Risky Business: You Fall when your franchisor fails

Running a franchise is like walking a tightrope at the best of times. When the franchisor hits the wall, it’s as if the world doesn’t make sense anymore.

Your supports are gone, in an instant: a senseless act of economic violence.

A recent Wall Street Journal article by Richard Gibson presents 3 not all that helpful suggestions, 1 hypothetical worthwhile observation, and 0 FranchiseLand reality checks (see Be Prepared in Case Your Franchiser Falls).

The 3 next-to-impossible alternatives are:

  1. rebrand to another franchise system (technically possible at any time but legally difficult to do, 99.9% of the time stupid to do while in a crisis, expensive, may increase aggregate and long-term risks),
  2. go independent (the franchisor’s difficulty does NOT free you it only transfers your obligations to another party, raises false hope, breeds moronic thinking and inertia), and
  3. advertise to your customers that you’re still alive (yes: the best of the 3 but, still, a thin stew).

The best part is the value of a well-functioning, prepared independent franchisee association (IndFA).

  • However, all IndFAs are not the same.

Only invest in a franchise that has an IndFA with the following 3 characteristics:

  1. a “rainy day” account of a minimum of $25,000 to take immediate legal action,
  2. a two-year track record of collecting monthly fees from 75% of the franchisee members (you do not buy house insurance as the first responders are driving up to your curb), and
  3. 50% plus 1 of those contributing franchisees have signed an agreement that they will contribute (loan, add equity) over-and-above the monthly commitment when asked.

Contingency planning is the main reason for an IndFA’s existence.

  • Saying an individual mom and pop franchisee can do effective planning is just plain cruel. They have neither the financial nor conceptual horsepower to do anything knee-jerk reactions. Most of time, it’s Bambi-in-the-headlights time.

Unfortunately, these 3 IndFA points are 99% irrelevant because 99% of franchise systems do NOT have an IndFA that meets these 3 characteristics.

In the real world…When the franchisor fails you do too unless you have the $ and cahones to take immediate action. Only then can you overcome the law of gravity.

Remember: If it doesn’t jingle, It doesn’t count.

One Response to Risky Business: You Fall when your franchisor fails

  1. Carol Cross says:

    It appears that franchisees have very little control over their fate when they sign a franchise agreement. The process of “securitization of royalties” demonstrates that franchisees are merely resources of the franchisors under law and practice that can be deployed always in the interests of the franchisors.

    The WSJ article doesn’t get into what happens when there has been a securitization of the royalty stream of the franchisor and the new legal owner of the franchise agreements becomes involved when the Brand Franchisor declares business bankruptcy.

    Apparently, “securitization” protects franchisors from their franchisees, as creditors, in business bankruptcies, and this is another reason why so many BIG Franchisors have gone the “securitization” route when borrowing money for their operations.

    It would appear that the franchisors aren’t accountable to franchisees when they borrow the money and are free to to sell the contracts and the royalty stream without the permission of their franchisees. ( Do only the IRS and security holders know what happened to the 250 million dollars that Quiznos borrowed in a securitization deal in 2006? )

    Why didn’t the WSJ get into some of this and explain to franchisees how hapless and helpless they are when the franchisor is declared by the courts to have no fiduciary responsibility to the franchisee whose assets and gross sales they own and control under boilerplate, binding and adhesory contracts, that become malicious legal traps when franchisees fail to thrive, and franchisors want to leave town?


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