There is nothing more challenging than dealing with failure, especially for a franchise business. For franchises, the inability of the company means that they have lost all their investment. It means that they also lose their livelihood. But business failure is widespread, even in franchising. If you are a franchisee, it’s possible that you purchased your franchise because you were attracted to the brand or system and the support offered by the franchisor. Anyone who thinks that after becoming a franchisee, they eliminate the risk of failure is a wrong concept. Failure brings emotional stages like embarrassment, helplessness, and anger as well.
In popular franchise systems, the loss of a single location may be so minor that it will go unnoticed. On the other hand, in smaller systems, the loss of an only franchise could be potentially devastating. The failure of a single franchise is not going to be felt in the same personal way for any franchisor as it is for the franchise. It is challenging to complete the loss of royalty to the mother company and the requirement to make a contrary disclosure in Item 20 of the franchise disclosure document. This legal document in the form in which those interested in buying their franchise will review and contain information relevant to the probability of success.
You would be very concerned if there were issues with your franchisor’s solvency. You have a lot to lose if your business fails.
The failure rate in the world
There is no reliable way of franchise failure. Most of the studies show that franchise success is old and inaccurate, and no one in franchising should be citing them. Studies about the success rate in franchising included only those franchisors who exist, and the franchisees of defunct systems were never even counted.
To solve this problem, no one has ever come up with a universally accepted definition of franchise failure. Some franchisees may have retired or decided to find a new career in case of failure. On the other hand, in some studies, the franchise leaving the franchise system before the end of the term because they sold their business, and the location had not closed its doors.
However, the doors of the franchise will never permanently closed, and the business was transferred to a new owner, then the business never really failed.
Franchisor cause of failure
The failure of any franchise is likely due to the management of the business at some level. The inability to operate the business is the leading cause of business failure. So, in franchising, the franchisor does not have control of the day-to-day management of the franchisee’s business.
When you find the cause of many business failures, you can see that the failure mostly starts with the business’s decisions before the business even opened. Some common reasons are poor site selection, inadequate working capital, and financial resources.
But you can’t ignore the fact that the franchisor approved the franchise into the system. They put forth efforts to help the owner succeed.
- Trained all the franchisee
- Approved their physical location
- Designed and updated all the franchise system
- Provide the franchisee with ongoing support
- Determined the products the franchise would sell
- Often specified the supply chain
- Created the marketing programs offer to franchisee
The franchisor was responsible for the franchisee’s failure as the franchisor does not run the business properly. Instead, that is the franchisee’s responsibility.
But why is it always the responsibility of the franchisor if the business fails? Even the franchisor does nothing. It should use a franchisee’s failure to improve the franchise system and look for ways to reduce the chance that it will happen in the future.
Failure in the franchising system can be stopped
Sometimes franchise sales and a low failure rate indicate what you would expect as a great franchise system. Sometimes it may only show an excellent franchise recruitment team.
Every franchisor should regularly be monitoring their franchisees’ bottom-line performance. Franchisors need to understand whether their franchisees are achieving a return on their investment and having sufficient cash flow to service their debt.
The franchisee must know his rights.
The most important thing is that a franchisee must know about his or her rights before signing the contract with the franchisor. The contract should be explicit in the state what will happen in the event of a merge. These types of agreements are negotiated by some franchisees but not by all. An example of such a franchise is an agreement to give the franchisee the option to purchase any franchise.
When a franchisee is signing the agreement, there is one point that if their business gets failed due to any reason, then the franchisor is not responsible for this. The franchisee has to read all the terms and conditions and then sign the agreement papers. Like this there are a lot of other arrangements like a franchisee can use two different trademarks in the same fashion after merging them, a franchisor has the option to refund the franchisee payment if he joins the logo, an agreement to reduce the royalty fee to make up any business lost due to new competition in the market.
If franchisors bankrupt, what happens to intellectual property?
Every property associated with the franchise will be sold off as part of the liquidation process. But not every element of your agreement can be conserved. Here’s what’ll happen to different aspects of your business:
- Your brand name: If you and other franchisees choose to work together, you could potentially buy the franchiser’s brand and trademarks. If you are unable to do this and no one else steps forward to buy them, you will have to change your brand name.
- Your territory: When the franchisor disappears, then use your territorial rights. This may or may not be an issue if you decide to continue trading; it all depends on the nature of your business and its physical location.
- Your suppliers: When a franchise system comes in danger, then suppliers are under no obligation to continue offering the benefits that former franchisees previously enjoyed.
As you can see, it is difficult to say precisely what will happen if your franchise does go underground. The situation can be different, and there’s no way of knowing whether you’ll continue trading similarly after the process is completed. The best you can do is stay aware of any changes to the franchise and keep your options open as much as you can.
What about all the franchise system?
The value of your franchise system will depend on the type of business you run. In some franchises, there may be many elements that will continue to remain the franchiser’s property. A trademark that can be purchased or a supplier that can be negotiated with, the system is more difficult to sort out.
If the franchisee takes a loan from the franchisor, then what about that loan?
Sometimes, franchisees buy equipment from the franchisor in the form of a loan rather than purchasing them outright at the start of their franchise agreement to keep costs down. If you haven’t finished repaying your franchisor, then you have to stop continuing to trade and turn a profit.
When franchisor all business goes bankrupt
If a franchise business collapses or due to some reason becomes bankrupt, then unfortunately not many options for the franchisee. The franchisee has the right to use all franchisors’ assets, including the brand name, trademarks, and other products and services, etc. The court will also have the right to all these things. The court will decide on what to do next with all franchisor’s things.
If a franchisee wants to protect all his rights, he must understand all the details of the franchise agreement. If there is a change in franchisor ownership or case franchisor collapse, he will need a lawyer.
Show good behavior with another franchisor so they can help you in times of difficulties.
One last, but most important point. Franchising is described as a “glass house.” Every franchise looks at how franchisors handle some complicated situations or deal with problems when they come up. There is nothing more sensitive to other franchisees than understanding how you work with one of their fellow franchisees when they are weak.
Existing franchisees should be treated with dignity. Franchisors should help the existing franchisee with the maximum amount of equity they have developed in their businesses. A focus on improving an existing franchisee’s exit value will pay dividends on how you are viewed by the other franchisees in the system and will allow the current franchise, even in a bad situation, to see your policy in a more positive light.
If this happens, then what a franchisee do next?
If your franchisor told you they are struggling financially, it’s natural you’ll be concerned about your franchisee rights and how you’ll be able to continue running your own business. The situation is different for each franchise, so we can’t tell you exactly how the process will be for you. Still, by staying in close contact with your franchisor, you’ll be able to make sure you’re always informed and in a great place to make any quick decisions if you need to.
SIMILAR POSTS 
