Author Richard Solomon is a conflicts and crisis management lawyer with 50 years of experience in business development, antitrust and franchise law, management counseling and dispute resolution including trials and crisis management.
In franchising we constantly hear about concepts. As it presents, a concept is an idea or notion for a format for operating a business that can be franchised. Potential franchise investors assimilate the use of the term concept as though it represented some kind of reality. More often than not, it does not represent investment worthiness and therefore cannot possibly represent any reality whatsoever. What then is a concept?
Heaven and hell are concepts. Salvation is a concept. Franchising itself is a concept that has become embodied by metrics. It has a measurable operational financial history. A concept is a notion about something that usually has no present tense embodiment. In franchising embodiment requires the characteristic of being replicable in profit/free cash flow models/stores.
There is only one way to determine whether something presented to you the investor as an investment worthy franchise concept is anything more than just some notional nonsense. You must actually see its metrics in a form that you can corroborate. Everything else is just fluff, or worse.
What is the present tense relevance of this to you the franchise investor?
The relevance is that the bozo deal franchisor knows that you are looking for metrics. He therefore tries to contrive metric fiction and then present it to you as due diligence worthy information when he knows it is not. Since he knows it is garbage, he used key phrases that are generic to every crooked franchisor trying to sell high risk trash.
The key phrases fall into just a few easily recognizable categories. Consider these for example. He presents financial performance information in Item 19 of his FDD and then in the text of Item 19 tells you that these are not to be taken as actual performance information that you can expect to achieve. That means that what he has just told you is fictional and that you have no possible way to corroborate it. He has just made Item 19 a joke or trick played on you if you fall for it. He may tell you to go talk with franchisees about his franchise. What you donít know is that the franchisees are scared to death you may be an agent of the franchisor looking to see if any franchisee is bad mouthing the deal. Since they donít want the expense of a big lawsuit for disparagement or trade slander or a termination and default notice under their franchise agreements, they wonít risk saying anything to you that might be taken as a negative statement. That makes talking to franchisees totally useless to you.
Another phony metrics ploy is telling you that the franchisor does not give out financial performance information and then sending you somewhere else to get financial performance information on his franchise. That might include a loan broker or some franchise magazine. Since the information you find elsewhere came from him anyway and you need to realize that, if you act on it you are a complete fool.
Then you will see in his franchise agreement that you acknowledge that he did not provide you any financial performance information; that he did not authorize anyone else to provide such information to you; and, finally, that if you did get such information from any source, you did not rely on any of it to make your investment decision.
If you got any financial performance information from any source and took it seriously in deciding to buy the franchise, you are simply out of luck when you later complain about being cheated after signing a franchise contract with those clauses in it.
If you accept financial performance information that the franchisor disclaims, a court or jury will usually treat you as an idiot and you are simply out of luck. You shot yourself in the foot Ė to put it nicely.
There are ways to validate financial performance information. Since you are not in the business of being a forensic fraud researcher, you donít know them. If you roll the dice on your total net worth in a bad franchise investment, all you really need is a bankruptcy lawyer. On such facts, you simply cannot shove the shit back into the horse.