Network: September 1991
I purchased a franchise that failed miserably. I think the franchisor was partly to blame. The service representative who should have conducted marketing and demographic studies was un-available, so a marketing rep conducted them instead, and the results were simply population statistics. Also, the franchisor chose a location in an underdeveloped neighborhood at the wrong end of town. After 10 months of operations, sales were running less than 20% of the franchisor's projections. Can I recover any of my investment?
Name Withheld* * *
If the franchisor made earnings claims outside of the prospectus, either orally or in writing, you have grounds to seek a recision -- the return of your out-of-pocket money, less any money you made -- or you may sue for breach of contract. The standard for recision is willful fraud, and that may also be grounds for punitive damages. Whether you can recover your money is a question of proving how much you relied on the franchisor's statement, whether it was false, and whether damages can be traced to that omission or misstatement of fact.
Can you sue just because somebody else found the real estate? Michael Seid, a franchise consultant, doubts it. "Most franchisors don't decide on the location. When you read the agreement, you may find you made the final approval."
Your problem is that you did all your preparation after the business failed. That's not unusual, according to Seid. It's also not unusual to face problems early on. Bev Karmanos, whose American Speedy Printing shop, in Tallahassee, Fla., was chosen by Inc. as one of America's best-managed franchises (October 1989), didn't break even for almost a year. "We had some very lean times," she says. "And it had nothing to do with the franchisor." But she and her husband were prepared for those times. You could have been, too.
"Franchisors want to sell you a franchise," says Seid. So you must find out as much as you can before you talk to them. Visit their franchises, research them in business magazines, and contact the International Franchise Association (800-543-1038). It sells a Franchise Opportunities Guide for $15, and a pamphlet of basic information called Investigate Before Investing for $5.
Then visit the company headquarters; it's worth the price of a plane ticket, Seid says. Arrive with a list of questions, "and don't be satisfied with glib answers. Ask about training and advertising, and get details. Is the franchisor making money? Is there a franchisee association? Who does the demographics? If it's supposed to be Joe Schmidlap, and some regional guy who's not a specialist does them instead, say, 'Whoa, this is my investment!' "
The disclosure document that franchisors have to supply you with will provide some answers, but don't leave it at that. You'll also get a list of established franchisees. "Pick up the phone," Seid says. "Franchisees like to brag about their businesses." Ask how much it really cost them to get into business, how long it took to break even, how much they're making, and whether they'd buy another franchise today.
Fred DeLuca, president of the Subway Sandwiches & Salads franchise, agrees. "Interviews with franchisees are the single most important step." He suggests that prospective franchisees talk to at least 10 franchise owners -- local and national -- to find out if the corporate literature jibes with their experience.
When choosing a location, the franchisor's numbers should be only the start of your research. "I wouldn't bank my money on those numbers," Bev Karmanos says. Instead, get your own. "You can't expect the franchisor to do everything," she notes. Even franchisor DeLuca downplays demographics as the sole basis for site selection. Franchisors can research concepts or regions, he says, but when it comes to choosing a location, you have to look at the place and trust your judgment. "If you rely on the company to make those decisions, you're not being a businessman." n -- Michael P. Cronin