International Law

Will Franchisees Pay for Competent Pre Investment Advice?

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One of the ongoing debates, a head scratching problem, is why prospective franchisees don't pay for and act upon the advice given by skilled or specialized franchise attorneys.

Richard Solomon, writing at Blue Mau Mau, argues:

"Franchise investors still don't avail themselves of competent pre investment due diligece resources.

Those resources are highly specialized franchise attorneys - very few - and they charge money for the services - more than some token to read the documents.

Without that specialized assistance, franchise investors just walk into the traps laid out in agreements that legally enforce the advantages of franchisors who see the prospect of making big money on the backs of these Fran Wad investors.

Wolves will eat defenseless sheep.

These Fran Wads later find out that they have been had, and there may still be a defense gambit available to them.

That would be a militant independent franchisee association managed and advised by another aggressive and activist, experienced franchise lawyer - who, by the way doesn't do that for chump change either.

These franchisee sheep always - almost always - elect not to pony up the financial resources to afford effective generalship.

Fragmented, they go down one at a time or in small groups - into the maw of insolvency and worse."

I don't see that is it necessary to hire a franchisee attorney to assist you with your due diligence, sometimes the work that we have done and published online is sufficient for you to undertake your own investigation.

As the recent thread at Blue Mau Mau on Filta Fry, people can be in love with a concept, and yet perform the required due diligence on the franchise, with only guidance from attorneys.

Here is the summary of the Filta Fry due diligence:

"As one commentor correctly suggested, please, please, please, spend a few days on the job with an actual franchisee if you can BEFORE signing on the dotted line.

But this thread is good stuff based on a lot of knowledgable commentors and obvious ones that did their homework or have experience operating the business.

This business can work if you are prepared to work hard, face a lot of rejection, and keep at it.

Also, the size of the area is a huge factor in determining success and failure.

Go to superpages.com, type in your city, and type in restaurants.

If you get less than 1,500 responses, I'd say you have a small territory with limited opportunity. If you have an area (territory) that has 2,000 or more restaurants, you can probably do well with hard work.

The 1st territory I was looking at had 600 restaurants, the second territory had over 2,000, but it meant me making a geographical move and I wasn't ready to do that.

I talked to a couple of franchisees within that "600" benchmark and they were struggling.

Red Flag!

And they weren't "man in a van" mentality either. These guys wanted to succeed.

I simply used "restaurants" as a guage when using the superpages to deterimine if my territory might be good or not, as compared to other available territories.

Corporate will give you a list of everthing you should put in as criteria A(such as schools, hospitals, delys, etc.). But restaurants would've been my bread & butter customers so that is what I used to make my decision.

The business is harder than how corp. portrays it, and having a small territory just makes the opportunity even more risky.

Factor in the possibility that many restaurants may not really be impressed by what filta can do for them."

This is an excellent commentary on the pros and cons of this system.  Read the entire thread on due diligence and Filta Fry.

Now in light of this, is Les Stewart correct to admonish Richard Solomon, and suggest that Richard is simply fear mongering, in an effort to drum up work for Richard's own franchisee services?

"This what's-a-poor-boy-to-do attitude? is a little overplayed, I fear. It's also inconsistent with the industry's or your personal history, isn't it?

You were there when the disclosure laws were created: a deal to strengthen the franchise bar while providing the pretense of protection, weren't you?

I'm not blaming anyone: I know I'd have done the same thing if I was in your spot. It's not selling out; it's being practical.

The charitiable interpretation of Les's remarks is that we can get propsects to buy our due diligence services but we cannot make them accept our advice, and disaster strikes anyways.

In general, I think Les is correct.  Every franchise attorney knows the difficulty of dealing with a franchisee so smitten with a franchise system that rational discussion of pluses and minuses is useless, or worse ratchets up the prospects attachment to the deal.

But both Richard, and I, and I am sure others have developed over the specialized techniques based on our understanding of both the history, psychology, and specific fact patterns of franchisors who stretch the truth.

We also think that we are more effective in spotting and stopping fraud than even ordinary franchisee attorneys. 

There is no silver bullet which allows you to see through the puffery and lies - but we do have a lot of bullets.

Richard and my problem is that if we bill by the hour, our services are too expensive for an single person.  We are both working on a solution to the problem, which we hope to roll out in the summer of 2009.

Full post as published by Misleading Advertising Law on February 26, 2009 (boomark / email).