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


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This page is an archive of recent entries in the Due Diligence category.

CAFA is the previous category.

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