Working Out a Franchise Business
Franchises really are a popular method for aspiring entrepreneurs to “launch” themselves into business. They come with an established business model, marketing, operations, training, along with a network of other franchise owners who are available to answer questions and provide guidance. Franchises are one of the fastest growing segments from the small company marketplace 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 company (as is happening across the nation), or personal savings dry out for reasons uknown, leaving the business floundering, a franchise (and the associated franchisor) can become a significant roadblock to successfully restructuring the company.
Why would it really make a difference, you ask? Simple, inside a restructuring, All of the key stakeholders must jump in (or perhaps be dragged on board) to successfully accomplish a restructuring. Each player while dining – the financial institution, the business owner, the owner, and also the franchisor – should have their demands addressed.
In the case of the franchisor, it is necessary to convince them that it is in their best interest to play ball using the restructuring…since the alternative is much worse. However, in some cases, I have found franchisors who PREFER for that franchisee to fail. Here’s why:
Franchise agreements typically provide 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 instances, they are able to actually prevent it. What happens then? Simple – the franchisor can step in and pick up the franchise agreement and convert the place to some CORPORATE OWNED location. The franchisor may then FLIP the place and make a tidy profit. I only mention this because I have seen it done…and it is not pretty. The franchisee who poured their heart and soul into building a great clients are wiped out of the equation, and the franchisor stages in, with almost no investment, and gets control the location…simply to market it 6 months later for a healthy profit.
The key point is the fact that when confronted with a franchisor, you have to understand that their interests do not necessarily align with you, the franchisee.
However, if you appreciate this moving in, you can build your restructuring plan so that you can avoid these pitfalls and are available by helping cover their a clean business, no debt, and possibly a restructured franchise agreement. They secret is being aware of what rights the franchisor has, and getting an earlier indication as to their motivations.
This simplest way do a workout on a franchise business is follows:
a) Speak to your franchisor in regards to a hypothetical – what would happen should you be instructed to sell the franchise at a liquidated value? Wouldso would the franchisor see that situation? Ideally you would speak with someone in the franchisor organization that has some history and can give you guidance.
b) When the outcome is bad, then you should pull back and minimize communication with the franchisor…they are now part of the problem, not area of the solution.
c) The only way to successfully deal with a hostile franchisor would be to ignore them during the workout, and then beg forgiveness post-workout. Keep sending them their royalty payments, and after you have successfully killed another debts about the business, you can step back in and notify the franchisor after the fact…or simply never notify them. In some instances, if they still receive royalty checks, they just don’t care.
Regardless, the lesson is the inside a workout scenario, franchisors could be a tricky item – either they are area of the solution or part of the problem…but you have to discover which one they’re before you understand how to handle them.