The Franchise Fraud by Robert Purvin

Bob Purvin’s book is a must read.

Don’t listen to Richard Solomon’s rants against Purvin and the American Association of Franchisees and Dealers. Richard needs a distemper shot.

In a Blue MauMau posting, Bob tries to explain what he meant by fraud:

Purvin explained it was a much bigger problem which he addressed in a book he wrote, The Franchise Fraud, which was republished recently. He told them that it wasn’t so much about the people that were out selling fraudulent deals, but that the franchising industry had painted a rosy picture about franchising. He said they tell you that when you buy a franchise you are reducing your odds for failure and dramatically increasing your odds of success, because everybody knows when you buy a franchise you buy a proven commodity. He said, “That’s false. Most franchises are much weaker than they appear to be. The blue chip list of franchise opportunities is a very short list.“

He goes on to state that any legal protection is an illusion:

He also said that people believe that they are protected by a fabric of laws that would prevent them from being defrauded. “That also is false.” The point of his book was to wake up the buying masses that when they buy a franchise they have to be very careful and treat that purchase every bit as cautiously as the guy in the corner who says, do you want to buy my Rolex watch. Unfortunately, hundreds of thousands have been bitten by the franchise bug and can’t believe that they weren’t buying into a sure thing, Purvin said.

Sound advice from a real pro.

1. Most franchise systems are unproven.
2. The blue chip franchises are very few.
3. There is no legal protection.
4. Treat buying a franchise like you would buying a “genuine” Rolex on the street.
5. Hundreds of thousands have been burned.

Read the book.

Solomon on Modern Franchising

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:

1. turn into the most predatory S.O.B. operator imaginable [sign with Dr. Jeckyll who turns out to be Mr. Hyde].
2. Force you to sell to him your very high volume and profitable store at 15% of its value.
3. Or sells the whole system to a sleaze ball.
4. Or goes bankrupt/insolvent [new squeeze, divorce, switch teams, boredom…who know/cares?: result is the same for investor].
5. Or decides your store looks good on Son #1 or the moron brother-in-law.
6. 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.

Get Smart. Get Solomon on franchising

Richard Solomon is an experienced U.S. franchise lawyer. His Franchise Remedies website is a very valuable educational resource. Everyone should bookmark it.

Especially spouses.

If you are thinking of investing (as a family) in a franchise, you will want to use Solomon’s FranWhack service. Priceless.

Solomon has several Franchise Fraud Symposium Articles that are just excellent.

Want to know how the lenders try to cover their breaches of lending duty or how franchise agreements create A License to Lie, Cheat & Steal? or how immigrants are targeted in franchising?

Words of wisdom from someone who was there when franchising was just a kid.

Catch Solomon as a regular Blue MauMau contributor (ie. The FranWad Manifesto column and discussion).

Get Smart. Get Solomon.

Selling a McLaw: Solomon on Oz

In an op-ed post on Blue MauMau, U.S. attorney Richard Solomon presents his extremely important views on the future of Oz franchise law. He speaks with true authority.

The article is called Australian Franchise Law: Assurances of Protection or Just More Christians Thrown to the Lions? and should be nailed to the forehead of everyone who thinks government or the ACCC will do anything other than serve their masters.

Richard starts his summary in his usual, no BS manner:

…Will Australia become a dumping ground for over the hill concepts that can no longer find growth in America? Yes it will in very many cases. Will American franchise companies pre-empt the market, stifling Australian concept creation? Probably. Will the flavors of Australian culture now found in its native small businesses be lost or diluted? Of course. Now aint that a shame?

What about the useless U.S. “protection systems”?

Will the Australian regulatory scheme track the franchisor advantaged regulatory scheme in America? You’re damn right it will. If that is what’s in store for our friends down under, why the hell do it at all?

Isn’t it bad enough that America blindsides its citizens with a pretense of investment protection in the franchise business? Why are the Aussies considering a similar system for themselves? Are they so self loathing that they would consciously set their own people up for investment disaster?

The franchisor lobby will win any battle in the political arena.

When the IFA [International Franchise Association] is finished with the Australian government, it will have either no franchise regulation or it will have regulation so weak as to be a ridiculous charade.

The only power the franchisor lobby fears is digital information sharing because it cannot control its distribution. They use the law (word-, type-based, linear); the fools use the new media: the internet (electric, acoustic, all-at-once)

Power never takes a back step – only in the face of more power. Malcolm X

Richard Solomon, Esq.

This is perhaps the best posting I have ever read on Blue Mau Mau. You should copy this out because this Texas attorney knows his stuff.

I want everyone to consider that there are legions of mean,
Submitted by RichardSolomon on Mon, 2008/04/28 – 10:04.

nasty, dishonest people out there in franchise land just waiting to tear your heart out.

To me it is less meaningful to be sympathetic to their victims than it is to be tough about putting out a tough message so that people don’t get caught up in touchy feely shit. People need to approach every investment opportunity as a war event, not as some kind person there to help you get rich.

You have no idea how mean and nasty spirited people can be when it comes to a chance to take everything you may have accumulated during your life and leave you bleeding in some gutter.

That’s reality – not all this sympathetic crap. Know your enemy. Your enemy gets into your knickers by pretending he is there to help you.

There are people out there so mean spirited that they actually rejoice in your suffering. They compensate for their own inadequacies as human beings by cheating you. You can’t tell the difference between good and evil in franchise sales techniques. You can’t tell the liars and cheats from the real investment worthy opportunities.

Forget about sympathy. Sympathy will not protect one person from being robbed. A real war attitude can provide protections that your notions of fairness and equity can’t even begin to address.

You address every investment opportunity as an attack upon your assets. No one gets over that wall without being subjected to intense fire. They have to prove – not just say – that they are investment worthy. You don’t know what that proof consists of. If you make investment decisions in franchise opportunities without the assistance of a really tough due diligence resource, you can expect to join the long line of victims who you read about in here every day.–

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

I have the utmost respect for Solomon’s approach.