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Five Alerts To Franchise Fraud

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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.

Used Gold Franchising, Business Opportunities In The Financial Crisis

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A difficult economic period like the one we are going through right now leads inevitably to a general decrease in revenue within many industries and sectors, although it also leads to the growth of certain types of businesses that benefit from the newly-adopted behaviors of consumers and from the ever changing needs that appear during a moment of crisis.

Among these growing sectors is the used gold franchising. Peoples need of liquidity and also the increasing value of gold in the financial markets as a stable good against the uncertainty of the markets make it so that activities dedicated to buying and selling this valuable good be among the most profitable to launch.

In combination with the franchising formula, the opening of an establishment specialized in the acquisition of old gold is an alternative worth evaluating if you are thinking of setting up your own business. As it happens for every new company, the initial investment is always the hardest step, but for the nature of the sales point and thanks to the know how transferred from the franchisor, a buying and selling gold business has lower than average set up costs and faster return of the investment.

It is precisely in the knowledge the franchisor transfers to the franchisee that lies the true force of this model in the gold and valuable goods industry. The set of techniques, methodologies and processes is given to the affiliate who benefits from a training period that yields not only general business management skills but also specific abilities required in an industry like that of used gold in which precision and deep knowledge of the product are essential.

Moreover, the reputation and brand image of the franchisor act as a guarantee in front of consumers. Especially in an industry as complex as that of used gold in which trust plays a truly important role, starting off ones business backed up by a consolidated brand is a huge competitive advantage.

Franchising is therefore a solid basis on which you can build your gold business, one that cannot but evolve in the current market conditions. With many unreliable alternatives for buying and selling valuable goods now in the market, the physical business with name and surname offers the security the rest cannot provide. Far from the solutions that promise immediate cash in exchange of used gold after unilateral evaluation of its worth even through postal means, the used gold franchised point represents the most reliable option for those who wish to find a serious, honest interlocutor with whom the transaction reflects the true, real market value of this valuable metal.

There are many firms that have traditionally worked in this industry that now see an opportunity for growth in the ever increasing demand of gold through the franchising formula. Consider the biggest and most reliable brands in the market and ask for details about their affiliates plans to find out if used gold can be a source of profit for you too.

Network Marketing A Business Model Comparable To Franchising

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Network Marketing is really a reasonable small business type which offers features similar to franchising. However the gain it offers compared to standard franchising involves a cost-effective entry level and huge income possibility.

Simply what kinds of individuals are fascinated to a network marketing company? Typically the types of people that find themselves fascinated in the direction of network marketing are disappointed in their specific occupations and have generally not attained the level of accomplishment they expected. These folks look at being employed as being troublesome and including lengthy hours. These people have furthermore been unfulfilled due to the fact of their income and what the foreseeable opportunity secures on their account. They possess nominal understanding of acquiring his or her own business and most likely would not have the resources to speculate in starting and operating his or her business. Regularly they have 0 % direct understanding of sales or of business development.

Therefore once they launch their network marketing career they often make some errors. They make an effort to use social settings to market their products and while doing that attempt to oversell. Often they’re inaccurate within their statements. This leads to an air of desperation and scarcity of trust. The main objective is purely on acquiring clients rather than developing and maintaining existing ones.

Shifting forward in the direction of network marketing should to be regarded as if you’re just as establishing a personal business. Consequently you have to be ready to produce know-how in many aspects of operating your own company. A substantial dedication is needed related to training on your own, on marketing and advertising techniques, social networking abilities, economic planning, effective time management abilities etc.

The actual procedures should additionally be set up to operate your business. The personal home office environment, your telecommunications programs, the way you promote yourself, your marketing methods, the way you take command of your budget, etc., will all mount up to how prosperous you will end up. Although becoming self-employed an individual will have to acquire the inspirational skills and perseverance to guarantee being successful. This is frequently is made easier by making use of a network or community.

The particular processes ought to furthermore be set up to run your company. The individual home office surroundings, your telecoms programs, the way you showcase yourself, your internet marketing techniques, the way you take on control of your finances, etc., may all mount up to exactly how profitable you will end up. While being self-employed a person will certainly have to gain the inspiring skills and conviction to ensure being triumphant. This is regularly made easier by making use of a network or community.

Franchising Vs. Licensing A Business

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FRANCHISE VS. LICENSE

What’s the difference between franchising vs. licensing a business? Is a license business model really different from a franchise business model? Whether you’re a franchise attorney or not, the starting point in any analysis is to consider the legal aspects, then the business aspects. This article focuses on the legal aspects. A franchise always includes a license of the brand and operating methods, along with assistance (training, an operations manual, etc.) or support (providing advice, quality control, inspections, etc.). A license that is supposedly “not a franchise” but contains these elements, is a disguised, illegal franchise with significant legal ramifications and risk.

REGULATORY BACKDROP

In considering the legal aspects, begin with the following premise that applies to both options:
If you put someone into business (or allow them to use your business brand/mark) this transaction will normally be a regulated activity, subject to substantial penalties for noncompliance. If it looks like a duck and walks like a duck, it’s a duck. This guiding legal principle (and common sense), coupled with the business aspects of selling a franchise vs. a license (discussed below) will answer most questions.

FRANCHISE & BUSINESS OPPORTUNITY LAWS

Why does regulation exist? Arising from the ashes of documented past abuses, where tens of thousands of individuals lost all of their worth by investing in nonexistent or worthless business endeavors, the government has devised two principal consumer protection mechanisms:

(1) franchise disclosure-registration laws; and
(2) business opportunity laws.

The thrust of these laws is to require sellers to give potential buyers enough pre-sale information so informed investment decisions can be made before money changes hands, contracts are signed and sizable financial commitments are undertaken. It doesn’t matter what terms are used by the parties in contracts or other documents to describe their relationship. For example, the contract may call the relationship a license, a distributorship, a joint venture, a dealership, independent contractors, consulting, etc., or the parties may form a limited partnership or a corporation. This is entirely irrelevant in the eyes of governmental regulators,. Their focus is not on semantics, but whether a small number of defining elements are present or not. Today sellers are subject to a complex web of regulations that differ from the federal level to the state level and even differ widely from state to state. Murphy advises through Franchise my business.

DON’T FALL FOR TODAY’S SUCKER PLAY

The internet is filled with statements like “Compare high cost franchising to low cost licensing.” Firms or individuals that say calling it a “license” dispenses with legal regulations are delusional and wrong for at least three reasons:

(1) Common Sense – if it was really that easy, everyone would be doing it that way. The 3,000-plus companies that are franchising are not stupid. Many can afford the very best legal talent available. It’s not a coincidence they’re all franchising and not licensing;

(2) Even if the relationship can be structured so it doesn’t fall within the definition of a “franchise,” the backup regulatory protection mechanism – business opportunity laws (discussed below) – will certainly apply. And complying with these is a lot more expensive than going the franchise route; and

(3) Any analysis must include federal law (franchise and business opportunity) as well as applicable state laws covering the same dual prongs (franchise and business opportunity).

This all reminds me of some financial planners who still advise their U.S. clients that filing U.S. income tax returns is not required under their interpretation of the U.S. Constitution. It just doesn’t work that way. Actually it does work, but only until the IRS catches up.

The “licensing avoids franchise regulations” spin (which, not surprisingly, is not accepted in the legal community) also only works until the company gets caught. The logic (not) goes something like this: licensing arises under contract law, not franchise law and therefore franchise law doesn’t apply. Sound’s just like the “you don’t have to file a tax return because tax laws don’t apply” argument.

REAL LIFE EXAMPLES

A license attorney prepared a dealer license agreement and ignored the FTC Franchise Rule disclosure requirements (“licensing arises under contract law, not franchise law”). The dealers became disgruntled and hired a litigation attorney who sued the company for, not surprisingly, selling disguised illegal franchises. It cost the company $750,000 to go to trial in federal court to answer the question “Is our license contract an illegal franchise?”

“Is our license really a disguised, illegal franchise?” is always a very expensive question to answer. Unless spending $750,000 is your idea of a good investment. Trying an end run around the franchise disclosure laws by calling it a “license” or a “dealership” may be a cheaper way to go initially. But it’s only a question of when (not if) you will be caught. Be prepared to spend mind-boggling amounts down the road when the disguised illegal franchise is challenged for what it really is.

In a 2008 case, Otto Dental Supply, Inc. v. Kerr Corp., 2008 WL 410630 (E.D. Ark. 2/13/08) another disguised franchise vs. a license was at issue. The company claimed it sold just a license, not a franchise and the franchise laws simply didn’t apply. It made a motion for summary judgment to have the case thrown out of court.

The federal Eastern District Court ruled against the company and ordered the case forward. It said whether or not the license was really a franchise was up to a jury to decide. Jurors are like most of us, and apply common sense to the simple defining elements of a franchise. They are not swayed by semantic arguments like “licensing arises under contract law, not franchise law and therefore franchise law doesn’t apply.” Another very expensive franchise vs. license learning lesson.

And here’s a final example. In Current Technology Concepts Inc. v. Irie Enterprises Inc. the Minnesota Supreme Court concluded a licensing arrangement was a franchise and held the franchise company liable for damages in the amount of $1.3 million for violating the Minnesota Franchise Law.

Hearing “after the fact” that the arrangement was an accidental, illegal franchise and you’re liable for $1.3 million was the last thing that company ever wanted to hear. Perhaps they got themselves into this mess by listening to statements found on the internet that franchising is expensive and licensing inexpensive. Again, if something sound’s too good to be true, it usually is and this should be a big flashing red light.

ROOTS OF LICENSING

It is important to remember the roots of licensing: artwork and character licensing – where the owner (licensor) grants permission to copy and distribute copyrighted works, such as allowing Mickey Mouse to appear on t-shirts and coffee mugs.

The most recent explosion in license law is the licensing of software on personal computers. Or, the owner of a trademark allows another a license to use its mark as a way of settling a trademark infringement suit. These are common and accepted forms of licensing. However, the attempt to use licensing as an end-run around the franchise laws is a corrupted use licensing was never intended for.

This is not to say licensing a business may be a viable option in foreign (out of U.S.) transactions where U.S. laws don’t apply – but these are a very small minority. Most transactions and contracts cover U.S. activities and residents, so the franchise vs. license question is usually an easy one to answer.

Should You Start a New Business or Go the Franchising Route

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Starting a business is a huge risk, but the payoff could be huge if your business succeeds. However, many are wary about starting a business from scratch because they think that it’s riskier compared with going into the franchising business. Some people think that buying a franchise is more advisable because there’s an established market. There are benefits of starting your own business from the ground up; for instance, you don’t have to worry about franchising fees or royalties. However, you might have to work extra hard before you get significant return on investment. This could be a huge disadvantage. This is not to say that it’s guaranteed that you’ll get rich instantly with a business franchise; it’s like any type of business, so this means there are huge risks as well. The difference is the fact that you’ll be working with a business that has a reputation and a customer base. Some people think profit from franchising is considerable because you’ll be working on a tried and tested business idea. You don’t have to work too hard on increasing brand awareness because people are also more familiar with the products or services that you offer. Aside from the potential profit, starting a franchise gives you more flexible hours. You can now have more free time to spend with your family and improve your lifestyle. If you are not sure whether or not you should start a new business or invest on an established one, you could consult a business coach. These people can tell a clearer picture and inform you about the risks and rewards of choosing either one. If you choose to buy a franchise, make sure that you read the company profile and see if you’ll have greater return on investment with it. Careful research goes a long way, and you could lessen the risk by choosing a franchise that’s under an industry that you’re more familiar with. If you want to try your luck on a new business, you should research on market trends and try to offer something new. There are advantages and disadvantages of starting a new business or buying a franchise. You need to assess your particular situation and see which one is more suitable so that you can be successful. If you want to learn more information on the subject, you can go to entrepreneur.com or franchises.about.com.

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