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What happens if I don’t make money in my franchise?

PUBLISHED ON 7TH OF JULY 2016 ONLINE – FRANCHISING MAGAZINE

After some deliberations, due diligence and thorough research you have made a decision and purchased a franchise business.  However, the business is not performing as you expected and the income is not coming in or is coming in much slower than anticipated.

 

You start asking: “What went wrong and why?”

First thing to do is not to panic. You need to assess your options and look at your business as a whole in order to ascertain the best option moving forward.

Assessing the business

You should find out all the information about the business before you took over.  Was it profitable? How was it operated? What is different in your way of operating it? Have fixed costs such as rent gone up a considerable amount? What other changes have occurred in the last year or two? Are you following the system?  These are just some of the questions you should be asking.

You also need to look at the history of your franchise business and work out at what point it turned from a profitable business, if this was ever the case, into a business causing you more debt.  Look at what changes have occurred in the last 12 to 24 months including changes in staff, menus, product offering, hours of operation and any new competitors.  Look at how the other franchisees in your system run their businesses, find out if there are any differences in operations or marketing and work out if you could be doing something to improve the business.

Getting the franchisor to assist you

Many franchisors will and should assist its franchisees during the tough times.  Speak to the franchisor, keep communication channels open and work out with them how they can help you to trade out of trouble. The franchisor may make suggestions on how to turn your business around. Franchisors can also offer further training for you and your staff if they feel you are not following the system or need upskilling in order for the business to become profitable.  In exceptional circumstances the franchisor may be able to offer you fee relief and even get the landlord to provide fee relief.  You should note that this is very rarely offered.

Selling the business

You can consider selling your franchise to a third party, provided that you have obtained the franchisor’s written consent to such a sale.  The franchisor may have an option to purchase your business under your franchise agreement and may choose to exercise it, depending on the offer by the third party. However, if your business is not doing well, this will most likely be reflected in the price you would be offered.

Misrepresentations

In some cases, franchisees are provided with certain financial promises by the franchisor which they rely on in making the decision to buy a particular franchise.  However, in most cases, proving that the franchisor has made misrepresentations is futile and close to impossible. Moreover, most claims of misrepresentations often end up being simple misunderstandings of information presented. Franchisees should ensure that any projections or any other financial information provided by the franchisor are looked at by a qualified accountant prior to signing the franchise agreement.

Surrendering the franchise

You can request that the franchisor allows you to surrender your franchise agreement.  The franchisor has no obligation to let you out of the franchise agreement early, especially when there is a lease of premises and rent payments involved.  The franchisor may ask you to pay a certain amount for them to let you out of your agreement, which may still be better than operating the business at a loss for a number of years.

Financial restructure

Depending on your overall financial situation, you may wish to consider obtaining advice from an insolvency practitioner in order to restructure your finances.  This does not mean that you need to put your company in liquidation or declare personal bankruptcy. However, obtaining such advice will provide you with better understanding of your options, considering your financial position.

Consider all of the above and make an informed decision about the future of your franchise business.

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