November 18, 2011
Franchise due diligence, thorough franchise research and consultation with qualified professionals before buying a franchise is more critical than ever, according to attorney Jon Fortman.
Fortman, of St. Louis-based Fortman Law, is an attorney who represents franchisees who believe they’ve been defrauded or treated unfairly by franchisors.
While the legal agreements governing the franchise relationship have always been undisputedly one-sided in favor of the franchisor, Fortman reports that the playing field is less level than ever before… and getting worse.
In a recent blog post, Fortman writes:
“…franchisers are tightening the reins on the franchisees while making sure the franchise agreement is written in such a way that they really have no obligation beyond letting the franchisee use the marks and providing some minimal training.
“For instance, five years ago a franchise agreement may have said the franchisor SHALL provide training on a quarterly basis. Now, the same agreement will say that the franchisor MAY, in its absolute discretion, provide training on a quarterly basis.
I am amazed at the number of franchisees who signed their agreements and never saw an attorney… The contract may be a ten-year term. That’s a long time if you rush into something without proper investigation. – Attorney Jon Fortman
Writes Fortman: “There are more terminations and the ability of many franchisees to seek a remedy from the franchisor has been limited by arbitration provisions and the inability to pay for an attorney to fight the battle. I have only been doing these types of cases for about five years. I can see that during that time the relationship between franchisor and franchisee seems to be more strained and there is a lot of caution and suspicion when they interact. It has led to communication issues which is never good.
“Some [franchisors] blame the franchisees, and the attorneys representing them, because they believe franchisees don’t take responsibility for their success and are quick to blame the franchisor. There are some franchisees who do not get proper advice and do not fully understand the relationship between the parties.
“I am amazed at the number of franchisees who signed their agreements and never saw an attorney. They will pay significant amounts of money to buy a franchise that is based on a legal contract. The contract may be a ten-year term. That’s a long time if you rush into something without proper investigation.”
It is critical for prospective franchise owners to do their own thorough due diligence and research prior to committing to any franchise or business opportunity.
Just reading franchise publications supported by franchisor advertising or the franchisor’s list of testimonials and awards is not due diligence. Prospective franchisees must dig in with a skeptical and thorough approach in order to find out the truth about a given franchise opportunity or company. And they must spend a few bucks (that’s right, spend a few bucks) on getting advice from experienced franchise professionals paid to give honest, frank advice.
“My advice to those of you considering the purchase of a franchise still remains the same. You must do your own investigation. It is even more important these days. Call every franchise owner listed in the disclosure document. That includes the open and closed locations.
The franchisor has a vested interest in seeing you buy into the system. Regardless of what the salesman says, their interest and your interest in the transaction are not the same. – Attorney Jon Fortman
“If it is a newer system, you must consider that there may not have been enough time for any flaws in the system to appear.
“The Internet has several sites that discuss franchising. I review the site www.unhappyfranchisee.com every day. That type of site lets you see what can happen if you don’t protect yourself. It also gives you examples of the types of things to look out for when making your decision.
“You also must speak to an accountant and an attorney, preferably ones who are familiar with franchising. They can spot areas of concern and get clarification for you from the franchisor….
“The franchisor has a vested interest in seeing you buy into the system. Regardless of what the salesman says, their interest and your interest in the transaction are not the same. A healthy dose of skepticism in any of these transactions can help you stay alert and spot problems before you sink your money into the franchise.”
“An Ounce of Prevention…”
Benjamin Franklin said “An ounce of prevention is worth a pound of cure.”
In franchising, a few thousand dollars and thorough due diligence can be worth hundreds of thousands of dollars and years of either prosperity – or misery.
The pages of UnhappyFranchisee.com are filled with the stories of those who wish they had done their homework more diligently before they took the leap.
Take our advice and investigate thoroughly before investing.
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