PLUTUS ADVISERS GUIDE TO NJ BUSINESS FRANCHISES:
Someone once said to me that everyone has a little larceny in them. And many franchisors have more than a little. If you have some larceny in your heart and would like to stay out of prison, selling franchises is a pretty good way of doing it. I’m not saying that there are not many worthwhile franchises and honest franchisors; I’m just saying that it is an area rife with fraud and theft.
Many franchise buyers are former corporate employees who are new to being in business for themselves. They may have been in upper middle management, handed their “package,” and for the first time in their lives have some capital. Their self image is generally that of being more savvy and sophisticated in the ways of the business world than they really are. Dirty franchisors know this and many take advantage of it. These dishonest franchisors sell the prospective franchisee on the idea that they are buying an established business model and that this is far less risky than starting from scratch. This is true, provided that the franchisor is legitimate.
Dishonest franchisors make money by selling equipment and products as opposed to receiving franchise fees from successful franchisees. The upfront franchise fee that the franchisee pays should go to supporting the franchisee. In poorly run or dishonest franchise operations, these funds are used to pay overhead and large salaries to the promoters of the franchise. The franchise agreement that the prospective franchisee signs with the franchisor is, of course, drafted by the franchisor’s attorney; this document makes it almost impossible for the franchisee to have any legal recourse against the franchisor barring outright theft, and most of them are too smart for that.
If you are thinking of purchasing a franchise, remember that anything the salesman tells you does not matter; what counts is what is in the written agreement. This is called the Franchise Disclosure Document. Second, retain a franchise attorney. If this individual is independent, s/he should have had at least three to five years experience working in the franchise department of a large law firm. Last, talk to and visit the operations of franchisees. Did the franchisor do what he promised to do, are they profitable, how long have they been in business, how long did it take to become profitable, and would they recommend this franchise to a close friend or relative? Visit them personally at their place of business.
In the March/April 2009 edition of Mother Jones magazine, there is an excellent article about franchise fraud. You may want to read it. And remember, buyer beware! Look carefully AND GET A GOOD FRANCHISE LAWYER.
This article is not intended to be a rendering of legal, accounting, tax or other professional advice. Assistance from a competent professional in these specific fields should be sought.