Working Out a Franchise Business

Working Out a Franchise Business

Franchises are a popular method for aspiring entrepreneurs to “launch” themselves into business.  They come with a proven business model, marketing, operations, training, and a network of other franchise owners who are available to answer questions and provide guidance.  Franchises are one of the fastest growing segments of the small business market for a good reason – they work!

However, when things don’t go quite right…when revenues drop due to sever competitive pressure, or macro-economic trends crush the business (as is happening across the country), or personal financial resources dry up for whatever reason, leaving the business floundering, a franchise (and the associated franchisor) can become a major roadblock to successfully restructuring the business.

Why would it make a difference, you ask?  Simple, in a restructuring, ALL the key stakeholders must get on board (or be dragged on board 😉 to successfully accomplish a restructuring.    Each player at the table – the bank, the business owner, the landlord, and the franchisor – must have their needs addressed.

In the case of the franchisor, it is necessary to convince them that it is in their best interest to play ball with the restructuring…since the alternative is much worse.  However, in some cases, I’ve found franchisors who PREFER for the franchisee to fail.  Here’s why:

Franchise agreements typically give the franchisor great control and power over the rights of the franchisee when it comes time to transfer the license to a new owner.  In some cases, they can actually prevent it.  What happens then?  Simple – the franchisor can step in and pick up the franchise agreement and convert the location to a CORPORATE OWNED location.   The franchisor can then FLIP the location and make a tidy profit.   I only mention this because I’ve seen it done…and it is not pretty.  The franchisee who poured their heart and soul into building a great business is wiped out of the equation, and the franchisor steps in, with almost no investment, and takes over the location…only to sell it six months later for a healthy profit.

The key point is that when dealing with a franchisor, you have to understand that their interests do not necessarily allign with you, the franchisee.

However, if you understand this going in, you can build your restructuring plan so that you can avoid these pitfalls and come out with a clean business, no debt, and possibly a restructured franchise agreement.   They key is understanding what rights the franchisor has, and getting an early indication as to their motivations.

If you are struggling, and have a franchise, give us a call.  We can help.