Recently in Due Diligence Category

Mr. John Anderson is a self styled "franchise consultant".

Anyone can call themselves a "franchise consultant". And advise you on how to invest in a franchise.

Mr. John Anderson is even more misleading. He claims to be a "certified franchise consultant."

But, being a "certified franchise consultant" doesn't mean that you are part of a regulated profession - even as it suggests some important element of regulatory oversight.

Franchise consultants sell a highly regulated investment -- a franchise contract-- but they themselves are not regulated.

It would be as if your stock broker could sell you stocks or bonds without any professional oversight. Most people who are selling investment advice are generally regulated. But not "certified franchise consultants"!

What could go wrong? Plenty, as we shall see.

Mr. John Anderson is promoting on LinkedIn an extremely risky method of due diligence, in part because he doesn't understand the subtleties of franchise disclosure law. He suggests the following:

"The best information comes when you speak to current franchisees of the company.

They are brutally honest and the best source of information for you to base your expectations on.

You will definitely get to build an estimated profit & loss plan and calculate returns on investment.'

There are 2 main problems here -- both exacerbated by the lack of any professional regulations or oversight.

1. Information is Not Legally Reliable.

When Mr. John Anderson has you talk with existing franchisees, to build your estimated profit & loss plan, the information that you receive cannot be relied upon legally. Somebody could mislead you, and unlike most situations, you would not have any legal recourse if you suffered harm as a result of that lie.

Why? Because when you sign the franchise agreement, you agree that you have not relied upon any information about profit & loss other than what is provided by the franchisor in the Franchise Disclosure Document, in Item 19.

So, any franchisee can lie to you with relative impunity.

2. No Recourse for Negligence

Mr. John Anderson is unlikely to have any insurance which would cover his professional negligence for "helping you build an estimated profit & loss plan".

So, when he makes an error, and you buy your franchise based on his error, lose your house and savings, there is no legal recourse against any insurance fund.

Regulated professions often, but not always, require its members to have professional liability insurance. This tends to lessen the amount of professional errors & reduce the impact of those errors.

Now, there are several fact specific situations in which you can get good & reliable information from existing franchisee. But, you have to understand franchise law to get this information.

In general, you cannot rely upon talking with existing franchisees to build an "estimated profit & loss plan and calculate returns on investment". It is a foolish idea.

Savvy Franchise Buyers know that they need Smart Franchise Advice.


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How can a really sweet deal turn into a really bad nightmare? That is perhaps what two franchise founders are saying to each other about now. Michael and Kathy Butler (collectively the "Butlers") are seasoned public relations folks. Michael Butler has had his own PR firm for 30 years.

The Butlers came up with the idea to open a retail store that offered PR and marketing services to small businesses. They liked the concept so much, they decided to franchise it. They called the franchise the PR Shop. They contracted with a franchise broker to sell PR Shop franchises. The broker did a good job.

A franchise prospect in New York wound up buying 20 franchise outlets.

Then the nightmare began. New York requires franchisors to complete a franchise registration prior to the offering or selling of franchises in the state of New York. PR Shop filed a franchise registration. But, it was not complete or effective at the time that the PR Shop franchises were sold to the prospect in New York. This was uncovered by the prospect turned franchisee. He called the state of New York wanting to complain about 20 PR Shop franchises.

Go no further. The franchise registration was not effective when the franchisee bought the franchises. The franchisor must offer the franchisee rescission. Rescission means, pretend like the franchise agreement was never signed and the franchisee gets all his money back.

One problem, by this time the franchise has dissolved. The franchise's founders (the Butlers) have filed personal bankruptcy. This whole thing cannot be written off that easy. Can it? Really? No. The case is In re Michael L. Butler and Kathy H. Butler v. John Mangione. The bankruptcy court did not look fondly upon the Bulters' conduct.

The court found that Michael and Kathy Butler were personally liable to John Mangione, the New York franchisee. And, the Butler's liability to Mr. Mangione was not dischargeable in bankruptcy. The Butlers must repay Mr. Mangione his initial franchise fees, for all 20 franchises + interest + Mr. Mangione's attorney's fees totally $714,000.

The Butlers broke state law by not completing the franchise registration prior to selling the franchises in New York. The Butlers did not hold the initial franchise fees in escrow as instructed by the state. Failure to put the initial franchise fees in escrow, in the court's opinion, was akin to stealing. The Butlers committed fraud by misrepresenting to the franchisee that PR Shop was registered in New York. The court did not take a soft approach in this case.

Lesson from the Court: Register it before you sell it or the deal may be unraveled post facto.

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More often than not, I get phone calls like this from prospective franchisees. (If you want you can skip directly to my free advice at the bottom.)

Prospect: Mr. Solomon, I am looking at a franchise to buy and I would like you to advise me about it.

Me: What franchise are you looking at?

Prospect: I am looking at an ice cream franchise called Tombstone Creamery.

Me: That's just about the worst franchise on the planet. If you invest in that you will only end up with years of misery and poverty.

Prospect: They tell me it is a wonderful investment for a good small business, and everybody eats ice cream. How can that possibly go wrong? I spoke to several franchisees and they all say they are happy.

Me: They told you that because they think you are working for the franchisor and looking for anyone saying negative things so that the franchisor can retaliate against them.

The truth is that this franchise is a one way street to misery and you need to run like hell.

No one trusts franchisee interviews anymore. Most of them are scared to say anything real.

Prospect: I don't understand how you can say that. Can you be more specific? And if not that, what about a sandwich shop franchise?

Me: Sandwich shops are almost as bad as ice cream franchises. Don't buy one of those either.

Prospect: What don't you like about those? Do you have a good thing to say about anything? I'm getting sorry that I called you.

Me: To answer your questions one at a time, there are too many sandwich shops and price competition is eating them alive. There is oversaturation everywhere.

Moreover, the prices franchisees have to pay to vendors to enable the vendors to pay rebates to the franchisors takes away all value of group purchasing from the franchisees and transfers that value to the franchisor like an added royalty.

The cost of being a franchisee in a sandwich shop franchise system is over 20 % of gross sales when you add up all the extraneous costs associated with being their franchisee, not what the disclosure documents tell you.

I like very few franchises because so few are revenue credible in the sense that when you go home at night you have made any money. There are a very few good ones in net revenue terms and you may not be qualified, for all I know about you, to buy one of those.

But you haven't hired me yet, so you have lost nothing by this phone call. If you can find a lawyer who will give you this much insight into the business risks of buying a franchise, hire him immediately.

Prospect: What would you have me do?

Me: You are apparently inexperienced at small business investment due diligence. You are listening to anecdotes and not demanding any corroboration of the sales pitch. You need to revise how you go about doing your homework.

I have something to share with you that may save you from bankruptcy.

Prospect: How much do you charge for that?

Me: This is something I give away so that you can prove to yourself that I know what I am talking about. Follow these 8 magical steps.



1. Go onto the Internet and do a Google Search using the words business broker in (name of your home town).

2. Contact business brokers telling them that you are looking for a business to buy and you do not want a start up. Tell them you want a business that has been open and operating for at least five years. You can give them the name of a few franchises that you think you are interested in. Tombstone Creameries and any sandwich shop franchise would be good areas to look at.

3. The business brokers will have dozens or hundreds of these that are up for resale.

4. Tell them that you need to see copies of the actual signed federal tax returns, including all the exhibits, for the last three years (five would be better).

5. All you have to do is sign a confidentiality agreement that says you will not disclose the information to others. You can disclose it to your attorney and your accountant.

6. Now you will see the financial realities of these franchises you think you are interested in.

7. You or your accountant/lawyer will be able to do realistic financial analysis based on the information in the tax returns.

8. This is the way you start looking seriously at small business ownership investment, franchised or independent. You will be amazed at the difference between what you see in the tax returns and what these franchise salespeople are telling you.

When you think you have found something you are interested in after looking at the real financial results of ownership, if you want me to be your lawyer, you can call me back.

You are welcome. But, do call me back.

Author Richard Solomon is a Franchise Lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management. Give him a call at 281-584-0519.

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There are many key steps in the franchising process but none are more important than evaluating a franchises' Item 19, or Franchise Disclosure Document (FDD).

The Item 19 outlines earnings, expenses and other relevant factors that will affect the future financial performance of a franchisee once they are up and operating. Unless a prospect is opening a franchise with the goal of saving the world, making profit may be one of their motives.

Today, prospects have become progressively more thorough in their search process, with more and more looking for hard numbers to give them deeper insight into the earnings potential of a franchise brand.

Providing straightforward, valuable financial data to prospects contributes to developing a high level of trust.

The "How Much Money Can I Make?" Franchise Question

At AdvantaClean, the financial performance of our franchises vary tremendously. Many of the factors that influence revenue and profit are controlled directly by franchisees' efforts and their management skills. Differing investment options and different approaches to business ownership make overall results harder to qualify and report.

So, to put it bluntly, we can't tell you with certainty how much money you can make owning and running an AdvantaClean franchise because so many of the contributing factors depend on you.

What we can tell you is that your best judgment about your chances for financial success with us will come from talking directly with our franchisees.

We do publish some key financial metrics that attest to the strength of our business model, and we can also tell you that, with close to a 98% success rate, our business model works for just about anyone who can follow it.

The top 50% of established AdvantaClean franchisees1 are doing really well.

Here's how we know; these figures are taken directly from our current Franchise Disclosure Document (FDD):

  • $679,430 Average Gross Revenue
  • 67.5% Gross Margin (after COGS and labor/subcontracted labor)
  • $2,328 Revenue per Job
  • $149,006 Largest Single Job 2
  • 356 Total Number of Jobs

1Established franchisees represents franchisees operating more than 49 months.

2Largest single job is the highest revenue job performed by a franchisee operating between 12-24 months in business. For more information please see the AdvantaClean Franchise Disclosure Document (FDD).

Whenever there is turmoil in the world, the most capable people look for someplace else to go where they and their families and their assets can be protected and nurtured. Historically, the United States is always high on everyone's list when it comes to selecting a new home. We get the cream of the society when uncertainty compels exodus. We get the intellectuals, the professionals and the best of the business people.

That makes me extremely proud. I love it that the United States enjoys the respect of foreign nationals in the context of sanctuary. I also derive enormous personal enjoyment at the diversity that exists here in Houston. That diversity is the direct result of a world in chaos.

I can go into stores and hear fifty languages in fifteen minutes, as well as enjoy the food, music and other cultural richness of the people who are now my neighbors - literally my neighbors. To me that is a blessing.

Since so much of what I do involves vetting small business investment opportunities for potential business buyers, I am in a position to observe pernicious patterns of nefarious dealings, especially by certain franchise companies.

I started to see this back in the 1970s, when it was possible for someone from another country to get fast tracked to a Green Card and to US citizenship if they invested in a business here. Unscrupulous franchise companies deliberately marketed franchise offerings to potential immigrants with malignant intentions.

The malignancy of the intentions took two main forms. First was the aggressive misrepresentation of the likelihood for success if the immigrants invested. These included every classic form of falsehood that almost everyone now knows about. Everything positive was overstated, and everything potentially recognizable as being a negative aspect of the investment was either denied or greatly understated and dismissed.

Secondly, there were a number of franchise companies that were offering real investment opportunities that were qualitatively excellent, but the agreements were written so that once the immigrant franchisee achieved success, it was easy for the franchisor to find incidents that could be claimed to be breaches of the agreement on the part of the franchisee that allowed the franchisor to take the business away for little or no money simply by terminating the franchise.

These were usually accompanied by threats that any resistance would result in the franchisee being reported to the immigration authorities as undesirables who engaged in dishonesty, and that they and their families could be deported, losing everything. I represented many of these people, and while some were so wealthy and sophisticated that they were hard to assault, many who were also wealthy by then current standards could also be frightened by threats to assault their standing to remain in the USA.

I saw this with sufficient frequency to recognize that some franchise companies made it a point to target immigrants. Immigrants had money. Many immigrants didn't understand how the American legal system works. Immigrants could more easily be frightened and intimidated.

I am seeing this again in epidemic proportions. The sharks are again thriving in immigrant rich target environments. Immigrants know less than any other category of potential franchise investors how to vet these so-called opportunities. They are, therefore, amongst the most defenseless and easy prey. While fraud is fraud everywhere, the "styles" of fraud are somewhat different here. Fraud is most effective when subtle.

One of the first due diligence issues to note in approaching one of these deals is the nationality/cultural affinity of the existing franchisee population, and also whether the franchisor's principals are from the same culture as the majority of the franchisees. The notion that people are less likely cheat their own kind is utter stupidity.

This cultural or national affinity profile is a huge red flag. It makes the traditional steps of franchise investment vetting much less reliable. Immigrants are much more fearful of telling any stranger anything that is not positive. They are accustomed to being enticed into betraying signs of disloyalty. Whenever someone is apparently trying to seek unflattering information, or check out the truthfulness of statements made, they instantly and instinctively smell a rat/sense a trap, and they clam up.

Talking to immigrant franchisees as part of the due diligence in this kind of franchisee population is almost a waste of time. You have to have a sense of what sections of the FDD, when read in light of that franchisor's marketing and sales brochures and sales pitch on discovery day, are changed in their significance by the cultural affinity of the franchisee group. What it does most urgently is change the mix between what you do with what you can see and what you have to go and find that simply isn't there amongst the readily available information sources.

If you are not of the same culture/nationality as the majority of the franchisees, your risks go even higher, because you are really much more thought of as "fair game". These franchisees wouldn't come to the aid of each other in any crisis, and they certainly wouldn't bestir themselves for the benefit of some outsider.

This xenophobia obtains in so many cultures that it is a more extreme issue in vetting a potential franchise investment when your client is an immigrant and when your client is an American Anglo Saxon thinking of becoming a franchisee in a system heavily populated and possibly also owned by foreign nationals. That they may have become American citizens has no weight whatsoever in this context.

If you are afraid of being thought politically incorrect and shy away from being harshly cynical in this kind of situation, you simply are not ready for prime time. Here you have to call the shots as they are in reality, not as you might think of doing at some church social with the bishop present. If people are offended by this harsh insight, that's just too bad. The job here is to properly vet the investment risks, not to be fearful of giving offense. In fact, you can expect the franchisor to accuse you of being a racist pig.

And if they do, then you know you have just hit a home run and that you should strongly advise against investing in any business deal with any such people. That is so because the answer to these criticisms is to be forthcoming with facts that are subject to corroboration to refute the doubt, rather than to call the challenger a racist.

Immigrants have a higher risk in investing in franchises in America (or anywhere else for that matter). They have pressure points of vulnerability that citizens of long standing do not have. Moreover, their perception of their vulnerability is much more acute. And they don't know how to/ are afraid to be directly challenging to what they are told by franchise companies. They are more easily swayed into believing by the bare number of franchisees, and, in many such cultures, they also believe that what will happen is really out of their hands anyway. That they were successful business people in their former homeland also makes them believe that they have staying power when confronted with difficulty.

But they simply don't have better staying power when they are fleeced, and they go through bankruptcy just like everyone else when they have been cleaned out by thieves.

When you represent an immigrant investor, the due diligence must be far more acutely incisive than due diligence in any normal situation. The acuity begins with the obligation to begin to educate your client about how the franchise world works. The client won't want to take this tutorial seriously, believing that anything that isn't transaction processing to get the deal closed is just a lawyer's way to job the file and make more money.

Americans aren't the only ones who distrust lawyers. The educational process is easier if you have actually been involved in situation of abuse and can provide actual case history type information. It will be important that you keep his regular lawyer in the loop, as that lawyer is probably of the same culture and has more personal credibility with the client than you do.

You need him to vouch for you in this new relationship. Keep also in mind that the better you treat this lawyer, the more immigrant business you are likely to get, as immigration issues are probably more of a specialty for him.

You will be able to assign less homework to the immigrant client than you normally would to a potential franchise investor who is not an immigrant. You will have to do more of the leg work yourself. If you are lucky and the client has children in college in America, you can bet they are highly computer literate and they can be a big help in homework assignments. They will also be gaining respect in the eyes of their parent by pitching in, and that means a lot more in most other cultures than it does in ours. The quality of their work will probably be superb with competent guidance from you.

In dealing with immigrants, it will be extremely helpful if you can find a way not to charge them for saying hello. If they/their lawyer can feel that they can come to you with questions without being charged for every phone call, a better job will be done. Showing respect for their culture goes a lot farther in international professional relationships. In other words, there are sensibilities that are called for in representing immigrants that we don't normally think about when we are representing Americans.

How you go about telling an immigrant that a franchisor representative that comes from his country/district/city/village and speaks to him in his native dialect is trying to fleece him requires some delicacy. They all have relatives back home, and the salesmanship here includes calling back home to learn about the investor's family, friends and associates, and then using that information to suggest that there are relationships back home that should be a basis of special trust by the investor in the bona fides of the franchisor.

You must be sensitive enough to take the initiative to ask specifically about conversations that seemed casual to your client at the time, but that were part of the "scheme" by a crooked franchisor.

The manner in which immigrant investors think about compliance with the rules and regulations that will touch their interests as they operate their future business is also an area of concern. The "education" provided by the crooked franchisor on this subject in the sales pitch must be accounted for, as it is done in a manner - always oral and always later denied - that suggests the presence of many opportunities for revenue that will be "off the books".

Those extraneous revenue opportunities are almost never available, and if the franchisor catches the franchisee operating extraneous business that is not reported, that will be an opportunity to terminate the franchise and take over a business should the business succeed.

Having a franchisee take the start up risk, establish the business, and then taking the business away for very little money is just as frequently part of the scam as the fraudulent inducement to invest in a franchise that has little chance for success.

This planned takeover aspect of selling franchises to immigrants is not usually given as much serious concern when vetting a franchise investment for an American client. It should be, but it isn't.

Your immigrant franchise investor client has to be vetted a bit differently also. Vetting your client for investment suitability is always important, but in the context of someone who has lived in another place where the rules, customs and expectations may be quite different, it takes on added significance. While you have to do it without giving offense, you really ought to put your client through a "discussion exam" in which he tells you about how things have been done in his life up to now and you counsel him about what differences have to be expected and about how to adjust to those differences.

For example, there is far more information exchange in business relationships here, especially in franchising, and the information is rather formalized compared to most other places. The attitudes about information exchanges are frequently very different where your client comes from, and he has to be made aware that a casual attitude toward information exchanges can cost him his business in a typical American franchised business. That is only one of many examples of the education you need to provide for the immigrant client that you wouldn't give as much attention to for someone who has lived here all his life.

I have seen some real nightmares that have arisen out of just a different attitude about information reliability - entire very successful businesses lost. If the business is being purchased as an up and running business rather than a start up, what the current business owner told the potential buyer will be absolutely outrageous compared to anything you will ever see in a UFOC or franchise sales brochure. If the seller is also an immigrant, you can bet that the discourse between the seller and buyer is right out of some street bizarre scenario.

Although I can't prove it, I am sure in my own mind that the franchisees who sell their franchised businesses commit the most egregious frauds of all. A franchise resale transaction is a minefield of deception.

The scope of this article is about representing people who are not born and raised in America when they are thinking of investing in a franchise. It is by no means intended to be a tutorial about how to do due diligence from a broader perspective. There are several other articles on this web site dealing with franchise investment fraud and how to approach it.

Even in their totality they are not encyclopedic in the subject of due diligence. You simply can't cover every possible scam tactic, as the fertile mind of the shyster franchisor keeps coming up with new tricks. Nuances on old tricks are counted here as new tricks. So much in vetting for investment fraud is only in the guts of the person doing the vetting, what he brings to the table based upon the multiplicity of schemes that he has been exposed to in his career.

But these articles are intended to assist general business lawyers to do a better job for their franchise investor clients. When I see them - after it's too late - I always ask whether they went to a lawyer, and they almost always say yes - and then go into a rant about how incompetently the job was done. That is the problem I am working on when I publish these tutorials.

If you are not a lawyer, but someone thinking of buying a franchise, direct your lawyer to this site to read those articles. As it is not politically correct to point out the fraudulent practices in the franchise industry, your lawyer won't find another place to get an education about that subject. Be advised, however, that reading articles about how to vet franchise transactions is not really a responsible substitute for experience.

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Are You Next the KFC?

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KFC pioneered conversion franchising. Pete Harman was the first KFC franchisee. He converted his independent restaurant to a KFC.

But, think before you convert your existing business to a franchise. If you have an existing business, you may discover opportunities to convert your business to a franchise--to get the benefits of a "well known brand", to gain "purchasing power", or to gain advertising and support. You may even be tempted because of the attractiveness of the package.

Such conversions probably occasionally work out well for the franchisee--but often they do not. As part of such conversion agreements, you probably are transferring (giving) all of your current customers and their information to the franchisor. In most cases, if the franchise ends for any reason, you have no right to even contact any of those customers--and you will probably be prohibited from being in the business you have been operating for years without their help--we call it a non-compete.

It is rare that franchisors pay for such benefits--except the somewhat illusory "right" they give you to sign their franchise agreement. Meanwhile, by signing the franchise agreement, you give up a great deal of the flexibility you now enjoy to control the products and services you offer to your customers and the direction of your business.

They want your money. If they want it bad enough, they will agree to some simple changes that might protect you in case things do not work out. For example, they might waive the post-term non-compete under certain circumstances or pay for your customer list or make other concessions. They might even agree to exclude your existing customers from royalty calculations.

If you do not think very carefully and listen to some good advice, you could lose not only your franchise, but the business you worked to build before you learned about the franchise "opportunity".

You could discover, after it is too late, that you now have to pay royalties on all of your existing customers--but that new brand and all the promised advertising and support has not delivered new customers.

In this situation, we cannot give a bright line rule. You should discuss your decision with an experienced franchisee lawyer. He or she should be able to advise you as to the risks specific to your situation. The longer you have been in business, the greater the risk in most cases. An experienced franchisee lawyer might also be able to help you negotiate some of the terms of the franchise agreement. (Yes, franchise sales people say they are non-negotiable, but that is not true.)

Take your time and think before you convert.

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4 Mistakes which Doom Franchisees

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When I am contacted by a franchisee or a group of franchisees that believe that their franchisor is engaging in conduct that is hurting the financial performance and value of their business, it is practically always the case that they have already done something that is not in their best interests.

When someone is perceived to be hurting your economic interests, any normal person becomes enraged and wants to go immediately on the counterattack. They do this in a number of ways.

Mistake 1: Write and Send an Angry Letter

One of the first very bad things that they do is write an angry letter in which they vent their frustration, often accusing their franchisor of unlawful conduct or conduct that violates the franchise agreement, or both.

Frequently there is much in the letter that is aggressively accusatory and threatening, to put it mildly.

The threats customarily include reports to government enforcement authorities, lawsuits, group action by many franchisees, political action and publicity about the negative attributes that the franchisee(s) believe deserve exposure to the public eye.

Mistake 2: Call up the other Franchise owners and Complain.

Another of the bad things that franchisees do is that they call each other without thinking it through and try to stimulate some group cohesion for the purpose of sharing expenses and jointly addressing the grievances.

Mistake 3: Hire a Trial Lawyer who doesn't know anything about Franchising

Another very bad thing that they do is to get involved with a lawyer who does not know much about how franchising works -- frequently a relative or some other lawyer who may have represented them in some matter totally different. Having no sensitivity about how franchise relationships work, the advice is usually awful.

The bad letter to the franchisor usually contains strong statements accusing the franchisor of violating duties that the franchisor really does not have. As such, it is insulting and not conducive to the achievement of positive results.

There are some very fundamental truths about franchise disputes that hardly any franchisees know about.

For example, a franchisor may lawfully do just about anything that there is no contract or statutory prohibition against. The fact that whatever the action is may negatively impact upon the franchisee's business does not mean that the franchisee has any right to prevent it or to recover damages because of it. Some injuries are simply the product of other companies behaving rationally in a changing market (merging with competitors, for example).

In addition, there is no 'moral' duty in any commercial agreement. The parties are obligated to do what their contract says they will do, and to refrain from doing what the contract says they cannot do.

Even those apparent absolutes are sometimes not as absolute as they sound. If the contract does not impose a specific duty to act or to refrain from acting, the duty probably does not exist.

No implied doctrines of good faith or fair dealing will supply provisions in a franchise agreement that the parties did not put there in writing in the first place.

Several courts have sought to insert good faith and fair dealing doctrines into franchising cases, mostly having to do with encroachment. These courts have either been reversed, or their rationales have not been followed in other cases. Congress has been holding hearings on changing the franchise legal relationship to include concepts like good faith and fair dealing. This has gone nowhere, and it will not go anywhere in the future.

Mistake 4: Threatening to Bring a Lawsuit against the Franchisor Immediately

Threatening the franchisor is always the worst first step in addressing any serious problem. The threat may be empty, either because the franchisor has the right to do whatever it is he is doing, or because there are not adequate resources to fund litigation/arbitration to redress the grievance.

Empty threats put everything on the worst possible footing. Everyone digs in his heels, and getting anything resolved peaceably is made doubly difficult or impossible.

Getting legal advice from some lawyer, who does not know what he is doing, either because he is a relative or because he is inexpensive, is always bad. If the gravity of the problem is not sufficient to justify spending a few thousand dollars to get really good professional help, it isn't worth starting a fight over anyway.

Today you can get on the Internet and find many experienced franchise lawyers who will evaluate competently whatever your situation may be and suggest alternative approaches in an order of priority calculated to make the worst and most expensive response a last resort.

No competent lawyer will recommend litigation without first having analyzed the problem and done research to bring his knowledge of what the courts are doing with similar problems up to date.

No group action should ever be attempted without capable guidance from legal counsel about how to go about it. Rabble rousing always gets reported to the franchisor and makes people targets. Other franchisees will always think they can get an inside deal for themselves by ratting you out. How one goes about making group action happen is very important.

Often the angry franchisee(s) may have some dirt in their back yard also, and that may come back and bite you if you don't handle this activity very professionally.

  • Get a lawyer who knows how to do this to show you how.
  • Ask lawyers whether they have ever done this before and how they would go about it.
  • Don't think that every franchise lawyer knows how to organize a revolt.

The goal of this approach is to preserve as many franchisee options as possible -- to burn bridges only when absolutely necessary. Angry confrontation often ruins the chance to resolve matters with a positive business solution. It may very well come down to angry confrontation. That should be done when other approaches are unrewarding and when there is a proper legal basis to wage war and the chances of winning are good.

Remember: Most franchisors can afford to defend bozo lawsuits.

Only a real, valid claim, competently presented to the court or arbitration panel, has a likelihood of changing anyone's mind or getting redress for injuries suffered. A seasoned franchise litigator can provide that kind of help.

There is a moment (and it may last for days or weeks) when nothing could make you angrier, when what is happening to your business is seriously injurious and is being done by your franchisor.

It is in this moment that you must, for your own benefit, find competent counsel -- that you must, for your own benefit, keep a lid on your feelings while the right thing to do and the right way to do it is accounted for.

Author Richard Solomon is a Franchise Lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.

Give him a call at 281-584-0519 to is discuss your specific franchisor problem. He probably already knows about it.

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

If you're thinking about purchasing a franchise, pay close attention to the franchise disclosure document (FDD)--the large document that contains disclosures about the franchisor and franchise system.

Item 20 of the document can seem daunting, but be sure to dig in and examine the information it contains. This section is made up of five tables that show the status of outlets within the system over the past three years.

Table 1: History of system outlets

Table 1 summarizes the history of system outlets over the past three years. It shows the number of franchised outlets, the number of company-owned outlets, and the number of total outlets. This chart is important because you can see if the franchise is growing or declining.

Table 2: Transfers

Table 2 shows the number of transfers by state from existing franchisees to new owners. A high number of transfers, particularly within one state, could indicate franchisee difficulties in that locale.

Table 3: Status of franchised outlets

Table 3 shows the status of franchised outlets by state for the last three years. It also provides details on the number of terminations, non-renewals, and units reacquired by the franchisor.

Terminations and non-renewals occur less frequently these days, so it's important to look at the number reacquired by the franchisor because franchisors often use this method to take care of stores that are in trouble.

A high number of terminated, non-renewed, or reacquired franchisee stores--particularly within a state--may be cause for concern.

Also, look for stores that have ceased operation for other reasons.

Table 4: Status of company-owned outlets

Table 4 shows the status of company-owned outlets over the last three years, including the number of outlets closed or sold to franchisees. In large systems, this table shows how the franchisor is fairing with its own stores. A decline in the total number of outlets may indicate trouble or that the franchisor is simply selling its stores to franchisees.

Table 5: Projected openings

Table 5 shows projected openings and provides the number of outlets the franchisor expects to open over a period of time. This gives you an idea of whether the franchisor anticipates growth in the near future and in what locations.

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The term Conversion Franchise refers to the situation in which someone with a successful small business is offered the opportunity to convert his independent business into a franchised business by affiliating with a franchise organization. And so, thereafter, if the proposal is accepted, the business would no longer be known by its former name, but rather by the name of the franchise chain.

Many of these conversions have been successful. The realty brokerage business is one of the more notable instances in which belonging to a large organization with national coverage has facilitated synergies that would never be available to a small or even a regional group of realtors. However, many, maybe even most, conversions are a disaster for the unfortunate person who converted an independent business to a franchise and didn't know how to do the "due diligence" before making the decision to convert. So many have come to me with this problem, usually no longer having sufficient funds even to hire a lawyer, that I have decided to put the due diligence protocol on this web site in the hope that some fine small businesses may be saved from a franchise conversion disaster.

What is needed to mitigate the conversion decision risk is never offered. What is offered is a franchise agreement with an initial franchise fee, subsumes an initial investment in changing the business identification to that of the franchise organization, a required regular payment to an advertising fund, a required periodic royalty payment which starts with the first dollar of income every month. The franchise contract purports to obligate the converting franchisee to a term of affiliation of at least five years, with a non-competition agreement to prevent departure from the franchise chain - you lose your business if you leave. While these are much less enforceable in the context of a conversion franchise, they are not entirely free of enforcement risk, and even if you win you have spent a great deal of money to fund the litigation. Then, too, there is the cost of re-identifying your business to its old name and advertising blitz expenses to get that name back out there where people are educated and conditioned to accept and patronize it.

Every conversion franchise agreement I have ever seen has these provisions. If this is the deal being offered, and it always is, there are certain obvious exercises that must be done to analyze its investment worthiness. Obvious, yes, but almost never done. I guess it is obvious if you know about it and how to do it. Well, now that you are reading this article, you will know.

The formula is quite simple. You will, by converting to a franchised business, add to your expense profile the monthly royalties (anywhere from 4% to 8% of sales), plus the advertising fund payments (usually around 2% to 4% of sales) plus other expenses. Frequently use of e-commerce facilities and other "support" elements are not included in the fee and royalty structure, but are separately and additionally charged for. These monthly expenses must be added up and subtracted from your profit and loss statement. What is the impact upon your profit as a percentage of gross sales? That reduced profitability will be your future profit-as-a-percent-of-sales profile if you decide to convert. What do you get for that? You are told that you will get greater name recognition, the impact of being in a national organization that can generate more sales, "support" (whatever that is), and the privilege to participate in that franchisor's "unique" system of doing business. There is an objective way to determine how much of what you are being told is true and how much of it is blatantly untrue.

The test is that you aggregate the monthly incremental cost of being a franchisee, and mathematically determine how much in incremental sales at the now-reduced profit percentage you will need to reach break even on your having assumed this additional financial burden. Your accountant can do this for you. And that is merely a break even sales number. To make the conversion decision a profitable investment you have to exceed that sales number by a substantial margin.

Once you have derived that sales number, go to Item 19 of the Uniform Franchise Offering Circular (UFOC) that the franchisor is required to have provided to you before you signed any contract, and see if sales ranges achieved by their franchisees is provided. If not, you are about to make a big mistake if you decide to convert your business to their franchise. Immediately and absolutely refuse to convert to any franchise that does not provide their franchisee sales ranges broken down into the categories of: (1) the number of franchisees in the top 25%, the second 25%, the third 25% and the bottom 25%; (2) the number of franchisees in each geographic region that are in each sales percent category (frequently there is great variance in sales performance by region, and knowing which region you would be in can be critical - not all regions perform with equal success profiles for any franchisor); and (3) the length of time the franchisees have been affiliated with the franchisor in each percentage of sales grouping (if it takes ten years to get near the top tier, you don't want to convert your business).

Now that you know how your sales would have to increase just to cover your expenses of conversion, without any incremental profit to you from having converted, ask the question, "How many of this franchisor's franchisees have achieved this sales level? The reason so many conversion franchisees have ended up in my office wanting to know how to get out of the franchise contract and how to get their money back is that their franchisor had few or no franchisees generating sufficient sales to justify the conversion investment. It is a loss situation for the converted franchisees. In many instances, the answer to this exercise is that the franchisor has never had even one franchisee with sales at the level you would need to justify converting your business.

This analytical exercise tells you whether the sales pitch about how wonderful the franchisor's stuff really is is true or false. While there may well be franchisees in that system that are satisfied with their relationship with this franchisor, that is not the question. The question for you is whether the affiliation with this franchisor will provide sales results for you to make you happy at the reduced profit percentage caused by the costs of affiliation.

If the results of this exercise are not positive, but for some reason you still wish to consider converting your business and joining this organization, you can mitigate the risk by insisting upon the following terms being put into your franchise agreement:

1. Current sales are exempt from all payments based upon percentage of sales. Percentage of sales payment obligations apply only to sales above current levels.

2. If sales growth does not exceed 20% by the second year, you may terminate the franchise agreement with no non-competition or other constraint upon your right to do whatever you want to do with your business.

3. If you are still in the system when the time comes to renew your franchise agreement, you have the right to renew upon the same terms as your current agreement, with no adverse changes. Many franchisors want you to renew on their new agreement that frequently has higher fees and less protection for you.

4. If you sell your business, your buyer gets your contract, not some new contract with different rights, including renewal rights.

If the franchisor if unwilling to agree to these terms, reject the conversion offer. So endeth the lesson.

Author Richard Solomon is a Franchise Lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.  Give him a call at 281-584-0519.

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Franchisors who provide Item 19 (Financial Performance Representations) in the FDD (Franchise Disclosure Document) show earnings claims that can be backed up by actual results of their franchisees; therefore, you can know what to expect when starting your business.

This is regulated by the Federal Trade Commission (FTC) and enforced by a number of state regulatory agencies.

I know that some people in franchising are nervous about providing that kind of detail to candidates- I personally think that it sets up reasonable expectations.

We may not award the most franchises on an annual basis...but we have happy franchisees who are meeting their expectations and have never had any litigation in over 30 years of franchising. (Check our item 3 in our FDD.)

Wild Birds Unlimited actually provide a significant amount of data in our Item 19 that provides information on top line sales and Bottom Line 'Owner's Cash Flow" data that is pulled from our franchise store owner's annually submitted financial statements.

We also provide data from our customer loyalty program so that prospective franchisees can determine system wide KPI's regarding average ticket and # of annual visits to our stores.

We give ranges, averages, medians, % & # of stores that exceed the averages and break down both top and bottom line metrics into quartiles.

This along with requiring that each and every candidate develops a Business Plan and projections (which we cannot review, of course) provides the candidate with information that they need to make the most informed business decision that they can make given the fact that no one has that crystal ball that we all would like to have.

I personally would find it hard to award franchises if we didn't have such a complete Item 19 as I wouldn't be able to sleep at night if our candidates didn't have historical numbers to use in their decision making process.

Transparency in our process allows me to sleep through the night...every night.

Does This Sound Like You?

1. Energy and Passion for Retail & the Hobby of Bird Feeding.

2. $300k Minimum Net Worth

3. $40 to 50k Liquid Capital

4. Commitment to Follow Our Proven Business Model

5. Strong Drive for Excellence Motivated and Community Minded

Take the Next Step to Find Out More

Many people buy a franchise because they feel they don't know how to effectively start a business without a lot of help.

Franchises offer support and systems already in place that are meant to help you start your business in an efficient and effective way. There seems to be a perception that buying a franchise is a much lower business risk than starting a business from scratch. While this is true in many cases, it is by no means risk free as there is also real risk with franchises. In many cases, help from your franchisers is there during your grand opening. It is one of the strongest benefits about franchising.

One of the myths of franchises is that they are "turnkeys." It is still up to the owner to manage the day-to-day operations and make the franchise work financially.

I worked with a struggling, established franchise in a very small North Carolina town. The franchiser charged them the same fees as their franchises in large cities such as L.A. and Chicago.

With a much smaller market, the business couldn't generate enough revenue to pay their franchise fees and earn a reasonable profit. Many franchisers do not differentiate their franchise fees for the size of the market. Always check with franchise owners in similar size markets to see how they are doing before making the leap. Another key factor is whether or not you will have exclusivity in your geographic market. Having the same franchise a few miles down the road will make it much harder to be successful.

If you are considering buying a service franchise where you have to physically travel to your clients, always check out the "density" of your potential geographic market. I worked with a client in a small Southern town who considered a service franchise where they would have to take their service to pre-schools in the area.

In analyzing the number of pre-schools within a 50 mile radius, I identified that it would require an average of 30 minutes of travel time between preschools.

This would only enable them to provide four service sessions per school day as well as cost more than $75 a week in gasoline costs. Given the franchise cost, their investment in equipment and operating costs, the franchise didn't appear to be attractive in that kind of market.

Franchises can be a good investment, but a lot of research and analysis must be done before making the leap. One crucial question is whether or not the "national brand advertising" will benefit you versus the same cost for local market advertising.

The key question is how strong is the franchise "brand name" versus competitors. Will the brand name generate enough additional business to cover their franchise fees and turn you a good profit versus going it alone?

Consult with other franchise owners in similar sized markets, evaluate your location for traffic and evaluate the drawing card power of the "brand name" and look at the cost of the franchise fee relative to your market size before making the plunge.

Bob Papes is a local business expert and the author of two books, "Management During an Economic Crisis" and "Turnaround." His email address is: [email protected]

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A franchise contract is a long-term arrangement that sets forth the rights and obligations of franchisee and franchisor in the operation of a franchised business. This long term relationship deserves serious attention by a franchisee.

I assume that you have spent:

  1. A good deal of time studying the Franchise Disclosure Document (FDD) which (hopefully) contains helpful financial performance information.
  2. Spoken at length with existing and former franchisees and discussed all aspects of the deal with trusted advisors.

Now comes the more serious and committed step.

  1. You must study carefully the offer contained in the franchise agreement with guidance from knowledgeable franchise counsel.

Let me guide you through some of what you and your counsel should be looking for, starting with review of the initial sales process.

The Initial Franchise Sales Process. Prospects should evaluate franchise offers prudently and wisely. They should not rush to buy or succumb to high pressure sales tactics (which accompany some but not all offers).

In the franchise sales process, sellers may emphasize success stories (or the potential for success) while steering clear of negatives (which accompany most franchise offerings).

Frequently, they downplay the significance of the so-called "standard" franchise contract. This does a disservice to the prospect. They may tell prospects to put their trust in the franchisor who will be with them "every step of the way, because if you [the franchisee] don't make money we [the franchisor] don't make money".

As a result, many prospects believe that all franchise contracts are basically the same ("standard") and that they are non-negotiable. Both statements are false, until tested.

Indeed, the contract is crucially important in the franchise relationship. Courts pay great attention to them in franchise disputes. Prospective franchisees should do the same.

Why? Because if the parties find themselves in a serious dispute (which is not improbable), nothing is more important in the relationship than legal RIGHTS.

If a franchisee is not lucky enough to benefit from a state franchise relationship law or franchise registration law (passed in only a small minority of states), s/he must look to the contract to determine the parties' rights and obligations. And if the franchisee has not negotiated rights to make the contract fairer, the likelihood is that it will be very difficult to prevail in a franchise dispute.

Let move on to some important areas you should be reviewing with your counsel.

Not all franchises are created equal. The two main benefits one looks for in a franchise are a well-known name (brand) and valuable know-how in operating the franchised business. Of the thousands of franchise opportunities in the marketplace, however, few have well-known names; the type that immediately attracts customers once the business first opens. What is more, many franchisors are not adequately capitalized; in some cases less so than prospects to whom their franchises are offered for sale. And yet, typically their lawyers prepare "standard", long, onerous contracts giving them extensive (sometimes unnecessary) rights and saddling the franchisees with extensive obligations, as if these franchisors were industry giants.

Some important points to take away from this discussion are as follows.

Contract language is very important. While there are many similarities in these contracts (such as the franchise grant and necessary franchisor controls over its system, trademarks and confidential information), there are also many differences. These appear in areas such as fees, franchisor services, termination, transferability, source restrictions (such as on inventory and supplies used in the business), remedial restrictions and post-termination controls, to name a few. The point is that there are material differences in these so-called "standard" contracts.

Some are more franchisee-friendly than others; some decidedly less. In light of the significant investment to be made in the business, prospects should engage experienced franchise counsel to study the contract and advise on the good, the bad, and what if anything, might be negotiated to level the contractual playing field.

There is no substitute for both franchisee and counsel to read and understand the contract fully. Often, this exercise may reveal material discrepancies between what the contract provides and what the franchise seller says about the deal.

Another key point is that more often than people think, franchisors will consider making changes to the contract; not so much to change the basic terms of a deal, but rather, to make the contract a bit fairer for the franchisee while not depriving franchisors of traditional rights in the relationship. A prospect may well be able to negotiate.

Just as a house rests on a concrete foundation, a franchise business rests on a contractual foundation. If the franchisee does not (or cannot because some franchisors do not negotiate) negotiate sufficient rights, the business rests on a shaky foundation (essentially the good graces of a benevolent franchisor) and thus, is more susceptible to loss through termination and post-term exigencies.

Review the following areas of the franchise relationship covered by the contract with your counsel. (These are not set forth in order of importance.)

1. Territory. For most franchises, the franchisee wants an exclusive territory protected from competition from other system outlets. In systems where this is purportedly offered, however, typically franchisors reserve many ways to compete in that territory, whether in other distribution channels (e.g., electronic commerce, department stores or grocery stores), under other marks, in non-traditional settings (e.g., universities, hospitals or hotels), or if a quota is not met. Also, typically exclusivity depends on the franchisee continually being in complete compliance (which is not realistic for the entire contract term) as compared to substantial compliance with material obligations, which is much more reasonable. Franchisees should try to strengthen their rights in this area.

2. Renewal. Though franchises often are marketed as long-term deals between so-called "partners" or "family members", usually the contract grants franchise rights for a ten year term and a right of renewal for one more term (e.g., five or ten years). After that, and after the franchisee has built a good business and added substantial good will to the brand, like a landlord who can evict a tenant, the franchisor can take over. And this is wholly aside from the fact that at renewal, typically franchisors reserve the right to change all contract terms (e.g., new fees, new territory if any, etc.) by requiring that franchisees sign their then-current form of agreement. This can be disastrous for the franchisee; who may be left with nothing and in addition, may be bound by a post-term non-compete clause. Accordingly, it is not unreasonable for the franchisee to have a continuing right to renew the franchise so long as reasonable renewal conditions are met and on contract terms consistent with those previously agreed to.

3. Pricing Freedom. Until a U.S. Supreme Court case re-interpreting federal anti-trust law in 1997, franchisors and suppliers could not enforce restrictions on prices charged by franchisees and dealers. Considered to be anti-competitive for the better part of a century, vertical price restraints were held to be per se illegal. In State Oil Co. v. Kahn, 522 U.S. 3 (1997), however, the Court ruled that each price restraint must be evaluated on a case by case basis as some may be pro-competitive. Under the old law, it was common to notify consumers during promotions that "price and participation may vary" or that a set price was "available at participating dealers". Since then, however, many franchisors have introduced this right into their contracts. This is bad for franchisees. They need freedom to set their own prices in order to adapt to competitive conditions, to make a reasonable profit or to mitigate losses.

4. Risky Personal Exposure with Guarantee and Indemnity. This is a crucially important area. Understandably, franchisors want a franchisee's principals to guarantee franchisee performance under the agreement so that they are assured of collecting sums due. Also, it is reasonable that franchisors be indemnified for some losses to which they may be exposed that may arise out of the operation of the franchisee's business. Conversely, franchisee principals have no interest in signing personally for obvious reasons. They could be exposed personally to huge liability. They invest substantial amounts in the business and may take on a lease and other significant obligations. What is more, when one combines the guarantee with the typical one-sided franchisee indemnity, there is concern that the principals may be exposed to high liability where a customer suffers a personal injury caused by something that is not the franchisee's fault and may be the franchisor's fault. This could derive from a personal injury caused by inventory or another product sold to the franchisee by the franchisor for use or resale in the business. Though this risk may arise from operation of the business, the franchisee and its principals should not have to take on risks that are not their fault. Yet that is what these clauses provide for. Such risks should be excluded from the franchisee indemnity. Further, the franchisor should indemnify the franchisee for acts or omissions that are its fault. In addition, if a personal guarantee must be provided, franchisees should seek to limit its financial exposure (as opposed to personal liability for compliance with confidentiality, non-competition, trademark use and comparable non-financial undertakings which is not unreasonable). Reasonable limits could include a sum certain (e.g., $20,000) and/or an amount equal to royalties owing during the franchisee's operation of the business (but excluding future fees post-termination). In fact, certainty of collecting royalties is a primary reason why franchisors require these guarantees. In cases where deals would have been lost unless franchisors softened their stance on guarantee language, franchisors have negotiated.

5. Franchisee Exit Strategy. Under typical contract provisions, if there is a termination without renewal (which often is a matter of dispute between the parties) or expiration, the franchisee could be out of business with no decent options and significant financial obligations. This is because the franchisor reserves an option to take over the lease and purchase certain hard assets of the business on terms that are unattractive to the franchisee (e.g., no compensation for a potentially valuable lease and book value less depreciation for tangible assets). Plus, the franchisee is bound by a non-competition covenant. All of the franchisee's good will in the business (which would be preserved if the franchisee were to transfer the business) is destroyed. In these cases, if the franchisor wants to take over the business, the franchisee should be paid its fair market value as a going concern. If not and if the franchisee wants to stay in business, s/he should be able to do so by paying a reasonable termination fee to the franchisor in the absence of a better alternative.

Conclusion. The foregoing contract terms represent very important issues for consideration in a franchise purchase. But they are hardly the only ones. In a 40-50 page agreement, there are many more. From arbitrary deadlines to open the business or curing defaults, to obtaining freedom to purchase items used in the business from approved suppliers on the best terms if they meet the franchisor's quality standards (as opposed to having to buy from designated suppliers at non-competitive prices), to ameliorating unduly harsh termination clauses, to more reasonable conditions precedent to obtaining franchisor consent to a transfer or a renewal, to fairer dispute resolution terms (which can be outcome determinative in a dispute), there is much that franchisees can do to give themselves a modicum of rights in relationships with their franchisors. And believe it or not, even if the franchisor were to agree to changes in some of these areas, it still would hold most of the cards should the parties get into a dispute. What is more, the suggested points for negotiation would not alter material business terms or the way the parties do business with each other during the relationship.

In the ideal situation, the parties will have put the contract in the desk drawer and not looked at it again because both will have experienced success without confrontation. But the value of rights in the relationship cannot be understated. Franchisors know this well. It is reflected in their contracts. Franchisees can help themselves significantly by understanding this and seeking to negotiate accordingly. Should they find the franchisor unwilling to compromise, at least they will fully understand just how adverse their contractual situation is. If they do the deal anyway, they will have done it fully informed and convinced, that despite unattractive contract terms, they cannot think of anything better to do with their time and money.

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Buying a Franchise

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Before you start looking for a franchise to buy, think about why you think you want to buy a franchise opportunity in the first place.

What benefits do you expect to receive from a franchise that are more or better than what you could gain from starting a business on your own? While federal and some state laws define what business opportunities are franchises-and that definition is very broad-there are no laws that require franchisors to provide their franchisees with anything specific. Or with anything at all.

No minimum level of assistance, no ongoing support, no marketing help, no on-site visits, not even phone calls or emails, and certainly not innovations and further development of the business model UNLESS it's in the contract!

Will you still be willing to pay royalties and operate by someone else's rules after you've been in business for a couple of years, and are comfortable that you now understand the business and what you are doing? Are you a follower? Can you play by the rules? For as long as you have the business?

Are you a risk taker? Willing to take a chance on a new concept, a new company? Do you need a mature, well proven business? How much are you willing to risk? Are you prepared to deal with the consequences of failure?

Everyone will tell you to do your homework on researching a business or franchise opportunity, but start with yourself. What is going to work for you?

Here are Five Tips on Buying a Franchise Business Opportunity

  1. Do your homework, don't just fall in love with the business. Be sure it is right for you and profitable enough to meet your need.
  2. Promises really are just as good as the paper on which they are written-this is especially true in franchising. The person you trust today may not be with the company tomorrow.
  3. Can you be a team player and follow direction?
  4. Investigate your franchisor, that means ownership, management and financial stability.
  5. Think about consequences. What happens if things go wrong? Maybe investing in an experienced franchise attorney is worth it.

After The Franchise Expo. What Now?

So after attending the franchise expo, what do you have?

A lot of questions, in spite of a bag full of literature that you carried home. You can't possibly process all the information that you heard from franchisors, seminar leaders, attorneys, and moneylenders, but you know there's something in it for you.

Buying a franchise can change your life for the better, if only you make the right decisions.

So what do you do now?

Why'd You Go To The Expo?

Post-show fatigue is a real phenomenon. It's the result of too much information in a short period of time. Many people, because they don't know what to do, do nothing at this point. Others promise themselves that they'll review their notes and that bag full of literature, but they never do. Consequently, many people miss out on making a decision that could, in fact, change their lives for the better. Granted, it's important to understand what you're doing if you buy a franchise, but isn't that why you went to the franchise expo? Or did you go for the free food?

If you're immobilized after a franchise expo, the good opportunities may pass you by. Sure, there's always another expo, and another opportunity, but that's what most people think - and most people don't buy franchises.

Five (+1) Steps To Help You Now

If you believe that franchising makes sense for you, and you want to come to grips with a decision to buy a franchise (and overcome post-show fatigue), here are the steps to follow:

  1. Select your favorite brands. Of the franchise brands that you discovered at the expo, which two or three do you remember as potential opportunities for you? Keep whatever information you have about those brands and set the rest of the information aside.
  2. List your questions. What do you need to know to make a decision about buying one of the brands you identified above? Make a list of the questions.
  3. Validate the franchise. Not sure if you're looking at a legitimate franchise opportunity? Stop worrying. Contact the International Franchise Association at 202-628-8000 or online. Is the brand a member, or at least identified as a franchise by IFA?
  4. Attend a Discovery Day. This is the easiest and the best way to get your questions answered efficiently. Almost every franchisor sponsors a free information day. Ask for an invitation and don't worry: attending a Discovery Day does not obligate you. This is an opportunity to meet the people who operate the franchise and learn more from them.
  5. Visit a franchisee. Talking with a franchisee may help you take the next step to buying a franchise. An existing franchisee can help lead your way.
  6. If all else fails, there's one final step: Visit another expo and start all over again.

Attend America's Favorite Franchise Expo

To that end, you should know that America's favorite franchise expo, the International Franchise Expo, is set for June 18-20 at the Javits Center in New York city.

You can register for free.

You may be interested in attending my symposium, The A to Zs of Buying a Franchise - it sells out every year - so buy early. Learn details here

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I hear franchise salespeople say, and read franchisor source printed material that says, that franchising provides a 90% success rate after three years in business!

I have been lecturing on the subject and will share my observations about investment grade franchises.

The Myth of the Franchise Success Rate - Misleading, even if True

I don't believe that was ever true. It was provided by a bozo in the Department of Commerce who later joked about all the "courtesies" he received from the IFA for having put out that porky.

The SBA, which certainly knows this because of its tracking SBA guaranteed franchise start up loan failure rates, still makes this absurd statement in its materials on the subject - another example of lobbying gone wild.

Could you so configure the base data to ever have made that statement true?

I have tried and tried, and I think you could create a false database that appeared to have corroborated the statement maybe 40 years or so ago.

Here's how someone wanting to perpetuate that fraud would/could have gone about it.

1. General Motors, Ford and Chrysler were all franchisors and at that time their franchisee dealers were pretty successful. If you only counted those within your statistical universe of data, a charlatan could claim that franchising was 90% successful.

2. If you included gasoline filling stations but did not count as failures all the dealers who went broke but considered the locations to be successful due to location churning to keep them open, you might still have high (but phony) success rates.

3. The same, back in those days could be said if you included KFC and McDonalds.

This would provide you with the basis for a "true" but highly misleading claim.

However, the claim would not be true as to franchising for other franchise systems.

The claim would be false and intensely misleading for most other franchise systems.

Worse,today's universe is nowhere near that level of franchisee success.

Today's Franchise Systems

Even the franchisees of the great systems are suffering now in comparative terms from the natural flow of concept life cycles having taken them into their decay stage. If you did a search on McDonalds today you would see hundreds of reports about that very subject.

We never thought we would live to see McDonalds go over the hill, but it clearly has. KFC is now really a dog.

AAMCO now enjoys almost a 40% SBA start up loan failure rate and is accused by hundreds of its franchisees of hanging on by its fingernails through churning - constant rapid reselling of failed locations.

Quiznos and Cold Stone Creameries were always nightmares.

Hundreds more are in the same boat.

New so called franchise "concepts" are by and large thin air fairy tales being sold as viable business models.

Cereality, Soup Man, Dagwood Sandwiches are just a few examples of total nonsense "concepts" sold to the suckers who have no idea in the world how to vet franchise investments; who believe ridiculous stories with no possibility of corroboration; sign the most ridiculous agreements you could ever imagine and go miserably into financial failure and bankruptcy, sometimes preceded by suicide.

How You Can Protect Yourself and Your Family

But the mantra continues and the morons keep signing checks.

By the time they figure out that they were defrauded they don't have money to pay for the requisite legal services, and, even in the face of fraud, they are bound to arbitration clauses that preclude exemplary damages, jury trials and attorney fees to them if they win.

Once you sign the agreement you are toast!

But people with advanced business degrees and years of "experience" as employees of substantial companies think they can see through the deception. They can't and they don't.

Last year around this time, as I predicted when the bill was first introduced, the California legislature failed to adopt a revision to its franchise law that would have imposed a duty of fair dealing on franchisors. Fair dealing has been the pipe dream of every defrauded franchise victim for at least twenty years now.

Shysters make livings telling franchisees that if they just join this association that the shyster has created, they can have that "Fair Dealing" rule adopted and their lives resurrected from the financial grave.

Having been cheated by the franchise sales process in the beginning, they are being cheated all over again by the Fair Dealing shysters promising relief from their suffering.

It is just more nonsense, and here is why it is just nonsense.

The commercial law was not created to wipe the noses of suckers who sign ridiculous contracts for bozo business deals. At sign up time you tell the franchisor all about your wonderful business experience and money in the bank to show what a qualified business person you are.

Later, when you have been fleeced, you want the law to assume that you were just an innocent child with no possibility of parsing lengthy commercial agreements to inform yourself of what you were agreeing to. This contradiction is too absurd ever to become a rule of commercial law.

Grow up. If you are an educated, experienced adult you are expected to perform the obligations of commercial agreements that you sign.

Franchise agreements are commercial agreements, not consumer agreements that Deceptive Practices Laws that the law will assume were morons when they signed up for the deal.

Moron signed consumer agreements are usually for amounts of money small enough that if they get set aside the markets will not fall. But, business investment agreements do not get treated that way.

If you act like a moron and sign bad business to business agreements you are held to them unless you can prove they were induced by fraud. (There are one or two other ways out, but they are just as hard to prove and in most instances the fleeced franchisee cannot afford legal representation anyway).

As the sucker who finds himself out of money you will not find a competent contingent fee lawyer in most instances because your agreement recites that you were not told what you now claim you were told, and that if someone inadvertently did say those things to you, you didn't rely on them in making your investment decision anyway.

The franchise agreement also recites that there are no promises other than those contained in the written document you signed. And there are those clauses limiting you to arbitration with no exemplary damages, no appeal and no way to recover attorney fees if you win (that are enforceable even if the agreement was in fact induced by fraud). The contingent fee lawyer doesn't have much of a chance to be paid for his work and won't take your case unless he is as stupid as you were.

Most franchise opportunities offered today are worthless, but people still keep investing in them.

The sobering up process is beginning to accelerate because it is easier to do good research if you hire someone who knows what to look for and how to find it to help you with pre investment due diligence. If all you hire is some bozo lawyer to "read you the contract and tell you what it means" you are doomed.

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If you think you can afford to buy a franchise, then you can afford to call me first -

Act now & call me before you buy a franchise -281-584-0519.

(See what others have said about my expertise in investigating franchises and franchise remedies.)

Every franchisor, big or small, has a franchise development department. In some cases it is a department of one that may be manned by a passionate (and quite frequently strange and eccentric) founder. In other cases, it may be a massive "bullpen" of franchise salespeople whose entire function in life is to sell, sell, sell--which, by the way, is common in larger franchising organizations. Regardless of the size of the franchisor, the franchise development department exists for one purpose: to sell franchises.

Franchise salespeople are often among the friendliest and most fun-loving people you'll ever meet.

With a smile in their voice and a twinkle in their eye, they will quickly and easily make you feel like the smart, sexy, savvy businessperson you know you are, and before you know it you'll be singing their praises from the rooftops.

While I'm certainly not implying that there is anything wrong with this process, make no mistake: Franchise development people love you because you represent a big, fat commission check and because they're under tremendous pressure to sell--particularly in the case of a new franchise concept or offering.

But, how much money will you make buying a franchise? And why aren't those nice & friendly salesmen telling you?

Please also note that a reluctance on the part of a franchisor to share performance data does not necessarily mean that the franchisor has something to hide or that the franchisor's model doesn't work.

In reality, it has more to do with the fact that franchisors must be very careful about the claims they make with regard to franchisee performance. In the not too distant past, it was not uncommon for franchise development people to make comments such as, "Unfortunately, I am prohibited by law from providing any financial information"; however, this has since changed based on the amended Federal Trade Commission (FTC) Franchise Rule, which was approved on January 22, 2007 and became mandatory on July 1, 2008.

In a nutshell, the FTC now specifically requires franchisors to state in Item 19 of the FDD that they can provide financial information, but have chosen not to. The specific language can be found later on in this chapter in the detailed description of the 23 mandated Items includ-ed in the FDD.

When I went through this process as a franchise candidate myself, I distinctly remember thinking, "Man, if I could just get my hands on a friggin' profit and loss [P&L] statement or some basic numbers, I could figure out if I can make any money!"

Don't fret--all is not lost. By reviewing each of the 23 items in the FDD carefully, you can piece together a fairly accurate framework of your basic expenses. In addition, by making a number of follow-up calls to existing franchisees, you should be able to fill in any blanks. You see, franchisees aren't prohibited from

sharing detailed financial information because they're considered to be unbiased parties.

Here's the real secret: Make those due diligence calls!

There simply is no substitute for contacting a broad cross-section of existing franchisees and asking the tough questions, so DO NOT skip this step. You'll also want to pay close attention to Item 7 in the FDD, which details the costs of getting into the business, aka the initial investment.

Do all of these things correctly and voila--you'll have a nice, reasonably accurate pro forma!

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I overheard an interesting conversation about Item 7s, how much it costs to buy a franchise, and the estimated working capital required.

A lawyer explained that "it was a rule that only 3 months of working capital should be shown on the item 7"

This made no sense to me. It is fine if your franchise system is going to ramp up under 3 months, but what if you have bought a system which is expected to take 12 - 18 months to ramp up? Like a child care system?

Why would a franchisor want to mislead the the prospective purchaser by miscalculating working capital? It won't help either party.

Mike Webster tells me that the 3 month "rule" is misunderstood. It really works like this. If the franchisor doesn't have an item 19, then they cannot have an accurate estimate of working capital, how much you need to break even, because this estimate is a financial performance representation. So, if you don't have an item 19, you cannot have an hidden FPR in your item 7.

This makes sense. But, I looked at some item 7's to see how misleading adherence to the "3 month rule" might be. I looked at Man in Van Franchises, because a big component of the cost is going to be the cost of the vehicle or vehicles.

Here is what 101 Mobility's Item 7, from 2013, reveals about the cost of buying a vehicle.

Car Cost.png

First, the cost of a vehicle is estimated at $7,360 to $9,400, including any shrink wrap for signage.

Well, that sounds a like a great deal! The franchisor must have an excellent vendor program to pull this off.

Well, no. We have to read the fine print.

Fine Print.png

We see the "3 month rule" being misused. Knowing the true cost of the vehicle is not going to allow you to make an accurate estimate of your break-even.

Could this just be the way the industry reports the cost of the vehicle in the item 7?

No, I am reliably informed by Jim Norton, Chief Operating Officer at Amramp, a competitor to 101 Mobility that:

"Amramp indicates $$23,950 to $42,500 for the purchase of a vehicle. So, at first glance a potential franchisee would see far less investment for 101 Mobility than for Amramp.

But, what should I expect when the 101 Mobility management team had no franchising experience or industry (healthcare experience) when they started the franchise?"

Jim is right, I think.

In my view, we need better Item 7s and better Item 19s, so that prospect purchasers can get an accurate picture of their expected return on invested cash. Adherence to the "3 month rule" produces dumb Item 7s, which cannot be relied upon.

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In response to this article: Is a Subway Franchise a Good Investment?, a reader on Linkedin asked if buying a franchise is "truly an investment" or "is it simply buying a job?"

My initial reaction was to strike back - I get the job question all the time - and I was about to reply: "Tell me a job that allows you, upon your resignation or retirement, to sell the assets that you developed while you worked the job."

But something told me that the commenter was not being sarcastic. I think the investment question is honest, and I've thought about it this last week.

Is a franchise an investment?

Officially an investment is "the action or process of investing money for profit or material result." My Linkedin commenter would agree: "The term investment suggests your capital contribution is working for you."

So let's see. Is building new highways an "investment"? Or is that a way for politicians to make us feel better about our taxes? Is a college education an "investment"? Or is that how educators make us feel guilty if we don't get one?

Is a franchise a job?

I think most people would say yes, we "invest" in roads and education. But wait. My Linkedin commenter said "If someone buys the franchise, then works 16 hours a day keeping the doors open and paying the bills, is it truly an investment? Or is it simply buying a job?"

In other words, so long as you use your money, and not your time, it's an investment. But when you contribute sweat equity then it's . . . a job?

Technically, yes. But does it matter? Would we all feel better if we said that a college education is not an "investment" because it requires sweat equity (i.e. studying, analyzing, writing, etc.)?

Would it make a difference if we said that a franchise is not an "investment" because it requires sweat equity? Even if you like it, it's still a job, so don't call it an investment! God forbid, don't buy one because you'll have to work in it, and even if you like it and sell it for a fortune -- well, it's just a job!

Can you invest sweat equity?

Or is sweat equity an asset that can be invested? Hmmm. Ultimately, you'll have to decide.

Meanwhile, I know a guy who owned six muffler shop franchises. He sold them for several million dollars when he was in his 80s. He happily worked in one of the shops every day for about 40 years. His initial "investment" was less than $40,000 to get the first shop. If I told him that all he had all those years was a job, he'd just look at me and . . . laugh!

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Where to begin? That's the problem for so many people when they think about starting a business, or buying a franchise.

The crazy thing is that it almost doesn't matter where you begin, as long as you do!

And I don't mean "as long as you do" as a way of saying it's a mistake not to start a business, or buy a franchise. I mean "as long as you do" as a way of saying it's better to find out if business or franchise ownership is for you than to continue wondering about the possibilities until it's too late.

BEGIN HERE

Should you or should you not start a business or buy a franchise? Why not begin there? It's as good a place as any, and thinking it through won't cost you any money!

People seem to assume that they can start a business or buy a franchise. It's easy enough to do either, but that doesn't mean you should. Even if you have the money, and even if you have a great education, it doesn't mean you're cut out for business ownership.

WHAT ARE THE QUALIFIERS?

Some of the wealthiest people have failed at owning a franchise; and some of the smartest people have done some of the dumbest things while owning a franchise. So money and education are not necessarily qualifiers.

What is?

Skills!

That's another good place to begin. Do you have the skills to start a business or to operate a franchise? Let me tell you: Most people do not!

CAN'T TEACH THIS

Of course, (most) skills can be learned, and (some) franchisors teach franchisees the skills they need, but there's one skill in particular that can't be taught. I'll tell you about that in a future article.

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If you want more great tips on how to be a savvy franchise buyer, then click here.

Some prospective franchisees admit they do not know what to ask existing franchisees, and others say they know what they'd like to ask, but they don't know how. Don't let either scenario stop you from thoroughly investigating a franchise opportunity. Here are 4+ questions to ask, worded in a way to help you get the information you need.

#1 "As an existing franchisee, knowing what you now know, would you buy this same franchise again?"

Some experts will tell you never to ask Yes/No questions, but in this case you must because you want a definitive answer. If you ask ten franchisees of the same brand that same question you want to add up the "yeses" and "nos" at the end of your interrogation and decide if this is a franchise you should buy. If the majority of existing franchisees tell you "no" then you probably need to look for another opportunity. There could be exceptions, but you'll want to understand what they are before you go ahead.

The answers to Question #1 logically lead to other questions. Whether the franchisee says yes or no, ask: "Why" If the franchisee answers no, ask "Under what circumstances would you change your answer to a yes?"

The answers to Question #1 logically lead to other questions. Whether the franchisee says yes or no, ask: "Why" If the franchisee answers no, ask "Under what circumstances would you change your answer to a yes?"

#2 "Do you find the business as satisfying today as you did when you first got started?"

Satisfaction is an important consideration in the life of a franchisee. In fact, many people explore franchise opportunities to get away from an unsatisfying job. But in this case, you'll pay a fee to go to work. Do you really want to work at something that you don't find satisfying after a year or two?

It's another Yes/No question, but again the answers lead to other questions: "What happened to change your degree of satisfaction?" . . . "What could you or the franchisor do to make the business more satisfying?"

#3 "What's the secret to the success of the top franchisees?"

It's an open-ended question that can reveal important facts for you to consider. For example, if the franchisee answers, "Location!" you need to zero in on where to open your franchise. If the answer is "sales skills" or "management skills" or "accounting skills" you need to evaluate your own skills, or your ability to hire those skills.

Of course, if you're not questioning a top franchisee, you may get the wrong answer! That's why you should always ask the franchisor to give you a list of the top performing franchisees, i.e. the franchisees who won awards at the last three annual conventions. (A franchisor that won't do that or can't do that may not be worthy of your consideration).

#4 "If I invest the money the way the franchisor suggests (i.e. in training, advertising, location, etc.) and I work the business as well as you have, how much money can I expect to earn my first year as a franchisee? The third year? The fifth year?"

That's what you really want to know, isn't it? "How much money will I make?" The franchisor probably won't tell you, but the franchisees will if you ask in a non-invasive manner. If you're expecting to earn six figures annually, but no franchisee ever has with this brand, you need to know that upfront. It may mean you'll have to buy more than one unit to meet your financial goals.

While these are some of the questions you should ask existing franchisees, you'll find more in my book 101 Questions to Ask Before You Invest in a Franchise.

If you are a franchisor (or prospective franchisor), I know for a fact that right now you are all atwitter regarding the following concepts:

1) Franchising is a "low-risk" business model wherein the franchisee takes the majority of the risk.

2) You can make good money without having to invest significant capital in a bricks-and-mortar operation.

3) You can create a flock of "golden geese" that will eventually be-come the greatest annuity ever.

4) And--if you're already a small-business owner--you love the fact that you can grow your empire by leveraging the passion and en-ergy of other entrepreneurs who are just...like...you (you hope).

For you franchisees (or prospective franchisees) out there, your brain is preoccupied with champagne wishes and caviar dreams.

You're most likely rabidly passionate about dog grooming or the art of sandwich making or the magic of dry cleaning, or whatever floats your boat. You are obsessed with the idea that for the (relatively nominal) cost of a franchisee fee, you will be magically anointed with the "secret formula" that will guarantee your success and deliver you from evil.

You believe in your heart of hearts that you are way smarter than those other poor saps who tried to start a small business without the loving protection and guidance of a benevolent and all-knowing franchisor.

And last but not least, you firmly believe that franchisors always put their franchisees' best interests first, and that their primary reason for existing is to ensure the health, happiness, and well-being of their franchisees. Behind The Franchise Curtain

Well, guess what? I hate to rain on your parade, but like most things in life, it ain't that simple.

As a matter of fact, the dirty little secret that many in the franchising community don't want you to know is that operating a franchise (as either a franchisee or a franchisor) is actually much harder than it looks, and probably much harder than you ever imagined.

Carol Travis and Elliot Aronson have written a throughly entertaining and accessible book about self-justification, Mistakes Were Made (But Not by Me): Why We Justify Foolish Beliefs, Bad Decisions, and Hurtful Acts.  We can all profit from their science.

From the introduction, "the Social Brain is wired for Self-justification.

When we make mistakes, we must calm the cognitive dissonance that jars our feelings of self-worth.

And so we create fictions that absolve us of responsibility, restoring our belief that we are smart, moral, and right --a belief that often keeps us on a course that is dumb, immoral, and wrong."

Here are some of their observations, which are relevant to both prospective franchise operators and sales.

1. On the value of Franchisee Testimonials.

"The more costly a decision, in terms of time, money, and inconvenience, and the more irrevocable its consequences, the greater the dissonance and the greater need to reduce it by overemphasizing the good things about the choice made."

If you are looking to purchase a franchise, then don't look to the existing franchisees for information - if they are doing poorly, their brains will engage in self-deception trying to convince you of how good their choice was.

Instead, you should get in touch with other individual making the same pre-purchase decision - individuals who have not been to discovery day or who have been in contact with the franchisor.

2. On being Confident:

"The weakness of the relationship between accuracy and confidence is one of the best-documented phenomena is the 100-year history of eyewitness memory research."

I would remove the qualifier "eyewitness memory research."

When reasoning about decisions, we have to make room for the possibility that even once we have chosen, we may be wrong.

For some major decisions, buying a house or car, if we are wrong we can sometimes sell and recover a large part of our investment. But for franchises, selling a money losing pit is not a realistic option.

Therefore, you have to plan for when your decision turns out wrong. What will you do?  Think about that now.

3. On Learning from your Mistakes.

"One lamentable consequence of the belief that mistakes equal stupidity is that when people make a mistake, they don't learn from it. The throw good money after bad, and the con artists are right there to catch it."

If you and I cannot admit to our mistakes, and constantly engage in self-justification to preserve our sense of how clever we are, then we can never learn anything.

We will simple repeat our mistakes in a new way.

While most franchise systems don't have a proven business method, franchisors typically berate the money losing franchisee as "not following the business model". They are made to feel stupid. Some then act stupid.

Others, instead of owning up to the mistake of the initial investment, mindlessly but energetically throw themselves into "following the business model".

The better approach is to question the facts upon which the business model rested. Perhaps you have found a counter-example to the business model. Together, you can change and improve the business model.

Evaluating a franchise opportunity today can be a difficult task.

With all of the different rankings, ads, and other franchise claims, identifying the right opportunity requires careful study of the FDD as well as talking with current franchisees.

Some words of advice to those looking to find their passion and work for themselves in Franchising:

When you get to the point in your due diligence where you see the Franchise Disclosure Document (FDD), certainly evaluate the costs associated with the franchise as well as the roles and responsibilities of both the franchisee and franchisor.  This is valuable when you talk to franchisees during your validation to make sure that the roles stated are actually experienced by existing franchisees.

Most will have what is called an Item 19 (Financial Performance Representation) and it is really important that you understand the unit economics of the system you are evaluating, as this will again aid you in your discussions with existing franchisees.

One area that is frequently overlooked is Item 20 in the FDD (Outlets and Franchisee Information).

This is a critical area to review, as it will provide insight as to how many stores were transferred, closed, and not renewed.

For example, at Sport Clips we are very proud of the fact that with over 1150 stores open, we have had only three closures in the past three years.

This provides insight as to how the brand you are evaluating supports its franchisees; how discerning the brand is in its selection of franchisees and real estate; and the overall viability of the model. Are a lot of units closing due to low sales? Is the Franchisor terminating an inordinate number of locations?

Is the Franchisor not renewing franchisees? Item 20 can be one of the most important considerations when evaluating a franchise and probably one of the most overlooked by those looking for their "fit."

This type of research should help guide you in the questions you ask existing franchisees in your due diligence.

One result you are very likely to gain by paying attention to Item 20 in the FDD, and factoring this into your due diligence, is a clear idea of what the values of the Franchisor truly are...not just what the plaque says on the wall, but the values the franchisor lives by in its service to its franchisees.

How does Neuroscience Explain Franchise Success?

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Nowadays in almost every mainstream magazine there is an article about the brain. The newfound popularity of neuroscience is helping us learn and explain how and why we do the things we do. New brain paradigms are transforming the way we see ourselves and others, and also opening up new frontiers for our growth and learning.

And, good news comes with this new knowledge, especially for the world of franchising.

Intuitively and experientially we know the franchising model works; after all, it has been proven many times. Today, however, brain science helps us explain scientifically why franchising is such a successful model and shows us how many of its premises may have been ahead of its time. Here are few examples:

Franchising and Neuroplasticity

Neuroplasticity is the ability of the brain to create new connections that allow us to change and learn regardless of age. Neuroplasticity is a fairly new concept-a paradigm of the 20th century. Only in the last 20 years or so has this concept become a hot topic and replaced the long-held belief that after a certain age our brains couldn't change.

The idiom "You can't teach an old dog new tricks" arose from the conviction that we all reach a point when our brains became rigid and start to decline; and, that meant we couldn't learn new things. Franchising didn't buy this now outdated belief. In fact, franchising is based in the idea that we can take people of any age or background and teach them how to operate a successful and proven business. Furthermore, the average age of most people buying a franchise coincides with the decline of the brain under the obsolete paradigm.

Standards of Operation and the Brain

One key to successful franchising is the use of standards of operation as the foundation of the system.  As it turns out, there are many brain-based reasons why this element of franchising produces such positive results. We'll cover two here; one relating directly to franchisees and their staff, and the other concerning customers of franchise outlets.

  • The Hebbian Axiom states that neurons that "fire together wire together"; this simply means that, when we repeat a thought or an action, we strengthen those particular brain cell connections. We create superhighways that make tasks easier and easier to accomplish every time we do them. In other words, repetition creates brain speed and efficiency which are beneficial in any business venture. There are many ways to make a burger, to serve a customer, to tutor a child, or to cut hair, but for each franchise system offering these products or services, there is only their way-their standard. Having consistent procedures for every activity of the business helps franchisees and staff members replicate successful results.

 

  • Standardization is perhaps not the preference of more artistic or creative people, yet for the rest of us our brains crave it. In fact, when something changes in our environment or when our expectations are not met, the discrepancy is processed by our brains as an error, generating a stress response that is unpleasant. The opposite is also true. The standards of operation and consistency of franchising produce a pleasant feeling of safety since no error is detected by the brain. All is good when things are the same; at least, as far as the brain is concerned. This feeling keeps customers going back to those franchise locations and produces the brand loyalty experienced in franchising.

Being in Business for Yourself but Not By Yourself and the Brain

Franchising is often defined as "being in business for yourself, but not by yourself". This definition has two powerful brain implications. First, as David Rock has reported in his books and articles,  a sense autonomy activates our brain reward center. Avoidance and disengagement occur when a lack of independence is perceived by our brains, triggering the danger-avoidance response.

On the other hand, a sense of autonomy helps the brain to more easily engage in cognitive functions and results in higher performance levels and a sense of happiness and satisfaction.  Franchising provides a level of self-sufficiency and autonomy not found when we work for someone else. Even when there are operating guidelines to follow, franchisees have the power to make daily business decisions which provides them with the level of autonomy that allows their brains to focus on meeting their goals and objectives.

The second part of the previous definition speaks to the sense of community and family inherent in franchising. Franchisees are not alone; upon joining a franchise company, they gain a new social network that is unlike any other business relations. Franchisees quickly find that other franchisees are not competitors but allies; they care about each other's success; they are supportive and giving.

Our brains are constantly scanning the environment and cataloguing people as friends or foes. That's just part of our survival instinct that kept us alive eons ago.  So when franchisees discover they have gained many new friends, it provides them with the feeling of safety needed for engagement and performance. Moreover, the social aspects of belonging to a franchise network strengthen this sense of safety craved by most of us.

In his book, Social, Matthew Lieberman explores groundbreaking research in social neuroscience revealing that our need to connect with other people is even more fundamental, more basic, than our need for food or shelter. Franchising provides a way to connect with other people who we consider friends and the support system of most franchise organizations reassure the brain that all is well.

Although franchising benefits from its intuitive use of many brain science principles, we still have much to learn. Groundbreaking research and findings are becoming more accessible every day.  This information can help franchisors immensely to improve relationships with franchisees, create higher performance levels, reduce ramp-up time and ensure franchisee success system-wise. The more franchisors learn about neuroscience, the better equipped they will be to assist franchisees achieve the success they desire which will result in their own success. Likewise franchisees who become versed in these new scientific principles will more easily achieve their objectives while becoming happier and more fulfilled.

Stay tuned for more information on how you too can use brain science to create the franchise success you seek.

Franchising is not for everyone, and unfortunately many franchisees don't know that until they sign the franchise agreement, pay their money, and find themselves struggling for survival.

Whether the struggle is their fault or the franchisor's fault is a moot point. The fact is, they were the wrong fit for franchising, or possibly the right fit for franchising, but wrong for the brand they bought. Now they're stuck, and they want to tell everyone about their misery.

Does anyone care? Not really.

Too many wrong franchisees . .

However, franchisors should be cautious about signing agreements with the wrong franchisees because too many wrong franchisees will make it difficult to sell more franchises.

Too often, franchisors are eager to make a sale (they need the money to meet the payroll, for example), and too often, prospective franchisees are eager to sign a franchise agreement (they need to replace a job, for example). And that level of impatience can lead to poor decisions.

Be curious to know if you are right or wrong

As a prospective franchisee, you should be curious to know what the franchisor is doing to separate the "wrong" from the "right" prospects. You should also ask where you fall in the mix and, either way, how did the franchisor come to its conclusion about you?

In my opinion, franchisors error by not using a personality profile that specifically matches prospective franchisees to opportunities. And prospective franchisees error by not demanding that the franchisor administer such profiles.

Free ebook download

In 12 Amazing Franchise Opportunities for 2015 I've written about two free franchise personality profiles with links to access them. You can get a free download of this e-book by clicking here.

Have your heard this from your great franchise prospect?

"After talking to your franchisees, I've decided this isn't the right business for me."

As a former franchisor, I heard that statement from prospective franchise owners many times. Too many.

I usually asked, "Who did you talk to?"

Sometimes the prospective franchisee wouldn't say for fear that I might use the information against the franchisees, but often times I persuaded them to "name names".

Talking to Unhappy Franchisees?

Then, I would glance at my list of franchisees rank ordered from Best to Worst. The "best" were the franchisees that produced the highest numbers (and most money) monthly, and the "worst" were the struggling franchisees.

If they had talked to the worst franchisees, I would ask:

"Do you think it's a good idea to make a decision based on information gathered from the worst franchisees in our network?"

"The franchisees you spoke to are ranked in the bottom third of our network.

I doubt that they can give you an objective review of our franchise.

If you had spoken to our 'best' franchisees, do you think you might have come to a different conclusion?"

Of course the answer was always "Yes," followed by, "Who are your best franchisees?"

Who Are Your Best Franchisees?

You might be wondering why I didn't give them the list of our best franchisees from the get-go.

I didn't because it might have been misconstrued.

Franchisors must be careful not to appear as though they are "leading" a prospective franchisee.

If I told you the names of my best franchisees, and you never talked to the worst franchisees, you might later accuse me of stacking the deck to convince you to buy a franchise.

However, had you asked me for the names of my best franchisees, I would have told you.

But, most prospective franchisees don't know to ask that question - or, for that matter, most of the other questions that should be asked before buying a franchise.

You might even argue that talking to the best franchisees only makes sense.

Yes, it does, because they are the franchisees that know what they're doing. They are the franchisees that know how to operate the business successfully.

The worst franchisees - and every franchisor has them - are looking for that "mutually beneficial relationship" that some franchisors promise!

By the way, you'll find all the key questions to ask before buying a franchise in 101 Questions to Ask Before You Invest in a Franchise.

How do you feel about a franchisor that promises you a "mutually beneficial relationship"?

Does it make you feel (choose only one):

  1. Warm, Fuzzy & Can't Wait To Invest
  2. Ambivalent: What's the franchisor really promising?
  3. Turned Off Because It's Not Good Enough

If you selected "C", I'm with you!

Franchise investments are expensive -- many require your life savings, plus your signature on a note for money that you will owe even if your franchise fails, and your legally binding commitment to pay the franchisor even if your franchise falters or fails -- so I'll pass on anything that's "mutually beneficial." In fact, does that even sound like it's "mutually beneficial"?

Instead, I want a franchisor who's going to do everything possible to make my franchise business successful. Even more, I want a franchisor who has proven time after time that he or she knows how to turn franchisees into success stories, even in the worst of circumstances.

I know a franchisor will not and should not promise to make me a success, but I want the franchisor's word for doing everything possible to help me. Beyond that, I want proof that the franchisor knows how to help me succeed.

I don't expect miracles -- I'll deliver on my end by meeting the franchisor's requirements -- but please, save the "mutually beneficial relationship" hype. That might attract neophyte franchise investors, but not me!

Am I asking for too much? You tell me.

 

The post Does A "Mutually Beneficial Relationship" Appeal To You When Buying A Franchise? appeared first on How To Buy a Franchise.

We have been very fortunate as the result of the intense emphasis by USA franchisors to sell their franchises to investors in other countries. Franchise proliferation outside the USA is now the fastest growing market, with heavy emphasis on Asia, India and the Middle East.

There are significant differences in selling franchises outside the USA from the selling environment to which USA franchisors have become accustomed when selling to USA investors.

To me the most important difference is that in selling to non USA franchise investors the franchisor is looking more frequently to larger area wide deals and financially well qualified franchisee prospects.

The next most important difference, to me at least, is that the shrewder foreign investors are looking more and more to USA franchise specialist lawyers to aid them in sorting out the deal population to sift out the less desirable candidates and configure the deal to suit their essential circumstances more positively.

Only at the end of the list of salient differences do I consider the various legal structures of what has passed for franchise regulation during the past forty years. While I downgrade any franchisor candidate that balks at providing good requested disclosure in writing, the format for the disclosure has little value. If it passes my vetting tests it will be better than what is required under USA franchise law anyway.

The consequence of these differences will be that non USA franchise investors will be signing better deals than USA investors usually get. The deal quality improvement will, I hope, result in upgrading how franchises are marketed in the USA. While I am always happy to travel to any country to meet any non USA client and get to know them and their environment better, the digital age has made that travel less and less useful. The social aspects of franchise client representation are of much less significance, which makes the lawyer-client relationship significantly less expensive. With 50 years of franchise practice experience, my social presence is not what clients seek.

When representing overseas franchise clients, after vetting the client for financial and operating capabilities, I save them a lot of wasted time and effort sorting through the available opportunities. Working with their own local lawyers, the entire effort becomes almost seamless and much more efficient.

One way in which we improve the process is to eliminate the way USA franchisors tend to treat non USA investors. While the better USA franchisors may tend to be more patrician in their approach with anyone, the lower tier franchisors attempt to mimic this approach. That mistake consumes and wastes a lot of time and energy that our process eliminates. As the franchisor does not get to my clients until later in the vetting process, they seem to know not to waste their breath on the more obvious marketing ploys that work when they deal directly with the investors from the outset.

Potential franchisees from other countries may be accustomed to the way marketing works in their cultures, but their first exposure to some USA franchise marketing organizations makes them quite uncomfortable. Perhaps that is because the non USA well qualified investor candidate is more astute than the single unit franchise investor in the USA who was formerly in a position that had no relevance whatsoever to the business being franchised. That kind of candidate who is represented by a very experienced USA franchise lawyer does not take very well to the "fluff" (to put it nicely).

Many countries are geographically the size of a state here, and the scale of their economies tends to be smaller. Cultural issues also impact significantly upon how the business to be franchised will be operated in the franchisee's home country, especially if it is a Muslim country. Unfortunately, few USA companies have developed sensitivity for these cultural and religious differences. Compared to how the relationship must work elsewhere, the USA seems like a wild west show with swashbuckling conduct freely engaged in here without fear of repercussions.

Foreign franchise investors dealing with USA franchisors can, with experienced representation, change the pitch of the playing field far more than USA investors have been able to achieve. While the differences may seem to be more nuance than role reversal, the impact upon the future financial prospects of the franchisee's business is positive and substantial.

USA franchisors may expect that very few really good prospects for franchise investment in non USA markets will fail to take advantage of effective representation from the very first contact.

Author Richard Solomon is a Franchise Lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.  Give him a call at 281-584-0519.

Last week's Wall Street Journal had a story about the franchise systems with the highest default rates for Small Business Administration-backed loans over the past decade.

The Journal reports that franchisees of Quiznos, Cold Stone Creamery, Planet Beach Franchising, and Huntington Learning Centers were among the "bottom 10" brands with the highest rates of defaults ("more than double the rate for SBA borrowers who invested in all other chains") during the period from 2004 through 2013.

SBA-backed loans remain one of the most popular ways of obtaining financing for franchisees.

Through the SBA, borrowers are able to obtain loans that are guaranteed by the U.S. government.

The Journal reports that the 10 brands that make up the list of franchises with the highest default rates represent a total of $121 million in total defaults from 2004 through 2013.

Rounding out the list of the 10 brands with the highest default rates are Aamco Transmissions, Curves International, Cici's Pizza, Minuteman Press, Sylvan Learning, and Cartridge World.

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The franchise industry has for years struggled with financial performance disclosures (Item 19 of the FDD). Some claimed not to give such information at all. Many of those simply arranged for franchise investors to get financial performance information from third parties - usually a subterfuge to avoid fraud claims when the truth came out later on. Others give scanty information that looks good to a novice but in reality is just nonsense. Others have loan brokers insert phony pro forma financial information into the franchise investor's business plan in order to impress a startup lender.

The net result of all this shabby history is that franchisees cannot believe any financial performance information provided by a franchisor or anyone acting with or in any connection to the franchisor. The information is so bad that the franchise agreements themselves provide that none was given or authorized, and that any was received by the investing franchisee, he did not rely on it in making his decision to buy the franchise.

The franchisor bar holds seminars every year that include presentations about how to dance around giving financial information and how to trap a recipient of it through the use of dodgy contract provisions.

Accept that what you get from a franchisor you are thinking of buying a franchise from is unlikely to provide financial performance information that you should rely on. Take what they offer to compare against the information you find on your own as you investigate further.

HERE'S WHAT YOU DO!

If you are thinking of buying a new start up franchise deal where you take all the start up risks, you owe it to yourself to consider the possibility of buying and existing franchise up for resale. Frankly you would be a fool if you failed to investigate resales of existing franchises of this franchisor or in the industry generally.

No one should ever think of investing in a new franchise without going into this resale aftermarket, so to speak, and seeing what the financial picture really is for people who have gone before you.

You would not be misrepresenting yourself by contacting business brokers and telling them you are looking at such and such franchise and that you want to compare buying a start up against buying a resale. In fact you would be more respected for having done this.

There are many business brokers on the Internet. Just search for business resale brokers, agents, business resales.

Obviously you are looking at a particular geographic area, so start there. If you find nothing in that locale, broaden your search. Location is not as important at first as finding the number of them for sale. Find the ones for sale and arrange to be able to research their financial history. A franchisor claiming his is as good as sliced bread needs to be considered in light of his Item 20 and 21 as well as the resale profiles you find on the Internet.

NEVER EVER RELY ON PROFIT AND LOSS STATEMENTS AND BALANCE SHEETS! You must insist upon three to five years of tax returns. Tax returns are filed under penalty of perjury. No one ever overstates his profits on his tax returns. You will have to sign a nondisclosure agreement, but you do not pay money to see tax returns. You also get to show them to your lawyer and accountant. If anyone tells you otherwise, walk away. Refusal to show tax returns usually means that the seller's profit-loss statements are pure fiction prepared for fools.

In most instances you will find resales. When you review the tax returns for 3 to 5 years you will see (be able to derive) magnitudes of profitability and TRENDS. Declining sales/net profit will tell you the truer story. Certain deductions may need to be assessed back into net revenue - your accountant can tell you that. Interest on debt (to someone other than the owner) may impact several financial questions - especially computing the interest rate being paid against current market interest rates. Paying higher interest rates may be a function of business strength or lack thereof, or bad credit. Sound businesses pay their bills unless they are run by people who fly close to the ground, in which instance you don't want to buy from them. Their payment history with vendors will follow you at least for a while.

When you have built up a significant sized file on what these franchises are really doing and what they are really worth, compare that against what the franchisor or someone working with the franchisor may have told you. If there is more than a minor difference, run like hell.

Smart people verify business representations in making investment decisions. Fools get incinerated.

As you consider your decision to purchase a franchise, you are most certainly also weighing the other commitments that go along with running your own business: employee management, day-to-day operations, sales, marketing and more.

By buying into a franchise, you're buying into what should be a working and easy-to-duplicate system that, when followed, will lead you to success.

It's important to consider what the franchisor has incorporated into that system. Is there a set sales strategy and process? Likely. Is there a system for hiring and managing employees? Likely. Is there a system for daily operations? Likely.

Is there a system for social media communication? Unfortunately, likely NOT. In fact, in a recent study only 2% of franchise systems with head offices in the Greater Toronto Area actually had a franchise-wide social media system in place.

Yikes. This is bad news for you if you're buying into a franchise that falls into the other 98%.

Does it mean you should walk away from an otherwise fantastic franchise opportunity? Absolutely not. It is, however, something you should plan for in advance.

Without support from your franchisor in the area of social media, here are the crucial questions you'll need to answer:

What ongoing social media platforms do I need to participate in and how?

You need to participate ONLY on the platforms where your customers are actively engaged (and you don't have to tackle all of them at once).

Let's make it simple:

  1. Pick one or two social platforms where your audience is already actively engaged.

  2. Post content on a regular basis.

  3. Monitor and respond to all user interactions. This is CRUCIAL!

  4. Engage daily (comment, like, retweet, favourite, reply, etc.) with your local market.

Where do I get content?

Most likely your franchisor will have loads of resources such as images, videos and/or articles (depending on your industry) that you can use both to setup your social profiles and to distribute as content. How do you script posts and decide what content to use? Well, that's up to you, and likely you'll need to create some original content on your own.

How do I manage it efficiently?

This is the hardest part because first you have to make a crucial decision. Are you going to be fully committed to social media or not? For most franchisees, this is a hard question to answer. You have a few options to consider:

  1. Setup the pages and not do anything with them (NOT THE RIGHT CHOICE!)

  2. Duplicate content being distributed on corporate pages. (While this also isn't the ideal choice, if you simply cannot commit to creating your own original content, consider using the corporate content but at different times and in different ways. If they post an image on a Monday, you could use that same image a couple of weeks later with perhaps some different wording that gives a new spin on it.)

  3. Create your own original posts (that include corporate resources and unique content) to distribute in the way that works best to suit your audience.

  4. Partner with other franchisees to share the content creation and distribution workload

  5. Not to be there at all (also probably NOT the right choice unless you're simply going to choose option 1...in which case this option is better)

Option 3 is by far the best choice when it comes to branding and building relationships with your audience. However, it is also the most time consuming and/or costly. Using an online communication tool like www.hootsuite.com will help with content, and email notifications will ensure you can keep up with customer service.

The second best choice in my opinion is option 4, and my third choice would be option 2. I don't really see 1 and 5 as options...but you have to decide that for yourself.

The best choice is to be honest with your franchisor and tell them that their support in this area would benefit not only local growth but the brand overall. Hopefully they will listen and take action. If not, at least you have a place to start. Ultimately the success of your franchise is in your hands, so don't let the lack of corporate support hold you back. Go for it!

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Several years ago, the FTC Staff issued FAQ 37 . This is the latest of the FTC's "frequently asked questions" that clarify various aspects of its trade regulation rule on franchising (the "FTC Rule").

FAQ 37 further defines the term "exclusive territory". This FAQ will change the way that many franchisors describe the franchisee's territory in Item 12 of their franchise disclosure document (FDD). Unfortunately, the required change may be more confusing than illuminating.

Many franchisors grant exclusive territories to franchisees but reserve the right to open franchised or company outlets in "non-traditional venues" like airports, arenas, hospitals, hotels, malls, military installations, national parks, schools, stadiums and theme parks.

In FAQ 37, the FTC staff states that sales in non-traditional venues can no longer be characterized as exceptions to the a grant of territorial exclusivity. Instead, the reservation of rights in non-traditional venues means that the entire territorial grant is non-exclusive.

Disclosing competition from the franchisor

As such, the FTC Rule now requires that franchisors who reserve rights in non-traditional venues to state in Item 12 that the franchisee may face competition from the franchisor or other franchisees. In many cases, this statement may be untrue. For this reason, it seems likely that FAQ 37 will make many FDDs less clear to prospective franchisees.

Franchisors must disclose in Item 12, among other things, whether the franchisor grants an exclusive territory. The FTC Rule states that if the franchisor does not grant an exclusive territory, then Item 12 must contain this statement:

You will not receive an exclusive territory. You may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control.

But what does "exclusive territory" mean?

FAQ 25 indicates that "exclusive territory" means a geographic area within which "the franchisor promises not to establish either a company-owned or franchised outlet selling the same or similar goods or services under the same or similar trademarks or service marks."

Alternative channels vs. non-traditional venues

Many franchisors reserve the right to sell in the franchisee's "exclusive territory" through alternative channels of distribution, such as the Internet or catalog sales. FAQ 25 indicates that such a reservation of right does not change the fact that the grant is exclusive. The reason is that the FTC Rule specifically requires franchisors to disclose in Item 12 the reservation of rights to sell through alternative channels of distribution.

The FTC Rule specifically states that whether the territory is exclusive or nonexclusive, the franchisor must disclose in Item 12

whether the franchisor or an affiliate has used or reserves the right to use other channels of distribution, such as the Internet, catalog sales, telemarketing, or other direct marketing, to make sales within the franchisee's territory using the franchisor's principal trademarks.

FAQ 37 deals with a related question. It addresses franchise offerings in which the franchisor reserves the right to open franchised or company outlets in "non-traditional venues" like airports, arenas, hospitals, hotels, malls, military installations, national parks, schools, stadiums and theme parks. In FAQ 37, the FTC staff states that sales in non-traditional venues are not just exceptions to the a grant of territorial exclusivity. They make the territory nonexclusive.

The FTC staff views non-traditional venues as something different than "alternative channels of distribution". They base the distinction on the fact that these venues are physically located in the franchisee's territory. They distinguish the physical location from sales via the Internet or mail order that may originate from a location outside the territory. Accordingly, a franchisor that reserves the right to sell through "non-traditional venues" must state in Item 12 that it does not provide an exclusive territory and that the franchisee may face competition from the franchisor and other franchisees.

But non-traditional venues do not compete

This interpretation of non-traditional venues can be problematic.

Sales via the Internet or mail order can compete with a store in any physical location. Yet franchisors who reserve the right to make Internet or mail order sales are not required to say explicitly that franchisees may face competition from the franchisor.

By contrast, many sales in non-traditional venues do not compete with stores outside of those locations, even those in close geographic proximity. These venues typically constitute a separate market.

An airport, hospital, hotel, military installation, park, school, stadium or theme park is distinct from the surrounding geographic area. The people in those venues are there for a reason. They are a captive market for the outlets in those venues.

People located in the venue do not commonly leave the venue to shop or eat elsewhere while they are awaiting their scheduled flight or attending classes, or in the middle of a sports event or a visit to a theme park. They are in the venue for a specific reason. They are a captive market.

Similarly, a person who lives outside of an airport, hospital, school stadium or a theme park does not enter that venue in order to shop or eat at a particular franchised store or restaurant.

Non-traditional venues are often distinct islands within a larger geographic territory that otherwise can be exclusive to the franchisee within the meaning described in FAQ 25. Outside of these non-traditional venues but within the boundaries of the franchisee's territory, the franchisor can indeed promise that it will not "establish either a company-owned or franchised outlet selling the same or similar goods or services under the same or similar trademarks or service marks." The franchised and company outlets in the non-traditional venues may not pose competition in any way to the franchisee. On the contrary, they may enhance the brand for the benefit of all franchisees.

Non-traditional venues are usually defined as such for the very reason that they do not compete with locations in the rest of the territory.

In some cases, the statement that the franchisee may face competition from the company and other franchisees will be true. A restaurant or store in a mall, for example, can indeed compete with locations outside the mall. It is not uncommon for people to go to a mall specifically to buy from a particular outlet or eat at a particular restaurant. Accordingly, one can argue that a mall should not be considered "non-traditional".

But even a franchisor that only reserves the right to sell in airports and sports stadiums within the boundaries of the franchisee's territory must now state that the territory is nonexclusive, even if this is not true.

Mandatory confusion

Because of the FTC staff's position in FAQ 37, a franchisor that grants an exclusive territory with specific exceptions for non-traditional venues must now say that the grant is non-exclusive and that, therefore, the franchisee may face competition from other franchisees, from outlets that the franchisor owns, or from competitive brands that the franchisor controls.

The FTC does allow the franchisor to include an explanation of the specific rights the franchisor is reserving. But a franchisor who reserves rights in non-traditional locations within the territory can no longer describe the territory as "exclusive". And the mandatory warning regarding competition from the franchisor and other franchisees may be misleading, confusing or simply wrong.

FAQ 37 is clear guidance for lawyers and does promote uniform disclosure across different franchise systems. It will result in many amended FDDs in the coming months.

Unfortunately, the Item 12 changes that FAQ 37 will require many franchisors to make are not likely to further the plain language goal of franchise disclosure regulation generally. These changes are not likely to benefit franchisors or prospective franchisees.

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There are many factors to consider when deciding what franchise is right for you as a new franchisee, and it's important not to leave any stone unturned.

This is crucial because 89% of local business comes from online search and 91% of consumers make purchases because of online experiences. You don't want to miss out on that potential business.

Once you've narrowed down your potential franchise choices, take some time to do the following and consider what you find:

Do a Google search for the products or services the franchise offers in a market where it currently has a franchise.

For example, if you are considering buying a frozen yogurt franchise, search frozen yogurt either while you are physically in one of the cities that has that franchise established or by adding the city word in your search.

Then duplicate this search in several other locations where the franchise is established.

You're specifically looking for three potential results:

1. Does the local franchise website appear on page 1 of organic search results?

If so, this is a great indication that the brand is well-established online. It also indicates that the corporate team likely supports online initiatives in order to achieve consistent rankings in local markets.

2. Does the local franchise website appear in map listings that show its location?

If so, fantastic. More and more people are relying on Google map results to help them find what they are looking for, and if your franchise does not appear there, your potential customers could choose your competitor instead. If the franchise does appear in map listings, it is also an indication that the corporate team likely supports local online initiatives.

3. Does the local franchise website appear on page 1 of paid search results?

If so, this means that either the corporate team or the local franchise is paying to ensure that the website appears on page 1. If the franchise is new, this shows that whoever is paying understands the value of page 1 rankings and wants to make sure they are there.

Paying for ads is a way to ensure page 1 ranking at the beginning, whereas it may take longer for organic rankings to be achieved. However, this often requires a large investment.

The fourth potential result is that none of the above occur, in which case you need to go past page 1 to see how far back the website is ranked. If you have to scroll past the top 5 or even 10 pages and still do not find the website listed, this should be an indicator that up to this point the franchise has not put an emphasis on online marketing.

In order to tap into the 89% of local business that comes from online search, there will need to be some significant work done to increase online exposure.

Whatever you find, it is important then to use that information as a starting point for discussions with potential franchisors.

Tell them what you found in your searches, and ask them the following questions:

    • Who ensures that local franchises appear in organic search results and local map listings? Franchisor or franchisee?

    • If paid ads are used, who manages those?

    • If franchisees are responsible for online initiatives, are they solely responsible for the funding of those initiatives or are they supported by corporate dollars?

    • If franchisees are responsible, what training and support is provided by the franchisor?

If these discussions lead you to believe that little support for online branding is provided by the franchisor, consider strongly whether other brand exposure is strong enough to compensate for the lack of online presence.

There are many franchises that have a great handle on their online brand, and many that are in the process of getting there. Those are the franchises to look for.

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This Week In Review - Value

Are franchisors producing value for franchisees?

Are web portals producing value for franchisors?  

Are franchise owners seeing enough value to put more money into their units? 

 

Most Read Update:  2734 LinkedIn Views 



Howard Bundy.jpgHoward Bundy's  What are You Getting When You buy a Franchise? 
had the most for LinkedIn views.

Franchisor increasing face a value proposition.

Franchises who ask: What am I getting when I purchase a franchise?

 

  

Most Commented on Story - 20 Comments


Tom.jpg
Tom Sagehorn's Are the Lead-Gen Franchise Portals Really Dead?

A wide and diverse views in the comments.  Great discussion for all franchisors on how to attract leads.

Continues to fascinate our readers.

 

 

Most Engaging Article Published on Franchise Info (2nd Week)

- 305 Readers who spent an average of 4:06 minutes reading

 

 


Richard Solomon.jpgRichard Solomon's
 Why Do Franchise Owners Really Fail?  asks whether is enough material disclosure in an FDD.

Richard had an interesting view about how to treat the effects of the material non dislcosure in section 8 - the rebate section.

Great estimate of the true royalty rate, reflecting his many years reviewing the FDD and comparing it to reality!

 

  

  What Franchise Info can Do for You to Get You People to Pay Attention to You. 

Every day people eager to own a business invest $500,000 to a million dollars in franchises where the FDD said the top of the range for "estimated initial investment" was under $250,000-and where the "initial franchise fee" is only about $35,000. When buying a franchise, the first question they should be asking is what are they getting for all that money?

The promise of franchising is four things:

(1) a well known tradename or trademark;

(2) initial training in how to operate the business;

(3) a proven system with most of the "bugs" already fixed; and

(4) ongoing support and training.

It is the perceived difficulty and risk of not having those things that prevents most people from undertaking to launch an independent business.

Those are the benefits that franchise sales people preach daily and that the "trade press" touts. In some cases those things are true.

Unfortunately, in a large number of franchises, including in some that are "highly ranked", one or more, if not all of those promised things is either missing or of little value. A franchise without a well known trademark among prospective customers of the business is like buying an airplane without wings. A recognized trademark is the very essence of franchising. It is the thing that brings customers through the door. If you are considering investing in a franchise, you have to ask whether the trademark, in your area and for your prospective customers, has any greater value than "Bob's Gizmo Sales". If the name is not well known (thus having value), then it will only acquire value the same way "Bob's" would-through your investment and hard work. It is nearly unheard of that a franchisor will spend advertising money developing its name in your neighborhood for your benefit.

As a prospective investor, you should also closely examine the value of the initial training. Remember, you are paying up to about $35,000 for it. Look carefully at the disclosure in Item 11 of the Franchise Disclosure Document, but also talk with existing franchisees. Did they really get that much value? Will you really learn everything you need to know about how to operate the business? Or will you, as many franchisees discover too late, be in business "for the franchisor and by yourself"?

The third promise you should evaluate is whether the franchisor offers a "proven system". The business system is of no value to you if you are going to be the franchisor's guinea pig-to work out those bugs. It would be extremely rare that a franchisor with only a few outlets would have a "proven system". The only way to find out is to spend a lot of time in the franchisor's business or the business of any existing franchisees to determine just how "proven" it is. Otherwise, you will discover-too late-that you have to go through all the same pain of working the bugs out that you would have had you opened as "Bob's Gizmo Sales".

Finally, you should evaluate what the franchisor promises regarding ongoing support and training. Examine Item 11 of the FDD very carefully. If the FDD lists the franchisor's "after you are open" obligations in "wiggle words" such as "we may", "as we determine" or "in our discretion", then the franchisor is not making any contractual promises to provide ongoing support. Look for clear and unequivocal promises, without conditions. If you don't find them, be suspicious and continue your search. An experienced franchisee lawyer can help you in identifying and understanding all of these issues as you make your decision about buying a franchise.

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What are some of the key provisions of the franchise documents that every franchisee should know?

Every prospective franchisee should read through all 23 items of the franchise disclosure document (FDD), but pay particular attention to the following items:

Item 1 of the FDD discusses the background of the company, its parents and affiliates. It also is the area that discloses the competition and regulations in the industry.

Item 3 of the FDD discloses the material litigation in which the franchisor is involved. A prospective franchisee should be wary if there are many suits against the franchisor by the franchisees or many suits by the franchisor against its franchisees.

Items 5, 6 & 7 of the FDD are the financial disclosures that every prospective franchisee should read carefully, including the footnotes to each item. These items disclose the obligations of the franchisee for the upfront fees (Item 5), on-going fees (Item 6) and the likely costs the prospective franchisee can expect to open the business (Item 7 chart).

Item 20 of the FDD are charts that show how many corporate and franchised locations there are and the growth that the franchisor anticipates. The prospective franchisee should know this information to understand how many franchisees a franchisor intends to add in their state.

In addition, the prospective franchisee should have an experienced business/franchise accountant review the audited financial statements of the FDD in light of the system and growth that is reflected in Item 20 to ensure that the franchisor is financially strong enough to support the system and growth.

Lastly, and most importantly, a prospective franchisee should have the franchise agreement evaluated by an experienced franchisee attorney.

Even when the franchise agreement is not negotiable, this review is important so that a prospective franchisee can have a clear understanding of the obligations and expectations with the franchisor.

If you know someone thinking of buying a new franchise or a resale, please have them connect with me on Linkedin.

There are basic three questions any prospective franchise owner wants to know: 

1.  How much does it cost?

2.  How much can I make?

3.  Is my area still available?

Some of the answers to these questions are found in the FDD.  

To answer "How Much Does It Cost", you need to look at Items 5 - 8. This is the standard format in all FDDs.

5-8.png

What makes answering the question, How Much Does It Cost?, hard is the quality of disclosure in Item 8- the item that deals with restrictions on your purchases and rebates.  Excessive restrictions on your source of supply can lead you to overpaying for your purchases.

Many propsective franchisees assume, without verifying, that the franchisor:

a) makes bulks purchases and receives better pricing, and;

b) passes on those rebates to the franchisees.  

After all, isn't that the point of being in a franchise system - to get better pricing through group purchasing?

Well, no.

You must actually read the Item 8.

Here is Solar Universe's Item 8.  It is remarkably clear.

How Much Does It Cost.png

(Here is the entire Item 8 Disclosure, How Much Does It Cost)

Solar Universe is very clear.

1. You will buy all your solar products from them, and nobody else - even if the prices or quality is better from an alternative supplier.

2. Solar Universe makes the bulk of its money, almost 75%, by selling franchisees solar products - whether or not the franchisee sells those products.

3. The definition of "solar products" is wide.

4. The is no group buying power, and rebates are likely not available to the franchisees, given this boilerplate lanugage:

"Additionally, we may negotiate pricing arrangements, including volume discounts on behalf of our franchisees with our suppliers.

Volume discounts may not be available to franchisees located in outlying markets that a particular supplier does not serve in significant volume."

In this business, you are essentially distributing and selling the products Solar Universe has bought -without regard to competive price and quality.

So, you need to be very clear on just how good Solar Universe is with their buying and prices to franchisees. Not something you can tell without more homework.  This is the major input to how much does it & you must be clear on it.

For more helpful tips from expert on purchasing a franchise, please click here.

Ok, you are interested in how much you can make with this franchise, right?

So, I want you to a take a serious look at this Item 19, Financial Performance Representation, found in the 2013 Popeyes Louisiana Kitchen FDD.

First, the Item 19 is 14 pages long, with useful data collected from the franchise owner's profit and loss statements.

Here is one of the seven sales charts, detailing gross sales.

(Click on the image to see a full scale view.)

Sales Ranges.png

This is a good presentation. We don't have to guess about how many locations did how much volume.

We can read it off from the chart.

For example, we know that 24 stores had gross sales less than $600,000 and exactly 126 stores had gross sales between $900,000 and $1,000,000.

We aren't presented with meaningless AUV numbers, instead we are given data from which we can draw our own conclusions.

(There is a table at the bottom showing the high, middle, and low AUVs, but it is presented in the context of useful data. I am not against AUV, but there is no reason to present an AUV only without showing the data the average was calculated from.)

Second, there are seven charts - each an attempt to compare apples with apples.

The seven charts are for: all free standing restaurants, freestanding built in 2010, freestanding built in 2011, inline restaurants, convenience store restaurants, and other.

Again, this is very useful. It is especially helpful for Popeyes to have broken out the gross sales figures for stores built in 2010, and 2011. This will give you a better idea of what the first few years may hold in store for you.

Third, and this is most remarkable, Popeyes has constructed a composite P&L, profit and loss statement.

Click on the image to see the large image.

P&L.png

Notes to P&L.png

All in all, this is a useful Item 19 and will help the probable purchaser of a Popeyes Louisiana Kitchen franchise.

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3 Tips for Happy Franchisees

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How often success or failure can be attributed to a bad franchisee?

It seems to have become popular to bash franchisors, but I believe that most of them are credible business enterprises, after all they have spent a lot of time effort and money to create a viable concept and business system and then they had to be scrutinized and pass regulatory hurdles, prepare a plethora of legal documents and then spend even more to promote their concept in a very competitive arena.

Because of this, it is possible that all to often in their desire to gain acceptance, they do not properly scrutinize and qualify their prospective candidates. I am sure that most zors survey their prospects for financial suitability, but I wonder how many test their prospects aptitude and personality for the field?

How many require the prospect to work as an intern under direct supervision of the franchisors for at least a week?

How many require the prospect to do their due diligence by preparing a business plan and cash flow analysis for the proposed location? 

A franchise creates a culture and as we all know, a few bad apples can spoil the proverbial barrel.

It's nice to think that you can formulate a system that will determine a good or bad franchise, but if you follow that logic, you never would have invested in Mc Donalds in its early years, after all the head of the company had been bankrupt and it was a relatively new and untested category and there was feuding and litigation between the principals of the firm.

Take responsibility for your success; in order to succeed in any new enterprise, it is important that you do your due diligence. That would include, but is not limited to: 

1. A realistic assessment of your financial capabilities; 
2. Demographics, including: site analysis, population density, income, traffic count and retail environment. 
3. Lastly, you should do a cash flow analysis to project how your assessment of these factors will translate into the business model you are considering and give you an anticipated outcome. 

Although the results will be hypothetical and will surely vary in reality, it will still serve to help you set your initial goals and give you a picture of what to expect from your new venture. 

Once you have completed these three steps, a picture should be emerging of your opportunity to succeed in your chosen endeavor.

Remember, the franchisor can only provide you with a system that has been successful in the past, train you how to use it and provide reasonable support, but it is up to you to make it work.

They cannot guarantee your success, nor should they; only if you have done your due diligence and are willing to put in the time and effort to make it work, will you succeed.

If you have been searching for a perfect franchise opportunity and think that you have found it, make sure to avoid the costly mistakes that franchise buyers often make.

Below, in no particular order, are 4 costly mistakes that can easily be avoided and save you time and money.

1. Incomplete Background Check:

Most franchise buyers do not take enough time to look into the history of a franchise before buying. Skimming the franchise documents and talking to the corporate owners is insufficient.

This is the equivalent of buying a house after speaking to the seller and the seller's agent, but failing to complete a home inspection. It is vital that you visit with other franchisee owner-operators in and around the geographic location in which your franchise will be located. If there are none, speak to other owner-operators regardless of geographic location.

Perhaps the single most important part of a background check is talking to current and prior owners of the franchise. Don't let blind faith and the excitement of the opportunity short circuit your due diligence.

2. Poor Understanding of Business Model:

I am amazed at the number of franchise buyers that fail to understand the business model that serves as a foundation for their business. And, no, having a clear understanding of the service or product you provide is NOT the same as understanding the business model.

To have a complete understanding of your business model, you must have an exacting knowledge of cost structure, expenses, revenues, profits, inventory, staffing, and overhead.

You must have a basic understanding of how to read and interpret balance sheets and profit/loss statements. Understanding these key financial metrics is essential to understanding your business model and will dramatically improve your likelihood of success.

3. Lack of Professional Assistance:

Reading about a franchise opportunity on the internet, speaking with the franchisor, and attending a Discovery Day is NOT the professional assistance I am speaking of.

Buying a franchise business the right way requires that you seek accounting, insurance, banking, and legal assistance. Though this may add to the cost of the purchase, it is well worth it if the counsel you seek is well-versed in franchise and small business matters. And, please, stop going to your cousin's uncle's brother-in-law that is a family law attorney for franchise and small business advice.

You wouldn't go to a pediatrician for knee surgery, so why would you go to an attorney that does not practice in the area in which you need expertise. Don't be pennywise and dollar foolish.

In the end, you will end up spending more on each or going bankrupt.

4. Undercapitalized:

This is a huge problem for franchise buyers. From an expense perspective, think of buying a franchise like going on vacation, it is going to cost 2-3 times more than you think.

Trust me, it will!! If you do not have sufficient cash on hand, the ability to raise capital through friends or family, or a line of credit or other loan source sufficient to get your business through downturns, you will fail.

Make sure you speak with a trusted advisor experienced in small business money matters so you get off to the right start.

The honeymoon period ends quickly, make sure you are ready for the financial realities of the small business world.

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The term Conversion Franchise refers to the situation in which someone with a successful small business is offered the opportunity to convert his independent business into a franchised business by affiliating with a franchise organization. And so, thereafter, if the proposal is accepted, the business would no longer be known by its former name, but rather by the name of the franchise chain.

Many of these conversions have been successful.

The realty brokerage business is one of the more notable instances in which belonging to a large organization with national coverage has facilitated synergies that would never be available to a small or even a regional group of realtors. However, many, maybe even most, conversions are a disaster for the unfortunate person who converted an independent business to a franchise and didn't know how to do the "due diligence" before making the decision to convert.

So many have come to me with this problem, usually no longer having sufficient funds even to hire a lawyer, that I have decided to put the due diligence protocol on this web site in the hope that some fine small businesses may be saved from a franchise conversion disaster.

Mitigation of Risk

What is needed to mitigate the conversion decision risk is never offered. What is offered is a franchise agreement with an initial franchise fee, subsumes an initial investment in changing the business identification to that of the franchise organization, a required regular payment to an advertising fund, a required periodic royalty payment which starts with the first dollar of income every month.

The franchise contract purports to obligate the converting franchisee to a term of affiliation of at least five years, with a non-competition agreement to prevent departure from the franchise chain - you lose your business if you leave. While these are much less enforceable in the context of a conversion franchise, they are not entirely free of enforcement risk, and even if you win you have spent a great deal of money to fund the litigation.

Then, too, there is the cost of re-identifying your business to its old name and advertising blitz expenses to get that name back out there where people are educated and conditioned to accept and patronize it.

Every conversion franchise agreement I have ever seen has these provisions. If this is the deal being offered, and it always is, there are certain obvious exercises that must be done to analyze its investment worthiness. Obvious, yes, but almost never done. I guess it is obvious if you know about it and how to do it. Well, now that you are reading this article, you will know.

The Conversion Formula - What's in it for You?

The formula is quite simple.

You will, by converting to a franchised business, add to your expense profile the monthly royalties (anywhere from 4% to 8% of sales), plus the advertising fund payments (usually around 2% to 4% of sales) plus other expenses.

Frequently use of e-commerce facilities and other "support" elements are not included in the fee and royalty structure, but are separately and additionally charged for. These monthly expenses must be added up and subtracted from your profit and loss statement.

What is the impact upon your profit as a percentage of gross sales? That reduced profitability will be your future profit-as-a-percent-of-sales profile if you decide to convert.

What do you get for that? You are told that you will get greater name recognition, the impact of being in a national organization that can generate more sales, "support" (whatever that is), and the privilege to participate in that franchisor's "unique" system of doing business.

Be Objective & Verify

There is an objective way to determine how much of what you are being told is true and how much of it is blatantly untrue.

The test is that you aggregate the monthly incremental cost of being a franchisee, and mathematically determine how much in incremental sales at the now-reduced profit percentage you will need to reach break even on your having assumed this additional financial burden. Your accountant can do this for you. And that is merely a break even sales number. To make the conversion decision a profitable investment you have to exceed that sales number by a substantial margin.

Once you have derived that sales number, go to Item 19 of the Franchise Disclosure Document (FDD) that the franchisor is required to have provided to you before you signed any contract, and see if sales ranges achieved by their franchisees is provided. If not, you are about to make a big mistake if you decide to convert your business to their franchise.

Immediately and absolutely refuse to convert to any franchise that does not provide their franchisee sales ranges broken down into the categories of:

(1) the number of franchisees in the top 25%, the second 25%, the third 25% and the bottom 25%;

(2) the number of franchisees in each geographic region that are in each sales percent category (frequently there is great variance in sales performance by region, and knowing which region you would be in can be critical - not all regions perform with equal success profiles for any franchisor); and

(3) the length of time the franchisees have been affiliated with the franchisor in each percentage of sales grouping (if it takes ten years to get near the top tier, you don't want to convert your business).

Now that you know how your sales would have to increase just to cover your expenses of conversion, without any incremental profit to you from having converted, ask the question, "How many of this franchisor's franchisees have achieved this sales level?

Don't Deviate from the Formula

The reason so many conversion franchisees have ended up in my office wanting to know how to get out of the franchise contract and how to get their money back is that their franchisor had few or no franchisees generating sufficient sales to justify the conversion investment.

It is a loss situation for the converted franchisees. In many instances, the answer to this exercise is that the franchisor has never had even one franchisee with sales at the level you would need to justify converting your business.

This analytical exercise tells you whether the sales pitch about how wonderful the franchisor's stuff really is is true or false. While there may well be franchisees in that system that are satisfied with their relationship with this franchisor, that is not the question. The question for you is whether the affiliation with this franchisor will provide sales results for you to make you happy at the reduced profit percentage caused by the costs of affiliation.

If the results of this exercise are not positive, but for some reason you still wish to consider converting your business and joining this organization, you can mitigate the risk by insisting upon the following terms being put into your franchise agreement:

1. Current sales are exempt from all payments based upon percentage of sales. Percentage of sales payment obligations apply only to sales above current levels.

2. If sales growth does not exceed 20% by the second year, you may terminate the franchise agreement with no non-competition or other constraint upon your right to do whatever you want to do with your business.

3. If you are still in the system when the time comes to renew your franchise agreement, you have the right to renew upon the same terms as your current agreement, with no adverse changes. Many franchisors want you to renew on their new agreement that frequently has higher fees and less protection for you.

4. If you sell your business, your buyer gets your contract, not some new contract with different rights, including renewal rights.

If the franchisor if unwilling to agree to these terms, reject the conversion offer. So endeth the lesson.

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Author Richard Solomon is a Franchise Lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management. Give him a call at 281-584-0519.

In almost 50 years of practice I have managed to alienate a lot of people. Face it. Some people are not qualified to be my client. Insane, you say. For you it would be insane, but for me it works perfectly.

Over the years I created my own model of practice. I did not spend any time in a large law firm. I hung out my shingle after leaving in house corporate practice with very large companies, went looking for work and got very lucky. The harder you work the smarter you get and the better you seem.

My model worked. I didn't promise people things that I probably could not achieve. Even when hungry, I turned down work that should have been turned down. It has always been more than money for me. I wanted (still want) a reputation for professional excellence and I worked very hard to get it.

For many years it was difficult trial work. I love it. But now I try fewer cases. After almost 50 years people want my insights based on what I have learned in that time. They want me to show them how to solve problems without having to try lawsuits as the only approach. I am enjoying the problem solver role, the expert role, the collaborator role and the analyst role.

Life is still a lot of fun. I will probably never quit.

Most law firms feel blessed by long client lists and heavy foot billing methods. The law factory approach has been the model for most large law firms for many decades. They will put enough lawyers on any matter to do everything that could possibly be done. Sometimes the spend the project into the ground approach may exhaust the opposition.

Large clients like to think they can just buy the pot, outspend everyone and win every time, regardless of the merits. That was always the General Motors approach -we don't have to care and we are always right because no one can afford to be as right as we can afford to be.

But, that gravy train is slowing rapidly. Clients are looking at those bills and shaking their heads. Clients are looking more carefully for talent than for sheer weight. Talent isn't cheap, but the file jobbing approach to billing for legal work is on the way out.

The big firms that lived on excessive billing are now splitting up and in some cases just going out of business.

Fortunately for me, most of the clients who seek me out would prefer a best solution approach, a netting out of potentialities and prioritizing them for risk, expense, impact upon other collateral interests. My clients are usually spending their own money, not that of hordes of anonymous shareholders. They don't always know that's what they want when they first come to see me.

When they first walk through the door they want to be reassured that they are right and that they will prevail - whatever prevail means. I could have a lot more business if I played that game.

I have reservations about giving clients a line of misleading salesmanship just to get retained. Many times the client is not as "right" as he thinks he is, and many times that is somewhat obvious in the beginning of the relationship. Often ancillary matters negatively impact prospects for a good result. These need to be identified and taken into account.

Rather than tell a potential client that I agree with him, I tell him that I am going to be a "devil's advocate" and ask a lot of challenging questions to see to what extent his view of things and his expectations can withstand cross examination. That's about as nice as I am capable of being. Accordingly, many potential clients go off and seek a more compliant resource.

While I would very much appreciate being retained, it is better that someone who cannot or will not tolerate challenge go elsewhere.

I handle mainly crisis, bet the company situations and groups of people with common life threatening business problems. Few people understand that a client in crisis is rarely without some responsibility for the fight. In these situations no one is entirely without blame. If the boss cannot accept qualifications to any endorsement of his position, I am really not the right person to be his lawyer. I am not a potted palm and I have been around too many blocks to accept stories on their first telling.

The guy who has to be "right" will pay a lot more elsewhere, and very often he will in the end have spent that money for nothing.

I strongly believe the Rupert Murdock debacle is a product of simple client arrogance. Maybe he has so much money that nothing matters and no result can affect him adversely. He is certainly conducting his response to the hacking accusations as though he had divine immunity. His son is an even worse example of how not to do this.

But even if the Murdocks can afford to mishandle everything, most people cannot. His lawyers follow anything he says without question. If there were effective questioning either things would go better for them or they would be cashiered. I suspect they believe they would be cashiered and just go along for the sake of the fees.

The Murdock spectacle has to be the worst example of crisis management this year. It should be a case study on the subject. I know there will be at least one book on the story and maybe a movie, like the Enron debacle. At least the public financial harm in the Murdock matters is not as substantial.

Your lawyer has to be able to tell you the hard news and not get fired. If your lawyer is more worried about getting paid than about doing the best possible job for you, you are defeating your own cause with a very negative attitude.

You can always get a second opinion to be sure you are not missing anything. I can guarantee you that you would much rather hear bad news in private than in court before the public, a jury or in a written court opinion about what is wrong with you. Of course it is better to provide a spoon of sugar to help the medicine go down, but this is a world where people have to grow up and to do it more quickly.

The digital age has accelerated the speed of calamity. Reality is an imperative in what I do. Your pastor can punch your card if that is what you need.

In the not too distant past a company that thought they just had to be represented by a large Wall Street law firm instead of by the people who prevailed in the nearly identical case a few years before, paid $ 16,000,000 to a Wall Street firm to lose. It was worse than that. They charged $ 16,000,000 and then told the client they couldn't win. Even worse, they had filed suit before they knew what to expect. To me running up a $ 16,000,000 tab and then telling the client you can't do anything for him is a description of incompetence. Competent pre filing due diligence on your client's case really should prevent such a travesty. Maybe if the client had hired the folks who knew how to try such cases he would have been better off. My team won the nearly identical case three years earlier against the same Defendants for around $ 1,000,000. My clients told this client about our success and recommended that they come see us. They didn't. An army of upper crust honor graduates is surprisingly ineffective in a crisis.

My client to this day tells everyone that he almost didn't hire me because I had very different and contrary views about the situation from the views his lawyers had been telling him. They had missed their very best strategic position and had focused upon a technical rather than a real theory of recovery. The opposition had hired four of the biggest firms in Texas to represent them. The opposition was used to "buying the pot", so finding their Achilles Heel was not easy.

But we found it and the big guys cried uncle instead of us. Now my client follows his statement about almost not hiring me with a lot of praise. His is one of the posts on http://www.franchiseremedies.com/what_others_say_about_richard_solomon.htm.

There are occasions when someone really is on the right side of a conflict, and the wonder is that they are in the fight at all. When it seems that my client is that correct and that the opposition is that incorrect, unless I know the client for many years, I am still skeptical. If I can't find the hole in the boat, the boat probably doesn't have a hole in it, or at least not a big one.

I have been told many times that "I'm not going to let a damned lawyer tell me how to run my business." On the other hand, if I see you headed for a fall, based on what I have seen others do to their detriment, I can't just sit there and smile and salute. My guts won't let me do that. I failed to get a good client just a week ago on just that kind of scenario. The potential client told me the plan going forward and I have had a few clients in the past go down in flames doing things like that. When I told her that if she retained me I was going to ask her to rethink that plan, I was dead meat. She had already announced her plan to everyone and was not going to reconsider. I could see on her face that I was about to be shown the door, but no one in her organization was going to tell her anything that she might consider questioning her "authority" as the owner of the company. I am reasonably certain her company will fail within eighteen months if she goes forward with that plan, and I could not salute it. On the way out I asked her one more time to "test market" the plan before betting the farm on it. The look on her face was extremely combative.

As one friend often tells me, "You are a good lawyer but a bad businessman." So be it.

Now had I not insisted on being up front about the need to cross examine every investment plan before going forward with it, I probably would have been retained. I have an awful lot of experience representing clients in her business. The plan would still have failed. I'm a lawyer, not a magician. She would only have been upset with me later anyway. She might even have blamed me then for not having spoken up earlier. People are like that. How does one finesse that? I am certain there are folks who can do that. It takes a pretense that you really think their idea is great and faking it until your relationship with the client is on firmer ground. However, when the drop dead date is staring you in the face, you don’t have time for that. Her plan was going to be put into effect almost immediately and there were three other conflict issues that were about to come to a head within a month or so. Things are closing in on her and she is about to implode her company. Sadly, some other law firm will smile and hold her hand right into oblivion. The rough justice will be that they will go out holding a rather large and uncollectible receivable. When the bad news does roost she will owe them a lot of money that she will refuse to pay.

A long time ago someone I respect told me "Bad news can't wait." I have seen a lot of times when bad news really couldn't wait and no one had the guts to say what it was. I have always spoken up. Most of the time, although I pissed off everyone in the room, I was later thanked for it.

Part of the issue may be that clients often wait until it is the last minute and they have already gone out on some limb before they call me in. That's when things are really tough. I published an article about what not to do when bad things happen. My first recommendation is to say and do absolutely nothing until you really do know what all the facts are. But people seem never to do that. They are always into denial of wrongdoing before they are aware of whether there really have been some shenanigans on the part of their company. It's tough to stuff shit back into the horse. There is no harm in saying that you have nothing to say now and that you may have something to say when you are certain of what the facts are.

Being the owner of a company does not mean you know everything that is going on. Sometimes it turns out that you really did know about bad stuff. Sometimes it turns out that someone you might want to protect has gotten the company into a jam and you don't yet know about it. That stuff will come out. Don't make a fool of yourself by ignorantly denying wrongdoing when you aren't certain what really happened.

The standard P R firm advice is to make immediate self justification statements in response to any accusations. That is really nonsense. If you want credibility you need to make responsible statements. Claiming to be right before you could possibly know the facts and have sorted them out is not responsible or credible. Why do that to yourself?

When you have taken a public enforcement position on a defective contract that seems facially to agree with you but in reality does not give you the rights and prerogatives you think it does, be prepared to spend a lot more money than you really had to spend in getting to a livable result. When the source of the bad news is someone who used to be with your company and knows the truth from the inside, deniability may not be just a matter of hiring a PR firm or a nasty lawyer. Talk is usually not cheap in these situations. Everyone, no matter how much of a good guy he may be (or think he is), has enemies.

It is dangerous to rely upon advice from people who were on watch when the bad conduct in question took place. They are usually on the defensive about it and for that reason less reliable. Get a fresh outside look before you take a position. Tell the fresh outside resource that you really do want to know the news, good or bad, and that you promise to deal with it realistically, whatever it may turn out to be. You will never regret having done that.

I know these admonitions seem simplistic. Truth usually is direct and simple. The amazing thing is that these obvious more successful approaches are so seldom used. If they seem so obvious to you when you read this, you might ask why the more harmful approaches are so often adopted. I think the answer may be that when you are the target of an immediate threat, your reflexes engage more intensely than your ability to be logical. In many instances it is ego driven.

Educating clients is dangerous stuff in moments of emergency. I think I am getting better at it. However I still get shown the door more often than I would like. This is the best mode of emergency representation, however, and I do not intend to change it. Clients in really serious difficulty need to grow up quickly and swallow fear. Fear never drives successful tactics and strategy. If you don't start by sorting out the truths that are in play you will spend a lot more money for a much less favorable result.

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Our US Supreme Court is wrestling with an issue that should have settled years ago.

The world is coming out of the closet, little by little, kicking and struggling, but coming out none the less. Recognition and acceptance of gay and lesbian culture grows constantly as people become educated to the plain and simple fact that we are all as God made us and not all alike in many important respects.

Being who you are is no longer thought of as a sin, except in the minds of those who refuse to accept truth in its unvarnished obviousness. The franchise industry is no exception.

Given the positive trend, there remain questions about capability, suitability, style, business methods, liability issues, vetting for suitability taking lifestyle issues into account where that is an important consideration in the ability of a business to function and succeed, and how to deal with furthering progress in positive attitude adjustment in the business world generally and in franchising in particular.

Inasmuch as franchising as a business concept and business model embraces dozens of legal specialties and calls them into specific focus, there should be a central locus of reference where assistance may be found to sort out how all these variations relate (if at all) to businesses operated by gay-lesbian owners and to franchising companies owned/operated/managed by gay-lesbian officers and employees.

Up until now, gay and lesbian business issues have been dealt with primarily from a perspective of civil rights issues.

It is time to move beyond that and to deal with the fact that there is absolutely no reason on earth why gay and lesbian business people should not be able to achieve business success in the franchise model just like any other capable operator.

We bring to the table consultative assistance in the facilitation of making your company accessible for investment purposes to all qualified franchisees, regardless of life style. In fact, we can assist you to achieve sufficient insight that lifestyle itself is not an issue at all.

Similarly, there is no reason on earth why any gay-lesbian business that has positive attributes to become a franchised model should not move in that direction. We bring to the table consultative assistance to get you there if that is what you think you might like to do with your business.

We will show you how to take the courageous steps that should be taken to overcome the remaining barriers to economic success in the franchise world.

What New Franchises Are Good?

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The world does not need another brand of sandwich shop, hamburger store, pizza parlor or other generic food concept.

The surfeit of those, together with some really rough franchising tactics, is already causing them to fail to meet any reasonable standard of investment opportunity.

The one store at a time franchisee investors are being fleeced by the score on these bozo deals, and much of the time it is already some over the hill or never ever was anyway offering by a garbage collector or bottom feeder franchisor.

Something that is not a washed up concept is still to be had and it is a wonder that established respectable franchisors are not out there finding the gems hidden in the bushes. If I were an established franchisor that has not yet run out of development energy, I would today, in this fast improving economy, be beating those bushes for the early stage gems and using these very scalable models to refresh my capabilities in a new medium.

My inspiration for this is that recently I have been seeing a few of these newer, fresher, different concepts that are not a "me too" of anybody. They have just a few stores and good volume.

They are the originators who need to be teamed with the respectable franchisors who can take them to their destinies faster.

Development speed is a much more critical factor now than it was twenty years ago. One store at a time scaling has more risk of simply showing a duplicator how to take your plum and squeeze a lot of the juice out of it by following you around.

We know from some of the nightmares of late that there is a lot of money out there dying to invest in a good concept. The trouble has been that so much of that money was stolen by FranWhacks selling stupid deals to wealthy suckers who didn't know how to vet the deal - think Dagwood Sandwiches, or Soup Man for example. There have been several others of similar ilk. The world doesn't have to operate like that. Their victims will never find the money they invested, as that left the building right after the checks cleared.

Several of the Soup Man victims later explained their investment decisions to have been based upon how good the soup was, as confirmed by some Zagat rating, and then were offended when I suggested they should just have invested in a bowl of the soup.

After 50 years working in franchising, I am now recognizing several really worthwhile opportunities that are fresh and well thought out and well executed.

The good franchisors who could pair up with these new concepts already have all the know how and the capital. The wave of this burgeoning economic recovery will continue to provide the right degree of incentive. There really are people out there who will pay more than a dollar for lunch now.

Breaking out in the most fertile markets and making our bones where the sun is shining brightest; being really revenue credible at the earliest possible moment; and competently profiling franchisee prospects to be people who already have track records - not taking checks from people who have only checks and little else - will make this the way to establish new franchise concepts for others in this new growth era.

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Author Richard Solomon is a Franchise Lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management. Give him a call at 281-584-0519.

The Securities and Exchange Commission today announced charges and an asset freeze against an individual living in Illinois and two companies behind an investment scheme defrauding foreign investors seeking profitable returns and a legal path to U.S. residency through a federal visa program.

The SEC alleges that Anshoo R. Sethi created A Chicago Convention Center (ACCC) and Intercontinental Regional Center Trust of Chicago (IRCTC) and fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China.

Sethi and his companies duped investors into believing that by purchasing interests in ACCC, they would be financing construction of the "World's First Zero Carbon Emission Platinum LEED certified" hotel and conference center near Chicago's O'Hare Airport.

Investors were misled to believe their investments were simultaneously enhancing their prospects for U.S. citizenship through the EB-5 Immigrant Investor Pilot Program, which provides foreign investors an avenue to U.S. residency by investing in domestic projects that will create or preserve a minimum number of jobs for U.S. workers.

The SEC alleges that Sethi and his companies falsely boasted to investors that they had acquired all the necessary building permits and that several major hotel chains had signed onto the project.

They also provided falsified documents to U.S. Citizenship and Immigration Services (USCIS) -- the federal agency that administers the EB-5 program -- in an attempt to secure the agency's preliminary approval of the project and investors' provisional visas.

Meanwhile, Sethi and his companies have spent more than 90 percent of the administrative fees collected from investors despite their promise to return this money to investors if their visa applications are denied. More than $2.5 million of these funds were directed to Sethi's personal bank account in Hong Kong.

Sethi and his companies prominently featured in their marketing materials the purported participation of three major hotel chains in the project: Hyatt, Intercontinental Hotel Group, and Starwood Hotels.

However, none of these hotel chains have executed franchise agreements to include a brand hotel in this project as represented to investors in the offering materials.

Two of the chains actually terminated prior deals with other Sethi-related entities more than two years before these offering materials were circulated to investors.

For more see the entire SEC Press Release.

So you have a franchise prospect. The prospect's native language is not English. Maybe the franchise prospect is not very fluent in the English written word.

Do you have to translate the franchise disclosure document into another language? The quick answer is 'NO.'

US franchise disclosure laws do not require franchisors to translate the franchise disclosure document, FDD, into the native language of the prospect.  If you are looking to franchise outside the US border, that is whole different conversation.

While not required to provide translation, franchisors may be confronted with what to do if a franchise prospect does not comprehend English very well.

Providing translation of the disclosure document inherently carries risks. There is the risk that the translated disclosure document will be inaccurate or carry an untended meaning. There is a risk that the disclosure document will inadvertently go awry of disclosing prescribed franchise disclosure legal mandates.

Or that the translated disclosure, by way of translation, will somehow be different or incongruent with the English disclosure document.

But is a franchisor to do? It is important that franchisees understand what they are signing when they enter into a franchise agreement. And, couldn't the franchise agreement be rendered void, if the franchisees successfully claim that they did not understand what they were signing when they signed the franchise agreement?

A good solution is to advise and support franchisees in seeking their own translation and consultation services for translation and comprehension of the franchise documents.

This post is in response to a reader's question. Do you have a question you want us to answer in a post? Email us with your question [email protected]!

Service Franchises, Sell or Sink

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3000 franchise brands are currently available in the marketplace, and a good percentage - approximately 40% plus - are service and/or non-retail based franchises.

Let's be honest. When many people hear the word "franchise" they often think of food - sandwiches, pizza, burgers, etc.. After all, that's where the 'world' of franchising opportunities got it's start. But service companies have become a very large part of franchising and, for the most part, are less expensive to open than their retail based 'cousins.' That being said, the vast majority of service concepts do require a good amount of sales effort on the owner's part in order to see success.

We're not saying that retail concepts do not require promotion and selling. In fact, part of many retail concepts - especially those in the food areas - require the owner to join and participate in a large number of community business and social groups. That is very different, however, from a service franchise top requirement to actually close sales. When all is said and done and the fine print is read, retail enterprises could safely be called: "Come to Me" businesses, while most service entities fall under the category of "Go to Them."

One of the most attractive things about a service franchise is the low cost of entry. In many cases a service franchise can be started directly from the home, or at the very least a small, inexpensive office. Examples of service franchise offerings are businesses, such as: Dog Training; In-Home Senior Care; Commercial and Residential Cleaning; Staffing; Business Services; Home Services; and the list goes on and on.

Service businesses can begin for a total that is not a great deal more than the initial franchise fee - in many cases for under $50,000 total. Being able to open a business for under $50K in this day and age is something that is very attractive to many people. There are even some concepts that can be started for much less, but it's been our experience that these have limited value and appeal. After all, what are you getting for that amount?

There is no such thing as 'something for nothing,' right?

Most retail franchise concepts require an amount four to eight times that in order to open and operate. The franchise fee is one thing, but then comes the leasing of the building or property, as well as the expense of equipping a retail space. If you want a "Come to Me" business, that's generally what it takes, and some people are quite uncomfortable with risking that large amount.

If you're a person who wants to delve into a business with a proven concept and a lower initial investment, then a service franchise is for you. Just make sure to investigate all areas that you need to know. Some people purchase a franchise with the idea that, because they have a successful 'brand name' to operate under, then the phone will automatically ring, their inbox will fill up with leads, and the business will generally run itself.

While that may happen on occasion, the truth is that you'll probably have to work a lot harder getting business than you originally thought. This is especially true if you don't have a great skill set when it comes to sales.

Selling is both an art and a science.

There are 'tried and true' methods for learning how to effectively sell anything. The truth is, however, that these skills are more often learned than simply existing naturally in the vast majority of the human race. We all have friends that possess the "gift of gab" and we think that they are, by nature, excellent sales people. While they may be outgoing and personable, those qualities in and of themselves do not make that person effective in representing and selling any product.

Think about it. Services are intangibles. One is basically selling "air," or the promise of performing something extremely well in exchange for money.

A good service franchise should have a well-thought-out and effective sales training program for their franchisees. This should include all of the important aspects of any sales training program including, but not limited to: lead generation or prospecting, qualification, presentation and closing, and probably the most overlooked area of a good salesperson - the ability to overcome objections.

Being an effective salesperson requires a person to get out of their comfort zone, come up with effective ways of communicating, while all the time dealing with objections to the final sale. This can require a good deal of memorization and role-playing in order to grasp the concept and be able to implement these techniques in a 'live' situation.

Some people have a real resistance to learning how to sell. They often make statements, such as: "That doesn't sound like me;" "That's not natural for me;" or, "I think I am good just the way I am." These are generally the same people who are not producing any revenue through their efforts.

If you're a person who either needs to find some way to make a living or really wants to work for themselves, these less expensive service franchises would be a good choice if you understand how important the ability to close sales is to your success.

If you're the kind of person that has a real aversion to learning how to market and sell, most businesses will not be for you, but we would suggest staying far away from service based franchise concepts.

Unfortunately, some people find this out the hard way. If you can find a brand and concept that you get excited about and feel enthusiastic about marketing and selling, then that enthusiasm will be transferred through you straight to your prospects. This will make getting business in the door a whole lot easier and more enjoyable for everyone involved.

There is a lot of solid sales training available these days for people in all walks of life. In reality, no matter who you are, if you want to be successful in life it's about selling yourself - from employers to a potential mate to business associates. In other words, everyone. Sales training can help anyone who wants to improve their lives even if they're not directly involved in selling something in order to put 'bread on the table.'

One amazing resource that we've found is www.optimalsalesperson.net, the program created and taught by Dan Caramanico. Check it out today! You'll find a great deal of information, and you will be well on your way to becoming the most successful salesperson you wish to be!

The Burger King going public transaction this week marked not only another organizational odyssey point for that storied brand--the fourth since 2002, and reminded us what's going in the restaurant franchising space.

A 1000 unit development plan for China and a 500 development plan for Russia were just announced as part of the Burger King pre-going public marketing.

This is somewhat reminiscent of the 1960s and 1970s era of US restaurant development, where big swaths of the country were sold off to area developers, and not all chains took the effort required to build and sustain the necessary brand and systemic business foundation.

On June 19, 2012, Hedgeye Risk Management, a Wall Street research firm, sponsored an experts call in forum focused on the quality of restaurant franchising. Hedgeye outlined six red flag indicators of weak restaurant franchisors, as reproduced below.

Weak Franchisors.jpg
The common denominator to all of the reg flags are: dysfunctional ownership, corporate and store level economics system problems.


It's said that potential franchisees are sophisticated investors, but here is food for thought during the due diligence phase before your next investment.

Taco John's Admirable FDD

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Prospective franchisees think reading an  franchise disclosure document, FDD,  is hard.  

They are wrong - not reading and losing your life savings is hard.  This article is about how to read and understand Item 5 disclosures - what happens when you pay your franchise fee.  What you get for paying the initial fee.

Before I tell you why I think that the Taco John's franchise disclosure of Item 5 is so admirable, I want to tell a different story, a contrasting picture.

(The following story is a parody, no lawyers were harmed in its production.)

You walk into your business lawyer's office.  You want him to review your FDD.  He has a new associate, who beckons you forth.

You move forward, and notice another new wrinkle - a VISA machine smack on top of the associate’s desk.  The associate apologetically explains that due to the economy all clients are on a pay before you go plan.  

Fortunately, there is now a fixed fee schedule and you are relieved to see that the associate only charges $800 for a review of the FDD.

You hand over your FDD, sign the standard retainer agreement, and shell out $800 on your VISA debit card.  

The associate confirms the transaction, ruffles through the FDD, and smiles at you expectantly.

This isn't going well, you think.  So you venture, "Well what did you think?"

"About what?"

"The FDD", you persist.  "The Franchise Contract."

"Oh that.  "It is the standard franchise agreement."  He then drones on something about France, the Singer Sewing Machine and something about a Lanham Act.

You really aren't interested and wish the associate would begin earning the retainer.

Abruptly, the monologue ends, but now the associate seems to have dozed off.

You want to shake him or worse.  But, you resort only to pounding the desk with your shoe.

The associate snaps to attention, looks around, fixates upon the classic timepiece on his desks and blurts: “Times up, next.  Agreement is terminated.”

“But, you haven’t done anything!”, you protest.

“Fulfilled the terms of the contract as per the standard retainer clause, paragraph 42.”, says the associate as you are ushered out the door.

Paragraph 42, you wonder?  So you flip open the retainer agreement –you just signed without reading.   You get out your magnifying glass and read:

Paragraph 42:

 "You will pay us $800.00 for a FDD agreement review, the Retainer Contract.

Your contract is likely to contain several contingencies that will allow you, your attorney to terminate your Retainer Contract if such contingencies are not met.

The types of contingencies that may be included in Retainer  contract are, by example:

·                  obtaining appropriate approval;

·                  obtaining adequate financing;

·                  receiving 3 acceptable bids for your Retainer contract, and:

·                  obtaining required municipal licenses.

If a contingency is not met as described above and your Retainer Contract is terminated, we will not refund any of the payments you have already made to us. 

And, we reserve the right to determine in our sole and unreasonable discretion whether the contingency  is met or not.

These payments will have been fully earned by the Attorney as a result of our lost and deferred opportunity costs, corporate expenses, and all efforts performed on your behalf before the termination of your Retainer Agreement.

We will, however, assist you in your efforts to locate another attorney and fully support your efforts to acquire another Franchise Disclosure Document review.”

So, you are now out $800 because you failed to understand the significance of a deeply convoluted legal clause buried deep within your retainer agreement.  

Even if it was marked in red, bold print, and had the notation "Here is a VERY DANGERGOUS CLAUSE", its significance would not have been apparent until you were "terminated".

(The above story is a parody, no lawyers were harmed in its production.)

Could things get any worse for you?

No, things are going to get better for you because your FDD is written with admirable clarity, and lays out exactly when and what happens to your franchise fee.

Your FDD might be written as well as the Taco John's 2012 FDD:

"If you terminate the Franchise Agreement any time before all persons required to complete initial training have been certified by us, or if we terminate the Franchise Agreement because of your (or your owner’s or manager’s) failure to meet our initial training requirements (see Items 6, 11 and 17 of this Disclosure Document), we will refund the Initial Franchise Fee less the actual expenses we incur due to your acquisition of the Franchise, but we will not retain more than 30% of the Initial Franchise Fee to cover our expenses."

This is terrifically clear. If you want to bail out, it will cost you 30% of your franchisee fee at most. If they want you to bail out, it will cost them 70% of what what you have paid them.

There are no tricks to this clause, and the attorney who drafted it should be congratulated.  So should the franchisor who has explained with clarity and transperancy the risks of not completing the intial training.  More importantly, there are no gotcha's in this clause - no unforeseen conditional contingencies which may rob you of your initial franchisee fee.

Review the item 5 disclosure.  It should read more like Taco John's item 5, and not at all like your lawyer's paragraph 42.

On February 8th, 2012, Forbes named Snap-On Tools its choice of Top 20 Franchise systems that "any competent operator should consider."

Within days, Forbes was forced to reconsider its methodology - effectively conceding that Snap-On Tools item 20 disclosure was misleading because Snap-On Tools doesn't ever terminate a franchise, but simply "reacquires" the operators route.

Unfortunately, even after receiving a barrage of well thought out criticisms and evidence, Forbes was still unable to identify the most important issue surrounding Snap-On Tools.

Mr. Sean Kelly had posted on his site, Unhappyfranchisee.com, a negative opinion for the franchise eligibily from the SBA.  The SBA attorney after reviewing the Snap-On Tools franchise contract concluded:

"the franchisee does not have the right to profit commensurate with ownership".

This is legal conclusion is a very bad thing for Snap-On Tools.  A regulator has determined that the hallmark of ownership is not present for those people who signed an agreement with Snap-On Tools.  

All franchisors have to exert some control through their franchise agreements in order to protect the value of their trademarks - indeed the franchisee is simply leasing the right to use these trademarks in their local business.   But as an independent operator, the franchisee has to have some room to make his or her own business decisions - the right to profit commensurate with ownership, not of the trademarks but of the franchise opportunity.

The last major franchise system that exercised too much control was Coverall.  They were successfully sued for misclassifying employees as franchisees - precisely because the level of control Coverall  exerted over the people who had signed franchise agreements was commensurate with these people being employees.

Recall that in the Coverall case, Coverall controlled all the billing.  A customer paid Coverall the franchisor for the work done by the franchisee and then Coverall remitted what it thought it owed the franchisee.  I discussed why this mechanism might have been needed, yet was an overreach by the franchisor.  The end result deprive the franchise of a right to profit commensurate with ownership.

Mr. Kelly argues that Snap-On Tools is actually more controlling than Coverall:

 "Coverall follows a business model specific to most other janitorial franchises, a model in which "franchisees" don't have to necessarily generate their own leads, close their own sales, etc. The franchisor fulfills the vital functions of marketing, sales, billing, collection and the franchisee, in theory, just has to show up.

Snap-on Tools, like the other three tool truck franchises, is in many ways, more controlling even then Coverall and its ilk. When a franchisee signs on he is issued a "List of Calls" (aka LOC) which represents 200 potential customers. Each of these 200 represents a tool-using mechanic or technician; the mechanics in a single dealership may represent 5-10 of the 200, a one-man shop would represent 1.

Franchisees are not technically allowed to sell to or solicit to anyone not on their list of calls. So if a mechanic from a neighboring dealership walks up to the truck with money in hand, the Z technically can't sell to him, nor can they add his dealership to his route even if no one is servicing it. He can petition Snap-on for permission, but it's up to their SO's discretion."

Some legal commentators had argued that Coverall decision was a result of a peculiar test for employee/independent operator in Massachusetts law.  Whether this is true or not,  Snap-On Tools control over the operator was found by the SBA to deny the operator the right to profit commensurate with ownership.  This test is the more general and widely accepted test for independent contractor status - the right to profit.  

So, if people who signed the franchise agreements with Snap-On Tools are more like employees than franchisees because they don't have a contractual right to profit, can a missclassification lawsuit be far behind - especially since Forbes so helpfully highlighted the issue in the national press?  Pretty sure that this was not Snap-On Tools intent when Forbes named it #1.

(Some franchisees in the Snap-On Tools system have indicated that they are forming an Independent Franchisee Association, Mobile Dealers Association.  No doubt some of the experienced franchisee group and class action litigators will be knocking on their website door shortly.)

 

There are many concerns of a weight loss franchise that need to be addressed by the prospective franchisee. Many individuals contact me looking to invest in a weight loss franchise believing that the product works, so the franchise should be successful. Unfortunately, just because a weight loss product works for you does not mean it will be a good franchise investment for you.

I started in franchising as an in-house attorney for Nutri/System, Inc., when Nutri/System had existed for over 20 years and had 1800 corporate and franchised locations in the U.S. After a bankruptcy in 1993 and sales to a few different owners, today Nutrisystem (name changed) has evolved into a purely Internet based weight loss program. This program, which is not currently a franchised system, is based on real food, reduced calories, exercise and behavioral modification (similar to Jenny Craig and Weight Watchers).

However, many weight loss franchises are not based on such solid methods. Many prospective weight loss industry franchisees who contact me are looking at systems that are based on a new drug or diet craze which are not FDA approved, lack any empirical research of their effectiveness and are questionable at best.  To bank your hard-earned money and significant time on a franchise that is based on unproven methodologies is risky, and perhaps foolish.

My advice is to research any franchise opportunity carefully.  Speak to franchisees that are in the system and franchisees that have left the system; review the audited financial statements of the franchisor; read the 23 items of the FDD (they are required to be written in “plain English”); and retain an experienced franchise attorney to review the documents and provide an unbiased evaluation of the opportunity.  Caution when investing in any franchise system is prudent, but particularly when investing in a “fad” diet franchise system.

This article is not intended to provide legal advice and does not create an attorney/client relationship.  Many factors contribute to providing legal advice, including the specific facts of a situation.

 

 

This is a guest post by Nancy Lanard.  Nancy’s law firm is a "legal boutique" that custom-tailors legal solutions to meet the specialized demands of small to medium-sized companies, individuals seeking a franchise and businesses looking to expand into franchising. Her vast experience in the areas of business and franchise law has included representing businesses in the negotiating and drafting of various types of contracts, handling the purchase and sale of businesses, reviewing, negotiating and advising prospective commercial tenants on the leases for their business, evaluating franchise documents for prospective franchisees and developing and registering franchise documents, including Franchise Disclosure Documents and franchise agreements, for businesses expanding into franchising.

Franchise Fraud -Churning

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DON’T BE A VICTIM OF FRANCHISE FRAUD AKA CHURNING --

CONSULT A FRANCHISE ATTORNEY BEFORE YOU BUY.

 

According to the FBI website:

Pyramid schemes — also referred to as franchise fraud or chain referral schemes — are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses.

 

There are thousands of reputable franchises in the United States.  However, as a prospective franchisee you should remember that one of the largest profit centers for franchisors can be the selling of franchises.  Therefore, with some franchisors, once you are hooked into signing the franchise agreement and paying the upfront “franchise fee”, the franchisor has little concern as to whether you generate a profit.  If you fail, the franchisor will simply sell the franchise again.  This form of franchise fraud is known in the industry as “churning.”

 

In the United States, franchising is regulated by a complex web of rules and regulations, including the Federal Trade Commission (FTC) Franchise Rule, state laws, and industry guidelines.  The FTC Franchise Rule, and many state laws, specify what information a franchisor must disclose to a prospective franchisee in a document entitled the Franchise Disclosure Document (FDD).  A careful review of this document is crucial before you buy a franchise, and e investing in a qualified franchise law attorney to review this document before you buy will be money well spent. 

 

One of the disclosures a franchisor must make under the FTC Franchise Rule in its FDD is Item 20:  Outlets and Franchisee Information.  Item 20 requires the disclosure of statistical information on the number of franchised outlets and company-owned outlets for the preceding three-year period. Under the latest version of the Franchise Rule, which went into effect in 2008, the franchisor is required to set forth information in five tables.  The first table provides a system wide summary of outlets, detailing the net changes in the number of outlets – both franchised and company-owned – over the last three fiscal years. The second tracks transfers of outlets, state by state, over the last three fiscal years. The third shows, state by state, changes in the status of franchised outlets over the last three fiscal years. Similarly, the fourth table displays, state by state, changes in the status of company-owned outlets over the last three fiscal years. Finally, the fifth table projects new outlet openings in each state, and sets forth the number of franchise agreements that have been signed but have not yet resulted in the opening of an outlet.

 

            There are various terms used in these tables, which according to the FTC have specific meanings:

 

            “Transfer” means the acquisition of a controlling interest in a franchised outlet, during its term, by a person other than the franchisor or an affiliate.  It covers private sales of an outlet by the existing franchisee-owner to a new franchisee owner and the sale of a controlling interest in the ownership of a franchise.

 

             “Termination” means the franchisor’s termination of a franchise agreement prior to the end of its term without providing any money or other consideration to the franchisee (e.g., forgiveness or assumption of debt).  For example, a franchisor may decide to terminate a franchisee for failing to abide by system health and safety standards.  As a result, the franchisee leaves the system without receiving any payment or other consideration, such as cancellation of a debt owed to the franchisor.

 

            “Non-renewal” means failure to renew a franchise agreement for a franchised outlet upon the expiration of the franchise term. For example, a franchisee may operate a franchise for period of 10 years. At the conclusion of the 10-year term, the franchisor (or franchisee) may decide not to renew the franchise agreement.

 

            “Reacquisition” means the return of a franchise outlet during its term to the franchisor in exchange for cash or some other consideration, including the forgiveness of a debt. For example, during the course of a franchise agreement, a franchisee may wish to terminate its relationship with the franchisor, and the franchisor may agree to buy back the outlet for cash or to forgive overdue royalty payments.

 

            “Ceased operation” means the cessation of business operations for any reason other than transfer, termination, non-renewal, or reacquisition. It includes abandonment of the outlet by a franchisee. It also includes franchisees in an “inactive” status.

 

            In some instances, there may be multiple changes in ownership or multiple owners of an outlet over the course of a fiscal year. For example, during a single fiscal year, a franchisee may cease operations and the franchisor may respond by terminating the franchisee’s franchise agreement. Where there are multiple events such as these affecting a particular outlet, the Rule provides that only the last event for that specific outlet need be reported.  In the example above, since termination was the last event, the change in status should be reported only as a termination.  Franchisors are permitted to add a footnote to the chart to explain the series of status changes, but except in the case of multiple franchise owners, are not required to do so.

 

            Under Item 20, Franchisors are also required to provide the prospective franchisee with the contact information for all current franchisees, or for all franchisees in the state where they are offering to sell franchises if there are 100 or more franchises in the state, or for at least 100 franchisees in contiguous states and the next closest states.  If a franchisor has fewer than 100 current franchisees, contact information must be provided for all of them.

 

            Also under Item 20, Franchisors must provide the prospective franchisee with contact information for every franchisees who: 1) has had an outlet terminated, canceled, not renewed, or otherwise voluntarily or involuntarily ceased to do business under the franchise agreement during the most recently completed fiscal year; or 2) has not communicated with the franchisor within 10 weeks of the disclosure document issuance date. 

 

            One might think that contacting former franchisees would be quite useful, as they have no ongoing investment in the franchise business and might speak more openly.  However, there are a few obstacles to gathering information from former franchisees.  First, under Item 20, in order to protect the privacy of former franchisees, the Franchise Rule calls for the disclosure of only limited contact information: the name, city and state, and current business telephone number of a former franchisee. While the Franchise Rule provides that a franchisor should only use the “last known” telephone number if the current business telephone number is unknown, one has to question how many former franchisees keep their former franchisor updated with current contact information. 

 

            The second obstacle is what are known as “confidentially agreements” or “gag orders” between former franchisees and franchisors.  Franchisors are required to disclose if franchisees have signed confidentiality agreements with the franchisor during the last three fiscal years that restrict a current or former franchisee from discussing his or her personal experience as a franchisee in the franchisor’s system. These confidentiality agreements typically arise as part of the resolution of a dispute between the franchisor and franchisee, and as such, might restrict a franchisee from disclosing relevant information about the franchise.  The unfortunate result of these confidentiality agreements is that it allows franchise misrepresentation by preventing prospective new franchisees from learning potentially negative details about the franchise.  All of which may result in the prospective franchisee unknowingly purchasing a franchise in a system that has a history of low or no profitability and high failure rates of franchisees.  It should  be further noted that current and ex-franchisees of systems have no duty under the law to disclose information about their businesses to prospective franchisees.  By having former franchisees under a confidentiality agreement or gag order, franchisors that practice franchise fraud or franchise churning "inhibit prospective franchisees from learning the truth about the franchising opportunity as they conduct their due diligence investigation of a franchise offer." (Federal Register Franchise Rule, page 15505.)

 

            While not foolproof, a careful review of Item 20 can disclose some red flags which might help to prevent you from falling victim to franchise fraud or churning.  Is there a high turnover rate?  What are the reasons for the turnover rate?  Does the franchisor require confidentiality agreements of its current and/or former franchisees which would prevent you from getting relevant information as you conduct your pre-purchase due diligence?  Again, before you purchase a franchise, you should seriously consider having an experienced franchise law attorney review this information with you, as well as reviewing the other disclosures in the FDD and the contents of the Franchise Agreement.  Doing so may save you tens of thousands of dollars in the long run.  The old saying, “penny smart, pound foolish,” is critical to remember when making such an important and financially significant investment.  

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