In the Des Moines Register today there is an article about a food truck franchiser that allegedly got cross-wise with investors and franchisees. The article shows just how critical it is to perform due diligence when it relates to franchises (or any other business opportunity). I have a number of posts available I have written over the years on franchise due diligence.
But what’s interesting to me is that investors were actually asked for smaller sums of money (example $14,000) than what you might ordinarily expect for a national franchise operation. In my experience if someone is asking for you to “invest” in their business in smaller amounts such as $10,000 to $20,000, be very careful. This may be a sign of someone who is merely looking to meet a short-term cash deficit/problem rather than someone who is actually looking for a long-term investor. Business “investors” are typically asked for larger sums of money such as $100,000 and above. The individuals asked to “invest” the smaller sums of money almost always have a more difficult time getting their money back. To compound the problem agreements of this smaller nature are often not reviewed by lawyers (or sometimes lack a written agreement entirely) and almost always lack key terms to provide recourse and collateral for the investor.