| Licensing, Technology Transfers, |
There is never perfect knowledge of all the circumstances relating to any business transaction. Not only is the purchaser, despite extensive due diligence investigation, dealing with blurred vision/insight, but the seller, who certainly should know more, has knowledge that has grown more imperfect with the complexity of the transaction and with its duration in time. Sellers of business opportunities have an original 'vision' of the deal when they begin. The concept changes from day one, but the so-called vision does not in most instances. Misdescription of what is being offered certainly starts at the very beginning, as the reality of the concept has yet to fit the 'vision'. It continues because the further development of reality won't fit the 'vision' either.
Franchising and business opportunities have had their very bright success stories. They were always rare. They are even more rare now. There is a saturation of concepts such that most offerings are just knock offs of concepts that may be found all over the place. Worse, many franchise and business opportunity offerings today, especially the new ones, are nothing more than what would normally be considered a job, but described to make it seem like a business. Today around eighty percent of new franchisors fail. Those who bought those franchises usually lose their investment. When one considers that a very lucky net profit as a percentage of sales will probably fall into the fifteen to eighteen percent range, the combination of royalty and advertising fund burden that is commonly ten percent of sales will make the franchisor a roughly forty to fifty percent partner in your franchised business. And the franchisor does not share your risks. The franchisor has no investment in your business. To the extent that the franchisor incurs expenses in 'servicing' your needs -- which is almost never worthwhile -- it is you who are paying their servicing expenses, not them. It has always been the case that franchisees after year one feel like they have by then received everything that the franchisor has to impart to them and that paying royalties for the balance of the franchise term is just a waste of money. While it may seem like value to pay an initial fee for what you think will be a head start, the ongoing cost will probably seem unjustified, even in a good deal. Are there other ways to get that head start without mortgaging the future and taking draconian penalties like being put out of business and losing your store should you decide to leave the system? If there are, shouldn't a prudent franchise or business opportunity investor go to great lengths to find them?
In short, there are a few worthwhile offerings out there. Most are not. Which is which?
The problem with which I am usually faced when a potential franchise investor comes to me for counseling is that the investor is already a totally pre-sold glob of quivering protoplasm, just itching to write that big check. Salesmanship is very aggressive here. Misrepresentations abound. A suggestion that what the client is enthused about may not be anything like it has been described is a very deflating event, and sometimes the client is so sold that the investment is made anyway, and the results occur that were predicted. By then it is either too late to get the money back for any number of reasons; the client no longer has money to hire a lawyer to seek redress anyway; and a terrible loss of money and emotional energy for the investor and for the investor's family simply destroys everything. The people selling these opportunities are very tough. The investor needs to have access to tough analytical resources to deal with it.
In the securities markets around the world there is a standard of quality in the required disclosure in which statements made should be true, in the light of the circumstances in which they are made; should be complete in the sense that one does not leave unsaid facts that might influence the investment decision in the mind of the mythical 'reasonable investor'. The 'reasonable investor' is one whose intelligence varies in some proportion to the mala fides of the people who solicited the investment. The more subtle the misrepresentation or omission, the stupider the 'reasonable investor' is presumed to be, and hence the greater degree of care and duty that is requisite. Nuances abound as circumstances change. As dependent variables grow and eventually approach chaos conditions, the imagination of the enforcer must be ever more fertile in the presentation of sub-principles of investment fraud theory. Only in that manner can the investment police keep pace with wrongdoers.
There are, in the instance of securities trading, institutionalized policing facilities of varying degrees of watchfulness and enthusiasm. The most obvious, of course, are the prosecutorial resources. In recent memory in the USA, federal securities investment prosecutors were out to a four martini luncheon during the most egregious campaign of fraud in modern memory, perpetrated not only by companies that issued securities, but also by those charged with certifying that financial investment information was at least fairly stated. Only the Attorney General of the State of New York was doing his duty, and it was the State of New York that lead the way in bringing an end to the fraudulent conspiracies amongst securities issuers, accounting firms, banks and securities brokerage houses that caused the loss of savings and jobs of so many thousands. The lesson here is clearly that no one may with any safety rely upon government regulation to achieve effective regulation. All the laws and regulations intended to protect investors do not suffice for the reason that those charged with their administration are themselves the weak links in the system. The regulatory link is weak when the regulators are taken from the ranks of the regulated.
As expectations for personal financial safety increase with the tenure of our employment, and the apparent 'prestige' of our company become less and less tenable, more and more people who thought of themselves as always being part of some commercial organization are turning now to investing in businesses that they themselves 'own'. The tens of thousands of highly educated people who found themselves in the street, so to speak, following the Enron and similar conspiracies, are largely unemployable. They are a glut. To the extent that many not have lost absolutely everything, they are seeking alternatives to employment in the form of their own small business. Here one does not buy stock that is 'regulated' and vetted. Here one buys 'opportunities'. And here is where they are learning that what they did not understand before with respect to stocks and bonds, they understand even less with no regulating intermediary. Unscrupulous business opportunity and franchise sales sharks -- many calling themselves consultants to make you think they are not really hustlers -- abound and are actively on the hunt for these new potential victims.
To be sure, there is the appearance of regulation in business opportunity sales, but it is more myth than reality. In the USA, the Federal Trade Commission does not vet offering circulars/disclosure statements associated with business opportunity offerings, and the several states that have their own business opportunity/franchise laws do not in the main bother to read the material either. And in this after-the-fact regulatory mode -- when we catch you we may do something -- the rate of prosecutorial activity is laughable. In the end, the business opportunity investors are left to fend for themselves, both in evaluating the information given to them by the opportunity sellers and in obtaining relief when they learn that they have been cheated.
Inasmuch as I am convinced that there is a paucity of professional resources to which potential business opportunity investors have recourse in deciding upon such investments, this discussion is offered, not as the answer to due diligence issues, but as an eye opening warning. It is my hope that readers of this article will come to an awareness that what they read in a document is often the opposite or quite at variance with the expected meaning of the statements in normal experience, and that taking the documents to 'a lawyer' for review may be quite useless if the lawyer is not highly experienced in business opportunity vetting. The lawyer who does tax compliance, divorces, estate planning and personal injury work is certainly a lawyer in those areas, but probably not even remotely adequate for the vetting process of which we speak. And, since lawyers who possess such experience/expertise are so few and far between, I would like there to be some awareness of subtleties available by virtue of access to this gratuitous tutorial.
A WARNING! THIS ARTICLE IS NOT A VEHICLE THROUGH WHICH YOU MAY BECOME A DUE DILIGENCE EXPERT. THE AUTHOR OF THIS ARTICLE IS NOT YOUR LAWYER UNLESS YOU SPECIFICALLY RETAIN HIM. THE AUTHOR OF THIS ARTICLE OWES YOU NO DUTIES OF ANY KIND. YOU CANNOT RELY UPON YOUR ASSUMED UNDERSTANDING OF THIS MATERIAL FOR ANY DEGREE OF INVESTMENT SAFETY. EVERY SITUATION/CASE IS DIFFERENT AND MUST BE EVALUATED UPON ITS OWN PARTICULAR FACTS AND MERITS. THERE ARE SIMPLY TOO MANY VARIABLES IN EVERY INVESTMENT DECISION FOR ANY ARTICLE TO COVER. THIS ARTICLE IS JUST TO TWEAK YOUR SENSITIVITY TO SOME, NOT ALL, OF THE TYPICAL MISREPRESENTATIONS AND IMPORTANT OMISSIONS OF FACTS THAT ARE COMMONLY USED BY SELLERS OF BUSINESS OPPORTUNITIES.
In the USA, the sale of franchises and other forms of business opportunities is regulated by disclosure requirements at the federal government level (for opportunities offered in interstate commerce -- that includes just about any opportunity -- hardly anything can be said to be entirely intrastate anymore), as well as by specific statutes at the state level -- not in every state. The gist of these laws is that there are certain categories of information that must be provided; that the information is to be truthful; and that the information must be sufficiently complete that omissions do not make that which is disclosed misleading. This is very similar to the rule that pertains to the trading in securities. The rule came about precisely for the reason that the securities rules were promulgated -- there was rampant fraud.
There is a difference, however, between disclosure required by law and truthful, reliable disclosure. In practice, the manner of business opportunity disclosure is more concentration upon filling out of forms than of qualitative truthfulness. There are certain standard statements that all franchise/business opportunity sellers tend to use, even though they most certainly apply differently to the opportunities being offered by each seller. A great deal of this came about through the practice of lawyers simply copying forms from other franchise offerings with not much more than name changes. And so, if one company states that it offers two weeks training and that it provides ongoing support to its franchisees throughout the relationship period, all franchisors make the same statement. Competence comes in the form of being able to tell which company's statements to that effect are worthwhile or even true, and which are less true or not true at all. Even though prospective purchasers may be provided with the disclosure document and the contract they will be required to sign if they decide to invest, most lack the ability or the industry to make competent comparisons between the two documents, and among these documents and the sales and marketing materials they received.
Illustratively, the offering circular may disclose initial training being provided and support being available thereafter, claiming both to have been the product of the company's 'unique' (the most frequently used untruth in franchise sales) system of operating these businesses. When, however, one examines the franchise contract's provisions on the subject of initial training and future support -- and it is the contract that defines what is to be provided, not the disclosure document -- it may be seen that 'The Company provides initial training for a period of two weeks' -- or any other period -- in accordance with the Company's then current training program. -- or words to the identical effect. In other words, you get whatever they have at the moment, such as it may be, good, bad or indifferent. As for future support, the contract will provide that 'The Company will provide such further additional support as it decides is needed and appropriate during the term of the franchise. -- or words to the identical effect. In other words, you get whatever they may feel like providing for you, with no quality assurance whatsoever. These are only rudimentary examples of the difference between what is in the disclosure documents and the contracts to which they relate. When you compare the company's marketing and sales pitch adverts, however, you may well wonder if this is the same opportunity being described in each document. The printed advert material is very aggressive, to say the least. It describes the opportunity as the McDonalds of the whatever-it-is industry, a totally unique innovative system that can be your highway to prosperity and comfort. Almost no one asserts any quality control over the advert material's language, even though such controls are intended from the mere reading of the regulatory language. The use of falsehood is specifically prohibited and may subject the miscreant to prosecution for felony fraud. The truth of the matter is that there are scant resources available for such prosecutions, and such resources as there may be are rationed only to the most outrageous cases involving companies that are assumed incapable of fighting back -- hence, easy victory and phony enforcement statistics for use in obtaining appropriations to fund the agency's future activities. Government agencies tend to 'study' phenomena, to be highly academic and hardly pragmatic or effective in any actual regulation. The history of complaints being acted upon with any degree of effectiveness by enforcement agencies is dismal. Governmental policing of business opportunity disclosure materials and selling practices is but an illusion. Few people understand this. They rather assume that the government is their Daddy and will care for them as for a child. Nothing could be more naïve. You are on your own.
Disclosure requirements include the civil and criminal litigation history of principals of the offering company and of those with whom the investors will be dealing in the course of the relationship. The manner of deciding who shall be included in such disclosures is subject to great variance, to put it nicely. And many who are deemed to be persons who must be disclosed about simply provide false information or omit instances in which they were sued, prosecuted or been declared bankrupt, no matter what the laws may require. Most franchisors do not go behind the 'forms' turned in by such people to be used in preparing the disclosure documents. Whatever is put on the form is what is given to the lawyers to use in preparing the disclosures. Could they go behind the document and verify the information. Certainly they could. Do they fail to do so because to do so would increase the expense of preparation of the disclosure documents? Certainly they do. Under the law, a prospective investor may demand that the offering company substantiate its claims that are capable of substantiation. But if the investor makes the demand, there is typically no response or an evasive response. And yet, so may people buy the business opportunity anyway. Any evidence that the offering company may not be up front with you should be a trigger that causes you to forego the investment. Your instincts are excellent indicators of what you should do, especially when the instinct is a negative one. Positive inclinations are all too frequently the product of misleading information. Negative instincts are much more reliable. And so the prospective investor sees a disclosure document subject to felony enforcement statutes and believes that it must be reliable on its face. Certainly not!
One of the most flagrant untruths in franchising is the representation that the franchisees of a franchisor, as a group, benefit from 'buying power'. With extremely few exceptions that is a patent falsehood. A group of several hundred franchisees whose stores each gross well over a million US dollars a year have some buying power. Fifty franchisees spread out over a few states have no buying power. They simply buy off the vendor's price sheets for the quantity that they purchase per delivery. In most instances that I have seen, the franchisees could actually purchase more effectively from a local big box reseller like Lowes, Home Depot, Sams Club, Walmart, Costco and the like. In many instances, the franchisor is using its control over the patronage power of its franchisees to extract a 'commission'/kickback/markup on the purchases of the franchisees. Hence the requirement that franchisees purchase only from 'approved suppliers'. In most instances the identity of the supplier is not the quality control issue at all, but rather what it is that is being purchased. And since what is being purchased is usually available through normal channels of trade very cost effectively, there is really no rationale for 'approved supplier' programs other than to provide leverage for kickbacks/commissions/markups. The franchisor's income may not be expressed in currency. It may take the form of discounts to franchisor owned stores, free goods, 'promotional allowances' (that may include anything from free travel to sports tickets to cars or whatever -- use your imagination).
Where there are many franchisees that are doing well, there will usually be a franchisee association that acts as a brake on abuse of their purchasing power by the opportunistic franchisor. Unfortunately, very few groups of franchisees will make the broad support commitment to have a well-managed franchisee association. They don't have the guts; they are too cheap; they just want to whine and complain so long as it costs no money. They get what they deserve. If franchisees just lay back and whine, they get what laid back whiners get.
Other than the large, well-heeled franchisee groups, there is no group buying power. Representations of group buying power by small, new, medium sized franchisors are simply not to be relied upon as a rational factor in any decision to invest in any business opportunity. When you see a business opportunity company bragging about purchasing power and that company lacks the real success scale to actually achieve group scale economies, that should inform a prospective purchaser that the offering company is perfectly happy to misrepresent to get a signature on a franchise or similar agreement. When is the purchasing power representation true, and when is it not true? That level of expertise is not anything that a new comer to business opportunity vetting could possibly have.
Another typical falsehood is that the right to do business under the name of the business opportunity company is something that is worth its cost due to name recognition. I am always amazed that that representation is made in almost every new and yet-to-be-successful franchisor's disclosure documents and sales/marketing brochures. Unless you have a substantial track record built up over a substantial period of years across a broad geographical area, that cannot possibly be true. A regional franchisor cannot possibly have good will beyond its traditional geographic sphere of operations. The fact that they may have been heard of elsewhere does not equate with commercial name recognition that will translate into sales or profits. Moreover, if a franchisor has been in business for ten or fifteen years and has only thirty to eighty franchisees, that is actually pretty solid evidence that the name is not producing widespread commercial success. When name recognition is touted as a selling point by a franchisor with that kind of profile, it is simply a misrepresentation.
There is a section of the franchise and business opportunity disclosure materials in which the store opening/closing history of the franchised units should be spelt out. The attrition rate/turnover rate (resales) often are indicators of lack of commercially valuable name recognition, and sometimes indicate extremely negative commercial repute, hardly justifying an investment. Some franchisors used coded documents that, if known, would tell a prospective purchaser of an existing company owned or franchised store just what number owner that purchaser would be if he decided to buy the deal. Why buy a deal that ten other folks couldn't make a profit in? There is also the technique known as 'pump and dump'. Pump and dump is the process by which a franchisor takes a losing store and pumps up its sales to make it look better for resale purposes. Not infrequently the franchisor engaged in very aggressive sales and promotional programs at that store, and when the uninformed buyer takes over operations, the store will not perform profitably using such tactics, and sales will return to their formerly unsuccessful levels if the aggressive programs have to be eliminated. Business opportunity/franchise investors usually have no ability to evaluate what is about to befall them under such circumstances.
Where a franchisor/business opportunity seller has experienced significant store owner attrition in its most highly store populated market(s), that is very strong evidence that the name does not have legs. If a name has commercial value, those who operate using the name and the system of the name owner do not experience significant attrition rates. It's that simple. But almost no one knows to read the name bragging claims in light of the store attrition/ownership changes statistics. Franchisors will also sell under performing company owned stores to franchisees telling them that it is a good opportunity because owners work better at store operations that company employees. Sounds good, but it usually isn't true. If the under performing company owned store is sold to an existing franchisee of that company who already has an excellent track record in operating those stores, maybe that will be accurate. It is not accurate when considered in the context of a newcomer to the system buying that store.
One of the selling points of any franchise or other business opportunity is site/location selection for your business. Often a potential investor will be told of a secret point system evaluating method that the selling company has developed, or other similar fairy tales. They may have a point system, but it is neither novel or unique or unusual. For most of franchising history, if you were thinking of investing in a fast food franchise, you needed only know that you had to be within half mile of a McDonalds. That's probably accurate even today. Whenever site location selection assistance is touted by a company asking you to invest in one of its deals, compare the bragging language of the sales/marketing statements against the language of the contract. In the contract it will always state that you are responsible for selecting your own site location and that the franchisor will approve your site (rarely ever disapproved, no matter what), upon the caveat that the franchisor does not vouch for the site or represent that the site so selected will be a good one for you -- or words to that effect. If a franchisor is being reasonably honest about site selection, the materials will say that you should hire your own commercial leasing agent in the city where you will be locating your store, and have that leasing agent help you select a good site and negotiate a favorable lease for you. If you hire -- and pay -- your own commercial leasing agent -- after confirming that the agent has done this for businesses of the kind you intend to open -- you have the best chance to get a good site, provided that you accept the concept that good sites cost more than lousy sites. There are plenty of less expensive sites in any town, and they are less expensive because they are not in good position vis-à-vis traffic flow and commercial attractiveness. Traffic flow is a very argumentative number. There are sites with unbelievably great numbers. The only thing is that the numbers are rush hour numbers, and yours is probably not going to be a business patronized by folks trying to get to the office in the morning. And if you are on the going to work side of the street, those going home -- on the other side of the street -- probably aren't going to be interested in making left turns in rush hour to get to your store. This is the kind of sophistication that your own commercial leasing agent can provide, and that you simply do not possess. The same rules apply to most any kind of retail business. You need your own commercial leasing agent. And you need to be frank and aggressive in asking about the agent's relationships and history with landlords to whom you are being introduced. You can't afford to be shy.
Whatever you choose for a location, your franchisor, in addition to insisting upon a covenant not to compete, will insist upon the right, consented to by your landlord in the lease before you sign it, to assume the leasehold and kick you out of the location if you ever, for any reason, cease being a franchisee of that company. Many times a covenant not to compete will not be enforceable even though it is contained in your franchise or business opportunity agreement, but premises assumption clauses are practically always enforceable.
If you are dealing with a relatively new franchisor, you should refuse to agree to either a covenant not to compete (unless your business attains a stated level of performance and you leave the system in spite of such success), and refuse to agree to premises possession by the franchisor. The new franchisor may frequently be less insistent upon aggressively over reaching provisions to get a sale. In any event, you lose nothing by trying very hard to get concessions. Your ability to leave the system without losing your ability to operate or losing your premises lease may be the most valuable aspects of any deal.
Support is another usually overblown representation in the business of selling franchises and business opportunities. On 'discovery day' -- the day you are shown around headquarters and visit all the 'goodies', you will get a load of selling on the quality of the ongoing support that the company provides to its franchisees. On the other hand, in the contract you would sign if you bought the deal, it will say that the company will provide such further and ongoing support as it may deem appropriate from time to time. It is that arbitrary. Representations about high quality support are not reinforced by covenants to provide any stated quality of support other than whatever the company may feel like doing from time to time. Even in the case of a good franchise, the truth of the matter is that you get your initial training and then you are on your own. If the equipment you are required to purchase does not work, you have to take that up with the equipment manufacturer. If some process that you must follow in operating your business somehow fails to function properly, no one is going to get on a plane and come out and fix it. You may get some conversation in a phone call if you're lucky. Support promises are among the most illusory in franchising. If you're lucky and you are in a business that has a lot of non-franchised independents, they may have a trade association that you can join for very little money. Much of the available real support will come through that independent trade association, not from your franchisor. You will think you are paying for support from your franchisor, but the reality is usually quite different.
In recent years, one of the biggest unpleasant surprises confronting naïve franchisees is the notion -- placed in their heads by their franchisors when the investment was first being sold to them -- that the franchise system in which they were investing was some sort of family in which everyone takes care of each other, like ideal families are supposed to do. Nothing could be further from the truth. Whenever a franchisor discovers any program by which they think they can optimize their revenues, they aggressively employ the program, no matter its adverse effect upon existing franchisees. If you have managed to overcome being mesmerized by the sales pitch and can find and read the contract language that deals with such issues as exclusivity, you will find that you have little or none. Some franchisors, when confronted with the sanguine comparison between the sales pitch and the contract language assure the victim by saying that it is 'their policy' not to do such and such -- whatever it is that you hope would not happen and that the contract language clearly permits them to do. This is utter nonsense. They will do whatever they like. Expressions of what their policy is or may be are worthless misrepresentations, for the reason that, even if it is their policy now, they can change policy whenever it suits them. If it is not provided for in the actual contract language, you are not protected.
Franchisors, other franchisees and other sorts of business opportunity companies will always compete with their franchisees via the Internet. Anyone who patronizes your store -- unless it is a restaurant -- will be able to purchase what you sell over the Internet directly from your franchisor -- if not now, soon. If you do not have explicit contract language that prohibits the addition of more stores to your geographic area, count on there being more stores, whether that affects your business or not. Some franchisors will tell you that they never add stores without doing an impact/harm analysis to assure that the additional units will not detriment existing franchisees. Utter nonsense! No impact analysis ever done by any franchisor has ever told them anything other than what they wish to hear. The 'analysis' always will say that they are justified in what they wish to do. Even if you commissioned your own impact analysis and came up with a different result, it would be rejected.
Item Nineteen in your franchise disclosure documents is the Earnings Claims section. It may give you sales numbers that do not tell you what you really need to know, but that make the system look good. The numbers may be analyzable, but more than likely more information is needed to make any sense of them. Item Nineteen will usually state that the company does not make earnings claims, or that it does not make earnings claims other than the information provided in Item Nineteen. That is almost always a falsehood. You will be provided, directly or indirectly with information calculated to make you believe that you are seeing profitability and that you should be able to achieve the stated level of profit, even though the disclosure document warns that they do not represent profitability prospects and certainly do not represent or guarantee that you will be profitable. In some instances the information may come in the form of helping you make a business plan to support a loan application so that you can afford to buy the franchise. The point is that earnings information is being given, despite the denial that it is being given. What that means is that a company that gives you earnings claims information while denying that they are giving you earnings claims information believes that you are a bloody fool who can be lied to without concern. If you buy the franchise knowing that, you may, if a court is intelligent, not be permitted to claim in a later lawsuit that you were defrauded. If the lie is right in front of your eyes and you are too stupid to see it, the law will not protect you anymore. It used to. But judges and juries are getting wiser. If you should have seen that they were lying and you didn't see that they were lying, you are out of luck. There may be other avenues of redress based upon this scenario, but when you flaunt your stupidity, people are less sympathetic. This is compounded elsewhere in the contract. In an acknowledgement clause you will agree that no one made any claims to you about sales or profits and that what is in the disclosure document constitutes all the information you relied upon when you made your investment decision. In an Integration or Entireties clause, you will agree that the written contract includes all the terms of the deal and that there are no other statements, representations or promises that have been made or that you relied upon. Finally, in many companies, you will be asked to sign a statement at closing of the deal that you were not given any representations about sales or profits. If, having been given such information, you agree that you were not given such information, you are simply a party to your own undoing, to put it nicely.
There is a section of every franchise or business opportunity contract that governs dispute resolution. It will say that any dispute, if litigated, must be litigated in the franchisor's hometown and governed by the law of the franchisor's home state. That is standard language and is enforceable.
There may be a requirement that disputes be arbitrated rather than litigated. That is also enforceable and eliminates a runaway jury awarding you outlandish sums on some sympathy vote. It may also explicitly disallow any claim for punitive damages, lost profits and other categories of harm that you could suffer if the deal is not right or if the ongoing relationship is abused. This will also be enforced in all likelihood, although in some outrageous instances it may not be given full weight. In abusive situations there is a mediation precondition to being able to arbitrate or litigate claims. That is mainly for purposes of delay and to make dispute resolution too expensive for you. A good arbitration panel will decide the dispute when it is presented, but will also encourage amicable settlement while the case is being presented, just as a mediator would.
Do not expect your fellow franchisees to come to your aid, even if your problems are their problems too. They will let you hang out to dry and will practically never stand with you. They will betray any confidence in hope of getting better treatment for themselves. You are on your own in almost every situation in any franchise relationship.
Your contract will permit the franchisor to engage in any business in your territory -- even the same identical business -- under other names. And so, if you would be doing business as the Jones Sausage Store, your franchisor can -- once they learn that you are doing well -- put another store across the street from you called the Smith Sausage Store. They know the best locations from their franchisees' sales reports. Your confidential information reported to police quality control in paying royalties is misused to identify where to put more stores and compete with the better franchisees. Many companies actually believe that if a franchisee attains more that a certain sales level, he is stealing from the company. The idea is that he is ripping off a richer market than he paid for and should not be allowed to take unfair advantage. Putting another store near him is, according to this 'logic' simply plain justice. Many companies build market recognition through selling their products to independent stores. If the products become popular, they know where the stores are located that do the best business for them, and they then put in stores of their own right across the street. Face it. There is no family here. There is a business contract that is very cynical and that leaves franchisees no wiggle room if competently drafted, but leaves the franchisor all the wiggle room in the world to do whatever it may like.
There are, to be sure, many nuances not discussed in this article that suggest a negative investment decision in purchasing a franchise or other business opportunity. If the franchise is a proven concept, and if you are already well experienced and are making an investment in the affiliation with an open mind and an understanding of the risks, then go for it. If you are already operating that kind of business under another identity, as an independent, and you are thinking of converting and becoming a franchisee of any company in that business, the way to evaluate the proposal is provided for you in another Specialized Tutorial on this web site entitled 'Conversion Franchises'. If you are not experienced in this particular business as an owner/ operator of this kind of business, you have other options that you would be very wise to consider. You cannot come out of a large company, having been some kind of administrative employee, whether or not at an executive level, or for that matter a factory worker or other kind of employee, and expect to buy a business, be trained in its operation for a few weeks, and not fail. I repeat that about eighty percent of new franchisors fail because they are not equipped to franchise. Their franchisees go down with them in most instances. Over the hill, older franchises have no growth prospects for the reason that by definition their growth potential has been exhausted. Every concept/product/system has a life cycle. When it is over its growth period it is done. It may still be in growth mode elsewhere in the world, in some other market, but if it is done in its home market, you don't want to buy a franchise to be located in its home market. The likelihood is that the company is simply flooding the country with as many new locations as possible to milk the last dregs from the market. If you buy that kind of deal, you become one of those dregs.
Every potential franchise or business opportunity investor has the ability to get on the Internet and find due diligence help from the many experienced franchise lawyers who maintain web sites and invite inquiries. It does not matter that any one of them may be located in another state or country. The issue is the scope of their experience to advise you about what you are thinking of doing. Ask them specifically about that experience, and keep on asking until you find the person who has the credentials to be of specific assistance to you. It does not matter if someone has been the high panjandrum of this or that credentialed honorific. Do they know what it is that you wish to do and have they sufficient experience in that or in things similar to that to be of assistance to you? You are not looking for someone to 'read the contract'. Hopefully you can at least read. Analyzing a small business ownership investment is far broader in its requirements than 'reading a contract'. It won't be cheap, but it will help reduce -- not eliminate -- many critical risks. In the final analysis, your success or failure will be a matter of your ability as a business operator. But even a good and competent owner needs to have appropriately fertile soil upon which to grow a profitable business with some expectation that when it is really successful, it may not easily be taken away.
Copyright 1997 - 2008 || Richard A. Solomon
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