Richard Solomon on Blue MauMau: Competent Risk Assessment Through Killer Pre Investment Due Diligence.
Absolutely right on the money.
Richard’s statement of problem:
The hoards of potential investors with access to over $ 500,000, coming out of downsizing companies and merger resulting reductions of work forces, have brought sharp practitioners to the small business opportunities field. These phony franchise opportunities masquerade as real business prospects, using the same descriptors as the legitimate franchise opportunities.
Does he see Any Protection?:
That Rule [FTC Rule, or similar disclosure type scams] does not, however, provide any reliable investment protection. The reason for this is that when you have parted with your total initial investment of upwards of $ 350,000 or more, and are on the hook for a ten year lease and to repay a large SBA business loan, and have personally guaranteed the performance of the franchise agreement (as they all now require), and have agreed to pay upwards of $ 100,000 to the franchisor as liquidated damages if you fail (which they all now also require), you have no resources left to pay for expensive litigation when you realize you were defrauded and are just plain broke. You are looking at bankruptcy as your only avenue of escape.
Richard versus Les: I agree with 100% the diagnosis. We part company regarding post-signing franchisor opportunism.
The problem, for me, is after you sign, the franchisor reserves the unilateral rights to:
- turn into the most predatory S.O.B. operator imaginable [sign with Dr. Jeckyll who turns out to be Mr. Hyde].
- Force you to sell to him your very high volume and profitable store at 15% of its value.
- Or sells the whole system to a sleaze ball.
- Or goes bankrupt/insolvent [new squeeze, divorce, switch teams, boredom…who know/cares?: result is the same for investor].
- Or decides your store looks good on Son #1 or the moron brother-in-law.
- Or [screw u du jour: a hundred other ways of excercising their discretion in an opportunistic way].
Yes, Killer Due Diligence works if the franchisee:franchisor relationship were to stay the same over the first term of the contract. But it does not.
- Pretending that the “good guys” will stay “good guys”, is too much of a leap of faith for me. I believe individuals are much more complicated that good or bad, black or white, evil/honest, etc.
I think the temptation to coerce more cash from a practically defenseless franchisee is too great for the vast majority of businesspeople.
I don’t think that franchisors are any more greedy than anyone else. I just think their situation [monopoly on supplies, renovations & equipment, $ from top not profits, etc.] gives them more opportunity to act selfishly than most business situations.
- BTW: I have zero doubt that if the roles were reversed, the vast majority of franchisees would be just as nasty. [Sorry…franchisees have just the same human strengths and weaknesses as anyone else. Easy to be morally superior when you have never been seriously tempted.]
For now, For the subordinate party, I say: Franchising is Unsafe at any Brand.