What if a franchise company fails?
A franchise is the safest way to start up, but it's not infallible.
A franchise company is the safest way to start up in business by yourself – as the franchising industry never stops telling us. But that doesn’t mean franchising is infallible. Franchises can and do fail – and it’s not only the individual franchisees’ businesses that can get into trouble. Franchisors themselves can go bust. So if you are considering buying a franchise don’t just look at success stories. Look at some of the things that can go wrong and see how they might have been avoided. Otherwise one of the future franchise failures could be you. There are four common reasons for franchise failure and how you can try to avoid them: 1. The franchise company fails to live up to the franchisor’s promises You’re not making the income you expected, or not getting the marketing support you were promised, your training was not up to scratch, or your territory cannot generate enough trade. But while you may blame the franchisor, they may blame you. What’s important is what’s on paper, says Brian Duckett, managing director of franchising consultants Horwath Franchising. “If the franchisor made written promises that were not fulfilled you may be able to take legal action, citing misrepresentation. “You have to be able to prove that they made false claims, such as citing earnings projections based on assumptions rather than giving real-life examples of what franchisees have earned. “But some contracts contain disclaimers designed to get franchisors off the hook if your business does not perform as well as their projections, so you’ll have a harder time bringing a case. Verbal promises are also hard to prove.” Try to avoid the problem by: · Demanding real examples, not projections, that you can check independently. · Refusing to accept verbal promises – get them on paper. If in doubt don’t sign up. · If you’ve already started the business and are not getting what you expect contact the franchisor right away. · Is it just you? Check whether other franchisees feel the same as you. · Tackle the problem before it is so bad that you need legal help – you might not be able to afford it by then. 2. The franchisor wants to buy your business back Not a problem if properly handled by the franchisor and you want to sell – Pizza Express bought many of its franchise outlets back after agreeing terms with franchisees.
But what if you don’t want to sell? It’s your business and the franchisor can’t force you to sell, unless there is a buyback clause in your franchise agreement, which is rare, says Duckett.
Try to avoid the problem by: · Checking out a franchisor’s long-term intentions before signing up. · Checking contracts for buyback clauses. · If you are one of a number of franchisees being offered a buyback deal, consider getting together (as Pizza Express franchisees did) and appointing solicitors and accountants to help negotiate a deal with the franchisor on behalf of everyone. You may get a better deal this way. · Always get a specialist franchising accountant to value your business before selling, especially if you are negotiating alone. 3. Your franchisor goes bust It doesn’t mean the franchisees go bust too. French restaurant franchise Pierre Victoire went bust and a group of franchisees got together and bought some of the outlets from the receiver, so they are still trading.
Failing this, other companies, such as existing suppliers, may well buy the business and keep the franchise going, according to Duckett.
But even if not, it doesn’t mean you have to go out of business. “You can carry on trading just the same as in the past. Often you can keep using the franchisor’s name and existing suppliers and customers may well carry on as before. Many franchisees have successfully survived a franchisor going bust.”
Try to avoid the problem by:
Thoroughly checking out the financial health of the franchisor and the business sector before signing up.
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4. You have a serious row with the franchisor Whatever it’s about, if you can’t resolve it between yourselves, and the franchise is a member of the British Franchise Association (BFA), you can use the BFA complaints procedure.
The BFA will take up written complaints against members and try to mediate, or if that fails, arrange independent mediation or arbitration. If your franchise is not in the BFA, your only recourse is to consult a franchising lawyer.
Try to avoid the problem by:
Checking that a franchise has some dispute handling procedures and/or is in the BFA before you join.