment- a captive audience of people in cars and trucks waiting for the light to change.

For that moment, the homeless, destitute, and dropouts are transformed into the begging or panhandling franchisees.

The Somali Pirates

Every Saturday afternoon around four o'clock, for instance, at the intersection of the Beltway and Highway 288, there is a small group (always the same folks) who I call "The Somali Pirates" who aggressively operate a panhandling enterprise targeting folks returning from the beach. This is a multi-lane divided highway intersection and they assign about twenty people -all very threatening- to go up and down the line at every red light accosting drivers and passengers with various messages about why they ought to "contribute" to the pirates. Sometimes they are selling some crap or other but usually they are just "begging".

The same market exists at every urban freeway exit onto a main street, because the traffic is heavier there and each change of traffic light provides a new dozen or so cars in more than one lane, stopped waiting for the next light change. To a similar degree the same venue opportunity is presented on any busy street at any traffic controlled intersection.

The franchisees, with custom but homemade looking signs, go up and down these lines of cars soliciting, sometimes with squeegees washing windshields whether or not solicited by the driver to do so and holding out a hand or bucket or basket into which the driver is asked/intimidated to make a cash deposit/contribution.

On more than one occasion, I have noticed that these small groups of beggar franchisees came together in a common vehicle and that they have several signs with different messages. A local marketing co-op, if you will.

These range from solicitations to finance school band or team trips, church projects like choir competitions in other cities, to claims that the beggar franchisee is homeless and jobless, a disabled military service veteran, just lost his family in some catastrophe, is hungry or needs money for medical attention of some sort.

There is an endless array of "Can you please help me" signage, sometimes revealed by some careless beggar franchisee who failed to remember to put the spare signs away out of sight of passing drivers.

Sometimes the "pitch" is flavored by its being done by a suggestively clad girl with the look of someone that your average man would feel like he might like to help/save/"adopt" (if you catch my meaning). These are more likely to be seen at male dense venues like athletic events just after the game is over and everyone is coming out of the parking lots, again traffic light controlled so as to provide that momentary refreshed inventory of about a dozen or so stopped cars. The signs say different things slanted to pathetic situations in which a young woman might find herself and be in need of a "hero" to help bail her out.

Cripples make excellent beggar franchisees, but they do have to be sufficiently mobile to enable them to get up and down each row of momentarily stopped cars with their signs claiming to be disabled veterans unable to find work and homeless as well as otherwise in need of assistance - the list of "reasons why you should help me" seems endless. Drivers face the dilemma of asking themselves whether this person really is a homeless disabled veteran to whom some help would be appropriate or just another bum with a sign.

The Real Jobs People Do

I live in a thriving big city where no matter what the labor statistics might say no one is really jobless. The grey market here provides more than enough work for those not on some corporate payroll. Lawns get tended. Curbs in front of homes get street numbers painted on them. Cars get detailed in vacant gas station or similar empty commercial locations. Vacated buildings get cleaned out for another tenant. Rent a cop security guards pretend to protect small businesses from anything that isn't dangerous in the first place. Chipped windshields get patched. Vehicles containing all sorts of contraband get driven from here to there. People who thought it wasn't cool to do homework and stay in high school stand in medians of busy streets holding signs proclaiming that you should patronize such and such store located in the strip center right there where the sign holder is standing.

All this is cash fueled with no record keeping and no taxes or other ancillary payments or reports made.

The signs held by the drop outs adverting gold buyer and seller jewelry shops are the funniest. They proclaim that this particular shylock will pay you more for your gold than the filthy shylock just down the street, or that this schmuck will give you a big discount if you buy gold from him. The funniest is the one where you not only get discounted gold but also some free silver if you buy from the adverted establishment. Meanwhile the sign holding dummy is roasting his bloody ass off in the heat of the street, usually drinking some sugar drink and eating something sweet like a Twinkie, Ho Ho or Ding Dong.

There is also a major industry in petty crime just below the level at which enforcement resources might be brought into play. Petty crime in Texas is defined as crime of insufficient seriousness to make the evening local news.

Panhandling Franchises and its Enforcement -Buttercup

The panhandling business, however, in a city like Houston, is well organized, and each intersection where the prospects of favorable demographics, as I have explained, is a micro business locale. Each locale has value expressible as a function of the panhandling revenue obtainable.

This has occurred to the more entrepreneurial amongst the beggars. Why stand in the hot sun for hours when they can take control of worthwhile intersections through threat and force and "license" others to do the begging and pay them the vigorish/royalties attributable to that cash flow?

The most successful of the street intersection franchisors is a person who goes by the name of Buttercup.

I asked around about Buttercup and actually was able to arrange to meet and interview him at a local dive where he hangs out while he enjoyed eats and drinks on my tab, eating slowly but drinking more aggressively as we visited. Buttercup is an ex teamsters union organizer from Detroit with hands that have come into violent contact with many things and many people. He has the look of someone who has left more than several people dying from assault in some cold wet dark alley and his eyes are dead. His speech is slurred but understandable as he goes from communicative grunt to communicative grunt, the real meaning being conveyed by his face as well as by the inflection of each grunt and hand gestures.

He certainly carries weapons of various sorts, but a knife and a gun are the most obvious. He has no concealed carry permit, nor for that matter any license or permit of any kind.

The government may not even know he exists, although I suspect the police know about him and leave him alone for any of various reasons. One does not ask such a person where he lives or how his family might be, or any other personal question that a paranoiac might feel is intrusive.

Payment is by the day and in advance in cash. The price is whatever Buttercup says it is. I know that the price has not been worked out on any break even or other formula. You can decline but you can't argue, complain, whine or criticize.

You get the "right" to pan handle at that intersection on that day until midnight. You buy a full day. You can buy one corner or up to all four corners of the intersection. If someone else comes along and tries to pan handle in your intersection during your tenure, he or she will be instructed by you to leave on pain of serious injury or worse. Few fail to get the message as it is well known throughout the potential pan handler community how this business works and that if Buttercup needs to be summoned to deal with you your Medicaid coverage will probably not see you all the way through to useful recovery.

But, I suspect that Buttercup probably has another identity that is well financed by his franchise operations. He has money "out on the street" as Tony Soprano would say. The loan shark business fits right in with everything else about Buttercup. Between the franchise business and the loan sharking operations, I have a feeling that Buttercup is rather comfortable by just about any standard. However, when he is seen driving it is in a car that looks as though it probably would not make it to the next corner. God only knows how many aliases he has. I am rather certain that he is better off than most lawyers.

Where does Buttercup fit in the world of franchising? I strongly believe that his franchisees attain a higher return on invested capital than those of most franchise companies in America today. Their executives may dress and talk in a more sophisticated manner but the contracts they use are the high tone legal equivalent of the Buttercup approach to system governance.

In fact, Buttercup probably offers gentler terms because you don't have to wake up the next morning and go back to work as a Buttercup franchisee if you don't like it.

Before you look down your nose at Buttercup consider that he probably - at his level of micro franchising - does a lot better for his franchisees than most so called franchise companies in America today. Any Cold Stone Creamery or Quiznos franchisee would envy the ability to walk away free and clear after any day on which he decided that the investment was not paying off satisfactorily.

Looking to exit your system and their Buttercup, talk to with an experienced franchise attorney who can deal with Buttercup.

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Throughout the United States franchisors have been able to enforce choice of law and venue selection provisions in their franchise agreements with few exceptions. A few states have proactively limited venue selection, but in the absence of rule or statute the U S Supreme Court has exonerated venue selection in the franchisor's home state as reasonable (Burger King leading case). On the issue of choice of law the primary confrontations have been over post termination covenants not to compete.

One state, California, prohibits them by statute (but see the Schlotzky's case where the California court permitted a restriction against making the Schlotzsky sandwich that was held to have secondary meaning as a source identifier for Schlotzskys).

Elsewhere when a franchisor chose its own state as the choice of law and the law of its home state was more permissive about use of post termination restrictive covenants, the question was whether the more expansive permitted use infringed the public policy of the franchisee's state. In those instances courts customarily reduce the scope of the covenant to the point at which the confrontation with public policy is eliminated.

The current direction of the law on post termination restrictive covenants, except in California, is simply to enforce them. The franchise can be old to the point of moribund and the market can already be so flooded with direct competition that enforcement of the covenant really bestows no material benefit to the franchisor other than a vendetta interest. Competent drafting of restrictive clauses today usually tie the clause in with the protection of confidential information and the non disclosure clause.

Venue selection has received little attention except for the rare prohibitory statute or rule.

Most large franchisors have now expanded extensively into foreign markets. Many of them still keep the domestic venue selection clause that facially requires franchisees in foreign countries to come to the United States and litigate or arbitrate disputes in the franchisor's home town. Just such a situation arises now in the context of an American franchisor requiring its European Community franchisees to resolve disputes here in America.

The agreement also prevents class treatment of disputes and groups as joint complainants. The EU franchisees would have to come to America one at a time and hire a USA lawyer to have their disputes sorted out by a court or arbitrator.

In the situation of poorly performing franchise systems, the franchisees' position is that this makes dispute resolution effectively unavailable to EU franchisees. This is, to be certain, part the purpose of this contractual configuration. This article offers a road map through the issues that will have to be dealt with if EU franchisees decided to attempt to defeat the USA venue selection clause.

INHERENT PRO FRANCHISOR BIAS IN THE USA

Over the last 25 years franchise law produced from decisions in dispute resolution has become more and more favorable to franchisors. Part of the reason for this tectonic shift may be attributed to the fact that every time a major court resolves a significant issue in favor of a franchisee, lawyers representing franchisor groups immediately redraft applicable franchise agreement provisions to circumvent that ruling. The "draft around" exercise has paid off handsomely for franchisors, and one would indeed be foolish not to avail itself of that technique. That is one reason lawyers go to annual seminars where they receive the benefit of the shrewd draftsmanship of the industry's best and brightest nit pickers. There is actual biblical precedent for this, but that is better left for drinking parties.

For these reasons alone, EU franchisees would win a substantial tactical and perhaps strategic advantage if they first found a way to defeat the international venue selection clause and were then able to have their disputes with their franchisors resolved in their own courts and arbitration resources, in their own languages and in context of the fairness balancing influences of their own countries and cultures.

Inasmuch as there is now no significant history of franchise litigation in EU countries, there is an opportunity for EU courts to approach franchising issues free of the pro franchisor bias so pervasive in the USA. How might one go about accomplishing that What are the issues and salient fact patterns relevant to confrontation of international venue selection provisions

THE ISSUES AND THE FACT PATTERNS

In the USA the ruling case law is that a franchisor may compel dispute resolution in its home jurisdiction under the law of its home jurisdiction. That is long established law. The rationale is that the franchisor ought to be able to operate its system in accordance with one set of legal principles and requirements and avoid the vagaries of local law that on the whole provide no significantly better legal climate than the law of the franchisor's home jurisdiction.

Even in this system, franchisors are required to provide a section of their disclosure package (FDD) that deals with state specific law that may affect the enforceability of various provisions of the franchise agreement. The shibboleth is that the essence of uniformity lies in its variables. There is essential uniformity, but not absolute uniformity from state to state.

Recognizing that the International Franchise Association spends a fortune every year to lobby franchisor favorable positions in every jurisdiction, nationally and internationally, one must begin by acquiring command of the jurisdictional trends and precedents in the EU countries relating to franchising dispute management to ascertain the extent to which there remains a meaningful opportunity to defeat an international venue selection provision under any circumstances at all. This involves the EU itself and the individual member states.

If the matter remains unsettled, then where does one initiate a proceeding seeking to upset a particular venue selection provision One thing is certain. One does not go to any USA court to try to achieve this.

It would be a total waste of resources with an almost guaranteed adverse result. This may mean a race to raise the question first, as one tribunal might not wish to devote its resources to an important question that is already before another tribunal. If the first tribunal decides the issue in a manner and pursuant to a rationale with which the EU tribunal would be comfortable, the ability to seek consideration of the matter before a potentially more sympathetic body is simply lost.

For this reason, I am somewhat surprised that USA court determination of these issues has not already been sought by the USA franchising community via declaratory judgment actions in American courts. By the time this article circulates, that tactic may be initiated as a possible means to preempt EU rulings on it. L'audace! L'audace! Toujours l'audace!

The salient fact issues will be distance, language, economic preclusion of a right to fair adjudication and the equities of the particular fact pattern before the court. It will be essential that the franchisee(s) in the case be essentially compliant even though contentious. You don't take a scoundrel to a court seeking fairness and equity.

If the initiator is a group of franchisees, it would be worthwhile to screen out the bad apples and proceed on behalf only of the more platinum plaintiffs/complainants. How that screening is accomplished is a subject for a totally separate article all by itself. Underlying every technical decision is an inherent, even though unspoken, issue of whether the party seeking relief is deserving of the relief.

With respect to the issue of distance, be mindful that a venue selection clause in an American franchise agreement may impose a more than 3,000 mile distance disadvantage, and that has not been the basis of an unreasonability ruling in a USA court. Distance from the EU to the east coast of the USA may not be much more than that. For this reason one should never raise the distance issue in isolation, but in every case in combination with language and other issues.

Consideration should be sought in light of the fact that the USA franchisor does not deem it inconvenient in any economic or distance sense to franchise its business in the EU as well as comply with EU and member state laws and regulations applicable to franchising there.

The distance and language issues should always be raised in combination with the franchisor's willingness to subject itself to EU and member state laws that enable and permit the enterprise from which the franchisor derives substantial financial benefit. That will go a long way toward blunting franchisor arguments before a European tribunal but probably not here in America.

The other crucial fulcrum of decision in this project will be the economic argument (which also would not prevail in the USA.) In the USA the concept of business risk, its assumption when you buy a franchise, not being a child or other person in need of special attention and protection in any business to business transaction tend to foreclose sympathy for "the downtrodden" in the sense of poor unprofitable franchise owners.

These so called victims, when applying to purchase the franchise, portrayed themselves to be financially and experientially capable of accepting the risks. Moreover, there are competent pre-investment due diligence assistance resources if they are not themselves astute at small business investment vetting. Additionally, the fact that the franchise agreements are in every instance rather draconian does not affect the pitch of the playing field in this discussion.

If you sign an agreement that permits the opposite party to take financial advantage of the situation and you do not expect that to happen, you are simply a fool. Actually, very few of these investors ever avail themselves of really competent pre-investment due diligence assistance at a meaningful level of competence simply because the services are not cheap. But that is their choice freely made.

There are escape hatch clauses in every franchise agreement plus a pre closing escape hatch questionnaire that further disable claims of being taken advantage of even when they have been taken advantage of in many cases and know about that before they sign the agreement.

So in the USA the "Oh poor me" gambit is usually worthless. Whether EU or member state tribunals are more receptive to the "poor me" arguments than USA courts remains to be seen. Ultimately, the USA is absolutely the worst place in the world to try franchise fraud and abuse cases today. There is no downside to trying to escape to another jurisdiction for resolution of disputes.

What constitutes an actionable complaint is probably different in the USA than elsewhere also. Notions of good faith and fair dealing are litigated here every year, and every year courts seem to find ways to deny their application other than lip service. What we just yawn at here in the USA could be a major offense against any fairness concept under EU or member state law. Equitable considerations are essentially worthless in the USA in business to business disputes. The free market means just that - the wild west.

Where then is the touchstone combination of circumstances in the making of a competent economic/predation case for escaping a venue selection and a choice of law provision in a franchise contract between an American franchisor and an EU franchisee I suggest the following approach.

Take seriously into account that an American court would accord no significance to the fact that the franchisee(s) are from another country and use another language. There will be absolutely no respect for a position that is a function of nationality. EU franchisees should make that clear to the EU or member state tribunal and suggest that a USA franchisor not be accorded preferential treatment.

The contract will have been drafted in the USA and will be in English.

There will be a local language version, but in the event of a disparity of meaning in any provision there will probably be a clause that says the English language version rules.

The EU franchisees will have been at a decided disadvantage in almost every instance when the "deal" was originally made.

One should suggest to the tribunal that one of the purposes of the EU and member state commercial law structure includes taking into account every way in which the EU party may have been disadvantageously positioned and make compensation for that by at least placing disputes before an EU or member state tribunal and applying the law of the franchisee's home country.

THE ECONOMIC POSITIONS

Usually the situation at hand will involve franchisees who invested in a franchise opportunity upon the stated or obviously implied representation that the franchised business model was a proven business concept capable of being operated by an investor acceptable to the franchisor with a positive financial performance profile.

If it is the case that the franchisees in the EU country are, as a group, unable to succeed in the business as licensed, that should be strong evidence that the opportunity was not investment worthy for this country/market and that the franchisor had no business selling it in the EU. If it is also the case that the franchisees in the USA are not doing well, that should be considered a strengthening of the conclusion that the transaction was not investment worthy in the beginning, much as a court would deal with a security that was not investment worthy.

There is a duty in all jurisdictions relevant to this discussion that the seller disclose material information that would cause a potential investor to make a negative investment decision.

In the face of such evidence, the franchisor should never be allowed to impose upon the EU franchisees an obligation to submit disputes to an American dispute resolution resource. The franchisees will be economically preempted from obtaining justice as a matter of simple economics, and no company selling investments should ever be allowed to put a victimized investor to that disadvantage. The argument that this requires prejudgment of the ultimate issue does not meet logical criteria here because we would be litigating jurisdictional issues and the findings would be for that limited use only.

In the USA the same standard is used in deciding whether preliminary relief should be granted in the course of deciding the issue whether the party seeking relief has "a likelihood of ultimate success on the merits. Taking this approach in protecting EU franchisees would not be a departure from American legal standards, and because of that the American franchisor should have no grounds to complain.

There is a countervailing argument available to franchisors in this instance. Regardless where EU franchisees must litigate their disputes, they will have to come up with resources to hire competent counsel, very few of which in the USA will accept them as clients on a contingent fee arrangement. In the EU contingent fee arrangements are much less condoned than in the USA.

The same requirements exist in the USA, and the cost of really competent representation is not going to be that different than in the EU. Depositions can be held in the locales of the witnesses, eliminating travel of everyone internationally before there is actually a trial. In each event the franchisees will need to create a common fund to share litigation costs, so there is no venue difference on that issue.

The adverse economics issue must be presented in a logical connection to other important issues rather than as a stand alone basis for decision.

If in addition to such a scenario (or even without it for that matter) the EU franchisee(s) can make a case of post execution abuses that materially adversely impacted the ability of the franchisees to make a reasonable financial return, that alone should make out a case that the franchisor is perfectly willing to engage in predatory practices no matter the impact upon the franchisees. A comparison of the measurable relationship cost as stated in the FDD to the actual costs, including extraneous revenues from franchisee operations not quantifiable from the information provided in the FDD, should serve to show that a franchise portrayed in the FDD as having a relationship cost of 15 % of gross sales actually has a relationship cost of from 20% to 25%. That would be very strong evidence of predation by the franchisor. Ten to fifteen percent of gross sales usually will equate to a negative impact of from 30 % to 50% of net profit. That is more than substantial impact to justify an EU or member state tribunal refusing to enforce a venue/choice of law provision in a franchise agreement.

How one goes about preparing such a case and obtaining evidence of sufficient quality is not part of this article, as that will vary with each case. Suffice it to say that counsel with very extensive experience in preparing and trying lawsuits involving franchise fraud and abuse should be tasked with assisting EU counsel in the entire proceeding. Knowing the theories and the art of expressing the theories effectively will not suffice without a record of competent evidence to support them.

As always, you can call me, RIchard Solomon, at 281-584-0519.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Bad Earnings Claims in Item 19

Liar Number Two does provide earnings claims information in Item 19 which is not reliable for the following reasons, among others:

Especially if the franchisor is a relatively new franchisor, numbers are inherently less reliable if there are none of the franchised stores in the market you intend for your location. That stores seem to be doing well in one part of the country means nothing if you aren't going to be in those markets, for many reasons.

If your intended location is 'out of the loop' geographically, your support and advert economies won't be the same either. The advert economies associated with several stores all in one market are important expense issues. If you need a penetration level for your advert message that can be effectively afforded only by a group of stores sharing the budget, the numbers in Item 19 will be significantly out of whack for you.

If the stores are only a few years old, the system has not had time to 'prove' itself. Many things change in a franchise system as the franchisor decides to mandate changes without first proving them out in test market in company owned stores. Without that prove-out test market, every change is just a crap shoot.

If the franchise is one in which a major segment of your cash flow is not paid directly to the franchisee, but is paid first to the franchisor who then makes deductions and, supposedly, passed the net of those deductions on to the franchisee, you are dealing with a thief. Anyone who can come between you and your cash flow will always find ways to nick you. Channeling the money in that manner is the hallmark of the crooked franchise.

If company owned stores' financial information is part of the mix that went into the earnings claim data, that is being done only because those company owned stores are performing better than franchisee owned stores. That skews the earnings claims and makes them false as applied to what you would be doing if you were to buy the franchise. One way the liar reassures you is to say that the stores are identical to the kind of stores that you would be operating as a franchisee. The may be identical in the sense that the sell the same products or services, but they are not identical in any sense relating to financial performance prospects for any franchised store.

If the working capital requirements do not include money for you to live on until you reach break even, then the working capital number in the total investment required disclosure is inadequate. If it doesn't say that living expenses are included in working capital, then living expenses are not included. If it does say that living expenses are included in working capital, you need to have that broken out. The odds are that you are being short changed.

If the earnings claims say that the information was compiled in accordance with generally accepted accounting principles, that is probably not true, and it is a hallmark of misrepresentation. The purpose of making that statement is to make the numbers seem more reliable than they are. There is no other purpose to make that statement. Ask to see substantiation of the Item 19 information. If they won't show it to you before you sign a franchise agreement, it's a scam. If they tell you stories like they can't show it to you before you sign the contract because it's a trade secret, you know you are dealing with hard core crooks.

If after you make adjustments for royalties, advertising fund requirements, lease and other occupancy expenses for the area where you intend to locate, insurance expenses for your area, labor expenses for your area, state and local taxes for your area, and every other expense you can think of, you end up with less than 15% of gross sales as your pre tax net income, you are just buying a job, not a real business, and there will be no room for any adverse change in any significant expense item.

One thing that is never covered in the earnings claims data is the cost of borrowed money -- the interest and the principal payments that you will have to make every month. You need to add that information to the equation. You will be told that that money comes out of the non cash deductions on your tax return -- the depreciation and amortization expenses that are not actual cash payments.

You need to figure out whether that is correct arithmetic or not. If the total of all payments to the franchisor, other than for goods you have to buy from them, approaches 10% of gross sales, then the franchisor has an effective 40% share of your total potential pretax net profit (if you do as well as the earnings claims data suggests) with no investment risk in your business.

Moreover, the franchisor's income expectation from your business is a function of gross sales and does not require that you make any profit at all before those payments are owed. If you can't find a better way to get into that business, you might be better off keeping your day job. There are some exceptions to this statement, but they are very rare.

Conclusion

If Item 19 of the UFOC states that no one is authorized to provide any information regarding sales or profits other than what is stated right there in Item 19, and the sales person does provide other or additional information regarding prospective profitability, then you ought to be able to recognize that you have just been lied to in Item 19.

And it is important to recognize that the same techniques of arranging for third parties to provide the earnings claims information, or approving or praising the pro forma information in your business plan, also make the disclaimer in Item 19 a falsehood, just as in the instance of the franchisor who claimed not to provide any earnings claim information at all.

Franchisors who provide sales information in Item 19, but who do not provide additional profitability information there, and whose employee or sales representative provides the additional information to enable a profitability estimate to be prepared, or who arrange for a third party to provide it, or who do it by approving or praising your business plan pro forma, are also lying to you when they deny that such information is provided as part of their franchise sales procedure.

They know that you are not buying any business opportunity in order to achieve sales numbers, and that it is only profit potential that you are seeking. They also know that by using only gross sales numbers in the 'official' statement made in Item 19, they don't have to tell you how many of their franchisees are achieving that level of profit performance. Gross income isn't net income. DUH!

These are just a few of the many issues that you will encounter in trying to figure out where the ball is being hidden in the Item 19 disclosures. The inventiveness of the crooked mind is limitless. Regulations can't protect you. You have to protect yourself.

You cannot allow yourself to sign contracts in which you agree that something that happened, and that you ought to know happened if you were paying attention, did not happen.

You have to go through what was said to you and see whether the contract is requiring you to agree that something that was an important consideration to you in making your investment decision did not in fact ever happen. If things important to you are excluded, either by not being provided for in the contract or by your having to pretend that they never happened, you are dealing with a thief.

That's another reason always to take careful notes on everything that is said to you, orally or in some brochure or written on a cocktail napkin. Being alert and diligent throughout the sales process can save you hundreds of thousands of dollars in lost investment, lost profits and attorney fees and expenses.

If you really want to know how the system is performing, you should include as part of your due diligence contacting business brokers in cities where this franchisor has franchised stores located, and finding out whether any of them are for sale.

If you agree to sign a confidentiality agreement that says you are using access to the financial information only in connection with your effort to find a business to buy, you will be able to find out which of this franchisor's franchisees is trying to sell the franchised business and get access to the federal tax returns and the profit and loss/operating statements and balance sheets for the past five years. Compare that to what the franchisor is telling you in Item 19.

Do the same thing with businesses in the same business that are for sale and that are not affiliated with this franchisor. No one ever overstates profitability on their tax return.

When someone tells you things that you could figure out are untrue if you just pay attention, and you then sign a contract in which you agree that they didn't tell you that, and you later find out that there are many things that are not as they were described to be, after you have parted with your investment funds and taken on a lot of debt and other liabilities, is it realistic for you to expect to find an effective remedy in a lawsuit or in arbitration?

As always, you can call me, RIchard Solomon, at 281-584-0519.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

This is the first of a three articles intended to raise investment care sensitivities. They are offered as a gesture of concern about what I see happening to people who invest in new and in old/over the hill franchise opportunities.

The purpose of the deceits practiced by these two groups of franchisor companies is, in the first instance, to portray itself as the investment quality equivalent of an already proven franchise concept/model, and, in the second instance, to portray itself as still being as good an investment vehicle as it once may have been but no longer is.

Is it possible for franchisors to say to prospective franchisees that profitability information is not provided when they do they provide profitability information?

It is also a very logical question to ask whether a franchisor can provide false or misleading profitability information so long as a warning is also given that there is no guaranty that you will achieve profitability and that you assume the risk of profit or loss and that there are risks.

Since risk is inherent in any investment, warnings about risks do not include or excuse risks that are produced by false statements made to induce the investor to part with his money in the first place.

How does someone who is thinking of investing in a franchise go about vetting the numbers?

This is the hottest button issue in disclosure, because assurances of potential profit are the most effective way to sell a franchise. Only an imbecile buys a franchise because of the bullshit. Real people want to know whether they will make a profit and how much, and how long it will take to reach profitability, and how much it will cost to get there.

Many years ago I published a suggestion in the ABA Franchise Newsletter that, since every franchise agreement empowers the franchisor to receive copies of periodic financial information and tax returns generated by its franchisees, compiling that information ought to be made mandatory, and that information ought to have to be disclosed in a way that displays how the franchisees are really doing.

This would include grouping franchisee performance information by levels of profitability (top third, middle third, bottom third), by region of the country, and by showing seasonality if seasonality is a significant factor. I also suggested that the information could be handled in such a way as to eliminate the impact of different franchisees treating various expenses differently for accounting or tax purposes.

If that were to happen, people might be able to appreciate at a higher level of quality just what the performance expectancies might be.

Franchisors, of course, howled at the thought. Why, if that were done, people might be able to see whether your franchise system was more profitable for its franchisees than someone else's franchise system, and the lower performing franchise systems would have a harder time selling franchises. DUH! That's one of the best reasons for doing it!

Since a potential franchisee will not receive that quality of prospective financial performance information, it remains necessary to have access to a fairly high level of sophistication in dealing with what is provided.

This article is intended to help to deal with the garbage that is thrown at you now.

Reading this article does not make you my client, and there are many other things that must be accounted for than just the questions raised here. But you can take this to your lawyer or accountant/financial planner, and maybe it will help you both better understand what you are being handed.

Are there Franchise Consultants? No.

Let's get started. Start by first asking yourself who it is that you are dealing with -- who is behind the face you are looking at when you are dealing with the person who is providing you with initial information about a franchise opportunity? If that person identifies himself/herself as a 'FRANCHISE CONSULTANT', you know you are dealing with a liar.

There is no such thing as a franchise consultant who sells franchises. While many people do that, they are not consultants in any functional meaning.

The reason for that is that they only get paid for selling franchises -- usually by a commission. That's a salesperson, not a consultant. And even if they were consultants, they aren't working for you to help you.

If you aren't the only one paying them for assistance, they are salespeople. When they tell you that they are there to help you get the right deal for your circumstances, that is total bullshit. They are there to sell you a franchise -- any franchise that will pay them a commission. You have to be extremely cynical about everything you are told.

Doubt everything until it is proven -- and you need to know what proof looks like.

What they call proof usually isn't. In once case in my office, the franchisor sales person claimed to be a vice president when he wasn't even an employee of the company. He was an outside salesman. You have to doubt EVERYTHING.

Item 19 Traps

a) - No Item 19 earnings claim is a Lie

Liar Number One tells you in Item 19 of the UFOC that the company does not give out earnings claims and that no one is authorized to provide earnings information in connection with the sale of its franchises.

This is an obvious lie for several reasons. The first reason is that the only reason to make an investment is to make a profitable return on that investment. If there is no representation of profitability potential/earnings potential, then there cannot be any reason on earth to make an investment in their franchise.

The second reason is that every one of these franchise companies does make earnings claim information to every potential franchise purchaser. The earnings claims information isn't in Item 19 of their UFOC, but it is provided by other means.

Among these other means you will see one or several of the following:

The franchise sales person provides the information either orally, on a blackboard, on a random piece of scrap paper/cocktail napkin/table cloth (and if you hang on to that piece of paper you may have a great exhibit when things later don't go as you thought they should).

b) Franchisee Verifications cannot be relied upon

The franchise sales person invites other franchisees to come appear at a meeting of franchisee prospects to tell of their experience as a franchisee. These folks always tell about their own wonderful financial performance. The presentation is intended to tell you that this is what you can expect if you buy the franchise.

The selected franchisee spokespeople are either all very successful or just shills lying through their teeth. In some instances these shills also receive a 'commission' on every franchise fee taken from each person attending that meeting who buys a franchise.

There are probably some successful franchisees in the system, but the point is that you are being provided with information that the franchisor denies providing to you, and that the information -- since it is denied it was ever given anyway -- is never reliable.

If you do buy the franchise, you will see in the franchise agreement an Acknowledgement clause that says that you agree that you were never given any earnings claims information.

If you sign that agreement knowing that you were in fact given earnings claim information, you may be out of luck even getting it admitted into evidence in court or in arbitration of any fraud claim you may later seek to assert.

Some courts are allowing the Acknowledgement clause to exonerate misrepresentation, making the defrauded franchisee seek reversal of those rulings in courts of appeal. That adds time and expense to obtaining relief.

You are provided, as is required, a list of the names, addresses and telephone numbers of all the franchisees of that franchisor so that you can contact them as part of your investigation/due diligence before you buy the franchise, to see what kind of experience they are having with the franchise.

But the franchise sales person steers you to certain franchisees. These will always say they are making tons of money and are just thrilled with the franchisor who provides great training and support. If you do buy the franchise, the sales person usually gives them a percentage of the sales commission, or they receive some other form of consideration for their assistance.

The franchisor's position is that, notwithstanding the steering, they have no part in providing you with earnings claims information. If you buy that you are too stupid for words. While it may in some strict sense be true that someone else, not the franchisor, provided you with the information, the fact is that the information was provided to you through the efforts of someone affiliated with the franchisor.

c) Financial Assistance for SBA Loans, but no Item 19

The franchisor who claims not to provide earnings claims information to persuade you to buy the franchise, does offer to assist you in seeking an SBA loan. The loan requires that you prepare a 'business plan' (another work of sheer fiction). The business plan requires a pro forma operating statement and balance sheet statement to show the lender what you expect by way of financial performance of the business for which you are borrowing the money.

The franchisor either provides you with information to use in preparing the business plan, including the financial pro forma, or steers you to a 'consultant' to assist you and the consultant provides financial pro forma information that the consultant obtained from the franchisor.

Then of course, you take your business plan to the franchisor for review, before submitting it to the SBA lender, and the franchisor tells you that you 'did a good job' or that 'your numbers are reasonable', vouching for the numbers/earnings claims information.

The lying franchisor's position is that they provided nothing and that you got that only from some third party, not from the franchisor. The franchisor's back up position is that they didn't provide you with the information in order to get you to buy the franchise. They just provided information to help you get a loan.

DUH! And -- I actually heard a franchisor person testify to this once -- the ultimate fall back position if the information is false is that the false information wasn't provided to you, but was provided to the lender.

There are other ploys by which franchisors who state in Item 19 of their UFOC that they don't give out earnings claims financial information actually do in some fashion provide it.

The fact is that it is almost never true that they don't provide earnings claim information, and if they provide it while insisting that they are not providing it, they are lying to you and you need to run like hell, not buy the franchise.

As always, you can call me, RIchard Solomon, at 281-584-0519.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

Franchise agreements were always too long - twenty years - in the early days of franchising. But you couldn't get a bank to loan mortgage money for a store build out on a twenty year note if you didn't have a twenty year franchise agreement. You didn't know that? That's why the agreements were for such long terms.

And, to make matters worse, in those days they usually provided for renewal of 'this agreement', rather than for renewal on the terms of whatever contract was then being used for new franchisees.

So the contract engineering failed to provide for system wide currency and essentially harmonized and rationalized terms of dealing across the scope of the system.

Now, franchise agreements tend to be for ten years, with renewal on the contract then being used for new franchisees.

The Evolution of Business Models

But the rates of change and evolutionary development in practically every business and market have escalated greatly. E-Commerce has further accelerated the ease and the speed of new competitive entry into any business when demand boosts appear.

Think of franchises that have typically sold products from expensive mall store locations, only to find that those formerly 'special' or 'exclusive' products started showing up in supermarkets and discount stores, and now on the Internet, making them more easily and less expensively accessible from sources other than those mall locations.

Food gift baskets, spiral sliced hams, vitamins and health foods are examples. Sam's club now carries Starbucks Coffee. Toys-R-Us is having a tough time due to toys being merely a group of hundreds of product groups available in enormous multi-category retail operations.

When a specialty product ends up in a supermarket or discount store where it is one of thousands of products available at a single location, the store can 'football' discount the specialty as a traffic builder and make its margins on its other products.

The mall site franchisee selling that single product line does not have that opportunity.

How does he sell at mall retail prices what the supermarket is using as a leader at much lower prices, where shoppers can simply throw the product in the cart and not have to carry it all over the mall?

With similar economic effect, saturation in the fast food business has destroyed margins and return on investment. Franchisees are less willing to invest in updating stores with lessened prospects for returns on that expenditure, and less willing to renew agreements on less favorable terms in order to remain in a business that is in the mature or decay stage of its life cycle.

The point of all this is that market changes are rapidly making franchise agreements less reliable as the set of rules by which a franchise system is operated.

Renewals - Is there Value?

More and more, your most successful franchisees are not interested in renewing their franchise agreements, not interested in continuing in the franchise relationship. They perceive little incremental value in associating with you for another term, because your techniques, like the techniques of everyone else, are not capable of turning back the clock to the easier money days when your concept was new and fresh and almost no one else was doing the same thing.

Along with their view of their own suffering, their franchisors are seeing lower initial fee income as fewer new franchises can be sold, more expensive operating costs at company owned stores with competition inhibiting price increases to keep up with expenses. Franchisors typically increase the number of stores as best they can, flooding markets and increasing the animosity that comes when one's franchisor is competing with him.

Franchisors are going on the Internet also, and these sales rarely are directed to the franchisees, but are taken more and more by the franchisor through direct on line sales.

Animosity keeps growing, and revolts happen.

Unfortunately, most franchisors are looking to their franchise agreements more than to what is happening in the market place, trying to force a relationship to work according to the agreed model rather than the reality model.

Termination Conditions - Legal and Business Reality

Attitudes about franchisees having to stick it out and play your tune because the contract says they must, and that you have a covenant not to compete to enforce if they leave, or a provision that allows you to take over their store if they leave, cause franchisors to mislead themselves into believing that they are more powerful than they really are sometimes.

But these scenarios are really more correctly evaluated from the perspective of chaos theory, because there are so many dependent variables at work that predictability of outcome is not just the product of contract drafting and market fluctuation.

Franchisees Revolt

Franchisees do not run to join in a fight as much as people would like to think.

There are techniques that tend to (but not always) isolate the leader(s) from the rest of the franchisee pack. Although few people think of it this way, the Protestant Reformation and the American Revolution worked in the exact same dynamic as a franchisee revolt.

Very few colonists fought King George. Most lay in the weeds, unwilling to take the risk of confrontation. They rightly believed, in the case of the American Revolution, that whatever the fighting colonists won would be winnings for all the colonies.

It isn't like that in franchise revolts, however. The folks who stand up and fight do not obtain anything for those who lacked the commitment to the struggle.

All too many times I have represented such franchisee groups, had many drop out or not join in the first place on the idea that they will get whatever the fighters win. In every instance, I have later heard from the less brave, wanting to get in on something that is already over, to board a train that left without them. Usually they simply get ground out or bought out very cheaply.

The management of franchisee dissidence is facilitated by tuning into what is happening in the system, not by seeing dissent and cowering in denial until you are in court as the franchisor defendant, in a fight not of your choosing, where you didn't get to pick or to frame the issues, where you go last and not first. When you are sufficiently alert to see it coming and to start planning for it, you have many, many more options.

Unfortunately, however, most franchisors wait until they are in court as defendants or until the franchisees start leaving and litigation to enforce post termination 'rights' becomes inevitable, on the belief that if you let one get away with it, the rest will follow.

When I evaluate a potential or actual revolt situation, I analyze it in multivariate contexts. There is no 'do this first' kind of approach. It is all done simultaneously in every mode. The order in which they are presented here is for convenience of expression only, and is not intended to be directional.

1. There is a need to understand what the market environment is doing to the system.

2. There is the issue of what that environment is doing to the franchisor and what the franchisor is doing to react to it.

3. There is the issue of what the franchisor's reaction is doing to the franchisees.

Structural considerations come into play-does the franchisor have company operated stores, and, if so, what are they contributing, if anything, to the perceived problems. The same questions are addressed to e-commerce, if that is a factor, and to how it is structured and how it is being operated. At the same time, advertising fund management is very frequently a focus of contention.

Then you look at the range of franchise agreement terms under which the system operates, and you ask questions to determine whether whatever it is the franchisor is doing conforms to those agreements, or at least, may be permitted by those agreements.

Along with this inquiry is the issue of whether, even though in conformity with terms of agreements, is what the franchisor is doing quite different from what was represented to the franchisees when they bought their franchises. This is more than technical, for even though statutes of limitation may have run out on misrepresentation claims in court, that plays a large role in how you manage the contention.

Ultimately, if the franchisor is doing everything right, in the sense that his agreements permit what he is doing, the franchisor has to make economic decisions. There are costs in ignoring the problems, and there are certainly costs in trying to solve the problems.

Trying to decide which costs to accept, and how much of them to accept, and to manage the enforcement of 'rights' issues, and to manage the 'propaganda' and 'political' issues are all absolutely obligatory aspects of franchisee revolt management.

There are no hard and fast rules, for the reason that each franchise system has its own 'baggage'. That baggage may be heavier or lighter depending upon whether there is more or less professional management in place, how difficult it is to deal with corporate ego issues that grew out of certain people having become addicted to always being told they are right.

Now that you are at the end of this article, do you feel like you have not been given a road map for franchisee revolt management? Good! There ain't no road map.

It''s a matter of complexity and sophistication that must be dealt with one situation at a time. Too many variables prevent a simple directional tutorial on how to do it for your company. What works for one company in this situation may be totally wrong for most other companies. It''s exactly like a recipe for making chili. Every ten miles down any road in Texas, the recipe for chili is different. Handling franchisee revolts for franchisors is just like that.

As always, you can call me, RIchard Solomon, at 281-584-0519.

For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.

It seems to me, looking at this phenomenon over the 53 year history of my practice as a conflicts specialist/litigator, that most of what I have to try (or where I have had to be sufficiently aggressive to cause my adversaries to lower their demands to an acceptable level) could have been remedied in one tenth the time & for one tenth the expense.

The introductory phase of conflict presents rather similarly across the range of dispute causes/subjects.

They begin and develop in the same manner. There is a grain of dissatisfaction over some subject/event/program or other that is either not identified as it first begins to sprout or is given almost no weight.

Ignore Some Irritations

Many times, ignoring that first flicker of annoyance is the sensible thing to do, judging by hindsight because it never developed into fulminating melee.

Sensible people appreciate that no relationship, business or personal, is without occasional inconvenience.

Sensible people absorb the minor shocks/vicissitudes of ongoing relationships because the value of the relationship itself is an overall positive. With quality control relationship management the difference between the ebb and flow of normal relationships and problem development is much more discernible.

But that is relative, not an absolute, and the value morphs as the relationship develops over years - sometimes becoming more valuable and sometimes less.

There is a dependent relationship that is expressible quantitatively between length of relationship/severity and frequency of difficulties/quality of reward for staying in the relationship. An econometrician could assign values to each of these factors and the passage of time would cause them to move along lines that diverge and intersect in trends to provide a mean scale within which, given a large enough sample, one could posit relative satisfaction generalities and, by measuring deviations from the mean, posit the potential for eruptions. I promise that at this point I will stop all this econometric mumbo jumbo and get down to brass tacks.

The major target of this discussion is distributive systems, vertical in the instance of managing franchise and dealer relationships. The application is the same in all business relationships that endure over a significant period of time, but I am going to use the vertical distributive relationship as the focus of this article.

Frequently people enter commercial relationships with unrealistic expectations. This is sometimes the product of hype and sometimes worse than that. If there is no enforceable agreement providing for a term of years, the situation is easily remedied.

The remedy is not always cheap as investments in infrastructure may have been made in expectation of success.

If there is an agreement for a period of years the exit cost is often extremely high, both in terms of cash and other non cash elements (think move out/covenant not to compete/transfer of customer loyalties). Often the deal is as expected but does not succeed for other reasons, some economic and some just a failure of relationship management skill.

Those involved can sense when the tension begins to rise and can also appreciate when the tensions increase. They suppress the angst for as long as possible because they simply dislike confrontation and don't want to waste money lawyering up every time there is a pissing contest. Somehow they never just sit down and try to find a path to YES. Maybe even if they did that path would not be available for one or both. Why is that so frequently the case?

The process of a relationship becoming disputatious is similar to that of an illness progressing from a sneeze or cough to pneumonia. The issue is when to intervene and how to arrest this progression. There is no magic point. How that point is identified is affected by attitudes of caring or not caring; of follow up quality control communication or simply leaving the strategic health to the care of the tactical functionaries. But everyone reports to upstairs, and dissatisfaction where the rubber meets the road becomes amplified as it effervesces upward.

Large institutional companies operate upon the assumption that all is automatically normal and positive because in some sense the belief is that anything but utter calamity is affordable and someone down below may always be thrown under the bus in the process of cosmetic accountability.

But most of us aren't General Motors and most of us can't afford the General Motors attitude - nothing matters because we are professional grade people. Sadly, even calamity failed to alleviate the kind of arrogance that persists even today in that company - and in more like it.

In many companies there is official doctrine. One must agree with the official proclamation of what and where and how or be moved out of the organization. This reduces the potential value of internally generated relationship quality control.

In short, people are afraid of speaking up when their doing so could be extremely helpful if only there were open minds.

Where the game is to "make it" through your assignment and move on, leaving problems to the poor bastard who will take over from you in this position, effective trigger point spotting will simply not occur. In so many companies there is the middle management belief that upstairs never wants to hear anything except positive reports and will punish in one way or another those who raise "issues". They really don't give a damn, won't bother monitoring what is going on until it is lawyer up time.

Even at the General Motors level of wealth that system doesn't work. What then for the rest of the rational commercial world?

But, When Is It Just Too Much To Take?

Real people managing real companies that have to face real vicissitudes of relationship quality fluctuations have to be alert to trigger points that, if left unattended to, may sour important ongoing transactional success. Left unmonitored, even the best commercial relationship tends eventually to unravel.

For instance, your largest customer begins to believe that he is too important to you and that you will absorb all sorts of impositions in order to keep his business. This would include, stretching/exceeding credit terms, taking unauthorized discounts and allowances, making demands that you the seller, absorb the freight, seeking "gifts" and inclusion in perquisites that few others ever receive. The list goes on and on.

Many companies fail to recognize at an early point in this progression that some relationship discipline must be imposed to prevent this kind of malignancy from metastasizing. While the customer may be important to you, on these facts you are also important to him as a critical supplier on whose products or services he makes a lot of money downstream.

Doing nothing leads only to ultimate confrontation, because the more the customer gets away with these ploys the more he demands. Too much is never enough.

I start trial in such a case in three months. My client let this customer get away with far too much for too long, and when the axe finally had to fall, the customer sued. This particular scenario is one in which the customer has used similar tactics on others of his critical suppliers and has also ended up suing them.

The abusing customer should never win, but everything positive that might have been preserved is destroyed by failure to see the truth about the coming threat in time to defuse it.

Why The C-Suite Gets Bad Information

It is perhaps not fair to expect the people at the low end of the ladder to deal with their opposite numbers in client companies in handling potential problems. In an ideal environment they would report the issue upstream and a conscientious middle manager would take it to his boss for consideration. Then one of those people would take the initiative to contact his opposite number in the other company and deal with whatever it is that needs attention.

No one will say this, but making people fearful of expressing themselves in any way but the approved way for fear of infliction of punishment is precisely what Lenin and Stalin did following the Russian revolution. If you thought of how something may be working in your company to make it look like that, perhaps the failure of that method and the need to correct those impressions would be easier to recognize.

In a more advanced mode there could be a company ombudsman to whom people could go with identified oncoming issues, and the ombudsman would pull the laboring oar in getting upper management to address it positively. And if the ombudsman also had the authority to go consult with critical professional resources (legal, financial), including outside resources, the ability to head trouble off at the pass would indeed be enhanced.

Novel Retainer

I have my own way to handle this problem. I urge non litigation clients not to hire me on an hourly fee structure, but rather on a monthly or quarterly retainer that covers absolutely everything other than litigation/arbitration and out of pocket expenses.

That prevents people not calling me for assistance because they dislike knowing that when I pick up the phone the damn meter starts running. I am available 24/7 under that arrangement. The initial period of the retention is one of adjustment regarding whether the anticipated work turns out to be more or less than anticipated for the flat fee retainer, but as time passes the retainer gets adjusted up or down to keep it fair to everyone.

I urge consideration of this mode of relationship configuration upon my brother and sister attorneys. It may be less remunerative in the short term, but it builds a much better attorney-client relationship, so that in the longer term the economics are rather favorable.

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Just back from the wars, so to speak, I found that most folks are too socially emasculated through the process of institutionalized position sensitivity to even have an inkling about what to do when a dominant position person goes off the deep end and his actions threaten to destroy businesses if not brought to a screeching halt. Such was the war just concluded, in which we represented numerous franchisees of a franchisor who's point person thought and acted like a white bread Benito Mussolini.

This was a renewal issue in which the franchisees had the right to renew on the same terms they currently enjoyed unless the franchisor was then selling new franchises, in which instance they would have to sign the then current franchise agreement in order to renew.

Obviously, new franchise agreements are historically upon worse terms for franchisees than expiring agreements. At least that is the predominant experience in the franchising business.

Money, restrictions, franchisor prerogatives and other matters that impact the relative economics of a franchise relationship tend to move in favor of the franchisor with each new iteration of the agreement.

This franchisor was a more than over the hill operation and had not sold new franchises for about twenty years. It had seen the attrition of most of its franchisee population and did not even have an operations manual.

Peter the Point Man decided that the value of being his franchisee was far above then current relative economics and that he was not going to be so foolish as to honor renewal terms, no matter how clearly they may be stated in the soon to expire current agreements of my clients. They were the best performing franchisees, historically, in the system and had been there for about forty years. Had Old Pete been possessed of any good sense, he would have paid them to show him how to operate the company owned units which lost money while theirs prospered every year more and more.

Any econometrician would tell you that in these circumstances the relative value of the relationship among the parties were indeed skewed, but in favor of the franchisees rather than the franchisor. Had Old Pete simply gifted these franchisees with the entire company, he would have come out far better off economically compared to facing years upon years of continuing losses eventuating in the bankruptcy of his company.

These franchisees had been clients of mine for over thirty five years, having once before been confronted by an earlier edition of delusional point person. I sued the franchisor on their behalf then, and the results of that litigation was the ultimate cause of their having favorable contract terms now.

My clients believed that when renewal time came around this Bozo had plans to try to rip them off, and so we had almost a year head start in setting Him up for his comeuppance.

Franchisors love discussions. Discussions leave no tracks. Writings are tracks, and thus are despised by franchisors, especially if they have an agenda to be predatory and need deniability in case there is strong push back by the franchisees. Peter the Point Man, however, failed to recognize that our insistence upon having email confirmations and exchanges to prevent negotiations from being nothing more than conversations was providing us with a plainly visible trail of the development of his entire program to rip us off.

His arrogant lack of subtlety even went so far as to acknowledge his obligation to negotiate terms with us and then insist that the negotiations be restricted to only those issues raised by the franchisor.

He even went to the trouble to have his lawyers send us a proposed contract amendment saying just that.

No one signed that, on advice of counsel.

He then told us that business requirements prevented him from being able to negotiate the renewal terms right now and offered a one year extension of the same terms to accommodate his claimed business needs. In fact, what he did during that extension period was to have his lawyers create a spurious FDD, which he registered in Virginia so that he could claim that he was in reality engaged in selling new franchises and therefore exonerated from having to negotiate new terms with us or to offer renewal upon the same terms as before. He then imperiously insisted that we sign his new franchise agreement, which was full of incredibly stupid positions that no competent franchisor would ever put into his agreement.

To be sure, he also changed the economics drastically in his own favor (as if that needed to be said). The State of Virginia took one look at his company financial reports and immediately slapped him with an initial fee impound.

My clients had been successful business operators for over forty years, and had been in only one real battle royal in their entire lives, the earlier litigation with this same franchisor under other "leadership". They found it very out of character for me to insist that they seriously do things to bring about the entrapment of the present franchisor management. I had constantly to explain to them that if they didn't handle the situation as a prelude to a main battle they were going to lose their businesses.

They, like most folks, erroneously believed that they had obvious rights and that that was all that was necessary for the correct result to ensue.

They were initially incredulous when I explained to them that there is no right on earth that is self-executing, not even those in the Constitution. If you don't stand and defend your rights, they can easily be taken from you, and this was an obvious situation in which that was exactly what would happen unless we succeeded in entrapping the franchisor into revealing his hand in an evidentiarily usable manner.

They had never heard of such a thing, and their regular lawyers had no inkling or experience with this sort of confrontation technique. They were always fearful of giving offense and messing up their negotiating posture. They refused at first to believe that there was in this instance no such thing as negotiations and accordingly no such thing as a proper negotiating posture. Fearful of burning bridges and self-destructing, it required a lot of tough love quasi-military training to get them to go along with my urgings.

Only as the unfolding of the fact pattern revealed that I had absolutely correctly assessed the risk and danger profile did they come to accept the ancient truth that the only way to deal with a bully is to whip his ass half to death - or at least until he came to terms.

Peter the Point Man had no experience in working with a company that was actively selling franchises. His overlord had once before been with a franchising company that had, under his leadership, gone into bankruptcy. Between them both, they were playing with far less than a full deck - were several bricks short of a load.

Accordingly, they compounded mistake upon mistake. They failed totally to do what every real franchisor always does to market a franchise program. They even sent us a letter half way through the litigation saying that they hoped soon to have an operations manual ready for review. The list of bozo mistakes would provide a standup comic with at least fifteen minutes of material.

They informed the court that their position was that the issuance of the spurious FDD was all they needed to prove that they were indeed engaged in selling new franchises. They could not have posited a more ridiculous strategy. This was the easiest possible position for us to defeat. Four days before we were to take their depositions in anticipation of an immediate preliminary injunction hearing, they had an epiphany, and about a week later the case was resolved upon very favorable terms for my clients.

The lesson here is that while it is nice to have polished manners and live by reasonable rules of commercial civilization, there comes the moment when those rules do not apply. If you continue to live by those rules you will simply be eaten alive. In times like that you need representation that understands and understands how to execute battle plans that level any playing field.

When someone decides that a business relationship is there to serve the terms of an agreement rather than the agreement being there to serve the quality of the business relationship, the result will be calamity if not immediately changed. Usually that change can only be brought about by aggressive confrontation.

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As always, you can call me, RIchard Solomon, at 281-584-0519.

The Vanishing Competent Franchisor

Franchise investors find, often too late, that the unique systems and concepts in which they have invested are neither unique nor have even competent execution by the franchisor.

The reasons for this are several. Some of them are the natural vicissitudes of living in any competitive marketplace over time, but others are fault ridden. Which is which? What are the identifiers? How early can they be spotted and what can be done to avoid or thwart them?

So far the courts have not seemed hospitable to the notion of going beyond the explicit wording of carefully drafted agreements entered into by seemingly sentient adults. From a macroeconomic perspective this is exactly what courts should be doing, as enforceable agreements are indispensable capital that underlie the value of enterprises.

But are the franchisees caught in an ever tightening noose of business contraction so constrained by contract language that the only diagnosis is: suffer a financially excruciating death? Should bankruptcy be the only resort/cure to being in contract with people who rely on legal enforceability?

How far can franchisees go without violating fundamental contract rights and thereby effectively changing franchisor inability into franchisee liability? Where is the line between act or die on the one hand and legal suicide on the other?

The Legal Framework

In today's franchise agreement one finds that the mission statement is not a term of the agreement. None of the hortatory rhetoric of the sales pitch/marketing materials is ever to be found anywhere in the actual contract language.

There is a bright line between all the positive reasons for investment and the machinery by which the investment, once made, is to be managed, performed and observed.

Investors seem not to notice that what convinced them to invest in the first place is nowhere to be found in the agreement itself. Franchise investors are in the main due diligence illiterate.

The agreement always provides that the goodwill of the business and the brands are all the sole and exclusive property of the franchisor and that the franchisor may change its configuration at any time, for any reason and without having to field test and performance prove any change before compliance with it is demanded of the franchisees.

The franchisees covenant to execute the business model as directed by the franchisor in the manual and otherwise, including participation in all programs mandated by the franchisor on the terms stated, all as may vary from time to time, and to guaranty the payment of royalties out to the end of the contract term regardless of termination or other reason for failure.

All fault for nonperformance is placed upon the franchisees while all decision making prerogatives belong exclusively to the franchisor.

Many attempts to modify the absolutist right versus wrong, franchisee versus franchisor abrasive interface have been tried and they have all come to naught.

Most of them have been in the guise of an imaginary unwritten covenant of good faith and fair dealing and more recently in the form of a so called franchisee bill of rights that exists neither in statute, ordinance or other document having any legal force whatsoever.

Finding Operational Salvation

Where does that leave the franchisees who see themselves caught in abandonment of the brand by the franchisor and in the inability of the franchisor to respond effectively to changes in market conditions?

Litigation/confrontation seems not to provide a remedy. Self help so often leads to litigation/confrontation.

And yet no one can live at sword points.

The only present tense answer to this problem lies in effective but insistent relationship management that is initiated by the franchisees acting mostly in concert with organization and a high level of competence that seems at such moments to be available only from the franchisees themselves.

How does that work?

Up to now it doesn't work at all/yet. Commitment at any effective level seems not to be an ability of groups of franchisees. As their collective minds now work, they feel entitled to competence/protection as a matter of "right" (whatever that is) and because of that they are simply waiting for someone to provide it.

Since no "right" on earth is self executing, no matter what they taught you in political science class, attitudes of entitlement produce nothing useful. Why can't franchisees seem to recognize that obvious fact?

They didn't get what they bargained for - in their minds - and want "justice". Inasmuch as what they signed on to did not provide for what they thought they were getting, they, as adults, in law are getting what they bargained for. The correct analysis is that they failed to recognize that the agreements they signed never said that they get what the sales pitch/marketing materials said they were getting.

They are not a "family".

They are in business by themselves.

They are not their own boss.

Nor, have they invested in any commercial vehicle that has prospects for a successful future -without a lot of work being done.

The courts enforce what they signed, not what they later wish they had signed.

Where does that leave them? It leaves them with only self help and self help is fraught with liability risk. The choice in a franchise system that is draining away their resources is between slow financial death and taking the risk associated with a turnaround through self help. How in hell does one accomplish that?

The Road To Glory

The road to glory is paved with personalities. There are definable personalities who are running your franchisor company. Their characteristics are known, unfortunately not any more deeply that epithetically. The things that need to be fixed spring from what is happening in the market place and the fact that their abilities to guide the company through the happenings without hurting franchisee financial performance are inadequate.

A method of approach has to be configured. It is not realistic to expect collaboration from people if your opening gambit is to itemize in loudly proclaimed expressions all their perceived shortcomings.

There is, after all, a bit of sonofabitch in each of us. We aren't perfect either. At least tacit recognition needs to be given to the fact that a close evaluation of our own constituency would uncover some warts too.

I am good and you are awful will not yield a desired response or open that door through which you must walk. This is reality.

I have sat in too many franchisee association meetings listening to epithets hurled at franchisor managers by people who were chronically late with many obligations, to put it mildly - and the principal reason for not doing what was agreed to was always self serving opportunism.

In some instances the franchisor was aware of the defaults but tolerating them for later use as bargaining chips - something that every franchise agreement specifically allows the franchisor to do but not the franchisee.

When the pain in the ass franchisee wants consent to open additional stores there will always be this stuff in his file to justify a refusal of consent. The same goes for anything else a franchisee might want to do that requires franchisor consent. The uses of those seemingly small peccadillos are many and delicious, which I have elaborated elsewhere.

While the personality profile of the people we must deal with is configured, and we have devised a few plans for how best to make the approaches we want to make, a goals agenda should be made and ranked in order of priorities. There are several, time being one and cost efficient feasibility being another. Rank the goals. Some goals will be interrelated so that they may be presented and achieved as a package, while others may need spacing.

Goals and projects need responsible people to take charge of their execution. Within your group there will probably be more than one person with a special interest in particular goals as well as the skill sets necessary to accomplish them. Identify them and privately vet their suitability and willingness to put forth the effort in a timely manner.

Each goal must have its own business plan. The plan must be cross examined viciously before it is presented, because that is exactly what management is going to do. If you cannot defend your thesis you have just wasted a lot of time and your credibility. Debug the plan to the greatest extent possible. There is an inside track for the plan. Find the management person who controls the track and win his/her support.

Until you have actually proved your ability to create and execute brand enhancing new concepts it is a hard sell. Once you have made your bones life will become easier unless you get cocky or careless.

You save up reputational wampum just like you save money. Don't spend your credibility before you make your bones on the next projects. Winners know how to share credit and shut the hell up about how great they think they are.

The road to franchisee primary participation in brand enhancement is not easy at first.

There will always be detours. It has to be managed and counseled by people who understand the process. Find such people and bring them on board to help guide you.

Theirs will be the job to ask the tough questions that members of your group will not want to ask for reasons of political correctness.

They pull their weight.

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Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop.

Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits.

There are in every segment of our economy, at every moment of the day companies/people who sense that some significant project for which they bear responsibility is starting to move in a bad direction.

Whether it is:

1. A franchise system filling with disenchantment due to market changes for which requisite adjustments have not been found and made-

2. A fashion house trying to cope with designer disputes and threatened license terminations-

3. Dealers that need to be terminated in order to more effectively aligning the company's direction with its marketing strategy or foreign trade issues -

4. How to build a more international network and mitigate exposure to foreign jurisdictions should things not go as planned -

The list is endless - that movement from well being to impending serious difficulty arises.

The people to whom you regularly turn for guidance in more normal circumstances are less helpful when life starts to get tougher.

They may have long tenure and vast company and specific industry knowledge as well as knowledge of the people involved. However, theirs is not responsibility for stepping away from the immediate picture and providing calibrated options that can with econometric reliability be sorted and prioritized.

Finally, let us assume that the situation/company/relationships now coming into higher risk are worth saving. Some are so desperate that the die has been cast.

Most of these relationships are founded upon written agreements containing clauses taught in law school or by long custom that are terrible impediments to braking as brinks are more closely approached. Feeling trapped by inopportune language, most law firms I have encountered advise the pulling of triggers, giving notice of claim or default, stated in those stilted lawyerese that so endears our profession to the rest of the world.

But contracts have other clauses, largely unwritten in the traditional sense. They have become incorporated into the business model of the agreement by the force of experience and change. Lawyers who can read often can't find these clauses due to lack of substantive insight. They may be legal scholars, but this isn't a law school final exam.

If pulling triggers for fear of being accused of not exercising one's rights and thereby losing them could without sacrifice of position be replaced, would you consider it?

And what factors would you have to take into account to decide to take a more unorthodox approach to dispute avoidance that could save the deal/relationship/realignment project that you really wish to implement?

Begin with the metrics. The metrics are not a set of likely numbers if one approach is chosen. The metrics are differentials between performance number sets when alternatives are not only netted against each other, but considered in series. Yes. You can do both. If you know you can still fight if the preferred approach doesn't work, with no loss of position, could you ever even think of not doing this as I suggest you should?

Obviously this is not addressed to scorched earth egoists who like fiddle music in the midst of conflagration. Most companies are rational. It is to those rational companies that our approach makes the most sense.

Few people are always or absolutely right. In most instances there is room for adjustment. The passage of time alone suggests market changes that make old agreements less suitable to modern issue resolution.

Lawyers who believe only in contract language can never accomplish what I am speaking of.

If you would like to explore this avenue to rational prosperous relationship preservation, give us a call 281-584-0519.

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My education and experience in crisis avoidance and - if that fails - crisis management began rather early in my now more than 50 year professional practice.

The purpose of this article is to illustrate how the seeds of disaster are planted and grow, slowly at first in many instances and then explosively, and how best to avoid or manage those life threatening events.

The context is a story of three companies' experiences. One probably could not be avoided, as it was the product of the human tendencies that operate as it approaches critical mass and then explodes.

The other two were instances of avoidable mismanagement coupled with refusal to deal with anything that was not openly supportive of the agenda of a limited leader/owner - bullying as we conveniently call it today.

1. Let's deal with the giant company syndrome first.

It was the company's heyday. It led its field in almost everything it attempted. It had more money that just about any enterprise on earth. Its sales were more than the gross national product of several countries combined and its profits were mind boggling.

Department heads worried more that if they failed to go over their budgets the budgets would be reduced the following year. While enjoying an as yet unearned designation as an antitrust specialist, I was the lowest of the low in an enormous group of highly educated experienced people. What I really got to do was observe and learn.

No confidential information will be revealed in this article. Everything here is of public record and very old. Most of the people involved are long since gone to heaven.

In retrospect I think it is probably impossible for normal human beings to remain modest, humble and maintain their essential humanity in the face of so much wealth and power. I am not against wealth and power, but in this instance we are speaking of national level wealth and power - supernormal even for large companies.

Oddly enough, while antitrust enforcers sought and failed to bring it down, it ultimately brought itself down with inbred delusionality.

2. What I quickly learned was that most crises come from management blindness and resulting gross miscalculation.

The notion that one may be possessed of so much power, authority and wealth as to be immune from disastrous consequences is practically always the seed from which the tree of emergencies grows. This company was an extreme example of that, far more so than any other place I have ever been.

What I observed that opened my eyes to the notion that no one is sufficiently powerful to be immune to disaster was a trio of catastrophic instances of management arrogance and of management being oblivious to the opportunities for change in the marketplace.

  • The management arrogance incident involved attempting to destroy a critic who had put his finger on a fundamental product weakness.

  • No one was to be permitted publicly to suggest that this company was imperfect.

  • The corporate braggadocios included such things as boasting that it was four deep in every position - the definition of wastefulness - and that its law department was The Praetorian Guard of the World's Largest Industrial Organization.

You just can't make this kind of stuff up.

The consequence of the incompetent attempt to destroy the critic was the establishment of organized insistence upon better automotive safety and the enactment of laws addressed to that and several other issues on which prior to that moment in history the company had had its own way. The genesis of the plot was laid to the law department.

Oddly enough, at the same time, its most effective potential competitor came out with a revolutionary design named The Ford Mustang that swept the market with excitement. Lee Iacocca really was the smartest man in the room.

Within a very short few years the Japanese, led by Honda, took up where Ford had begun and the era of the giant, powerful, fast, quick, gas guzzling behemoth of an automobile began to fade.

Ultimately, the product of such ingrained arrogance was the failure of the entire company and a federal bailout to try to save the jobs it potentially represented. In such a rarified atmosphere it is probably unrealistic to expect what would seem rational to normal people.

Anyone suggesting that management look into a mirror, on any level, would be summarily cashiered. After all, "What's good for General Motors is good for the USA", according to its chairman Alfred Sloan.

We begin with this vignette only to demonstrate that there is no one so mighty that he cannot be the author of his own comeuppance, even if it takes a while. The world does change. Circumstances do catch up to everyone.

As always, you can call me, Richard Solomon, at 281-584-0519.

A very long time ago (about 15 years) I wrote about why new franchisors fail.

During that 15 year period we lawyers have "improved" upon the legal infrastructure of the franchisor quite substantially.

As you may know, the franchise legal infrastructure, a/k/a franchise agreements and FDDs, have moved significantly along the road to elimination of all legal risks for franchisors, except maybe for the more hard core thugs.

If you are not and do not intend to become a hard core thug, you might just want to read all of this.

There is still a lot of room for sound concepts to be developed into investment worthy business replication models. And the fact that in doing that your legal infrastructure has morphed into much better protection should be a positive influence for you.

After all, isn't risk reduction what this is all about after you demonstrate to yourself that you have a profitable model and that you can translate that into a profitable business for others even after loading onto it the costs of being in a franchise relationship?

The Current Franchise Landscape

Even in the old days there were dodgy franchisors:

  • They sold tons of franchises and opened very few.
  • They made profit representations that were total fiction and impossible to achieve.
  • They said things about where the business was positioned and about the quality of the support they provided that were outright falsehoods.

In the 1960s some states began enacting franchise disclosure and relationship laws modeled somewhat upon the laws regulating securities selling.

But there were also a lot of really good, serious opportunity franchisors, and a reasonably careful person with some professional help could buy into such things as KFC, McDonalds, Little Caesars Pizza, Pizza Hut, Wendy's and Burger King, among others.

Today there are many more dodgy deals being put out for investment to less able investors.

The techniques for getting around the law one way or another have become more sophisticated. Analysis of potential franchise investments is more complicated. Most lawyers shrink from giving any business advice or analysis for fear of professional liability lawsuits. Asked about an opinion whether a particular franchise is a good investment, the lawyers say that it might be if they are telling you the truth, and stop there - utterly useless.

Franchise blog sites abound on the Internet, chock a block with broke and whining franchisees on their way to bankruptcy and unable to afford legal representation. Class action lawsuits against tough franchisors take years and are rarely certified by the courts. When they are, they drone on for a few years and settle out for paying the lawyers, with the franchisee class members getting little or nothing.

Where Does That Leave You?

If you really have long term intentions regarding the health and survivability of your franchisees, it helps to build a dynamic financial model of what the business is that your franchisees have to live in.

(None of the bozos do this. They don't really care anyway. All they want is as much fast revenue as they can squeeze out of the system)

For the serious long term franchisor, departure from the IFA norm can really help you measure the health of your system.

But you have to make the franchisees send in the tax returns their agreements require anyway, and from those, you can build the dynamic financial model, making the adjustments to derive an approximate EBITDA. It is not the impossible project that the IFA says it is. 

The reason it isn't thought to be a smart move is that then you would eventually find out which franchise system in any business segment is the most profitable, and once that got out no one would ever buy any of the others in that segment. Nobody wants to be known as tail end Charlie on producing positive cash flow.

The IFA also fears that such activity will one day lead to compulsory financial performance disclosure, which is a distinct possibility only if the IFA lobbying arm, Franpac, runs out of money.

So it is a bit of a dilemma. You really cannot count on the information not getting out. On the other hand, since the franchisees will soon be doing this for themselves, there is little justification for you to deprive yourself of the information. Dynamic financial modeling will enable you to see what the traffic can bear and continue to have positive, meaningful yield potential for your franchisees.

If your franchisees start a lawsuit or arbitration proceeding using dynamic financial modeling to show that you are tearing the financial heart out of the business they invested in, you would have to build your own model to dispute theirs, and yours might have to be rather contrived and convoluted in its attempt to show that theirs is not reliable.

Econometric modeling of markets has been used for decades in antitrust litigation, to positive effect. The government lost its first merger case under Section 7 of the Clayton Act because the target defendant used competent econometric modeling. The same thing soon after that happened when the FTC lost the breakfast cereal oligopoly case. I know because I brought econometric modeling into both those cases.

Financial Models for Franchise Systems

Financial modelling of franchise systems is not more complicated than that.

The universal solvent would be a cooperative project that produces a really high value dynamic financial model. That, as we say in Texas, ain't gonna happen.

Franchisors that operate numerous company stores, if they are going to consider this, should have a separate financial model for the company stores. While it may lack positive sales information potential, the ability to compare company owned versus franchisee owned financial results probably would yield marketing information. It would show what we have always believed to be true, that absent artificially imposed barriers to positive cash flow, franchisees really do better than the company does in producing cash flow.

But the really important value of dynamic financial modeling would be that it would tell you when you are approaching marginalization of the franchisees through add on extraneous periodic charges. If you went just one step further, you would also know your franchisees' debt structure profile and would be able to determine what they can afford in terms of remodeling the stores and even to prearrange the financing of large projects before you impose them.

Lenders pay commissions to those who bring them large deals like that.

In this interim before everyone is doing it, you can designate all information regarding financial modeling to be a highly secret body of information and treat it as such. If you designate it secret but everyone in the company has access to it, you are just kidding yourself. If more than five people have access to it you can forget confidentiality. The grunts who churn the basic data can be controlled if you don't fire them every now and again.

Attitude Issues

No franchisor is ever going to be loved by her franchisees. That is axiomatic. Within a year or two of becoming anyone's franchisee, the attitude becomes one of disbelief that there is anything special or unusual in being your franchisee.

They believe your support sucks and that they are getting little or no value from being affiliated with you. How virulent this attitude is will be the only variable. If you don't have a competent information management protocol in place your franchisees will rob you blind. There are just as many cheating franchisees as there ever were dodgy franchisors.

Back in the days when franchisees filled out monthly paper sales reports, the audit of their actual performance was their biggest fear. Of the literally hundreds of depositions I took in cases having to do with under reporting terminations, not one franchisee was ever under reporting unintentionally.

Some of the stories of whining franchisees and what they were charging to the business would make your eyes roll back. One franchisee in Florida was writing off a twin engine airplane against the revenue of a print shop with a three mile territory. His lawyer went ape when that part of the examination happened. Lawyers rarely make the effort to understand the finances of their clients before the horse leaves the barn, and clients never tell you where the bad stuff is hidden. If you don't find it yourself, you can usually bet that your opponent will.

Since you will never be loved in franchising, your contentment will come in providing a working positive cash flow franchise model from which you will become wealthy. If you need more than that, well, be prepared for large legal bills.

The Ultimate Franchise Solution

The ultimate franchise solution for anyone wanting to begin or expand a franchise system is to provide a concept that you have field tested and proven to be revenue credible in a franchise mode, and then to continue to measure its financial performance through dynamic modeling. To be sure, you will also have to improve its appeal to its customer base, but that is what you tell your franchisee prospects that you do best. It helps is that is true.

(I am publishing another article about the risks of becoming a franchisee. If you read that you might be offended. Franchisees who see that I drive both sides of the franchise road often criticize me for that, and some franchisors wouldn't touch me with a stick because I represent franchisees too from time to time. I never worry about that, but be aware that I see this business from both sides all the time, every year, year after year. My feelings about franchising are really love - hate, but that is because I wish I could make it better and that people could more safely invest in franchise opportunities.)

As always, you can call me, Richard Solomon,  at 281-584-0519.

Many years ago I was pulled away from my usual assignments to do a major product production tolling agreement between two of America's larger food companies.

It was a stroke of luck for me because it provided something new for my interest in multivariate risks management. Since then I have prepared many multivariate high risk agreements, and it is always an enjoyable as well as remunerative adventure.

When you think of every brand as a franchise in itself, it fits perfectly into my customary practice of managing franchise relationship disconnect issues.

Recently, I have been able to mix some of my more basic interests, consuming olive oil, with my interest in being able to negotiate and prepare the enabling agreements that bring together great marketing companies in America. More specifically, working with the best producers of great Extra Virgin Olive Oil and managing risks inherent in horticulture to delivery.

This is a wonderful exercise in multivariate risk management.

Olive Oil - Fraud and Standards

The notoriety of product purity fraud in the extra virgin olive oil business has stimulated my interest intensely. I love good olive oil to a degree that borders upon religion, I think that I probably consume good olive oil at the level of a Greek.

I am now eating the world's most incredible and unquestionably pure olive oil, and every meal is almost a religious ritual.

Olive oil is something with soul. You consume it with such incredible gratitude. I long ago gave up on European wines, with occasional ventures back there only when the auguries compel it.

California and the American Pacific Northwest is to me the world's most fantastic wine producing area, but has yet to arrive when it comes to top quality and taste olive oil.

Inasmuch as good wine also enjoys the presumptuousness of highly specific imprimatur, especially in France and, to a somewhat similar degree elsewhere in Europe, one might well expect that the snooty who insist upon their nomenclature prerogatives would, when put to it, lie cheat and steal to keep the black ink flowing on their financial statements.

Tom Mueller's book and blog, Extra Virginity, depicts the degree of hardship that olive oil producers are facing in the current economic difficulties and the "blending" that has become rampant to enable what is labeled Extra Virgin Olive Oil, "EVOO", to be sold profitability.

What is blended into it is often not even olive oil.

What most Americans buy as EVOO isn't, to make a long story short.

Whole Foods Market and Standards

However, there is some hope.

I was browsing in a new Whole Foods Market in Houston last Sunday, sitting at their new wine bar placed next to the olive oil shelves.

A rather nice looking woman was looking rather lost as she tried to determine which bottle of olive oil to select.

I walked the few steps over to her and pointed to the Lapas olive oil. She asked why I suggested that and I explained to her that it was from a reliable producer and told her that it was a house brand for Whole Foods Company, one of the very few trustworthy house brands in the world olive oil trade and completely organic.

She smiled and took the Lapas bottle as her selection.

Risk Management of Sole Source Producers

Whole Foods Company had to have carefully researched this project. Contracting for a single source agricultural product in a distant and troubled economy is high risk to say the least.

I know what terms the agreement has to include, but I wondered how each of the contract risks in the Whole Foods - Blauel Group agreement was dealt with.

Fritz Blauel is an Austrian who went to Greece in the 1970s and became interested in olive oil production and cultivation in the Peloponnesus and Kalamata in particular.

The Greeks of that area were still using rather ancient methods, and he sought to influence the producers of the area in totally organic methods.

To make a long story short, he succeeded, and Whole Foods Company's house brand of really top grade olive oil (not their 360 brand), Lapas, comes entirely from Blauel's operation. He produces about 650 tons of organic top grade olive oil each year within his group of farmers, and it may be found also under the brands Mani Organic and Kalamata Gold.

The Challenge and Rewards of Risk Management

What does one think of when contemplating the establishment of such a relationship, beyond the market research and the position of the brand as a "fit" within one's business?

For the lawyer crafting the seminal protocol it is a wonderful challenge. It requires input from several specialists who will probably be found within the client company or be on retainer for the client company.

In the matter of food and agricultural products, those would include not just the market research folks but also the agronomists, food chemists, manufacturing technique specialists, those in transportation and delivery as well as the financial staff.

The issues, especially in the instance of purchasing foreign agricultural output from a single producer or single group of producers include the management of numerous risks.

When you have accounted for absolutely everything you and the group can think of you have to start playing "what if..." games. The what if games should continue throughout the process of building the relationship and the agreement, right up to the moment of signatures.

Even then you can be assured that there are contingencies you missed. When that jumps up and stares you in the face you have to rely for relief upon the credibility and trust you were able to build up during the relationship right up to the moment when the event arises, and your approach to dealing with it must be obviously fair for it to be successful.

By way of illustration, a client lost total supply from a sole source vendor for a whole product line because someone served a subpoena on the vendor without handling the diplomacy properly.

The vendor was in Iceland and it required a several day long "social event" with its Vikingesque CEO just to get talks started on the real problem. It took a few weeks to recover from the "social event". You simply cannot think of everything.

Particularly in the instance of olive oil being produced at an exceptionally high level of quality within one of the most troubled economies on the planet where no one feels secure, just the notion that minute controls can be expressed in a single writing seems farfetched.

The cultural and economic divides standing alone would be insurmountable without bringing into acute focus many talents and skills in common easy to read and effective ways.

The resulting economic engine microcosmically and with mutual compassion and grace generates profitable product integrity without sacrificing the art or the nuances of timeless beauty encapsulated within a sacred tree fruit. We are speaking of olive oil, sacred, healthful and delicious.

Commercial lawyers rarely get to work on a symphony of nuances that embrace a fundamental expression of an entire culture. Smoothing the contrapuntal rhythms into a composed useful protocol calls upon artistry of expression as it seems to seek a trivializing of the ephemeral, a capturing of spirituality.

This is an example of the grace notes of law practice. It comes to very few.

What must be produced is a reliable encapsulation of many inherently indefinite forces that are answerable in the normal course to the uncertainties of agricultural crops and worked on by farmers and associated trades as well as social and political upheaval.
At many points along the lines potential leakage can occur if care and sensitivity are not brought to bear. Investing in great things is not to be approached without the willingness to support a work of very fine art as well as a mundane agricultural food product.

Doing that with an eye upon effective economics is rather breathtaking. If you are already in this business as you read this you understand the nuances and risks.

I really enjoy this kind of work because I find myself working with extremely competent committed people who take an almost worshipful approach to the products.

Whenever I get such an assignment it is a call to celebration and wall to wall happy in addition to remunerative. Professional life doesn't get much better than that.

As always, you can call me, RIchard Solomon,  at 281-584-0519.

Lawsuits and arbitrations often sort out disputes in their legal sense.

They rarely sort out disputes in a satisfactory personal, business or financial sense.

Anyone familiar with the litigation and arbitration process can tell you about how unsatisfactory the result was in most instances.

  • They cost a fortune.
  • Think of the legal fees.
  • Think of the administrative costs (court reporters, expert witnesses, transcripts, travel, and the value of company resources wasted in the process).
  • Think of how little you achieved compared to what you hoped to achieve.

A few people come out of the process glad that they did it. Many do not.

There are better ways to manage disputes. After fifty years of law practice, I have learned how to avoid them rather than embrace them. The difference is incredibly better.

In any business context people can begin to become unhappy with their relationship.

The reasons for that are almost endless. The buildup of every full blown dispute began substantially before it came to "lawyering up" and the end of it came long after.

A large part of the reason is that people naturally seek to avoid confrontation. They don't want to deal with it. It isn't high on anyone's list. And so in most instances it gets worse rather than better.

Positions are taken that are defensive in the confrontation sense - what if we come to blows kinds of things. People write things, memos, emails, instructions that make matters worse rather than better.

Months and sometimes years are spent in mutual distrust (to put it nicely) and people do all the wrong things, like send each other accusatory emails and far worse.

The value of whatever the relationship may have been intended to be in the beginning is lost, at least to one side of this, but it keeps on going, more weed than flower.

That's how conflict and dispute management usually works. Anyone in business for a long time has probably experienced some or all of this. Not everything we do works out the way we intended.

How can we change the way this is traditionally handled so that the length of its infectious presence is minimized and its cost greatly reduced?

Where do you begin in trying to answer the question whether to try this better way of conflict avoidance?

To begin, one truth needs to be recognized: Anger has a Value of Zero.

If you can convince yourself of the truth that anger has no value, and if you can see that earlier rather than later dispute avoidance effort holds significant potential for favorable results, we can begin to bring costly confrontations to less destructive conclusions more quickly.

At the point at which you are thinking of sending someone an accusatory email, you are about at the end of confrontation avoidance at reasonable economic cost. If you have just received an accusatory email, this is your last practical chance to step back from the brink.

Part of the war persona is the ancient battle boast - I am wonderful and you are terrible.

If someone made you read BEOWULF in high school or college then you know what that ritual is all about. This is a tipping point that people do not recognize. They think it is a beginning. It is way past the beginning. This problem began way before that email, and if you had recognized it well before that moment you might never be sending or receiving it.

When you think of all you spent after that email went out in your last "fight to the death", you will understand the savings of funds and resources associated with my approach.

There is a pigeonhole practice for dispute avoidance called Conciliatory Law Practice.

But, what I am suggesting is way beyond that, far from any touchy feely politically correct exercise. This is hardball played with intellectual acuity rather than with noise.

Specifically, there are always ways to derive valuations of potential conflict results. Among those valuations there is one or more that both you and your potential adversary can live with, no matter what the nature of the dispute. These valuations are not solely derived through accounting exercises.

Accounting is a numbers only game.

If you have ever seen this work you will never handle potential disputes in any other manner?

Can a completely unreasonable person refuse to participate as a matter of irrational obstinacy? Sure. Then you can always go back to wasting resources in all out confrontation with nothing lost by way of positions having been compromised. Is that likely to happen?

Probably not. I have seen very angry people awaken to the realization that this is the best way possible to deal with disagreement. It is how you find the leverage point that makes this work.

Often that requires some very outside the box thinking.

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Within the next 15 years we will see dramatic changes in the franchising business.

Today the business is saturated with "me too" so-called concepts that lack adequate business model legs to survive even at marginal profitability through the lifespan of their franchise agreements.

Their FDDs are fiction and fantasy, and those who buy them lack relevant sophistication for small business investment (to put it mildly). In plain English, they are sold to fools who sign ridiculous draconian franchise agreements critically lacking in merit level consideration.

Soon they are whining to be let out of the deals as realities they could have discovered pre-investment descend upon them and they recognize the terminality of what they did. This will begin to change.

The franchise business cannot grow on toxic deals that are just myths designed to fleece morons.

The world does not need any more pizza, hamburger, sandwich, Mexican, Asian, ice cream, cake and fruit stores, print shop, single product, all other kinds of retail stores franchises.

When what is sold through a franchise system becomes available through alternative distribution channels that do not pay franchise relationship expenses, or over the Internet, franchisees are detrimented and lose investment value.

Anytime a franchise is configured so that the franchisor gets paid your revenue stream and then deducts what you owe from that and remits the rest to you, you will be robbed into bankruptcy.

Moreover, every time it is suggested that some new government program is afoot, someone designs a fantasy concept to fit it. Someone is now, for instance, selling franchises in which the mythical profit opportunity is based entirely upon Obama care being upheld by the Supreme Court. Even if it is there will not be sufficient funding to cover the care services that will be provided, a return on that investment plus revenue sufficient to cover to costs of being someone's franchisee.

The Old Model franchise business provided a living for legions of franchise lawyers who were essentially clerks grinding out template franchise agreements and FDDs, many hundreds of whom are now walking the streets looking for law jobs, presenting resumes that show they spent the last ten years being overpaid clerks.

The economic meltdown we are now enduring has impacted franchising as well.

So what should we expect the next phase of franchising to become. Here is my take on it.

1. Investor quality will change. Fewer investors will charge into buying a franchise without competent pre investment deal due diligence assistance. The horror stories are now so pervasive that greater care will be taken before betting the farm on someone's optimistic descriptions of so called "concepts".

To be sure, there will always be suckers, which means there will always be bozo franchise deals to be sold to them. As long as there are sheep there will be wolves.

But more intelligent franchise investing will mean that only revenue credible franchise opportunities will attract financially responsible operators.

Revenue credibility will have to be demonstrated in the sense that there is a provable track record of financial success after the costs of being a franchise are accounted for - all the costs of being a franchise, not just those specified in what is laughingly called today a Franchise Disclosure Document (FDD).

Franchises today that describe themselves as having a franchising expense of 10 % to 13 % of gross sales are in reality at 20 % to 25 % of gross sales. Such franchises have no legs and will only bankrupt investors.

2. Smarter buyers will force changes to the draconian terms of today's franchise agreements. Among the clauses that will be modified or eliminated will be those that tie in purchases, that run revenue through the franchisor's hands before the franchisee gets his share, that provide for so called liquidated damages upon termination, that prohibit group dispute resolution proceedings, that force acknowledgment that representations made were really not made at all, and no reliance provisions.

Intelligent investors will refuse to accept terms that put them in a serious bind should things not be as represented.

Courts will refuse to allow enforcement of contract provisions that exonerate fraud through the artful use of language. Bad facts will cause a re-examination of just how sacrosanct contract language has to be.

It may be that this carve out is limited to franchise investment cases of certain profiles, but some way will be found to curb the "license to steal" provisions that are today in every franchise agreement.

3. Life cycle characteristics will become a more aggressive segment of due diligence. No one will any longer rely on the fairy tales told in franchisee interviews, as it is now sufficiently obvious that franchisees rarely tell the truth to prospective investors for many very valid reasons, including fear of franchisor retaliation.

Expectations that franchisee associations will provide a reservoir of truthfulness for investors may not come to fruition in the next 15 years.

The problem with that is that truthfulness is not attractive if it would result in making it more difficult for franchisees to sell their franchised businesses. Franchisees should not be expected to act contrary to their perceived interests in order to protect third parties. Will that aid and abet franchise fraud?

Of course. The solution to that issue will again come only from competent deal due diligence in addition to legal due diligence. Those who offer only legal due diligence will find it harder and harder to attract franchise investor clients.

People will more maturely recognize that so called government regulation of franchising is a myth and that they conduct competent pre investment due diligence or face failure. Were it otherwise we would not just now be exposing the massive "liar loan" schemes in which franchisors insert fraudulently inflated financial performance information into the SBA loan application process to enable SBA backed bank loans for franchise offerings that haven't the slightest possibility of providing return on investment.

4. Similarly, realists will no longer expect real government assistance in improving the quality of franchise pre investment disclosure or of franchise relationship abuse restraints. Investors will know that if the franchise provides the franchisor the right to be a predator that is precisely what will happen. The vehicle for most of these changes will be the more substantial investors who can afford multi unit and area development deals. Single unit investors will continue not to have the bargaining power to get the best terms or the best deals.

The single unit investor will continue to be the victims of franchise charlatans more often than not, as single unit investors tend to fail to purchase competent deal due diligence help.

Established multi unit operators often buy area deals from new or recent franchisors, believing that they know how to make the business model work and won't suffer if the newbie franchisor isn't up to speed on support.

With all the bottom feeding going on, it should be expected that good operators may take advantage of the difficulty of a brand and buy it for nickels and dimes.

Any new owner with franchise knowledge knows that you can always find ways in today's franchise agreements to squeeze more money out of the franchisees, and that if you squeeze them to death that really isn't much of a loss.

The acquiring good operator company can take those locations and convert them to their brand. Those locations can be had with a mere swap of releases in most instances, as the starveling franchisees would see a walk away as a positive event compared to having to pursue bankruptcy as the way out of the franchise agreement with its liquidated damages and personal guaranty clauses.

When the new crop of toxic guaranteed failure franchise concepts dries up over the next ten years this will become less of a factor.

Some of these going broke franchise systems are also conducive to money laundering by narco traffickers as well as a front system for drugs distribution itself. One day someone will do an expose on the use of decay stage franchise systems by narco traffickers.

By 2030 I expect to see franchising have a different and better look.

It will be harder to bring a franchise to market, so only better franchises will make it. Charlatan franchise consultants who tout that anything can be franchised in order to get people to hire them to help franchise their businesses, usually drop outs from past over the hill franchise companies, will be less and less credible as they are exposed for over selling the ability of any franchise company to extract large extraneous revenue streams out of any franchise system, regardless of its success in attaining any significant measure of growth.

More of these guys would already be defendants except that they usually are judgment proof and not worth suing.

There will be very few viable new franchises. The good ones will be extremely rare. Indeed, the good ones are already extremely rare, as certain popular categories are already too overcrowded and price sensitive to be investment worthy. That includes the all time favorites in the fast food business. None of them is worth having. The few good ones are not being franchised, like Chipotle Grill for instance.

Toxic new franchises will tend more to lean toward technological themes and be sold to nerds with no business savvy.

You have to be really stupid to buy a food franchise today, or to buy any franchise that is already 20 years old. The few good old ones are bought by existing operators when they become available, and new buyers never get a chance to buy them. Why allow a resale to a newbie when someone who already has a positive operating history in that same franchise is willing to buy it?

Vulture capitalists are securitizing old franchise agreements in moribund companies and categories.

Bain Capital is scamming the public into buying stock in over the hill Dunkin Donuts, saying that this regional geriatric has new life in expanding westward.

That ought to be a great lesson in what not to invest in. Bain reaped millions in fees; risked nothing; and loses nothing if price of the stock crumbles. It is the franchise version of the mortgage backed securities scam that created so much damage in 2008.

One could posit that, having learned nothing from the mortgage backed securities fiasco, franchising is headed for its own royalties backed securities disaster, and that is certainly not unlikely. If so, the ball should drop within the next few years. It is unfortunate that evil begets evil until the roof falls in, but so it seems goes life these days. This is the kind of abuse that I expect to assist in turning the market in franchising from a thieves market into a more rational market over the next 15 years.

In an intelligent investor's world, no one would go near any franchise related investment without extremely competent deal due diligence in addition to the legal due diligence. When asked what in franchising today is worth investing in, my usual response is NOTHING for the moment. There may be isolated niche opportunities, but only extremely competent deal due diligence could possibly perform the tests necessary to identify a real opportunity from a false opportunity masquerading as a real opportunity.

Franchise law practice now is centered more upon people wanting to find ways to escape from the franchises they invested in. I look forward to the positive changes I anticipate in the next 20 years or so.

As always, you can call me, RIchard Solomon, at 281-584-0519.

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A large portion of the difficulty and expense of dispute resolution is that there are pre-emergence symptoms that are not recognized and dealt with.

Financial advisors evaluate and assist in the management of financial variables. There are other kinds of variables that impact the humanities side of company performance as well as its financials. If these are taught about in school, few people get passing grades and most don't take the course.

Business degree curricula being certificate oriented and template compliant regimes such as they are, the analysis and competent management of non-arithmetic variables are beyond their scope and capability.

What is taught is that nice people do right and you are a nice person so you must be doing right all/most of the time. Since neither proposition is regularly true in most instances, troubles happen.

No amount of instruction can rule out disputes. Disputatious situations will arise no matter what. What is unfortunate is that they are not identified with sufficient anticipation and not competently managed so that their impact is negated or minimized. Dispute anticipation can't be taught. This comes only with years of actual dispute management/resolution experience that enables one to see what it was that caused the disputes to arise in the first place and in retrospect identify when a dispute began to take root.

I have spent so much time over so many years going through case files and interviewing the people involved in so many lawsuits that a sensitivity to moment of arising and methods of avoidance simply became part of my psyche. In later years I can recall conversations with client managers in which the real goal was not in the resolution of the situation but in the avoidance of blame for its having happened. This, simply put, is unnecessary.

How does one go about not having to worry about blame for difficulties?

Dispute forecasting is both art and science. It does not readily lend itself to hourly rated retention, as the passage of time during which difficulties are identified/anticipated, how best to manage them is identified through collegial consensus, and the chosen method(s) implemented make hourly rated expenses prohibitive. Mission creep and the incentive to maximize billing poison the quality of the endeavor.

In addition, the resource to provide the expertise is not usually conducive to appointment to officer or director status. The resource needs to remain outside and to be involved in doing the same things for other companies in order to maximize its usefulness. A resource with only one client quickly becomes more fearful of alienating that client than focused on confronting root causes of difficulties. The ability to move on without suffering economic dislocation is indispensable to this kind of work.

How then does one establish and carry out being someone's effective dispute avoidance/management resource?

I believe the most effective relationship in the performance of these functions is a continuous presence/availability. Now that we have such things as email and electronic file transfer, we do not need to be constantly under foot. We can be available for face to face meetings at client need or convenience, but most of this can be performed remotely.

Retention terms should be periodic but not hourly. The resource and the client can come to mutually acceptable terms per month or quarter so that mission creep and billing incentives are removed from the scene. Since this kind of work requires the establishment of trusting relationships with relevant management and open channels of communication with no increase in project cost, this longer periodic arrangement fits/works better than any other.

The alternative is what companies suffer through now. A conflict on any given situation begins to arise. It is swept under the rug for as long as possible. Eventually it grows, like Rossini's description of slander, from a whisper to cannon fire. During this period of development, memos are written, emails are sent, and angry conversations occur that are later received in evidence or memorialized in deposition testimony transcripts and dueling affidavits. When the lawyers finally get involved the situation is on fire, the expenses are horrific (including management dislocation), and in many cases the resulting damages can destroy or financially undermine a company.

This unfortunate set of circumstances is no longer necessary. People need to feel free to deal up front with negative issues without career threatening consequences. When significant disputes can be avoided through competent variable management techniques, these negative impacts can be eliminated or so mitigated that threat levels are not critical. Of course conscious, intentional misconduct is an exception that nothing can eliminate. However, vindictiveness and scofflaw behavior are rare notwithstanding all the attention they get in the newspapers and on TV.

Most folks want to play reasonably close to the rules. The more you think about this the better it sounds and the more you will want to consider this approach.

 

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

 

There are in every segment of our economy, at every moment of the day companies/people who sense that some significant project for which they bear responsibility is starting to move in a bad direction.

Whether it is a franchise system filling with disenchantment due to market changes for which requisite adjustments have not been found and made; or a fashion house trying to cope with designer disputes and threatened license terminations; dealers that need to be terminated in order to more effectively aligning the company's direction with its marketing strategy or foreign trade issues - how to build a more international network and mitigate exposure to foreign jurisdictions should things not go as planned - the list is endless - that movement from well being to impending serious difficulty arises.

The people to whom you regularly turn for guidance in more normal circumstances are less helpful when life starts to get tougher. They may have long tenure and vast company and specific industry knowledge as well as knowledge of the people involved. However, theirs is not responsibility for stepping away from the immediate picture and providing calibrated options that can with econometric reliability be sorted and prioritized.

Finally, let us assume that the situation/company/relationships now coming into higher risk are worth saving. Some are so desperate that the die has been cast.

Most of these relationships are founded upon written agreements containing clauses taught in law school or by long custom that are terrible impediments to braking as brinks are more closely approached. Feeling trapped by inopportune language, most law firms I have encountered advise the pulling of triggers, giving notice of claim or default, stated in those stilted lawyerese that so endears our profession to the rest of the world.

But contracts have other clauses, largely unwritten in the traditional sense. They have become incorporated into the business model of the agreement by the force of experience and change. Lawyers who can read often can't find these clauses due to lack of substantive insight. They may be legal scholars, but this isn't a law school final exam.

If pulling triggers for fear of being accused of not exercising one's rights and thereby losing them could without sacrifice of position be replaced, would you consider it? And what factors would you have to take into account to decide to take a more unorthodox approach to dispute avoidance that could save the deal/relationship/realignment project that you really wish to implement?

Begin with the metrics. The metrics are not a set of likely numbers if one approach is chosen. The metrics are differentials between performance number sets when alternatives are not only netted against each other, but considered in series. Yes. You can do both. If you know you can still fight if the preferred approach doesn't work, with no loss of position, could you ever even think of not doing this as I suggest you should?

Obviously this is not addressed to scorched earth egoists who like fiddle music in the midst of conflagration. Most companies are rational. It is to those rational companies that our approach makes the most sense. Few people are always or absolutely right. In most instances there is room for adjustment. The passage of time alone suggests market changes that make old agreements less suitable to modern issue resolution. Lawyers who believe only in contract language can never accomplish what I am speaking of.

If you would like to explore this avenue to rational prosperous relationship preservation, give us a call at 281-584-0519.

Trouble hides in the weeds for a while before it actually strikes out and bites.

There is little difference between finding out where and what it is and snake hunting.

In the corporate world, the two most probable snake hunters will be the General Counsel and the Chief Financial Officer.

The CEO/Chairman may liminally sense it but people in that role tend to deny it for as long as possible.

They don't want to be distracted or confronted by it and they don't want to think about the expense of dealing with it. That allows it to fester a bit.

Eventually someone with awareness of the situation will walk into the General Counsel's or CFO"s office and start a conversation that leads to revealing what is hiding in the weeds..

The GC or CFO will be the person who brings it to the attention of the CEO, at which point the CEO recognizes as the result of that conversation that this must be dealt with or the costs associated with dealing with it will get out of control.

Real trouble can't be dealt with via publicity or advertising.

General Motors has been advertising for years that its management are all "professional grade" and they are going to take at least a $ 750,000,000 hit for shoving its faulty ignition switch issue under the rug for several years and for power steering malfunctions of several year's standing - about 3.5 million cars.

Toyota is about to take a similar hit.

Johnson & Johnson has been doing this for decades.

Someone in the past knew of the problem and decided to try to conceal it and fix the aboveground part of it on the cheap. That almost never works. The company is just deluding itself.

Scores of other companies do this every year.

They never seem to learn.

Denial is a very strong impulse.

Waiting to deal with it until after your potential adversaries have already lawyered up is a very wasteful approach. You can make a much better arrangement for your company if you lead the way. The humiliation and injury to sense of integrity associated with GM's head engineer on this particular matter testifying under oath at his deposition that he does not recall the matter; when it came up; making any decision not to fix the defective cars that already went out to the market, but just to correct it going forward are simply tragic.

When those who know are so afraid to tell the truth for fear of being fired, your company had made a terrible blunder.

Even if GM can afford $300,000,000. In addition GM has now taken the Chevrolet Cruze off the market and Edsels itself beyond anything in history. Professional grade? Yeah right! This is what comes from head in the sand techniques of dealing with impending crises. These were known long ago and nothing helpful was done.

Your company may not have the financial depth to take these hits periodically.

My belief regarding who are the first to begin to register impending trouble is based on the fact that it is always the General Counsel or the CFO who is the first to call me and suggest we visit.

They are the two most likely places that management go to for consolation and direction when bad things are on the horizon. They are usually the people in whom most managers have the most confidence.

Those are the guys to talk to if you are a crisis avoidance specialist.

Sometimes it is their outside law firm if company management does not want it known that they have brought in a crisis specialist,

If potential crisis is perceived it should never be taken by a company's regular law firm.

The reason for that is that they have an inherent conflict. Their first concern is always going to be for self preservation. Either they may have had a hand in the trouble - think Enron - or they tend generally to be ultra possessive about other lawyers being allowed to get close to their clients. If you have ever watched them at a convention with a client person, it is fun to watch them cling to these folks constantly to avoid any other lawyer getting a chance to be alone with them, even for a second. If you know what to watch for, it is hilarious.

Many a crisis situation has been mishandled for just that reason. Confidentiality obligations keep me from telling some horror stories.

They tend to call who they know. The worse the matter is perceived to be, the more likely it should and will go to a specialist rather than to their usual law firm.

There may be liaison with both groups for a short period, but the crisis specialist has a different perception of how potential bet the company situations should be handled. For one thing, putting a lid on the PR folks is an immediate must. What goes out of a company has to be carefully and centrally controlled, and PR template denials are usually the worst opening gambit. If you are being compelled to say something by a stock exchange you are very late in knowing about the issues arising.

But even then the PR auto deny gambit is usually a wrong move. In this day of people tweeting their bloody lives away, control over unvetted public statements by the company itself must be as tight as possible.

Sometimes it isn't a business dispute, but a problem of some key person or group being involved in improper and potentially embarrassing conduct, the scope of which is limited only by the human imagination. Corporate board room types are not well versed in how to manage this kind of damage control, but the first place the news will go is to the GC or the CFO in all likelihood. That is the moment when (after the CEO is advised) the potential crisis management specialist needs to be called.

Misconduct by a key person may be exploited for economic advantage and it may have been engineered deliberately just for that purpose.

Anywhere in the world. Any kind of matter at all.

The difference between the normal course difficult situation and the impending potential crisis is that the latter cannot be dealt with using template approaches.

Template approaches are taught in every law and business school and is practiced by every medium/large law firm and PR group.

Why that is inappropriate and why it usually leads to a terrible result is another story, but it usually does not get you where you want to be. In a really terrible situation, a bet the company problem template approaches are regularly disastrous.

Finally, another nice attribute of the crisis specialist is that, since he won't be anything like the people you socialize with, you are done with him after the conclusion of this one situation.

You can then go back to the golf pals with no bad blood hanging over those relationships.

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As always, you can call me, RIchard Solomon, at 281-584-0519.

The term "epithet" is most commonly thought of as just using cuss words.

The dimensions of epithet are many and diverse, and their applications materially adverse to those who use them when it comes to avoiding or managing disputes.

For example, everyone who can now look back on an adverse dispute resolution result will be able to remember that in the beginning there was a lot of emotional input.

Furthermore, that input was egged on overtly or subtly by their lawyers. The angrier your client can become and the longer you can help to keep him angry, the larger will be the fees earned by "helping" him through the event.

Epithetical approaches are the least positive result productive and the most expensive way to deal with tough situations. By way of sarcastic example, consider that the names we call those we dislike tend to make whatever the chasm is between us wider, impassible, outrageously costly. The obvious "son-of-a-bitch" is simple and mild. Think terrorist, gangster, communist, socialist, rabble rouser, shyster, dead beat, malcontent, ingrate, Hamas, Hezbollah, Nazi, bomb thrower, jihadist and so on.

How does identifying a potential adversary as one of these help to get through the rough process? It doesn't.

Most of the time the accusation is also simply wrong. Your adversary may have a sincere belief that he is right - that his position lies upon solid ground. A good many times - as I have found in the last 52 years of dispute resolution practice, when you first call him that name, you will not yet have total command of all the facts and you will later find out (when all the facts are martialed and assessed by someone without passion) that you are not in as perfect a position as you assumed when you sent that first email; let out that first press release or took other first step actions that angry people tend to take when they are accused of doing something wrong or when they think someone is fudging on obligations.

Think, for example, of the campaign against Ralph Nader that General Motors waged when Nader challenged the safety of the Corvair.

Just the cash that GM paid to Nader when the lawsuit was resolved over GM having his hotel room bugged sufficed to finance the establishment of the Center for Automotive Safety.

The additional costs incurred by GM's insisting that it could do no wrong include not only expenses directly related to the Corvair, but market injury suffered by GM generally resulting from the enormous blunder; being inattentive when Ford developed the Mustang and when Honda came into the United States market. The accumulated injury came from arrogantly insisting that there was something called the General Motors Way and that no other approach was either correct or to be tolerated.

To this very day with its scandalous behavior regarding recalls and faulty electronics, we can see that the General Motors attitude has not changed in the least.

They still advertise that they are "professional grade" people - nothing could be further from the truth and they are the only ones who don't know that. GM has turned itself into an excellent case study in how not to deal with risk and confrontation. General Bullmoose is long dead, and that is true for GM as it is for any other company with similar inclinations.

General Motors is an extreme example of epithetical thinking, but not even they can afford what they are now caught doing.

Even if your company is publicly held and you are playing with shareholder money rather than your own, epithetical thinking, assessment, analysis of the essence of any dispute makes its resolution much more costly in dollar terms and in market position/reputational injury.

Never let your PR people or your lawyers cheer you on to be overly adversarial. There are always less costly and quicker ways to get beyond any dispute.

And no matter what you may think at that first moment, you may not be in the enviable position you thought you were in then. Ultimately you will receive greater respect and accolades for a more mature manner of dealing with adversity than you will get from being just another corporate loudmouth later proven wrong, or at least not right.

What is required to head off confrontation is that you step back from what your training and your instincts have conditioned you to do in the face of perceived adversity.

If you were an elite unit military person you were told never to hesitate to shoot or you will end up dead. You normally would think that you must present an intensely adversarial front or be consumed by a more aggressive opponent.

In dispute avoidance management and in dispute resolution management you must take another approach while keeping open the option to shoot if the more reasoned, outside the box techniques do not produce at least positive movement.

How that is accomplished differs somewhat with the particular facts of the situation and with the chemistry that has resulted from what has already happened that cannot be taken back. That is the point of differentiation between the template following traditional law firm and PR group and the expert crisis avoidance/management resource.

I am not supposed to be blunt here, but I would rather risk being politically incorrect that fail to get my point across.

I want you to think of how I do things as handling it so that you do not have to attempt the burden of stuffing the shit back into the horse.

In its best mode that is more likely to be the positive result if I am consulted very early on, before you have made any move or response to anything that falls within my definition of being epithetical. You can deal with an adversary being epithetical if you can contain yourself - keep your head when all about you are losing theirs, as Kipling put it.

When your normal professional resources are telling you to follow your instincts and your former training, it is very hard not to go in that direction.

But when you disregard the adversaries and act/speak as though you have command authority when in fact you may not have command authority, you always get the General Motors result.

You usually do not know for sure whether you have command authority that early on.

All too often what comes out later makes you look dishonest or out of touch. You don't have to do that to yourself.

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The temptation is to think of this title as some word game without substance. If you give yourself a chance here you may see something very worthwhile and you may even want to put your company on this regimen rather than what you now have/use.

Litigation management is currently thought by most companies to consist of having an in house ex litigator monitor and work with the company's outside law firm(s) to shepherd cases through their lifecycle, relieving management of that burden and trying to keep a lid on outside law firm litigation expenses.

It quickly becomes rather inbred in many dimensional facets that have negative or at best neutral implications.

That is a really costly way to proceed and promises no happier resolution of disagreements that what I am going to propose here.

The system was born of less than imaginative contract draftsmanship (in cases dealing with accused default behavior in contract settings).

Since the scope of this can be made rather large, I will confine this discussion, the first in an intended series, to business disputes arising out of contractual relationships and in some instances tortious behavior as well.

Franchising is full of these instances. The fashion world is full of these instances. Just about all licensing of technology and the performing arts are very similar.

(I would prefer at this point to exclude from this discussion the extremely large technology licensing dispute territory for the reasons that there we are usually talking about giant parties to which legal expenses are thought of as chump change, and that antitrust and market opening considerations are always hovering over every aspect of these disputes. They are in those respects somewhat different in their management profiles than "normal" business dispute management.)

Almost all substantial business agreements provide that in the event there is a claim by one party that another party is engaging in behavior amounting to a default, prompt notice must be given in writing by the complaining party.

To be sure, some of the personalities involved have already discussed the issues and failed to resolve them, which is why the contract requires trigger pulling.

In my never humble opinion the main reason why this trigger is so often pulled is that in this stage of dealing with the problem the specific management resources have no resort to expert dispute resolution assistance.

Very few companies can afford or justify having a dispute resolution management expert on the payroll, and almost none of their outside firms have anyone capable and prepared to perform that role.

Actually, it is much more profitable for the outside law firm for the situation not to be resolved quickly and amicably at that point.

The pulling of this trigger inevitably calls for the writing of a strongly accusatory letter to the opposite party setting forth the complaining party's position in rather aggressive terms.

This, of course, though professionally correct, is really calculated to throw down a gauntlet, the single worst thing that could be done at this moment. It also starts a quick clock in most instances within which one must sort it out or whip it out, as we say in Texas.

This is the standard of American commercial corporate law practice, taught in every law school and practiced by all the right law firms - and it is the worst approach that could be devised.

Obviously the parties may "grant" each other extensions of time to do this or that, but the tone has now been set.

They aren't getting ready to get this resolved.

They are getting ready to go to war over it. In any privately held company where the leader is spending his/her own money, unless there are giant ego issues, this should instantly be recognized as insane and the company's lawyers should be asked to explain why such a terrible regimen has been inflicted on the company by those believed to be protecting its best interests.

Just about every time I get called in to help with a bad situation, this nonsense is inevitably what I find has been done.

The standard reasons given for the terrible first letter is that supposedly if you don't laundry list every blemish on the opposing party's face you will be claimed to have waived what was omitted and to have ratified that omission as now a part of the working agreement in question.

Rubbish! It really is the obvious primeval gauntlet throwing.

What should be done, even in the presence of gauntlet throwing contract clauses, is for disagreements with third parties should be given professional attention as they arise.

That is the moment when management can most profit from professional expert guidance.

Since your company's current legal resources do not include this focused resource, it should be found and summoned for discussion re how best to proceed, and then a decision made whether the recommendation is worth pursuing.

If the decision is to go with this approach, the gauntlet throwing contract clauses can be finessed as the immediate situation dictates it be handled, hopefully prior to the name calling stage of the relationship, but even if it is already too late for that to be avoided. After all, if you have already called someone a sonofabitch, s/he has also done the same to you, so the books are balanced albeit not at the optimum level.

If you like what you see, retain the resolution expert and observe how this approach works as well as how it preserves everyone's right to revert to combat in the event it is not bearing fruit.

No positions are compromised when this is done correctly. There is no downside risk other than that you may miss out on an expensive fight.

(As odd as it may seem, some clients have actually received CYA letters from their outside law firms disclaiming responsibility if following my approach backfires and bites them in the ass.

That has never happened yet, thank goodness. This doesn't always work. When it doesn't work no rights, positions or leverage have been lost and very little money has been spent, comparatively speaking. When it does work, which is most of the time, it works wonderfully.)

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As always, you can call me, RIchard Solomon, at 281-584-0519.

The next major economic blunder I witnessed enabled me for the first time to take the matter out of the hands of the blunderers.

A major client had acquired the leading company in its industry segment. The government attacked the acquisition under the antitrust laws.

The company's large Wall Street outside law firm with a partner on the company board recommended that the company simply roll over and agree to divestiture because no company had ever beaten the government in a merger case brought under Section 7 of the Clayton Act.

I opposed that and, to make a long story short, that was the first time the government ever lost a merger case under Section 7 of the Clayton Act.

It was then I began to realize that not having over the horizon insight into crisis avoidance/management did not have to be an incurable disease. You must immediately look beyond your normal representational resources for a specialist who can handle bet the company situations.

Later, after I had established my own law practice as a boutique business litigation resource, I had many more occasions to be that specialist.

A couple of other stories will help the reader with insight into how I handle potentially disastrous situations by going outside the box and looking back into the interstices of how the issues began to develop. I can now usually head them off or resolve them if I wasn't lucky enough to have been brought in at the very beginning before it went viral.

These examples developed in the following manner and they blew up in the clients' faces at just about exactly the same moment.

1. CEO - Great Leader, Terrible Witness

In the first such instance my client's former trial firm had garnered the account by agreeing with everything the head honcho said, telling him that he was absolutely right and that if he didn't make his stand on the issue in this case he could kiss his business advantages goodbye.

None of that was true and a competent law firm would have known that. To this day I don't know whether they knew it and misrepresented the situation in order to get the case or whether they really were that ignorant. They made their stand and lost the case. That was the point at which I was contacted.

The client wanted to appeal. The client wanted to sue the lawyers for not putting the president back on the witness stand for further testimony.

What an appeal would have accomplished would have been to take a lower court's correct rulings and have them confirmed by a federal court of appeals for a more potent precedent to be used against the company in all future cases on this pivotal issue - and there were a lot of them waiting in the wings.

When a franchise company loses a major case its franchisees see it as a wounded animal and close in for the kill.

I almost got fired because I urged them not to appeal but to simply take the defeat and move on.

I again almost got fired when I privately told the president that he was the worst prepared witness I had seen in years and that putting him back on the stand would have only made things much worse.

But I urged him not to sue the other lawyers because there were far more important things needing attention and there was no high probability of success in the malpractice suit anyway.

I think I was kept on because I was willing to be the first lawyer to say no to the president and take my chances on his being mature enough to recognize what it takes to do that.

There were more than a couple dozen other cases pending in courts all over the country to deal with, all previously "handled" by the same predecessor law firm, and they were all potential time bombs. We either favorably settled or tried to a victory over 15 of these lawsuits, whereupon the company started to shrink from the sheer weight of pervasive contention.

2. Winning Lawsuits versus Good Business

Winning lawsuits does not automatically translate into marketplace success, and this company turned out to be a one trick pony left behind by advances in its core technology.

Illustratively, when I suggested diversification over dinner one evening, the response was "When I want a goddam lawyer to tell me how to run my business I'll ask him".

The opportunity to avoid becoming irrelevant arose early and often. The company was enabled by a technological change in its industry, and it had mastered that technology. However change continued and its owner refused to adjust even though many asked him to.

"That's not part of our franchise" was his stock response to requests from his franchisees for support on the implementation of the newer technology in their franchises.

Told that the new technology was not part of the franchise, they opened separate businesses to exploit the new technology, using other names, and paid no royalties on that business.

Then the owner of the franchisor became furious and began accusing these franchisees of stealing from him. These were many of those other lawsuits I inherited from the prior law firm that had obviously not done any homework or saw the problem and pretended it wasn't there for the sake of the monthly bills.

The hardest of these were the California cases where covenants not to compete are not enforceable in franchise settings. Fortunately for my client, counsel for the franchisees was no more astute than that and mispleaded their claims so poorly that they could be defended to the point at least of them paying us money in most instances as the price for a release from an unenforceable covenant not to compete and a franchise agreement.

Configuring a potential loss into a revenue event allows it to be reported rather favorably.

3. Mass fraud claims

Next, in another case over 120 franchisees joined together as joint plaintiffs in a gigantic racketeering and antitrust case with pendant fraud claims, asking the court for $ 62,000,000. The company's CPAs threatened not to give a going concern opinion because of that case.

As tough as it was - and 120 plaintiffs with the same history tend to be believed by judges and juries - the franchisees actually paid us $ 750,000 to settle the case they had brought.

The real point of this story is that the owner of this franchisor had so cowed his officers and senior managers that they were afraid of making any gesture in the direction of the newer technology.

The man bullied everyone but me, it seemed. One of his officers once told me that they tried to keep us apart because at least now they were not losing lawsuits and they wanted us to continue as the company's counsel.

In the end our attorney client relationship was somewhat taken for granted to put it nicely and I asked them to obtain other counsel.

They threatened in writing to sue me for leaving them and went around telling people in town that they had fired me for incompetence.

No one believed that and I just ignored it.

That was the right decision. The company has since slipped into almost total oblivion, still unable to accept the notion that it has to evolve in order to enjoy continued success. I can keep the wolves from the door, but no trial lawyer can force any company to open its eyes to realities it wishes were not so.

The last of these stories involves another franchise company whose owner rose to the point of being delusional about almost everything.

4. Wasting your empire.

This last company, also a franchisor, benefited mightily from the advent of the personal computer. Its market position was so strong for several years that it could require its franchisees to buy their PC and other inventory from them and to pay in advance for it. It too was the largest distribution resource in its field.

Ultimately the market began to evolve and its hundreds of franchisees were seeing other avenues they wanted to investigate. The VAR and VAD - value added retailer and value added distributor - were making their entrance into the market and wanting recognition.

The company began to lose its grip on its franchisees, partly from the changes in the market and partly from the delusionality of its owner.

It had come to me before becoming my client and been turned down because the lawsuit it wanted to bring simply did not include any valid claims. When I told this to its in house general counsel his response was that they would find and hire a lawyer who agreed with them. They did. They lost.

The owner had once borrowed a rather small amount of money - around $ 250,000 - giving a note that, in the event of default, would be convertible into a large percentage of the company's stock. The note holder sold the note to someone else, which was his right to do. The maker, owner of a by now very successful franchising company, decided that it was inappropriate for the holder of the note to sell it and announced that he would refuse to pay it. The note holder gave notice of intent to convert the note into shares of the company, which the owner refused to recognize.

The head of the company refused to honor what was essentially a slam dunk obligation and hired the same firm to represent him and the company in that debacle as well. He lost control of the company; had to pay the note plus interest; and had to pay the expenses and attorney fees of the suing note holder. The franchisees, as could be expected, saw this as the pregnant moment to strike and they did so.

While this was going on I had favorably settled or prevailed in 14 straight franchisee cases in courts all over the United States. Ultimately those victories were to no avail.

That franchise system is now no more than a shadow of its previous self. Its former owner fled to a pacific island and continued to get into more trouble until he was kicked off the island.

The enterprise was literally wasted because its controlling interest refused to deal effectively and immediately with impending negative prospects.

As odd as one might think it, similar lapses occur all over the United States. Company leadership seems to feel that by taking a fresh look at a bad situation there is an inherent exposure to criticism. Fear of "embarrassment" and wishful thinking lead to these companies doing and saying the wrong and most damaging things imaginable, urged on by the two most inept resources at hand.

One should never follow the advice of its PR people when bad things happen. PR people do not deal in reality and do not know how to address tough situations in other than formulaic ways, assuming that all situations, no matter what, can be made to fit into their templates. That is simply wrong. At its best it is inadequate.

Similarly, a company facing distress should not give responsibility for addressing it to the accountants or law firms that were associated with the conduct that is being challenged. Those law firms and accountants are almost always preoccupied with covering their own potential liability and for that reason have a poisonous conflict of interest. Get new resources in there and see whether there is a more realistic way to go about addressing difficulties when they arise. For examples of what to do or not do, seehttp://www.franchiseremedies.com/Franchisor_Mishaps.htm.

If you really do want to minimize injury and damages from impending difficulties, you need to make yourself open to critical assessment.

People with confrontation avoidance capability need to be able to speak to you about the situation in real terms in real time.

You are not right because you say you are right.

Even when you really are right the circumstances may be such that you would better serve your own interests by considering compromises of less than indispensable issues and principles.

Disputes are never about "the principle of the thing". They are always about several principles that are vying with each other for priority of consideration.

With the passage of an amazingly short period of time the leading principle may seem less important and other considerations may call more heavily for your attention. Life is fluid, not static.

Get an expert and watch better things happen to you.

As always, you can call me, RIchard Solomon, at 281-584-0519.

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We are still recovering from a crisis of market collapse caused in major part by abuse on the part of banks and investment houses.

From mortgage backed securities where the mortgage portfolio was of extremely low quality to derivatives called credit default swaps, the Federal Reserve and the SEC enforcement division were asleep at the switch - called deregulation - and everything hit the fan.

As should be expected there are cries for more stringent laws and tough regulation by the current administration and a return to deregulation by the opposition.

Franchising is also an area in which there have been some wonderful entrepreneurial opportunities & yet many atrocious abuses that have not even been considered as enforcement opportunities by what most people think of as regulators of franchise sales and relationships.

For several years people have been going on to BlueMauMau or Unhappy Frranchise after having been unsuccessful in a franchise venture, calling for more stringent regulation of franchising.

They complain that securities are more stringently regulated than franchising.

But, franchising does not need a stronger hand controlling it.  For two reasons.

1. To begin with, the regulation of franchising and the regulation of securities sales start from the same platform.

Both prohibit false or misleading statements, acts or practices in connection with the sales process and go another step beyond the common law of fraud in prohibiting omissions of fact needed to make what is said not misleading in the light of the circumstances under which the statements were made. (As a caveat, the common law of fraud in many states can also be used to cover omissions that produce fraudulent inducement, but under the common law it usually requires a very strong set of facts before a court will use omissions as the basis of a finding of fraudulent inducement.)

What people fail to appreciate is that enactment of a law is not by itself regulation. In addition there has to be serious enforcement commitment and that costs a lot of money.

Money is not available for strict regulation - not even for casual regulation of franchising activity in today's world. There are too many higher priorities for every dollar.

There is also another important consideration when thinking of franchise regulation.

2. Can prospective franchise investors self protect without government intervention? Yes.

The self protection capability makes it a very tough argument to favor active regulation of franchising. They govern best who govern least applies here as much as it does in any other context.

The reason is that markets have to be free markets in order to function in their best mode. Regulated markets always allocate assets less efficiently than free markets. We make policy choices to justify government involvement in banks, utilities, airlines and securities markets. In each of those markets there is no ready availability for consumers to self protect.

Franchising is different.

What is different about franchising is that there are really competent resources available to potential franchise investors that can vet the legal and the business issues in any franchise offering. If you want to invest in a franchise and you have not previously been involved in the franchising process, you are unfamiliar with the intricacies of franchise selling.

It does not matter one bit what you did for the company you worked for or what degrees you hold from any university.

Franchising is a different kettle of fish and you do not know how to swim in it no matter how grand your opinion of yourself.

  • This statement is based on the actual experiences of several thousand former business executives who lost everything they owned because they thought they were smarter than the franchise salesmen.

  • These are the people who refuse to accept that their ineptitude may have contributed to their loss and who are demanding that the government step in and more stringently regulate franchising.

  • When it is pointed out to them that they could go on Google and search for FRANCHISE LAWYER and through questioning of the lawyers on the first page of the search results find competent legal and business issue due diligence assistance, they hurl epithets at the person making the suggestion. The notion that they may have had some responsibility in their own failure is beyond their ability to accept.

Let's look at a few of the kinds of mistakes these former executives made when they were vetting their own franchise project.

1. How Much Can I Make?

The most glaring is that in one way or another they were given financial performance projections for the franchised business they were looking at. These projections came directly from the franchisor in Item 19 of the FDD - least likely. They may have been given sales information and any financial information beyond that was so hedged as to be useless. They failed to spot the useless issue.

They were given financial performance information by reading Entrepreneur or some similar magazine. Franchisor P R and sales departments plant hortatory stories about their franchises in these magazines touting profitability. While a few franchisees may achieve that profitability it is never typical of the chain as a whole.

Often there are no franchisees in that system doing that well. They failed to spot that this magazine information was just a shill planted story and not some real journalistic piece. If a franchisor buys space for these planted stories and advert space in the magazine, the magazine will then hail, salute or designate that company as a leader in the industry or franchise segment, awarding the designation as though it was somehow earned. This utter charade was never spotted by the investing executives.

They prepared a business plan - fairy tale - to present to a lender in support of a start up loan application in which they inserted a financial performance pro forma. The information for the pro forma came from the franchisor, either directly or through some franchise broker or loan broker. The numbers provided always show what the lender would require to "show" that this was a loan worthy investment and almost never represent even a reasonable approximation of expected real financial performance of the franchise. The investing executives never spotted this charade or if they did spot it they pretended not to in order to get the start up loan.

The franchisor arranges for a franchisee to speak at a sales presentation and this franchisee provides financial performance information, usually saying that his shop does even better than what is provided. Even if true, it means nothing to the new investor. However the executive new investor isn't sharp enough to appreciate that he is being taken in.

There are other issues that follow the same path, but these two other examples are enough to show you what this is really about.

2. Not understanding a 500 page contract, and not caring.

When the time comes to read and sign a franchise agreement, if the executives read the contract at all - and many later testify that they didn't read any of it - they find clauses that say that the franchisor never gave any financial performance information that was not contained in Item 19 of the FDD; that no one is authorized to provide financial performance information on the part of the franchisor; that no one did provide any financial performance information about this franchise; and that if anyone did provide financial performance information, the investing executive did not rely upon such information in making his decision to invest in the franchise.

3. Agreeing to Falsehoods.

All of these clauses, plus the merger clause that says there were no promises not actually stated in the written agreement, are absolutely false. They represent a total fiction. The investing executive knows that they are false and that he did get the financial performance information and relied heavily on it in making his investment decision.

But he signs the contract anyway. He also in many cases fills out a questionnaire just before the deal closes in which he is asked in writing whether he received financial performance information and if so from whom.

He fills out the questionnaire saying that he received no financial performance information and signs his name to that document as well as to the franchise agreement. He has just screwed himself royally.

How will he be believable when he later claims he was defrauded through the giving of false financial performance information to induce him to buy the franchise? He won't be. It's that simple. Most judges will not even allow such testimony to be given in the face of his having signed those documents.

Since he screwed himself by admitting what he knew was not true, he now claims that the government needs to protect the franchise investing public from the franchise scoundrels. And when someone points out that he had access to competent pre investment due diligence resources and failed or refused to use them, he becomes furious and calls that person all sorts of bad names. He will never accept responsibility for his own stupidity. His self inflicted wound will never heal and he will go to his grave whining about his misfortunes.

Conclusion - Know Yourself, even if it costs money.

It is easy to avoid these traps if you are willing to pay for the assistance.

No additional regulation of franchising is justified. Self help would prevent almost all franchise fraud.

Those who seek protection already have sufficient and ample resources, which they are not using. Why should the public be forced to pay when the individuals have sufficient resources?

It is that simple and that obvious.

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How Do Franchises Go Bad?

Franchises start out with an initial cash requirement - initial fee, business set up costs and working capital. It is not unusual for this to be $ 500,000 to $ 1,000,000. The money comes from liquidating a lot of family assets plus SBA guaranteed loans or start up loans that are not SBA guaranteed.

Franchisees always have to personally guarantee the full performance of the agreement. In addition to the regular operating costs, there is the ongoing cost of being a franchisee, nominally in the disclosure materials around 10 % of gross sales.

Because the disclosure materials never tell the whole story, the cost of being a franchisee begins at around 15 % of gross sales.

Hidden franchise fees include the additional cost of having to buy from designated vendors who have no competition when selling to the franchisees and can charge more than competitive prices. Some parts of some franchise systems are franchised separately under add on licenses with additional royalties. Software is often licensed separately for additional charges per month.

The list is long. When I tell franchisee clients to go back and refigure their business plan pro formas using 15 % of gross sales as the true royalty and advertising cost and then come back and talk about whether the working capital number is adequate or whether they can come out at all, they are often in disbelief that people would do something like that to them.

As the franchise matures, imaginative franchisors find other things that can produce additional revenue streams from the systems at the cost of the franchisees. So called improvements, remodels, and miscellaneous fee add-ons drive the cost of being a franchisee to over 20 % of gross sales. Franchisees cannot survive.

The businesses cannot be sold to others in most instances. Avarice has bled the system dry. There are other nuances in the mix, but I think this shows the pattern of what is happening in scores of tough franchise systems today. Oddly enough, some of the profit that is removed by the franchisor resulted from franchisee cheating.

There is no difference in the honesty rate between franchisors and franchisees. Business information tracking capability has so improved over the last 35 years that cheating is harder, but it still happens. If this was about telling war stories I could use up a lot more space on the subject of shenanigans.

There are exceptions to Blaise Pascal's suggestion that the more things change the more they are really the same - Le plus ca change le plus c'est la meme chose. Franchise branding is one of those situations from the perspective of many legal doctrines.

This case study is somewhat dear to my heart because it involves a company that in years past I used to represent from time to time until it decided to hire its own in house general counsel, a man who's entrepreneurial spirit caused him to think it was just fine to demand a kickback/referral fee from outside law firms he hired to represent the company in lawsuits.

When I declined to pay him for the company's legal business, for reasons just about anyone can appreciate, the company and I parted ways.

To be sure, there were other ways in which the gentleman derived extraneous income from his client's business, and it might be a good story scenario for Saturday Night Live, but not here.

Fortunately, there were other firms that also declined his blandishments that in desperation were hired anyway because the company's situation was rather desperate and the firms were ethical enough to just say no.

In these desperate situations the large firms did not produce victories and charged a bloody fortune to obtain settlements that were hardly favorable, in one instance charging $16,000,000 before fessing up that they were unable to present a plausible case.

The latest of these exceptional situations came to a bad end recently and represents a good case study about a company's management believing it could simply spend its way to victory no matter what.

It happened eventually to General Motors, so for a privately owned franchise company to convince itself that a litigation budget was the road to invincibility is an exceptional case study in arrogance and one worth discussing.

There is a doctrine in intellectual property law known as "secondary meaning". Secondary meaning imputes to a "look" the value and power of a trade or service mark when that "look" becomes so identified in the public mind with the company that the look alone becomes an automatic source identifier. Imagine that the Golden Arches were not registered intellectual property of McDonalds. Even without that statutory protection they so speak to McDonalds in the mind of the public that one would say with confidence that they had secondary meaning.

Not all things that could eventually have secondary meaning as source identifiers attain that status, and some that do eventually lose it because the "look" becomes generic to that segment of trade, mainly through its functionality aspects.

Functionality is a secondary meaning killer because serving a function common to most companies in that business inherently means that all will adopt it. In the beginning, however, for a fleeting moment something functional could be a source identifier in that interim before others start using it throughout the industry. Think of the "serpentine" line up of customers waiting for service back in the early days of Wendy's when Wendy's was the only company using it. There was actually a case on that subject in Tennessee back in the day (Judy's Hamburgers).

In normal circumstances functional features do not achieve secondary meaning status. This case study involves the assertion of an incredibly ridiculous claim that the interior appearance of this brand of restaurant was itself a brand identifier. Impossible and absurd on its face in all but the most exceptional situation (which this was not), but insisted upon as the product of arrogance and stupidity by company management and by the large nationally known law firm it hired to make that assertion in court. The legal expenses were outrageously huge.

One could posit that they were not outrageous on the theory that the firm had to know it was a balls out loser and would only make the assertion if it could find a client dumb enough to pay a fortune to finance the effort. It would be difficult to find a competent trade dress lawyer to give an opinion that the functional aspects of the interior of any chain restaurant had secondary meaning.

Face it, the interior contains tables, chairs, counters, maybe a bar, and any kind of "back of the house" configuration you like. Paint and decor could be extremely distinctive, but that could be fixed by an accused infringer with a cheap paint job on a weekend.

No one litigates over something curable by a cheap paint job.

Where it is a paint job resolution the accused infringer has to be a fool for refusing to redecorate and the franchisor has to be a fool for not being able to resolve it short of the cost of full blown litigation to a verdict. That is a total failure of relationship management as well as dispute resolution management. But this company and its former franchisee did exactly that.

Moreover, the company hired one of the country's major franchise litigating firms to handle it. No large firm can afford to turn down a big fee with all that overhead, no matter how stupid the position it has to take in a public forum.

Let's take a second look at this and give someone the benefit of the doubt by suggesting that the decor infringement claims were really just the manure spread across a field planted with the seeds of a post termination covenant not to compete. If that is the case, then the franchisor is doubly stupid. If the covenant is enforceable, why screw it up with BS? And if the covenant claims are worthless, is the BS decor infringement claim going to put lipstick on this pig? This is wall to wall stupidity no matter how you slice it.

Something tells me that maybe this client went through a number of competent firms with self respect who turned it down before it came upon a firm who, for the right money, would represent anyone on any claim regardless of the merits. There's a song about a girl who just can't say no, and this is that kind of firm. I know this company's regular firm - went to school with one of its partners, and he is smart enough to know better than to do this to a regular client. I also know the trial firm who took the case, and this is the kind of trash they will roast in a slow oven for a long time and tell you it's good brisket. If you are a spoilt child client who will pay anything to have someone tell you that you can have your way, I guess you really deserve this kind of result. Intelligent folks don't shoot themselves in the foot (or elsewhere on their anatomy) like this.

One could posit that the usefulness of this court's ruling to other departing franchisees represents an enormous impact loss. Almost all franchise contracts and disclosure documents claim great value in distinctive decor. Will their next step be to try to force franchisee investment in a new decor that is distinctive, an investment that at this stage if its life cycle holds no promise of generating ROI. When arrogance trumps analysis the result is always to ignore realities.

Certain kinds of relationships - franchising is one of them - tend to imbue the lead player with a sense of entitlement that simply won't work all the time. The passage of time - the impact of history - changes in technology, market and company life cycle changes all coalesce to erode balances of power. What once may have been a reliable option may, even with the same contract language over time become less useful and even dangerous. That's called reality. Refusal to take hard looks at your situation when trouble arises often leads to unnecessary expenses of large magnitudes and to serious structural damage to your future potentialities. The insights borne of crisis management experience transfer well from industry to industry and company to company. Don't let your access to this resource go unused. It may save your company, your distributive systems and your future.

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Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits.

Representing franchise investors who are capable of developing entire territories or states is a very different ballgame from representing single unit investors. The reason is simple. Single unit investors have no leverage.

Territory developers have very great leverage with new or recent franchisors and the issue is how that leverage may be used to establish trigger points in the franchise relationship that seriously reduce the risk of overreaching as the relationship grows over the years. There are also simple dollar amount triggers in play.

Exceptions to this are situations in which investors that already have experience in the franchise concept they wish to invest more in because they already know the franchisor and have decided they can do business with him. That is why you seldom see a good franchise resale opportunity that is available to an outsider. That franchisor would much rather have one of his own family be the buyer in any resale because of experience and reduced risk of the new owner not bringing a full experience and financial load to the resale's future performance.

The franchise investor that has not only the financial ability but also a positive history of operations performance, franchised or not, is the diamond every new concept franchisor is looking for. In some instances the investor may even be stronger than the franchisor and the deal could possibly capitalize on that relative strength in several ways up to and including the investor actually becoming the franchisor.

So many of the new concept franchisors are looking to be quick hitters and the possibilities at some point become a little like the television show "Shark Tank".

The triggers are many, but a look at just a few should give you an idea of the approach.

  • Money now versus money later is always a multivariate negotiating category.
  • Territory rights, non infringement, rights of first refusal and alternative distribution channel infringement rank high on the list.
  • The investor's right to invest in other concepts notwithstanding in term covenants not to compete in the proposed franchise agreement provides fertile ground, especially when played against other variables.
  • Terms of renewal and resale rights are important considerations to the power investor.
  • The right to develop your own stores or to do it as a sub franchisor, sharing in the franchise revenue stream from those stores, often accelerates the available rate of development of new stores.
  • Think of the triggers that might be available regarding dealings with vendors and overcoming the difficulties of not having access to reasonably competitive suppliers. The power investor can make that more rational at the beginning without regard for what might happen to other less important investors.

There are no rational excuses for not considering these important triggers when a new or recent franchisor is dealing with a power investor. You can't side step important issues with claims that you are prevented from doing what is needed by some law or because your lawyer says you can't do that.

The power investor knows better and if the new franchisor tries those useless ploys he may lose the opportunity to get a very strong initial player that can enhance his salability reputation with others. That foolishness is for the single unit investor who usually doesn't know up from down in franchising.

For the franchise lawyer representing these investors there needs to be awareness of the corporate, taxation issues that would be in play with each variable.

The power investor already has these resources retained or employed, and these folks have a history with the investor that should not be compromised by using the franchise lawyer's abilities in these areas. Open channels to the investor's professional resources that are already in place are critical to mistake avoidance.

The franchise lawyer is his own separate specialized resource and brings focused expertise that those others don't have.

A few years ago a local very large retail chain made the mistake of buying into a franchise system thinking that their customary business lawyers were sufficient. They weren't. The deal was inadequately vetted. The relationship failed to work in ways that should have been seen and prevented before the papers were signed.

The investor lost 27 stores in the breakup and had to wait out the two year covenant not to compete before going back into a business that the family had been in for three generations.

That kind of calamity is never justified. Tax and regular business lawyers are not equipped to vet or negotiate large franchise deals on their own.

If you are an franchise developer, area or master, drop me a line and connect with me on LinkedIn.

Last week, I described a new approach to dispute resolution within a franchise system.

Are there some situations in which this new approach simply will not work? Of course. Nothing works in every situation. Here are two examples.

1. Think of an over the hill or "very" mature franchise company with franchisees departing or about to depart who do not intend to comply with the post term covenants not to compete in their franchise agreements. The typical company position is that any departing franchisee that seeks to avoid the covenant not to compete must be financially destroyed or every franchisee in the system will leave.

The view is that this is do or die with no middle ground. I have seen this dozens of times and made a lot of money over the years trying these cases.

As the outside trial lawyer I know that I have been called in later rather than earlier and that all heels are by now fully dug in.

If I were even to suggest compromise at this moment I would be removed and a more tractable trial counsel retained.

If I win the lesson is taught and the non compliant departing franchisee has been made to pay a price that will deter all the others.

But, I have made non compliance vastly more costly than compliance. The other franchisees become less inclined to make a fight over this and everyone goes back to loathing each other in a business relationship that one side is milking into its eventual grave and the other side is too disorganized to be creative about a business positive solution.

The lawyers made out like bandits. The parties are still as miserable as before the whole process began.

2. Think of a business organization leader who is simply so egotistical and insecure that he could never be introduced to any compromise.

With him everything is always and immediately "The principle of the thing". He refuses or cannot see that it is almost never a matter of a single principle. It is always a matter of several principles in competition for attention and waiting for some rational person to sort them out according to their value priorities.

When ego forecloses rational business valuations, everyone loses.

If this boss owns the company, well then it is his money and he can very well do as he chooses with it.

Often, however, he has other investors and it is also their value that is wasted even more than his (if they tolerate the ego aggrandizement).

These are the two most often encountered situations in which there is usually no opportunity to achieve a rational economic disposition of a coming conflict.  (Actually even in these two there are other rational approaches, but few listen.)

When you need competent advice on how to change your franchise business model, connect with me on LinkedIn and let's chat.

People have mannerisms. They wring their hands, fidget, and look away when answering, sweat, and do all sorts of other things. If the witness tends to do things that are extreme, they may need to be the subject of training. If the mannerisms are not extreme, I tend to leave them alone.

After all, the witness is human, not an automaton. Sometimes the mannerisms may be taken by a jury or arbitrator as an indication of a tendency to evade or to be less than truthful.

In your final summation it is useful to address the issue of credibility -- how does one tell whether to believe a witness? When someone wrings his hands or looks down into his lap when speaking, he may be doing that because he is a liar, or he may be doing that because his is simply nervous and apprehensive about being a witness in a public forum or hearing.

The person who looks at the ceiling and waits to answer may be concocting perjury or simply concerned that what he is about to say is correct. You can't tell which it is from the fact that he does that.

So that may not be a reliable indicator of truthfulness.

The person who looks you straight in the eye and speaks to you as though you were social acquaintances may be doing so because he is telling the truth or because he is simply brazen in his mendacity.

That is, therefore, also not a reliable indicator of truthfulness.

It is the same for practically every personal tic.

But there is one very reliable extrinsic corroborator of truthfulness.

Do the records and documents that were created at the time the events occurred, when there was not yet any dispute, when there was no motive to impress any judge or jury, agree with the witness' testimony or contradict it? That is the best test of witness reliability.

Is he telling you now what he was telling his associates when all this was happening. Do the contemporaneous company memoranda confirm what the witness has said? If he one story then and is telling a contrary story now, one of them is probably false.

The more reliable statement of facts is the one made when no judge or jury was looking. That part of your summation takes ten seconds to make and is worth its weight in gold.

No matter what you do, things simply do not always work out as you hope.

Litigation is a very inexact process in which emotions and biases and expectations do not always combine in harmonious, symphonic works of artistic grandeur. It is not as bad as trying to predict the weather -- that is pure chaos theory.

But there are many dependent variables in litigation, and risk expands exponentially with the number of dependent variables.

The dependence upon third party witnesses is one very critical element to case evaluation.

You can't have access to third party witnesses the way you have access to your own client's employees. If the third party witnesses are your client's customers, there is serious concern about lost business as an overlay to the concern to optimize the quality of evidence.

I have seen a subpoena for records end serious, long-term business relationships because it was ineptly handled. If the third party witnesses are competitors of your client, another layer of risk is added. And the story gets worse as it gets longer.

This tutorial is about preparing witnesses to whom you have essentially congenial access. It focuses upon a small, albeit important aspect of dispute resolution. It does not pretend to account for the overall risks of civil confrontation. That is another tutorial entirely.

 

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(This is Part 6 of 6 on How to Win Franchise Trials. Here is Part 1)

Noise reduction consists of purging the witness' speech patterns of habits of expression that are irrelevant and potentially harmful. It is important to re-emphasize here that you are not coaching him to speak untruthfully, but to speak truthfully in the most effectively communicative manner.

Most of us are not conscious of how others hear us when we say things. We think we are doing just fine when misimpressions are sometimes occurring.

One of the worst things that people do is self justify. The answer to 'Did you do that?' is not 'I would never do such a thing.' The answer is a yes or a no.

Many who hear self-justification and not direct testimony come away with the impression that the witness has just tried to duck the question for the purpose of concealment.

Teach the witness to listen to the question and to answer the question that is being asked and not some other imagined question.

The questioner is not asking him to give a speech about his rectitude and integrity. He is asking if something happened; was the witness involved; how was the witness involved; and what was the purpose of doing whatever it was that was done. These will be asked in separate questions and need to be responded to directly.

The witness needs to know that he will not be entrapped by this response pattern. If you are calling the witness and are on direct examination, he will be asked these questions in a manner that will give him the opportunity to say what needs to be said.

If he is being called by the opposition and roughly examined, you will be there to resurrect his opportunity to say the proper things immediately after the opponents have concluded their questioning. He can feel comfortable that he will not be left hanging from some limb.

Long-winded statements of company policy, mission statements (the single most horrid language usage in the universe), and rectitude do as much damage to credibility as false testimony.

When you aren't sticking directly to the point and answering questions forthrightly, the perception is that you are being evasive for purposes of concealment and false testimony. If the answers from the witness are direct and forthright, the impression left with judge, jury or arbitrator will be that you are being truthful.

This includes direct answers about the good and the bad. You shouldn't be there in the first place if the bad outweighs the good. You should have settled and taken your medicine in private.

There is a tendency to speak ill of the opposition. If the opponents' acts are blameworthy, a straightforward statement of what they have done ought to suffice and leave the desired impression of what miscreants the opposition truly are.

Name-calling and undue rancor leave a bad impression. Let their conduct speak to the issue of what they deserve, not your opprobrium and epithets.

Hopefully, they will not be so gracious when it is their turn to speak, and they will by contrast show that you are being direct and that they are not.

Many lawyers make the mistake of thinking that accusations, often repeated, are a substitute for evidence. It is not and will elicit proper objections and rulings from the bench that confirm your view of the negative value of name calling as a 'filler' for evidentiary voids.

You should teach the witness his proper role and show him how attempts to confuse his role with yours can get him into big trouble. His role is to provide truthful information and to be a gentleperson.

Yours is to be the advocate.

It is your function to be concerned about where your opponent is going with a line of questioning. If the witness deems that to be his function, he is not concentrating on simply giving accurate answers. If he gets into that mode, he will not be convincing.

Constantly coach him to simply answer the question that is being asked and leave the advocacy to you.

Role-playing in this and in every other phase of witness preparation is an indispensable tool.

 

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(Here is Part 4  This is Part 5 of 6 on How to Win Franchise Trials.  Here is  Final Part)

You simply must prepare the witness about the story told in the written documents. There are two ways to approach this. 

One is to simply talk to him about the events that are at the core of the dispute. It should be as much a conversation as you can make it. Save the tough questioning for another round.

The other is to have first given him a set of the relevant documents to study to refresh his recollection, and then have the initial conversation about the events.

I think most people will appreciate having been given the documents first rather than having been allowed to misspeak and then perhaps be embarrassed when the documented history does not agree. If embarrassment raises its ugly head, it will either be a positive learning experience or you will have to go back and rebuild part of the relationship with him.

Keep reminding him that there is no agenda to tell the 'story' in a particular direction. At this point the object is to get him to appreciate what really happened and sort out any incorrect recollections he may have had. In this manner you are consolidating the truth in his mind and eliminating unreliable recollections.

It may be that some documentation does not mean what it seems to mean, and this round will help you sort that out also.

People do not always say things in an unambiguous manner.

Sometimes it is useful for the witness to know what others have said about the events if their statements seem to conflict with his. If there is genuine conflict, it needs to get sorted out. If not, telling him what others had to say may not be productive. It would be helpful in this phase to know whether he and others who were involved have had conversations amongst themselves about the events, and what those conversations were. It is now a distillation process for the witness and for the documentation.

It is important to discuss the completeness of the documents.

  • Are all the files there?
  • Is anything missing?
  • Have documents been removed from any files?

If so, what happened to them?

  • File searchers and those involved in the operative events have been known to remove and destroy files.
  • In-house lawyers, seeking to impress their only client with their loyalty will do that also.

Witnesses will be asked about records retention/destruction when they are deposed.

Find out the truth before you are on a public record and under oath.

Once the distillation process is complete, and the witness and you are both confident that the essential truth is clear to both of you, and you are still comfortable with your case, it is time for round two -- noise reduction.

 

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(Here is Part 3. This is Part 4 of 6 on How to Win Franchise Trials.  Here is Part 5)

Our thoughts, so far, presuppose that you will be candid with a client or potential client once you have evaluated his position based on the available evidence.

If you will continue to tell folks that they are on the side of the angels when it is clear that the other side has something significant supporting it's position, and don't aggressively promote amicable resolution, then you need not read any further.

When Arthur Anderson accounting shredded documents regarding Enron's business, in the face of an obviously oncoming SEC and grand jury investigation, some fool concocted a position that they weren't doing that to conceal evidence or obstruct justice, but they were 'just' complying with their records retention policy. If you are at that level of stupidity, you are counting upon a jury of idiots, which, of course, Arthur Anderson didn't get.

And, amusingly, it was some dumb lawyer who concocted that scenario for the company. Delusional lawyers and desperate clients concoct fanciful stories that are not worthy of belief and try to sell them to a room full of ordinary folk with ordinary common sense. Most of the time it bites em in the ass. This article is not for such people.

We are now at the point at which our investigation about our client's position is telling us that we have a sound evidential and legal position, and we are not getting anywhere with initial efforts at reasonable settlement.

People will have to be deposed.

Now is when you prepare for trial -- not prepare for a deposition -- prepare for trial.

To me the deposition is the trial. I want my people to be as good in the deposition as they will be expected to be at trial. If that can be accomplished, the deposition transcript will not be useful in the witness' cross examination, for there will be no prior testimony inconsistent with his trial testimony. The deposition will serve to enhance chances of settlement.

Witness preparation begins with reassurance.

Tell the witness what you think about the case.

Tell the witness that the only thing he can do to hurt you is to be untruthful.

Tell the witness that if you have made a mistake and he spots it, the greatest favor he can do for you and for the company is tell you what that mistake is.

If his perception differs from yours, remember that he was there when it happened. You weren't.

Tell the witness that the plainer and simpler the telling of the truth is, the more believable a witness he will be.

Tell the witness that it is easy to remember the truth and difficult to tell untrue stories the same way more than once.

Tell the witness that what you are going to help him do is to tell the truth in the plainest and simplest and most direct form, eliminating extraneous noise that everyone has when they speak of events and their participation in them.

Tell the witness that not every fact in any case is going to be one hundred percent in support of your side of the case, and that the negatives have to be dealt with in equally straight forward a manner as the positives.

A witness who will, without hesitation, own up to a mistake is a believable witness. Having been up front about the bad stuff, what he says about the good stuff will be pure gold credibility.

If you have no confidence in your case because of the presence of negative facts, then you probably don't have a case and ought to settle it as soon as possible. Negative facts abound in every business dispute There are always mistakes in every single business project. Perfection is impossible, and pretense about never being wrong is a hallmark of a liar.

Now that you have had the conversations with the witness that have provided him with the requisite comfort level, and trust has been established between you, it is time to 'work' the documents and hear what he has to say -- round one.

 

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(Here is Part 2. This is Part 3 of 6 on How to Win Franchise Trials. Here is Part 4)

If we have a good case, and the opposition cannot be convinced of that, then we do have to go to trial, and we have to have our people testify in a way that makes them practically immune to effective cross-examination.

How you go about doing that is the lesson of this tutorial.

People come in all varieties of personality. The most scrupulously honest person may be the most boring, confused, frightened individual who, though he would only tell the truth, would tell it so badly that his testimony is worthless or worse.

Among the sentiments at work in the mind of a potential witness are, in addition to an inclination to truthfulness, fear of being embarrassed; for embarrassing others and his company; for not being able to provide affirmative support for his side of the case; for his position in the company should he be seen not to have been helpful; for his financial future; for his references, promotions; for his being included in significant projects; for his dignity; for his family; for his masculinity; for ... the list could go on and on.

  • Is he boring?
  • Is he a smartass?
  • Does he have nervous tics that can be interpreted adversely?
  • Does he get quickly to the point or wander around it forever?
  • Is he into self-justification?
  • Is he ostentatiously religious?
  • Does he have his own agenda?
  • Is he intelligent?
  • What are his language skills?
  • What are his reasoning skills?
  • Does he try too hard to please, either you or, when the time comes, opposing counsel?
  • Will your time spent trying to help him be simply truthful be seen as an inappropriate attempt to coach your client's agenda?

Does he fear you are trying to make him someone other than who he really is, and that he won't be able to do it the way you want.

If the witness is the high panjandrum who is always treated with deference to an extreme -- used to having his own way - there is another cart full of baggage to be accounted for.

All these and many more fears and attitudes are strongly present in the mind of a potential witness. They will have a physical effect upon him. They must be recognized and addressed in an effective relationship-building manner, so that in the end you have built confidence and trust, not fear and loathing.

The central goal of all you do to prepare a witness to testify has to be to show him how to tell the truth in a way that is obviously truthful. One by one you must help him overcome each of his fears and each of his adverse tendencies. You must spend time with a witness. You must show him how to do his homework.

And you must do it before he testifies in his first deposition, as changes in testimony later on may be used to impeach credibility, comparisons of his trial statements against his prior, seemingly or actual, inconsistent statements. It is not an issue of rote memorization. That is almost as bad as ineptitude. The goal is that he knows what the truth is and how best he can state it with the least fear of confusion or of being ambushed on cross-examination.

In my experience, even if they superficially portray an air of modest pliability, just beneath the surface is a thick layer of 'How dare you?' With this person the relationship building is tougher, because he can fire you and find a 'real' lawyer who appreciates who this person really is and how he is to be treated.

His ego is engaged far more than any other witness in the company. He expects to appear for a deposition and at trial and have the judge, jury and opposing counsel rise when he enters the room, and that he will be able to control the questioning, not the lawyers or the judge. If you have never seen such a person on the witness stand, you have missed a spectacle.

When his side loses, his analysis is that the company's lawyer would have won if he had just 'put me back up on the stand'. Yeah right!

  

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits. 

(Here is Part 1. This is Part 2 of 6 on How to Win Franchise Trials.  Here is Part 3)

Dispute resolution management requires realism and maturity.

People, and their lawyers who think that they can prevail despite the facts, despite the law, and that all they have to do is tell the story a certain way, usually fail. Sometimes they get away with murder, but it is very rare. 

Justice usually works the way the justice system is intended to work. And that is even more reliable in business disputes where the burden of proof is simply that your side of the case is more appealing that that of the opponent.

More appealing in this context is not just a sympathy contest. More appealing really means that what you are telling the judge, jury or arbitrators is corroborated by extrinsic evidence that was created when there was no dispute, usually in the normal course of business -- what you honestly wrote about what was happening at the time it was actually happening.

True, there are companies that have such a bad reputation that even the truth won't help them, and it is a delight to sue them in their own home towns where everyone knows them and their prospect of picking an unbiased jury is slim.

But that usually isn't the case. Nor is it usually the case that 'home cooking' spoils the prospects for the correct result. Sometimes that happens. Usually it does not.

Where does that leave us? It usually leaves us with a level playing field in which the correct result is the most likely result.

The purpose of this article is to suggest that it is probably not going to be possible to change that by concocting fanciful stories contrary to the true facts.

On the criminal side, executives can rob a company and its shareholders and employees blind and get away with 'I did nothing wrong!' or, if they are 'society criminals', a light sentence in a country club prison.

On the civil side it is a different story.

One critical reason is the difference in the burden of proof.

Another critical reason is that on the civil side they are confronted by a better class of opposing counsel -- one who probably can expect compensation only if he wins -- an arena in which razor sharp cross examination is the rule, not the exception.

Arrogant executives to whom everyone has always been afraid to tell the unvarnished truth without polishing it to reflect positively upon their ego often get their comeuppance because they can't imagine anyone having the unmitigated gall to challenge their veracity and shove their own paperwork up their ass in a public forum.

But, as they learn too late (and for which they blame their lawyers, not themselves), shoving your corporate records up your ass in broad daylight in front of a crowd of people is what a good trial lawyer does for a living.

In over fifty years of trying business cases, I have so often seen disputes that should have been resolved reasonably and properly long before trial, go to trial because someone who did something wrong, mistakenly or intentionally, was insisting that the facts be found and the result be rendered in his favor no matter what.

And since that kind of person will pay anything to 'have his way', he is fair game for any lawyer who will pretend to agree with him for the purpose of generating a big fee.

Later, when everything has come a cropper, the lawyer will simply say that the judge ruled incorrectly and we should appeal (also stupid in almost every instance); the witnesses against us were lying; the jury was crooked; opposing counsel rigged the result; and any number of other stupid excuses. Then, of course, the fractured executive will go find another lawyer and tell him to sue the first lawyer for malpractice. And the cycle may go on and on. It just depends on the degree to which ego rules over intellect.

I have my own way to evaluate a case and to prepare a witness.

I am absolutely brutal on my own side of the case. If it can pass my sniff test, it will probably pass that of any judge, jury or arbitrator. And if it can't pass my sniff test, I tell the client about my concerns.

The client can then consider my advice and seek a reasonable resolution, or look elsewhere for less challenging counsel.

In my experience, if you are forthright about the situation early on, and have not called everyone on the other side a no good son of a bitch, rational resolutions are readily available and, in the long run, much less costly.

 

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits.

(This is Part 1 of 6 on Franchise Trials.  Here is Part 2)

The crisis management debacle du jour is Asiana Airlines' decision to announce they will sue a television station for broadcasting a bad cultural slur/joke about their pilots who were unable to land the plane successfully at San Francisco airport.

You would think they would prefer the story go away as fast as possible, but they are keeping it alive through lack of debacle management insights.

Paula Dean did the same thing by testifying in a PC charged environment that she had used the N word and then going on one television event after another with a hillbilly headed campaign that destroyed her total franchise value.

These glaring examples of the consequences of winging it with inexperienced situation insight resources should be business school case studies in why professional crisis management should be called at the very first moment when a major problem can be spotted looming on the horizon.

You can't stuff this material back into the horse once the big initial mistakes have been so publicly made. Why make them?

Is the senior management of Asiana Airlines simply so arrogant that they believe the world owes them a duty to pretend they are thoroughly training their pilots? Can anyone be that out of touch?

Did the crash in Buffalo New York two years ago not teach everyone in the airline industry some lessons about arrogance and hysterical PR blindness?

The Internet has cured everyone of the disease of respecting the inept. While your employees (or rather some of them) may not go on the Internet with exposure information and tasteless jokes about your situation, the public at large can now do so with anonymity.

Reacting with indignant rage is the worst thing anyone can do. There is no difference between Asiana suing the television station and Paula Dean saying "I is what I is".

Who will be the next to fail to finesse an extremely bad situation?

It doesn't have to be that way.

Tamerlane group's purpose is to prevent you from shooting yourself in the foot when you see a bad event threaten to develop. Our focused expertise in crisis management can prevent these situations from developing if we are called before someone makes self-humiliating public statements/files absurd lawsuits.

Financial modeling is not new to business planning. It is attempted in one form or another, crude and sophisticated.

The pro forma in every franchise investor's business plan is an example of crude, incompetent financial modeling.

Many Item 19 FDD presentations are incompetent or deliberately misleading attempts at financial modeling. In decisions to franchise businesses, pie in the sky financial modeling is the delusional mind expansion medium that caused many doomed franchise attempts to be initiated. In this article we will discuss them all.

Anyone who has ever contemplated turning their established successful business into a franchise operation has gone from the anecdotal "This would make a great franchise" suggestion from friends and customers, to contact with a franchise consultant whose sales pitch enthuses the mark with suggestions of revenue streams capable of slaking the greatest thirsts.

A hundred sold franchises at $ 25,000 initial fees provides $ 2.5 million - never mentioning that most new franchises never attain that number ever.

A hundred franchised stores generating $ 500,000 a year in gross sales represents at 6% of sales $ 3 million a year in royalty revenue and, at 2% of sales, another $ 1 million a year in advertising revenue that can be used for all sorts of yummy venture functions.

Four and a half million a year plus initial fee income makes many otherwise rational people delusional.

But, reality may be seen in my article Why New Franchisors Fail The new franchisor field is strewn with the wreckage of misled business owners who were successful at what they did and lost everything in the world to unscrupulous franchise consultants.

In my opinion, in addition to all the failure causes dealt with in that article, there is the matter of failing to model with financial competence the business that the franchisee will be operating.

If there is no competent success financial model for the franchisee's business, you cannot arrive at a decision that your business is franchisable.

More importantly, franchise investors have no ability without focused specialist assistance to sort out the incompetent and misleading information presented. Consequently, the field is also strewn with the financial corpses of duped franchisees who thought they understood what was set before them. 

Constructing a competent franchisee's business model is an exercise in multivariate regression analysis. That isn't as complex as that fancy name suggests, but it must be honestly done if a reasonable financial model is to result.

(Using wishful thinking financial modeling causes incompetent financial planning in the franchisor model and in the information that will end up in your Item 19 Earnings Claim calculated to enthuse franchisee investors to buy into your system.

Then only litigators will make money on your franchise and you will spend years in misery funding nightmare dispute resolution instead of sipping good single malt on the fan deck of your yacht.  Examples of this are Cuppy's and Java Joe coffee; 1-2-3 Fit; Curves; Dagwood Sandwiches; and many others that are on the brink of collapse but not quite yet in the tank.)

Boiled down to a very simple statement, financial modeling is an exercise in which you establish a chart of accounts that your franchisee's business will use and then populate the chart with the numbers/ranges of numbers that you can identify as reliable.

That will leave a number of line items that you have no current reliable data to corroborate, where you have to provide an estimate for each category.

How you do that is to repeatedly, ad nauseam, ask "What if..." questions until you believe you have probably exhausted the range of expectable events that could influence the number than goes into each line.

Actually, you also do "What if..." analysis on the lines where you are fairly certain you already know the appropriate number, discounting for learning curve impact and discounting further to arrive at an imputed value for unidentifiable risk. What's that, you ask.

Unidentified risk includes such things as the extent to which others may not be as adept as you are in the operation of your kind of business; or that it may take quite a while for them to get the hang of it while you fine tune your franchisee training program; or the vicissitudes of any geographic market (or the market as a whole) for your products or services; or "gambler's ruin" - poor estimating of the time required to achieve break even/positive cash flow (which may not result in "free" cash); and several more such categories.

Asked simply, the question you would be trying to answer is "Can a franchisee, using my business format, have a reasonable potential to achieve a good return on his investment if he operates my type of business competently in another geographic area and had to carry, in addition to all other expenses, the costs required in order for him to be a franchisee?" These costs include more than simply the initial fee, the royalties and the advertising fund contributions.

For example, if you believe you will confine your franchisees' purchase of supplies/inventory to vendors designated by you, and that those vendors will be paying you for your approval to be vendors to your franchisees, the franchisees will incur an opportunity cost of not having access to competitively priced vendors and the cost of their having to pay you for the privilege of being designated vendors.

Inasmuch as there will be opportunities for you to impose other expense categories from which you will intend to derive extraneous revenue, these will also be franchise relationship carrying costs.

The "What if..." analysis is a lengthy exercise if you intend to come up with a reasonable financial model of what your franchisee will encounter.

For more of Richard Solomon's articles, please click here.

What makes a person think about taking his or her present business and franchising it, becoming a franchisor? It isn't just the fact that they have heard of Ray Kroc and what he did with Mc Donalds or the miraculous story of Wendy's having come into what everyone thought was an already overcrowded hamburger franchise universe, having to practically give away their first few franchises, and then eventually becoming another superstar franchise organization.

Of course, every franchise salesperson claims that his or her franchise offering is going to be the McDonald's of the widget industry, as McDonald's has become the quintessential term for ultimate franchising success.

No. It takes more than that. We think the typical potential franchisor has a profile that goes beyond mere anecdotal celebrity references to the rich and famous.

An irreducible minimum requirement, before anyone is eligible to even think franchising, is a business operator who had at least several years successful experience operating the 'model'. The 'Model' is not the franchise company. The model is the business that the franchisees will operate if the concept is sound. Throughout this article you must constantly distinguish between the model, the business to be franchised, and the franchising company. They are completely different kinds of businesses. The failure to constantly keep this distinction in mind is one of the leading causes of early franchisor failures.

In all likelihood, a reasonably franchisable concept will be operated by its owner in multiple locations, all running successfully. This evidences that the concept is replicable and that it can be run by managers who can be trained. If the owner has to be everywhere all the time to keep the multiple units afloat, that is a strong sign of replication difficulty.

Either the system is too complicated to teach to a lot of people, or it is idiosyncratic, the extension of the owner's unique personality, unlikely to be successfully replicated with others at the helms of the various units.

In such a scenario, it is to be expected that customers have helped plant the seed of franchisability in the owner's mind. People come in, have the customer experience for that business, and exclaim their pleasure, their having been impressed with the idea and the manner of its execution, and their belief that it would be very nice to have such a business in their home town. 'Have you ever thought of franchising this?' will have been asked many times.

Eventually, the owner's thought processes turn into the franchise thinking neighborhood, and he starts talking to people who are in franchising, no matter at what level they may happen to live.

The model owner starts hearing money talk - initial fees of $30,000, royalties of 6% - 8% of gross sales, an advertising fund swollen with franchisee contributions of another 2% of gross sales, area development agreements through which entire states are sold off with large initial fees and a contractual requirement to build out and open a substantial number of stores within a very short time.

The model owner goes to the library and reads up on success stories of multi-millionaires who made it big from franchising.

There are no stories of franchisor failures - wrong spin control. In the world of franchise literature, everything is wonderful all the time, prospects are always bright, franchisor organizations constantly bestow awards upon their membership at conventions held in exotic places.

Soon, the model owner is slavering over a virtual feast of franchising good fortune and is ready to write checks to get the structure established, to get to the first sale. The entire focus becomes sales fixed, there is a great hurry to get to that first closing, and carts get put in front of horses.

The franchise sale is the last step in establishing a potentially successful franchise system, not the first. To be sure, even after the sale there are details like franchisee training, site selection and store opening assistance, but even these post sale responsibilities have to be prepared and tested well before the first sale closes.

Where does one start, then, in deciding to franchise. One starts with trying to find the answers to the feasibility issue.

Albeit I have a very good business that I have operated successfully in several locations for several years, how can I find out whether this concept, configured as I have configured my own businesses, has very good potential as a vehicle for franchising? If more people began here, at the real beginning, fewer franchisors would be in failure and fewer franchisees would have wasted their investments in an incompetently evaluated franchise opportunity.

Unfortunately, so many new franchisors start with lawyers drawing up contracts and disclosure documents, a fantasy trip with zero value and enormous potential for harm.

What the lawyers have never learned is that the legal work has to match the business concept, not vice versa.

The legal work is done last. Then it can, if done by attorneys who understand the franchising business as well as simply being able to draft contracts, become a charter that has rational positive value to the franchise relationship rather than merely being some set of rules cut and pasted out of somebody else's franchise documents, that most surely won't fit the situation to which it is being applied in many very difficult areas, and that become litigation breeding machines.

The business comes first, not the legal work.  (Part 1 of a four-part series on Why New Franchises Fail.)

For so many years the quality of most of what passes for franchise investment opportunities has been so abysmally low that their selling risk has had to be hedged with capital punishment clauses galore in the franchise agreements and in the FDD materials.

Part of this is that the quality of the concept being sold has been marginal and worse almost all the time. Whole business segments are now populated junk offerings.

Along these lines one might mention sandwiches, ice cream yogurt and gelato shops, pizza, printing, car repair and maintenance and dozens more. For various reasons - a long list - these are not real business investment opportunities and only fools buy them. Since the market does not provide protection for fools, I am not going to waste any more time talking about what they are and how they are sold. Rather, I would prefer to discuss how one should sell a real, investment worthy franchise opportunity.

In a real investment opportunity you have demonstrable revenue credibility.

The franchisor, before embarking upon a franchising program, had a real business that made decent profits and showed substantial growth and could be operated by trained and monitored managers in several replications of the franchise model. This kind of franchisor paid attention to what was happening in his market and made adjustments and improvements as soon as the opportunities presented themselves, keeping the operating manual current and paying attention to detail. It is a fine tuned, well managed business at the moment that the decision is made to franchise it.

In other words, it is a real business with an identifiable attainable breakeven point that will occur within a year in the right market.

The franchise's financial performance is sufficiently monitored both in company store mode and in the franchised mode, and differences in financial performance are accounted for in terms of what causes the differences. The franchisor knows his franchise and is not just some circus clown with a glib sales pitch chock a block with slogans and meaningless pseudo information.

A real franchise is not sold to every bozo with a temperature and a room temperature IQ who can write a check for the initial fee. A real franchise is not sold in any market where its anticipated performance is not responsibly projectable.

A real franchise skims the best markets first. In that manner the franchise itself, as a system, achieves early revenue credibility that enables the franchisor to begin writing a more aggressive FDD.

A real franchise is sold to carefully vetted franchisee prospects with more than enough money than will be needed and a proven business track record that includes actually having to make serious business risk decisions, not some marginal mid level "executive" who had to remortgage his house to meet the anticipated total initial investment.

Total initial investment, as presented in almost every FDD is an inadequate range of numbers intended to speak to the first 90 days after store opening and omits far too much to be remotely reasonable. In our real franchise, the Item 7 information will be a much higher number because the caliber of investor sought will not be scared off by it.

The number will also change frequently because its underlying information is being monitored carefully. The franchisor will have a good grasp on where breakeven can be expected to occur and how long it takes to get there. This enables more aggressive FDD information that is not misleading. This is the kind of information a real investor wants to know about. This is what sells franchises to intelligent investors.

If area development deals are sold, they are sold to people who have a track record demonstrating the capability to meet a development schedule. That schedule will describe the art of the possible in an area with defined top level geographic areas and good demographics specifically measured for this franchise.

With this approach the FDD can and will become more aggressively informative each year. There will be few surprises and those easily manageable. The franchisor will be willing to make adjustments for these surprises so that they do not result in serious economic disruption and the rise of disputes. The franchisor's willingness and ability to make adjustments and accommodations where appropriate, no matter what the franchise agreement may say, will mark that franchisor as the affiliation of choice for the best operators. Good reputations grow almost as fast as bad ones, and one does not become known as a chump for using good sense.

In this kind of franchise there is no danger in demanding compliance with the agreement terms, because the business is not financially impaired by the range of possible additional charges that could be made by the piggish franchisor. Good business partners know that everyone in the deal has to make money and that only a pig tries to squeeze every last nickel and dime out of it.

However, the extraneous revenue stream temptation will always be there, and an enlightened franchisor is all too often succeeded by more opportunistic types. For this reason it is critically important that franchisees establish an effective independent franchisee association long before abuses occur. It is far easier and less expensive to prevent abuse than it is to stop abuse.

Usually franchisees assume the best and leave themselves open to abuse until it is too late. That is a terrible mistake.

Franchisor established franchisee advisory boards are no substitute for the franchisees having their own independent organization. The franchisees of Quiznos and Marble Slab Creamery and many others learned this lesson the hard way. They are now dropping like flies.

For several years the franchise world has been populated mainly by mediocrities and worse, all sold to moron FranWads who were usually corporate middle management types - glorified clerks. They accumulated close to a million dollars in many instances through hard work and frugality, only to lose it all and end up in bankruptcy.

It is time for a higher level of investment quality. There are plenty of investors for those opportunities who are financially and experientially qualified. Following the plan suggested here and elsewhere on www.FranchiseRemedies.com a solid and credible franchise investment environment can again be established. I will be very happy to help guide them through their early years into their growth phase to maturity.

This article deals with compliance with contract issues, not compliance with laws regulating franchise sales. Its opening major premise is that the concept of compliance has many dimensions, is seen from many different perspectives, and is in many instances more situational in its relevance that an institutionalized constant.

I don't mean to be flippant or casual when I suggest that compliance is a sometimes thing. The fact situations in which compliance becomes a do or die issue so often involve application of compliance standards in one situation that are not utilized or insisted upon in normal situations, that a legitimate question arises regarding selective enforcement.

Sometimes selective enforcement is justified, as in the case of a hard core recidivist constantly resisting conformity.

And, as the trial lawyers (myself included) so often say, that makes for the 'justiciable issues' revenue stream we know and love so well. It becomes in most instances a question for the trier of fact, judge or jury, whether the behavior of the parties in this particular case is acceptable, or aberrational and without just cause (whatever that means).

The general rule of contract construction is that the express terms are there for the purpose of being insisted upon. That's too elementary to be of much assistance in understanding how the contract language and the franchising agenda work together. It's one thing to be able to read and quite another to understand the 'system'.

But that's what you agreed to, so that's the standard to which you will be held, unless of course you were induced to sign the contract by misrepresentation and can prove that.

Stupidity/ignorance is not a defense, but it is still unlawful to cheat the stupid (in most states).

General rules of construction, however, are themselves subject to selective application when the ambient circumstances suggest that to do otherwise would work injustice. One important point is that whenever a variance from strict compliance is in order, the contract is written so that it is the franchisee's burden to prove that it is in order. That fact alone gives the franchisor most of the options in deciding what level of compliance may be insisted upon in any individual situation. Inasmuch as the franchise contract is written to give the franchisee the fewest possible options in time of trouble, reading the contract does not inform a potential franchisee of the 'quality' of the investment being offered.

A potential franchisee has to start out with the understanding that the contract favors the franchisor at every turn and on every question. With that level of riskiness staring you in the face, the due diligence on the quality of the investment being offered is the most critical area of inquiry. Unfortunately, new franchisees almost never go to a franchise industry specialist for that due diligence. They go to their cousin or their divorce lawyer who has absolutely no ability to inform them about what they are getting into. Is it any wonder that about 70 % of them go broke in the first three years?

What the International Franchise Association says about survival chances being enhanced if you are a franchisee is thought, by many who have good reason to know, not to be true. Judging the prospects of the newer franchise offerings by the success track of the more mature franchisors is not a reliable risk assessment technique.

There is a curious analogy that I often joke about (See 'The Ultimate Franchise' at www.SeamusMuldoon.com ). Most of us casual compliance folks think of the fundamental mandates of the Bible in terms of the Ten Commandments, supposedly a contractual construct given by our Creator and accepted by the Israelites at the theophany on Mount Sinai. Like the Sherman Antitrust Act, the Ten Commandments have sufficient constitutional vagueness to allow them to be interpreted and applied to the ambient circumstances of an ever changing world.

The more compulsive amongst us have, however, scoured the Bible and found at least 613 commandments. People like this write franchise contracts. Compliance with 613 commandments requires the dedication of life itself to compliance, with little time or energy left over to do much else. Franchise contracts are so convoluted, especially when viewed in conjunction with franchise operating manuals, compliance with which is mandated in all franchise contracts, that running a normal business can be obstructed rather than facilitated by over zealous devotion to compliance. Where is the line to be drawn that demarcates reasonable compliance from fanaticism? The answer is that it is an ever moving line.

This article is intended to suggest an approach to how to find the line in the particular situation that you face today.

A franchise contract is written to cover every conceivable situation and to maximize the likelihood that in any dispute the franchisor will have the upper hand. Those of us who draft franchise contracts have been fine tuning every provision and adding provisions over at least the last 40 years since I have been in practice to keep the advantage as far over in the franchisor's corner as possible through changes in statutes and regulations and to accommodate the variant approaches to dispute issues that have come out of court decisions and opinions.

It requires constant vigilance to counter any change that might erode a franchisor's control options regarding the franchisor's name, system, identity and the enforcement of the franchisor's will in all situations.

Because the franchise contract is written to be the ultimate safety net to enforce franchisor control options, no matter what, it may not be/is not correct to think of it as the standard for normal day-to-day operations. It deals with emergency preparedness, and emergencies simply do not occur all the time. In some companies it may seem like emergencies occur all the time, but those are not system wide emergencies unless the company is not competently managed.

There are usually different emergencies amongst many franchisee scenarios. Even the operations manual, which is supposed to be the micro management reference source, is a 'best case' construct that itself changes several times each year. What does not evolve does not survive. Once protecting the crown jewels is accounted for, no one wants the documentation to stifle progress.

The contract itself is not the crown jewel. The business relationship and its prospects for success and growth are the crown jewels, and the contract is to serve that, not to usurp that -- no matter what lawyers think.

I submit for the sake of this argument that in a well run organization, on a day-to-day basis, neither the franchise contract nor the manual is fully observed/complied with.

They are target benchmarks that are rarely/never one hundred percent met in a well run business that is making money.

Technically speaking, therefore, there is non-compliance/breach occurring every single minute of every single day.

And in a 'management by exception' mode, what we do is react to activity that it outside the margins of tolerance and perceived to be pernicious. Outside the margins of tolerance and not perceived to be pernicious is called innovation. Innovation, once field tested, is brought into the tent and becomes part of the operational fabric.

Given that 'breach' is always occurring, one must then, I think, concede that the critical talent that must come into play in any enforcement decision is management discretion.

As we say in Texas, that's why they pay us the big bucks -- to use excellent management discretion, to be able to balance competing interests and prioritize issues so that the best result with the least adverse risk becomes the most likely outcome in any situation.

There are limits on discretion. What one might wish to do in a seemingly deserving situation is sometimes influenced by considerations of precedent. What might be a salvaged relationship is sometimes lost to considerations of precedential impact, and more frequently lost to management ego issues.

Here is where a great deal of error creeps in, as many situations feared to be precedent setting are actually not precedent setting. Competent analysis is required to distinguish between the two. If I let this franchisee off the hook on this default, everyone will think they can get away with it too. Even though there is no regulation or law that requires uniform enforcement of any contract provision, there are erosion and dilution issues that can become acute if the perception amongst the franchisees is that the franchisor is not militant about enforcing the franchisor's rights and authority.

Rabble rousers are all too frequently looking for some wiggle room to find issues to use as rallying points to promote the formation of adverse constituencies around some agenda or other. And sometimes there is a situation in which tolerance should be exercised, especially if the franchisor is not blame free. Confrontations over enforcement issues that end up in court/arbitration and that go against the franchisor become worse precedents and more virulent in their impact. 

The nature of the event(s) of compliance failure, the level of gravity, is always the first step in the process of trying to decide whether to actually declare/give notice of a default under the franchise contract. The second step is due diligence. All too often the second step is ego driven/agenda driven rather than objective investigation. That's a wrong turn in practically every instance. It matters much less who is in issue here than the ability to provide adequate documentation of the default, including the ambient circumstances leading up to the default. Files must be marshaled, people interviewed and statements taken and signed.

This is lawyers' work. If management does the interviewing, there will be more concern on the part of the employees being interviewed that they respond in harmony with what the think the boss' agenda is rather than a straightforward fact statement. That concern will be there even if the lawyers do the interviews, but it will be much more palpable if the executives do or are present during the interviews. Even with the lawyers doing the interviews, it is often the case that the employees have met to assure that they are all on the same page, and sometimes there has even been a meeting with the boss where they are made keenly aware what the boss' agenda is. The employee may give false statements effectively while on his home turf with wishful thinking friendly folks in the room. He can't reliably be expected to do as well under cross examination by opposing counsel with unfriendly folks in the room and a transcript being made that can be evidence of perjury. This is the very essence of ego driven procedure, and the worst possible scenario for the production of a high quality result. When you impair the quality of your own company's due diligence, bad things happen. I ought not even have to say that. But I have seen so much of it that in my opinion it merits comment. But this article really isn't about the ego driven boss. After the facts are marshaled and able to be examined in a sensible mode, then agenda can rationally come into play. Having an agenda isn't bad per se. Letting the agenda get in the way of accuracy is very often extremely bad in the results obtained. If the agenda is a constructive agenda, accuracy won't dilute it or thwart its advancement. You really can't have an agenda that depends for its effectiveness upon management never making mistakes. Management is human, and mistakes will happen. The agenda must work despite management mistakes if it is a positive agenda, a substantive (non fluff) agenda.

The vast majority of compliance failure is dealt with at the level of the inspection report. In a well run company, copies of inspection reports are left with the franchisee at the end of the inspection visit, after discussion with the franchisee/manager of what inadequacies were found. If the problems were more than marginal, there may be a follow up inspection at an earlier date than would normally occur to be sure of cure or a detailed written cure report required of the franchisee. If people are using good sense, it ends there. If people are not using good sense, deficiencies persist and may get bucked up to operations and an operations manager may call or send an email to the franchisee requesting an explanation of why 'stuff' wasn't fixed when it should have been fixed. If compliance failure continues and the problem is significant, the director of operations will usually make personal contact to inform the franchisee of the risk of default notice, and ask if there is some agenda at work that is making the deficiencies persist. This makes good sense and it makes for a good paper trail to show a judge or jury that the franchisor is really trying to be as reasonable as possible before whipping out the big gun. Persistent compliance failure always gets more aggressive treatment in court than occasional events of compliance failure. Only the persistent failure gets the big gun treatment unless the nature of the event is such that there is an emergency need to take immediate remedial action. This is the regime for dealing with operational defaults, and I have seen CEO and COO type people get on the phone personally before resorting to the heavy hand. Default notices usually need to be approved at the top anyway, even if the honcho does not insert executive authority into the mix -- sometimes because the executive really doesn't want to be a witness if that can be avoided. Apex witnesses are a phenomenon to be avoided. They frequently make terrible witnesses, and often judges and juries simply don't buy the notion that the executive really doesn't get involved personally in the day to day operations. The Enron executive is the worst case scenario for this problem.

Above operational compliance failure would probably be financial defaults. Things don't get paid when they should get paid. This is more serious than not putting date labels on the inventory in the walk in cooler. This also goes to another part of the franchisor organization, the accounting and finance people, who should be less tolerant than operations people. Financial compliance failure is more frequently a harbinger of greater and more fundamental failures of compliance, and if they are not nipped in the bud, blossom very quickly into situations requiring surgery.

This is dealt with more effectively where the franchisor is professionally managed. When the founder is still at the helm, the franchisees are often seen as his children, and too much forgiveness of tardy financial compliance leads to systemic evils of enormous proportions. Allowing franchisees to fail in compliance with financial responsibility issues is never beneficent. Immediate resolution is the best resolution. The issue should get kicked upstairs sooner, and executive approval of default notices should be given after one attempt to find out if some emergency/calamity has befallen the franchisee that might justify exceptional consideration. The recent hurricane season on the gulf coast and health calamities epitomize the level of calamity called for. The level of clemency allowed will fit the particular situation.

If it is not done in this sanguine fashion, it is always the case that the slow paying franchisee starts to feel that the need to account and to pay up is not acute. The obligations to the franchisor go to a lower order of priority. Even in the normal pecking order of things, paying the franchisor is all too often on the lowest rung after all other expenses of operation. The psychic influence always buried in the mind of the franchisee is that the franchisor doesn't deserve to be paid if profits are down, regardless of the reason. If you don't kill this germ immediately, it grows into a monster. Franchisors who, absent calamity, allow franchisees to sign promissory notes for past due obligations are not helping anyone. The more the franchisor relents on financial performance, the worse the situation will always become, until ultimately the franchisor has a drawer full of promissory notes that are of dubious value and the auditors make you take a write off on your operating statement and balance sheet. Shame on you if this ever happens. And if you let people give you promissory notes instead of cash, you deserve what will happen to you. This is not a legitimate form of kindness. The franchisees who owe you money will eventually try to find a way to get out of paying you. The more of them who owe you money, the more enticed they will be to share costs of litigation, and the more prone they will be to foment any kind of problems within the system. This kind of kindness never goes unpunished. Any CFO with promissory notes in lieu of cash needs to be relieved of duty. If the founder owns the company and wants to throw away his/her money, that's their business. In a professionally managed company that is per se incompetence. And they brag about not paying you to each other. That leads to 'why should I pay if Charlie aint paying?' How far do I have to go on this scenario before the point is made?

The other category of defaults, neither operational nor financial, fall under the heading structural compliance failure. This includes using the name/mark in an unauthorized manner, establishment of unauthorized stores (almost always accompanied with under reporting of sales and royalties), unauthorized assignment of the franchise.

Hijacking the franchisor's identity is rarely other than intentional. Someone would have to make a clear and convincing case that is almost impossible to make to explain away anything like this. Every now and then, a franchisee who sees termination coming will find a sucker to dump it on, getting cash money at closing and hitting the road. Sometimes the sucker is really a bumpkin with money (like an immigrant) or just an opportunist. The immigrants with money may not be money bumpkins, but they are often bumpkins when it comes to how franchise assignments work. Part of this is simply that they come from countries where business is simply not done this way. Many come from cultures in which without deception it is impossible to get anything done. Bribery/extortion is so pervasive that open disclosure is suicide. I have seen many of these situations in real life. In one an established franchisor bought a major market from an area developer who had just received notice of termination of the area development agreement for failure to meet the development schedule (and who had no hope of meeting it with a reasonable extension). He bought it for cash. He did no due diligence. The deal just seemed too good to take any chance that it would get away. The buyer then called the franchisor to introduce himself as the new owner of Detroit, only to learn that the rights he just bought for cash had been terminated. He should have known better. He was impulsive about many things. If his gut told him it was a good deal, he went for it. I had to bail him out of several deals in the middle of the night over the phone from some long distance venue. Years before that, he had been talked out of the opportunity to buy Michigan from Colonel Sanders (by a lawyer who said it was a scam) when the Colonel was just getting started. He hated lawyers. He vowed never again to miss out on grabbing the gold ring. How he had gotten to trust me and start calling me first at the last minute before writing big checks is just good luck on my part, I guess. He was a sucker for any fried chicken deal.

When he learnt he had been bamboozled out of big bucks for the Detroit rights to a very hot franchise name, he called me and, with murder in his heart, ordered me to get injunctions and tie everybody up in court until they begged for mercy. As we had no case against anyone against whom a judgment might be helpful, I infuriated him all the more by telling him that was not the way to approach this. I suggested begging. He blew his stack. He was not a beggar and no one was gonna beg on his behalf. When I explained to him that all he would do by going into court was make a public record of his own stupidity, and that he would become the butt of franchise jokes all over the country for the next five years at least, he started to calm down. I learnt that I am really a wonderful beggar. We flew to the franchisor's office, met with the right people and walked out of there with a 40 store market worth of franchise rights. Maybe that's why he called me whenever people offered him the moon after a big dinner with cocktails, wine and after dinner drinks.

I have had a few immigrant situations also. Many immigrants with a lot of money have very poor insight into the intricacies of how franchising works. Many come from environments/cultures in which concealment and devious business behavior is considered to be the only way to survive. They bring these perspectives with them to every deal. Frequently they view contract signing as theater. They know how to act out the part, but have a non-compliant agenda. They would not hesitate to rip off their own countrymen, and certainly would not hesitate to do the same to a stranger. Only in recent years has franchising really made big inroads into many areas of the world other than the European Union. Pre-contract execution cultural conditioning helps a lot. You owe it to yourself to inform the potential immigrant franchisee that your contract is not a social document and that you will police compliance. That should be done in addition to the formal franchise contract language that, of course, says it will be done, but says it in lawyerese. At every franchise sale closing event there ought to be a 'Come to Jesus' discussion in which the franchisee-to-be is told rather frankly what compliance is going to be like in reality. There are a number of steps that could be taken at the closing event that could make life a great deal easier for franchisors when trouble raises its ugly head.

Franchise transfer is one of the events in which the franchisor's compliance expectations often have little to do with the seller's intended course of action. Sometimes, if the seller of a business is one of their countrymen, the greenhorn wrongfully assumes that some trust ought to be extended. This is what a crook trades on. They buy rights that a seller has no authority to sell, for cash of course. The seller hits the trail back to his homeland and finding the money is hopeless. The franchisor has the unpleasant task to tell the buyer that he bought nothing. In most of these situations, but not all, the only way to approach the nightmare in representing the buyer is expert begging. Hopefully the buyer has good business credentials of some kind that may suffice to convince a franchisor to accept him and make the distinction between the sucker who got scammed and the person who scammed him. Hopefully also, the buyer really is someone who was actually taken in, and not an active co-conspirator in a scheme to hijack a franchise.

Probably the main obstacle to be overcome in this scenario, assuming that the buyer would be a good operator and can handle the responsibility, is that if the franchisor rejects the buyer as a potential franchisee, the franchisor then has a profitable store that has now become a company store that the franchisor can sell to a new or old franchisee for its going concern value, without itself having to pay going concern value to get the store. The sucker who bought from the non-compliant franchisee is out all his investment, and the franchisor will get the going concern value if it refuses to accept that person as a new franchisee. The franchisor may not have ripped the poor bastard off in the first instance, but the franchisor will end up receiving the fair market value of this going concern by refusing to recognize the duped buyer as a new franchisee (assuming the buyer is willing to sign a then current franchise agreement). The attractiveness of that windfall is sometimes more than a franchisor can resist. Not at least allowing the buyer to sell out and recoup his investment could be viewed by a court or jury as an actionable form of over reaching, assuming that there are other operative facts that weigh heavily in favor of the buyer as a competent operator. The situation is too easily portrayed as plain old greed. Does the franchisor have the right under the applicable contract documents to do that? Of course it does. But the buyer may not yet be a party to such a contract, and the contract escape mechanisms may not apply to a buyer who has not yet been approved. That's why being able to perceive the difference between the duped buyer and the swindling former franchisee who sold the business improperly may in the long run be something worth consideration. It isn't really giving away/making gifts of corporate assets when a franchisor decides to accept the buyer in such a transaction. It's a legitimate officer's bona fide judgment call about what is the best business practice in any individual situation. Doing it does not set a precedent that could be used to require that the same be done for every unauthorized buyer. It depends upon the circumstances in each instance.

These are always cliff hangers. The situation gets sorted out very fast once the franchisor realizes what has happened, but there are several days and nights of sheer terror. The Buyer usually has everything he owns in the world tied up in this transaction and will lose his home and have to enter bankruptcy. His entire positive business history will be destroyed in a flash if the franchisor cannot be convinced to give him a break. The franchisor has to get really good results from investigating these deals to even think of the possibility of giving these folks a break. Even something like the buyer's ethnicity can work against him. Having to get a 'pass' for someone in that fix who is from the Middle East or Russia is a much tougher road. Feelings just run higher against them. There is a definite angst about whether an intentional hijack really is happening. [Cross reference 'Infiltration of Franchise Systems', another in this series of Specialized Tutorials] Even the slightest threat of litigation by the buyer is an act of suicide. Save the threats. If the deal goes south in its entirety -- the buyer isn't even allowed to sell what he bought to save his investment -- you sue if you can find something to sue about. But you never talk about it. You just do it when the time comes. If you know what you are doing and have a decent litigating reputation, the franchisor knows what's coming if some way to 'work it out' can't be found. There's no need to talk about it.

Before I will agree to be the beggar, I do my own investigation. I think that my reputation has some weight in the process. I never misrepresent and I make full disclosure up front so that the franchisor's investigation will not uncover anything I haven't already disclosed. I have to disclose the good, the bad and the ugly -- no one is all good all the time. If I can satisfy myself that my client is deserving of some consideration, then I think I can do a better job for him. If I don't believe him, why take his money and fake it? I won't be able to help him and it will hurt my own reputation. And if the client isn't fully forthcoming with me, this approach will certainly sink his ship. I tell them that so that they will come clean to me. If they don't, they are very likely to get caught, and their investment goes down the drain. So far, my reception by franchisors in these situations has been very positive. I don't always get what I hope for. Sometimes it just isn't in the cards. All too often I get the client after his so-called regular lawyer has done all the wrong things and the whole situation has become acrimonious. That's hard to overcome. People always seem to start out on any tough problem by calling each other awful names. That's really stupid.

This tour of default management issues is certainly not encyclopedic. Even if it were, someone will think of something new next week, and there will be more fodder for litigators. And there are, of course, many flavors of compliance failure within each of the major categories I have suggested.

There is one universal constant in the resolution of all this. If the decision is made to forego terminating a defaulting franchisee, the franchisor should always exact a quid pro quo.

If you have the right to send a termination notice, but opt instead for a peaceable resolution that leaves the offending franchisee with his investments intact, get the benefit at least of an acknowledgment that from that moment on you are free and clear of any claims against yourself. Get a bankable status of effectiveness confirmation. Don't let someone off the hook who may be saving in his back pocket a claim that was about to be asserted against you in the event of confrontation. In commercial leasing this is known as an estoppel certificate. In franchising, I call it a reaffirmation and ratification (ReRat). This agreement says that the franchisee acknowledges that the franchisor is foregoing the exercise of enforcement rights under the franchise agreement; that the exercise of enforcement rights by the franchisor would be a reasonable and proper act under the terms of the franchise agreement; that in consideration of that forbearance the franchisee acknowledges that the franchise agreement(s) is/are in full force and effect in accordance with the written terms and that the franchisee has no defense to the assertion by the franchisor of any term of the agreement; that the franchisee is not aware of any claim that it has against the franchisor, and none are under consideration that have not already been asserted; that the franchisee releases and waives any and every claim that it may have against the franchisor, of any kind or nature whatsoever, whether known or unknown; and that the franchisee hereby ratifies the franchise agreement and all other agreements in force between the franchisee and the franchisor, including any related entities. Be aware that in some states a release of unknown claims must be separately stated from a general release, and put a separately stated release of unknown claims in every ReRat agreement.

Let's shift gears for a moment to another compliance dimension. There is a point at which, no matter how one sided a franchise contract may be written, the franchisor's own exercise of its perceived prerogatives may be sufficiently extreme that franchisees look for ways to 'get even'. Every industry has this experience where the basic protocol of the business relationship is extremely one sided. The insurance industry is an example of this. The practice takes the form or reducing the number of items included in the franchise package without additional charges being made for them -- adding 'fees' for what used to be compris -- or adding non-essential services as compulsory items and tacking fees on for those. In this second category, I include items that may already be in the package and that the franchisees purchase from unrelated vendors, but requiring that they be obtained from a new and related entity at a higher price without improvement in quality. My most recent exposure to this phenomenon involved electronic in-store ambience systems that suddenly have to be purchased from the relative of an officer of the franchisor for substantially more than was paid in an open market transaction. This was also done in a very heavy handed manner. The officer's relative didn't even have the grace to provide a reliably working product or reasonable tech support when it didn't work. New store opening approvals were delayed if the system was not up and running, and many times the delays were due to poor response to technical support requests. When franchisees refused to pay for systems that were installed but not operating, the late payment became a cause for denial of store opening approval and for notices of default being sent out by the franchisor. It was an episode right out of 'The Sopranos', except that it was really happening to people. While this may seem an extreme example of morale destroying avarice on the part of the franchisor, it serves the purpose of demonstrating the kind of franchisor action that causes compliance morale to go into decline. That these actions tend to stack upon one another as similar opportunities to impose additional charges/revenue streams arise should not come as a surprise to anyone.

When the franchisor is doing these kinds of things, it usually is accompanied with programs of 'cheerleading' propaganda about the quality of the relationship and the opportunity. This is seen as utterly venal and cynical, and never has a morale boosting effect. Baloney is always baloney, no matter how you slice it. An excellent example of this kind of baloney is the recent General Motors advert campaign. While its competitors in Europe and Japan are producing better quality vehicles and eating General Motors' lunch out in the market place, GM elects to produce the same crapola products year after year and ride its market share and financial performance history into the toilet. The advert campaign proclaims that 'We are professional grade people'. The obvious absurdity of it is that all those professional grade people at GM can't produce reliable vehicles that can be sold at a profit. DUH! When the message is ridiculous, the relationships to which they apply can't really be expected to improve, can they? This is a B School case study for corporate stupidity. You might as well hang out a sign 'Company In Deep Trouble'. Who thinks up these ridiculous campaigns?

When any franchisor looks at compliance, neglecting to do an examination of the extent, if any, that things being done by the franchisor may be contributing to compliance problems will always produce skewed/unreliable diagnostics. In psychology it's called being in denial. Denying the obvious never produces a cure, does it? I fully understand the temptation to engage in piling on of non-essential items as a way to enhance financial performance, It's not really unlike a person who decides that he likes Martinis and drinks more of them every day than he did last year, while denying that he is becoming an alcoholic. Looking in the mirror isn't always pleasant. But if you dont look, how are you going to know what you look like? 'Nuf said?

Ultimately I must add a disclaimer. This is not intended to be legal advice to any company or person upon which they may rely in resolving or evaluating any claim or event. Each situation you encounter that may involve the assertion of contract rights and invocation of remedies requires that you consult with a competent attorney to assist in the evaluation of that specific situation. Sometimes the decision whether to go forward turns on the personalities of the people involved. I know that doesn't sound right, but based on my experience it is right. Much more is involved in making enforcement decisions than just a technical legalistic sorting out of rights and wrongs.

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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