CHAPTER SEVEN Short Case 2
CHECKING IT OUT
When Arlene Ryan inherited $250,000 from her grandfather, she decided to use the money to start her own business. Arlene has been a legal secretary for 14 years and feels she knows quite a lot about business. “Every day I take depositions and type legal memoranda,” she noted to a friend. “And I’ve seen lots of businesses fail because they didn’t have adequate capital or proper management. Believe me, when you work for a law firm, you see—and learn—plenty.
Almost six months passed before Arlene decided on a business to pursue. A franchise ad in a business magazine caught her attention; Arlene called and found out that the franchisor was selling fast-food franchises in her area. “We are in the process of moving into your section of the country,” the spokesperson told her. “We have 111 franchisees throughout the nation and want to sell 26 in your state.” Arlene went to a meeting that the franchisor held at a local hotel and, along with a large number of other potential investors, listened to the sales pitch. It all sounded very good. The cost of the franchise was $150,000 plus 5 percent of gross revenues. The franchisor promised assistance with site location and personnel training and encourages the prospective franchisees to ask questions and investigate the organization. “If you don’t feel this is a good deal for you, it’s not a good deal for us either; good business is a two-way street,” the spokesperson pointed out. “We are going to be looking very carefully at all franchise applications, and you ought to be giving us the same degree of scrutiny.”
Arlene liked what she heard but felt it would be prudent to do some checking on her own. Before leaving the meeting, she asked the spokesperson for the names and addresses of some current franchisees. “I don’t have a list with me,” he said, “but I can write down some that I know of, and you can get their numbers from the operator.” He then scribbled four names and locations on a piece of paper and handed it to her.
Arlene called information and was able to get telephone numbers for only two of the franchises. The other addresses apparently were wrong. She then placed calls to the two franchisees. The first person said she has owned her franchise for one year and felt it was too early to judge the success of the operation. When she found out Arlene was thinking about buying a franchise, she asked if Arlene would consider buying hers. The price the woman quoted was $10,000 less than what the company currently was quoting. The second person told Arlene he simply did not give out information over the phone. He seemed somewhat edgy about talking to her and continually sidestepped Arlene’s requests for specific financial information. Finally, he told her, “Look, if you really want this information, I think you should talk to my attorney. If he says it’s okay to tell you, I will.” He then gave Arlene the attorney’s number. Before, she could call the lawyer, Arlene left for lunch. When she returned, one of the partners of her firm was standing beside her desk. “Hey, Arlene, what are you doing calling this guy? He asked, holding up the telephone number of the franchisee’s attorney. “Are you planning to sue someone? That’s his specialty, you know.” Arlene smiled. “As a matter of fact, I am. I’m thinking of suing you guys for back wages.” The attorney laughed along with her and then walked back into his office.
- What is your appraisal of the situation? Does it look good or bad?
- Would you recommend that Arlene buy the franchise from the woman who has offered to sell? Why or why not?
What would you recommend Arlene do now? Be complete in your answer.