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Warning Signs That Your Franchisor is Having Problems


During these economic times, many companies are facing difficult challenges and franchise companies are not immune to these same challenges. Since franchisees are dependent upon their franchisor, itís important for franchisees to identify warning signs that their franchisor is having problems. Find out what these warning signs are and how to respond.

The past several years have demonstrated how seemingly sound companies can quickly run into trouble. Although the financial services industry has received the bulk of attention, companies both large and small from different industry segments have had to sell, agree to a merger, cease operating or file for bankruptcy relief. Some franchisors have had to choose among these same options. The important distinction between a franchise and a non-franchise company is that franchisors are the lifeblood of their franchisee network. When a franchisor has a serious problem, itís usually financial in nature. If the situation deteriorates, it can severely impact the franchisees. In addition, since the majority of franchisors are privately held companies, financial reporting is very limited compared to publicly owned companies. This can make it more difficult to know when a franchisor is having financial problems.

Here are some examples of how important a franchisor is to their franchisees:

  • The growth of new franchise locations spurs sales growth and promotes the brand

  • The franchisor provides a sense of direction and support for the franchisee network

  • Franchisee disputes can be resolved by the franchisor

  • The overall strategy of the franchisee network is spearheaded by the franchisor

  • R&D and the development of new products and services

  • Administration and operation of the advertising fund

If the franchisor is unable to effectively operate the franchise company, then it will directly affect its franchisees. Itís important that franchisees recognize certain warning signs that can indicate problems.

Some of the warning signs to look for include:

  • A reduction in franchisor staff

  • Reduced advertising and promotional activity for new franchise sales

  • Lack of timely response to franchisee e-mails and phone calls

  • Franchisor communication slows down. This can include meetings and conference calls

  • Field and support staff become less responsive or unable to make visits to the field

  • Franchisor Senior Management is hard to reach. Messages may be returned by a subordinate

  • Depending upon the type of franchise operation, vendors may complain about slow payments from the franchisor

  • Franchisees start to contact each other

If these warning signs start to appear, the best approach for franchisees is to contact the franchisor directly and confront the situation. Itís far better to face the situation head-on, rather than speculate about the actual situation. However, be advised that the franchisor may try to downplay the situation in order to avoid creating a sense of panic or fear among their franchisees.

As a franchisee youíve made a decision to pin your future success upon the ability of your franchisor to innovate, administer and support the franchise program.

Here are some suggested ways franchisees can respond to franchisor warning signs:

  • If there is a Franchise Advisory Council (FAC) request a meeting with the franchisor. Most large franchise systems will most likely have a FAC in place.

  • In the absence of a FAC, a small group of the most tenured and successful franchisees should request a meeting with the franchisor

  • Franchisees should be careful to avoid overreacting or making threats.

  • This select group of franchisees should gather as much information as possible regarding any information that may indicate that the franchisor is having problems

  • Ask the franchisor if there is anything the franchisees can do to help alleviate the problem

  • If the situation deteriorates, secure competent legal counsel to provide advice and potentially serve as a contact point with the franchisor

Itís important that franchisors are financially healthy and able to effectively operate the franchise program. If a franchisor has problems, then the outcome for its franchisees could be devastating. If particular warning signs appear then the franchisees need to bring their concerns directly to the franchisor. Failing to detect and react to franchisor warning signs can lead to major problems.

© 2010 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com 

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