Time trumps all franchise Fraud

michaelwebster

Con men understand very well when their targets are the most vulnerable.

It’s a game for them: Their comparative strength (trump) is knowing how to manipulate your human weaknesses for their profit.

With hundreds of billions of dollars being thrown into the world’s financial institutions with zero accountability, the risk of funding a franchise fraud  (in my mind) is be greater now than before the www recession.

Michael Webster at Misleading Advertising Law makes a very good point at his post, Selling Franchises to the recently Laid Off:

One of my concerns in this economic environment was with how the newly laid off would react, what they would do, and how they would make decisions.

With nearly 60,000 reported layoffs in the United States alone, it is of pressing concern that these individuals understand the how to avoid failing for the franchise fraud.

Michael provided some extremely useful advice in a recent Blue MauMau interview named, Fraud Expert Says Those Wanting to Be Own Boss Easily Scammed.

First, with high unemployment the blood is in the water for unscrupulous sellers:

With the economy seeing the highest unemployment figures in nearly four decades, Webster thinks once those unemployed have access to credit, there is the potential for record numbers to be ripped off. In order to avoid being swindled, his first piece of advice is to think of buying a business as one option among many investment opportunities.

Michael warns against getting out of the pan and jumping into the fire and relying solely on your own research, which can become distorted (confirmation bias):

WEBSTER: There are times in our lives when for whatever reason we want our aspirations to be achieved immediately. For many, the most compelling overriding value is the need to be in complete control of their economic lives. Simply put, they never want to be fired again.

Those people are sitting ducks.

The con criminals know this and wave phrases like “be your own boss” and “in business for yourself but not by yourself.” Prospects pick up on such words of puffery. Buyers blow it up into full-scale fantasies of business ownership. And then to compound the problem, they perform bad due diligence by sloppily selecting evidence that only confirms they are making a good decision.

You need a professional 3rd party to help you and you need to take your time.

A buyer should take their time – some six to eight months. Read the franchise disclosure document. Get the best professional help to explore the opportunity and its accompanying documentation. Ask questions. Do not jump! Get a part-time job doing anything if you need to so that you don’t feel like you have to buy this franchise. If the opportunity is any good, you’ll figure it out.

Time will trump all frauds.

Excellent advice from someone with great insight.  Michael had also suggested in previous posts to actually work for a franchisee within the proposed system for several to six months and that you should budget up to $5,000 for professional advice (on not only the contract but also the business deal).

Michael’s caution against being sucked into a phantom dream is very important. Follow his advice and this will greatly reduce your chance of experiencing a financial nightmare.

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6 Responses to Time trumps all franchise Fraud

  1. Carol Cross says:

    If only ALL prospective franchisees were aware of sites like Franchise Fool and Michael Webster’s Misleading Advertising Law, and Franchise Pick and Blue Mau Mau. If only YOU could reach all prospects out there today.

    There are millions of POSITIVE comments about franchising and franchisors on the Internet. The FTC in the US who regulates advertising on the Internet does not consider the PR on the Franchisors’ websites or U-tube advertisements to be “earnings claims.” Apparently, they are just “puffery” events that can be disclaimed in the actual package of the Franchise Disclosure Document and the binding, non-negotiable, standard franchise agreement.

    We can be sure that prospective franchisees are not referred to these sites by those who sell franchises to those in need of jobs and income, nor by the government in the disclosure process. While the government warns that franchising is “complicated” they fail to warn that is is generally and inherently very risky.

    The SBA and the FTC actually partner with the predator franchisors when the SBA Franchise Registry containes franchises that have high failure rates of first owners of franchises and low and no profitability for those who are trying to survive to break even to avoid losing their entire investment.

    What is the purpose of the FTC Rule?

  2. Les Stewart says:

    Carol,

    The purpose of the FTC Rule is to provide the appearance of safety. I say that not with any degree of harshness, whatsoever. The Rule does that, just like almost all franchise laws that I know of. One possible exception is Iowa.

    The slight cost and inconvenience of the Rule and other disclosure or relationship franchise laws is more than made up for by:
    * protection the franchise bar affords by thwarting valid litigation,
    * the implied state “sanction” of having these fly-by-night systems have documents with the seal of a federal agency and
    * the credibility illusion that franchising gets when it is nothing more than some loosely communicating, small groups of professional near-thieves with a long-since-past sense of ethical dealings.

    Franchising is like the sound stage of a spaghetti Western movie: a fiction that is invoked to facilitate cash flow re-distribution.

    Les

  3. Carol Cross says:

    Les! Who drives the get-away car?

    It is like a movie and the sham of litigation in franchising is a spaghetti Western movie movie that keeps on selling tickets to those who want to believe that the “good guys” always win.

    There is much noise and discussion by the BAR on both sides of the franchise relationship for 30 years about the unconscionability and unfairness of franchise terms and NO discussion about the “constructive fraud” of a binding and adhesive franchise contract that is wrapped in an ineffective disclosure document that was designed to provide fraud insurance for the franchisors.

  4. michaelwebster says:

    Les, what is worrisome is that in the next six to eight months, the banks are going to start lending again to many unemployed people. Could be a massacre.

  5. Les Stewart says:

    Michael,

    If public oversight is ineffective, I wonder what private tools could be developed to police this gated community? I would think that the insurers would have an interest in avoiding massive legal claims against predatory lenders if an effective legal “counterspin” strategy could be devised.

    Public institutions cannot profit directly from exposing predation but a private corporation could. The risky behavior is NOT primarily getting 90-year olds to sign their latest mortgage re-write, notwithstanding the moral element.

    Predatory executives and their shareholders should be sued for their positive and negative actions. These corporations should not be able to place their general liabiltiy insurance because of their reckless behavior in much the same way that AIDS patients are held accountable for their non-disclosure to their partners.

    The weakest link, I believe, has always been the financing of franchises. Strategic for-profit litigation is a coarse instrument but probably holds the greatest hope for an industry who just can’t play by the rules of the game.

  6. michaelwebster says:

    Les, with respect to financing, prospective franchisees should a) sign the franchise agreement only with their corporation, b) negotiate for a time limit to the guarantee to limit the financial bleeding, and c) be prepared to walk if they cannot get a) and b).

    I don’t see much hope for using the litigation system to sue predatory banking executives – instead, we need to see the system for what it is, and use the standard corporate remedies of minimizing risk.

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