Sending Out an SOS

Our franchisees just hit an iceberg in negotiating their land deal. Will they be able to keep it afloat?
Magazine Contributor
5 min read

This story appears in the July 2003 issue of Entrepreneur. Subscribe »

It's been nine months since Jack wrote two checks totaling $20,000 as the down payment for an oil-change franchise. The search for an affordable site has taken months. As of a few weeks ago, everything appeared to be on track. Then Jack's world was turned upside down.

It's a pretty worn axiom that it takes money to make money, but for Jack and Diane, the cliché certainly rings true. Like many of us, this couple has invested religiously in their 401(k) plans and has built equity in their home. Unlike many of us, they have been able to save some cash-enough to purchase a pretty expensive franchise. But they need more, and they need it now, because the deal on the real estate they want is in jeopardy.

Over the past month, Jack's broker has been able to negotiate a purchase price of $245,000, which made sense for Jack's business plan. In addition, the broker found an investor who was willing to purchase the land and construct the oil-change building to Jack's specifications. The plan was for the investor to lease the building to Jack for three to five years with an option to purchase. This is known as a build-to-suit transaction. The scenario was perfect for our entrepreneurs, as they could conserve cash without having to put up their house as collateral. But then the phone rang.

It turns out Jack's investor, a neophyte in the development business, pulled the plug on the deal. Apparently, the investor's partner, who was experienced in such matters, decided investing in a single-use building was not the best way for the investor to get into the development business.

Dealing With Hardship
Back to square one. Fortunately, Jack remains stoic in his approach. "This process has, at various times, been exciting, scary, frustrating, heartbreaking and demoralizing," he says. "But I view it as an endurance test, to see if I really have what it takes. If I can't pass this test, then maybe I have no business going into business for myself."

I have never heard a presentation from a successful entrepreneur that did not include the story of their sacrifice and struggle to find success. Overcoming hardship to find your dream has been a part of the American psyche since the first settlers crossed the sea, and Jack's attitude reminds us that failure is not the act of falling down; it comes only from staying down.

So the morning after getting the bad news, Jack came up with an action plan to buy the property himself, with the offer based on obtaining financing as a contingency. During the negotiating process, the seller of the land had indicated that another purchaser was also in the bidding. This negotiating tactic is sometimes known as the "phantom bidder" approach--or also as "the oldest trick in the book." If the seller is bluffing, Jack's offer may fly; if not, Jack has already instructed the broker to find another parcel. In the meantime, Jack has decided to make a closer determination of the actual costs of development to see if his piggy bank can carry the load.

Jack and Diane may need an angel with some cash, because if they spend all their resources on the land purchase, even the slightest blip in their franchise business could put them under. Many franchisees fail early on because they are undercapitalized, and Jack is smart enough to know this.

Jack and I discussed the normal options, including asking family members or friends for loans, using credit cards and drawing down their 401(k) plans. If the friends and family have no money, and credit cards are too expensive, the 401(k) money just might help. But when you're in your 40s, pillaging your retirement fund could have severe ramifications.

I could tell Jack felt like a lone wolf. Although his resolve and planning are laudable, I had to remind him of one flaw in his thinking--namely, that he is not going into business for himself. Jack joined a franchise chain, and while new franchisees always seem to consider the amount of support that the franchisor can provide, they often forget about the support other franchisees can offer. Furthermore, there's no law that says you have to own 100 percent of your first franchised business. I told Jack to contact his fellow franchisees and explain his dilemma. Joining forces with existing operators could help him leverage other stores and add vital experience. I've structured deals in the past where the operator retains all the business while the investor gets a healthy return. No one understands Jack's pain like those who've been through it. It's time to send out the Mayday signal to all ships at sea.

Todd D. Maddocks is a franchise attorney and small-business consultant who is founder of You can reach him at


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