UPDATED: June 30, 2019
In my book, 'The Next Financial Meltdown: 10 Shocking Predictions For Business Owners', I made a prediction that there will be a large flow of other businesses (including franchise businesses) going bankrupt in the next financial meltdown, and the implications for business owners are enormous.
One of the most unenviable situations for franchisees is when the franchisor becomes financially insolvent. Franchisees typically have less control over their own business so what happens when the franchisor goes into administration and/or collapses as a business?
The control ceded to the franchisor is in my opinion the biggest drawback of becoming a franchisee. Many business owners think of franchisee businesses in terms of operations, like head office managing the marketing and product development. The reality is many franchisees are unaware of the control they give over to the franchisor. This may come back to hurt the franchisee later down the road - if the franchisor runs into financial problems.
However, many franchisees have not considered the possibility of their franchisor going under. As a franchisee, the future of your business is intricately dependent on the franchisor.
Franchisee businesses can become independent businesses in the event of a franchise collapse. However, if the franchisor controls most of the supplies or the intellectual property (such as a secret recipe) or the exclusive production of goods or services, you won’t have a business anymore without the franchisor.
If you are forced to close up shop, you the franchisee could lose all your initial investment. And worse, upon your involuntary exit, you could also be left with a hefty debt to the landlord and to other stakeholders.
As a franchisee, you should be actively aware of how your franchisor is doing as an on-going business concern. If they are in financial strive, or the franchise is losing market share, or the other franchisees are simply closing up shop, it could be time for you to sell the business quickly before the franchisor is exposed to disruptions and collapses.
In August 2016, Australia’s third largest pizza franchise, Eagle
Boys went into administration. (http://www.smh.com.au/business/retail/pizza-chain-eagle-boys-collapses-into-administration-20160719-gq8n62.html)
This left 127 Eagle Boys stores in limbo and with uncertainty. There are talks of Dominos taking over but nothing is certain at this stage.
This is a perfect illustration of a real and serious risk that franchisees face.
A franchisee has less control over their business and this makes them more vulnerable to uncertainties. While a franchisee business is suitable for newbies with little experience, I see too many franchisees stay in the business for way too long, well after the learning curve has been conquered.
Contributor: More franchises have collapsed or in serious financial troubles since the original article in 2016.
Max Brenner to shut most of its Australian stores after collapse (SMH)
Disclaimer: The information in this article is not advice in anyway. The content is provided as an educational resource and is not intended as a substitute for professional advice of any kind. The author, founder and contributors assume no responsibility for the use or misuse of this material, including any omissions or inaccuracies. Copyright 2019.