Franchising: Lessons for the Unwary
Over the years I have advised both Franchisors and Franchisees in relation to Franchise Agreements and Franchising issues generally and have also acted in relation to numerous disputes on behalf of Franchisees. You may be surprised by these are some real life examples of what I have seen happen:
- A Franchisor induced a Franchisee to renew a Franchise Agreement at a time when the Franchisee was already in debt to the Franchisor for over $70,000.00. The business closed within 12 months. At the time the Franchisee owed the Franchisor over $120,000.00 and was facing bankruptcy.
- A preferred franchise store location was rejected by a Franchisor so the Franchisee opened a store at another site. Within 8 months the Franchisor opened its own store at the original site preferred by the Franchisee.
- A Franchisee ceased carrying on the business after 6 weeks because he was not comfortable performing one of the key requirements of the business. This lesson cost the Franchisee over $60,000.00.
- A Franchisee was sold a Franchise business that was illegal to run in New South Wales and was forced to cease trading by the Department of Fair Trading.
- A Franchisor of a retail shop franchise with the exclusive right to supply stock to the Franchisee repeatedly supplied excessive quantities of unsaleable stock to the Franchisee. As the stock did not sell the Franchisee could not afford to buy new stock that did sell and was forced to close the business.
- Franchisees with multiple investment properties and substantial savings were forced to sell everything to fund continuing losses and franchisee fees and still faced the prospect of bankruptcy due to an uncompromising Franchisor.
- A Franchisee felt compelled to extend themselves financially to purchase a second Franchise store in order to prevent the Franchisor from selling a Franchise in a nearby area that would impact on their business. The profit margin on each store is very low and they are now forced to work weekends to keep wages expenses to a minimum.
- Indicative turnover projections are too often relied on by Franchisees despite comprehensive written disclaimers.
Many Franchisees experience great success and end up owning numerous Franchise businesses. However, these are typically the people who have properly investigated the Franchise and sough appropriate advice before signing the Franchise Agreement. While the costs associated with obtaining legal, accounting and business advice in relation to buying a Franchise may be an undesirable expense, these costs will be insignificant to the costs associated with becoming involved in litigation against the Franchisor or the risk of losing everything you own if the business fails for whatever reason. Instead ask yourself, can I afford to enter into a Franchise Agreement without fully understanding the obligations and risks? Most people can not afford to throw away tens or even hundreds of thousands of dollars.