Franchise and Business Opportunity Fraud
Franchise Remedies: Franchise and Business Opportunity Fraud Richard A. Solomon writes, on his legal website, "Franchising and business opportunities have had their very bright success stories. They were always rare. They are even more rare now. There is a saturation of concepts such that most offerings are just knock offs of concepts that may be found all over the place. Worse, many franchise and business opportunity offerings today, especially the new ones, are nothing more than what would normally be considered a job, but described to make it seem like a business. Today around eighty percent of new franchisors fail. Those who bought those franchises usually lose their investment."
1. Franchising bright success stories have been rare, and even more rare now. Why, then do so many people fall for what Bob Purvin called "Franchising Fraud"? The idea that buying a franchise is relatively risk free? Part of the problem is what psychologists call the base rate problem - the vividness of the successful departures from the base rate of success is more striking than failures. A franchise system that failed, fails to register for very long in the collective memory. (See this thread at Blue Mau Mau on failed franchise systems.) For the same reason we hold dear our childish infatuations with jinxes, it is much easier to recall when the jinx worked than when it didn't.
2. Many franchise and business offerings today, especially the new ones, are nothing more than jobs, described to make it sound like a business. Again this is a very important observation. Why would a person pay for a job? Again, there is a psychological component to the decision making. The individuals looking at franchise opportunities looking for a change. They want and need to make more money than the current situation allows. Many times they have a severance of $X in hand. The rational decision should be between Option A -invest $X and get a new job for $Y and Option B- Buy a franchise. Unfortunately, Option A loses its attractiveness, not because it is a worse decision than Option B on a risk adjusted basis, but $Y is by comparison smaller than the earnings of their old job. To take Option A feels like failing, even if it is a superior decision to Option B. (There is a simple way to calculate the value of Option B from the franchise disclosure documents.)
3. Today around eighty percent of new franchisors fail. Those who bought those franchises usually lose their investment. Can you afford to lose your entire investment? Do you know how to calculate the potential risk of losing your entire investment? Do you know how to calculate your average gross earnings? If you don't have a clue about how to do this, then you are the person at the poker table wondering who the sucker is. It is you.
Comments
Great post!
Posted by: FranchiseBrief.com | May 25, 2007 12:09 PM
Thanks for stopping by.
Posted by: Michael Webster | May 25, 2007 2:23 PM