International Law

Is Killer Due Diligence Affordable for Franchisees?

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Fascinating story developing over at Blue Mau Mau about the price and effectiveness at what is called "killer due diligence" for prospective franchisees.  One claim is that effective due diligence costs too much for the ordinary bloke - only the rich can afford the luxury.

"Big name scam franchise systems tend to take most of the spotlight in discussions about a franchisee's responsibility to perform effective due diligence before he signs a contract. 

If they were bright enough to achieve a sizable net worth then it is expected they should be bright enough to investigate investment risk. 

Fair comment!  I cannot argue against that one.

However; much of franchising consists of relatively small brands with limited growth potential and here we often see the deliberate targeting of the incompetent, inexperienced and/or naive. 

We don't see the large turnovers per brand but we see a large turnover of franchisees across a mass of immature systems and this is usually ignored.  

Entry to these brands typically involves minimal investment."

Let me summarize the themes.

1.  No matter what the cost of the franchise, if you don't get professional help you could lose your savings.

2.  But it is hard to evaluate what is good professional help.  Hint - don't ask for an attorney to simply read the contract to you.

3.  Don't go to an attorney or professional late in the game - nothing that you have paid for will change your mind.

4.  Killer due diligence has to focus on what happens during the contract - but relationships can change without warning.

5.  The opportunity to renew a franchise is little more than the option to purchase a new franchise at a somewhat reduced price, if you have never violated the agreement during the entire length of the contract.

Hmm, do you still want to investigate these opportunities on your own?

Full post as published by Misleading Advertising Law on February 12, 2009 (boomark / email).