Five Alerts To Franchise Fraud
For the new investor, not having to start a new business from scratch offers significant advantage, both in time taken to earn a return and in initial investment cost. Marketing costs are expected to be reduced. Of course its in the interest of the franchisor that quality franchisees succeed and the franchisor support offered is a quantifiable attraction. How does that investor reduce the risk of fraud in the due diligence process?
The relationship of the investor franchisee with the franchisor will and must be ongoing. As with any contractual arrangements it should go without saying that both parties to the contract must honor it. Disputes arise in the best of relationships and some may give rise to litigation initiated by either party on the basis of fraud Here are five key areas where possibilities for fraud may exist to destroy the plans of the franchisee from the commencement of contract. Some will be familiar to the first time investor as a risk for an entrepreneur; but all warrant that second take.
Make sure to look only at quality franchise offerings. The new to franchising investor should forget the passion for a particular business and try to be more objective. Just as too popular franchises will be more expensive, may be subject to passing fads, or have fierce competition alongside the sales territory defined in the proposed contract, there are the few franchisors that are known to someone as sharp operators. Every franchise offering could have a number of unhappy, unsuccessful franchisees who may claim to be subject to fraud A strong internet search should be done and, if done on behalf, not stop at page one Google. . Speak to Franchisees. Is there a pattern to the complaints? If the complaints make the investor uncomfortable this is an alert to move on to another option. The relationship with the franchisor must be built on trust and respect.
There should be a check whether the franchise principals have any history of litigation. Disputes over failure to perform can arise from either partys perspective. Franchising is a very litigious business and most franchise companies will have some history of legal actions but its important to separate fact from fiction (as the internet is filled with both). Was the franchisor looking to enforce their agreement to protect the brand and the system, or were they taking advantage of the franchisees? It is important to the franchisee to understand the competition. The investor`s lawyer may alert the investor to signs of undue competition. But what if the competition represented in various initial discussions about marketing does not in fact exist? Are there other flags of fraudulent practise of which the investor should be aware?
Franchisees must go in with eyes wide open. Use of detached, competent and professional help to draft the franchisee`s own business plan and research on earnings forecasts is an essential step as a protection against fraud on the part of the franchisor especially internationally where FTC type protections are non-existent. Breakeven analysis and less optimistic scenarios must be included and the investor should not place o reliance solely on the information provided by the franchisor, no matter how well known that particular franchise may be. In lower cost and lesser known franchise offerings, earnings performance may relate to the strengths and skills of the buyer; then again an optimistic earnings scenario provided to the potential investor may also be a flag of fraud. The investor should prepare a detailed assessment of initial investment costs and compare that with the data which must be requested from the franchisor.
There is a greater risk inherent in considering a start up franchise. It is in the interest of the inexperienced would be franchisee to choose a business for due diligence with a track record over a minimum of 4 to 5 years, with a minimum number of currently operating franchise units. Should the support and expert advice of a franchise consultant not be sought out at an early stage, there will be a need for basic legwork such as visiting the head office of the franchisor and viewing the training material for oneself.
To quote an old adage, the devil is in the detail, even before a study of the draft contract is the next step. Researching important detail early in the due diligence process will make the intended franchisee less concerned about the possibility of fraud. They should be comfortable with the quality of training and support provided, where it will be provided and for how long. A promise to send on the material later should be regarded as just that, a promise, and should be made good promptly. Delays in the provision of any paperwork agreed to be provided should alert the would be investor and their advisors and the franchisor challenged at an early stage in the process.
MatchPoint Franchise Consulting Network was founded in 2006 with a mission of helping companies expand their franchise networks and improve their system profitability. Its mission included improving the quality of new Franchisees coming into a system. From its inception it was clear that complimentary advice offered to franchise buyers on the web site and by MatchPoint consultants is vital to the would be franchisee to enable a better, prudent, buying decision. The advice offered by our consultants does not make us lawyers, rather it is there to help bring all advice offered to the potential franchisee in the due diligence process to a high level of quality.
MatchPoint consultants trained by Nigel Mayne know the red flags of fraud in the industry. It takes the very few franchisors that practice franchise fraud to taint the dream of the franchisee. That`s where seeking the independent advice of an expert franchising consultant is prudent and invaluable.