Franchise and Business Opportunity Due Diligence
Richard A. Solomon is a Texas lawyer with over forty years of legal experience, including the areas of franchising and business opportunities. He has seven fraud tutorials on his website. Richard pulls no punches and I am going to quote some of what he said about business opportunities due diligence and fraud.
"The problem with which I am usually faced when a potential franchise investor comes to me for counseling is that the investor is already a totally pre-sold glob of quivering protoplasm, just itching to write that big check. Salesmanship is very aggressive here. Misrepresentations abound. A suggestion that what the client is enthused about may not be anything like it has been described is a very deflating event, and sometimes the client is so sold that the investment is made anyway, and the results occur that were predicted. By then it is either too late to get the money back for any number of reasons; the client no longer has money to hire a lawyer to seek redress anyway; and a terrible loss of money and emotional energy for the investor and for the investor's family simply destroys everything. The people selling these opportunities are very tough. The investor needs to have access to tough analytical resources to deal with it." (my emphasis)
Over and over again, I have emphasized that you cannot perform due diligence during the 10 or 14 day cooling off period you are permitted by law. If you start your due diligence after a trade show, then just go to a casino and bet your house on red - at least you will know where your money went.
What else does Richard have to say about due diligence?
First, get an expert franchise or business opportunity lawyer to review the distributorship materials, including all promotional materials.
"Inasmuch as I am convinced that there is a paucity of professional resources to which potential business opportunity investors have recourse in deciding upon such investments, this discussion is offered, not as the answer to due diligence issues, but as an eye opening warning. It is my hope that readers of this article will come to an awareness that what they read in a document is often the opposite or quite at variance with the expected meaning of the statements in normal experience, and that taking the documents to 'a lawyer' for review may be quite useless if the lawyer is not highly experienced in business opportunity vetting. The lawyer who does tax compliance, divorces, estate planning and personal injury work is certainly a lawyer in those areas, but probably not even remotely adequate for the vetting process of which we speak."
Second, beware of the offer of location assistance, the difference between what you were told orally and what the operator is contractually obligated to do.
"One of the selling points of any franchise or other business opportunity is site/location selection for your business. Often a potential investor will be told of a secret point system evaluating method that the selling company has developed, or other similar fairy tales. They may have a point system, but it is neither novel or unique or unusual. For most of franchising history, if you were thinking of investing in a fast food franchise, you needed only know that you had to be within half mile of a McDonalds. That's probably accurate even today. Whenever site location selection assistance is touted by a company asking you to invest in one of its deals, compare the bragging language of the sales/marketing statements against the language of the contract."
Third, getting back to the first point, get good and appropriate legal help.
"Every potential franchise or business opportunity investor has the ability to get on the Internet and find due diligence help from the many experienced franchise lawyers who maintain web sites and invite inquiries. It does not matter that any one of them may be located in another state or country. The issue is the scope of their experience to advise you about what you are thinking of doing. Ask them specifically about that experience, and keep on asking until you find the person who has the credentials to be of specific assistance to you. It does not matter if someone has been the high panjandrum of this or that credentialed honorific. Do they know what it is that you wish to do and have they sufficient experience in that or in things similar to that to be of assistance to you? You are not looking for someone to 'read the contract'. Hopefully you can at least read. Analyzing a small business ownership investment is far broader in its requirements than 'reading a contract'. It won't be cheap, but it will help reduce -- not eliminate -- many critical risks. In the final analysis, your success or failure will be a matter of your ability as a business operator."
This last point is very important, franchising and distributorship are not an industry, I may detailed experience on the business of ATM distributorships but have little knowledge about bakery franchises. Just ask. After all, it is your money.
