The terms of the deal were clear. The franchise agreement spelled it all out, and dozens of franchisees invested between $20,000 and $50,000. In return, they were given a route along which to sell the franchisor’s exclusive line of snack and beverage products. The franchisees ordered the products from the franchisor and sold them to stores, keeping the profit. The franchisor advised the franchisees that they should also buy equipment, rent warehouse space and purchase a truck—and the franchisees complied because they were told it was essential for their business.

However, the products arrived months late and when they did arrive on time, they were of poor quality. For instance, the potato chips were stale and there were foreign particles in the beverages. Soon after the new franchisees paid the initial fees, the franchisor closed down his warehouse, stopped answering his phone and disappeared with the franchisees’ money.

This case is real.¹ The Attorney General’s Office brought an action against the scam artists and achieved a settlement which resulted in a large monetary judgment against the defendants. The victims in this case thought that they were investing in a legitimate franchise business. They were normal, everyday people who lost their life savings because of a lack of thorough research and skepticism. They trusted what they were told instead of doing their homework and checking up on each aspect of the franchise.

 Consulting with an attorney, accountant, or some other business professional knowledgeable about franchising would have aided purchasers in learning about some of these risks. As it turns out, not only was this "franchise" not registered with the state, but the President and owner had previously been convicted of a felony, a scheme to defraud. If the franchisees had known what to consider when buying a franchise, they would not have invested.

Source: New York State Office of Attorney General