Your franchise is failing, what should you do?
Nancy Lanard of Lanard & Assoc. answers this tough question below.
Unfortunately, I sometimes receive a call from a client telling me that his/her franchise business (as a franchisee) is failing and is costing him money out of pocket each month. The client is often afraid to speak with the franchisor or the landlord or ask them for help. When they come to me they are desperate for some advice on how to handle that situation.
What are the steps you should take if you have a franchise that is failing? Here are a few suggestions on what you should do if your franchise is in trouble.
1. TALK TO THE FRANCHISOR
Most of my clients are surprised when I suggest that they have an open conversation with the franchisor. Often the franchisor can help by waiving royalties for a period of time; providing additional training or suggestions to improve the way the franchisee is operating his business; offer to re-purchase the territory. A good franchisor wants you to succeed as it helps with future franchise sales to have successful franchisees and helps strengthen the brand. Additionally, if a franchisee fails and closes, it must be disclosed in the FDD and that is not something that a franchisor wants to disclose if it doesn’t need to.
2. TALK TO THE LANDLORD
Again, my clients are surprised by this suggestion. However, a Landlord can often be cooperative with a failing franchisee and help him by reducing rent for a period of time (usually the reduced rent will have to be made up at the end of the term) or reducing the term of the lease. Landlords are most likely to try to help as it is never desirable for a Landlord to have vacancies in the shopping center. It is usually preferable for them to work something out to keep a business going unless the shopping center is so desirable that there are other businesses waiting to go into the center.
3. RESPOND TO NOTICE OF DEFAULT
If you have received a notice of default from the franchisor, you should immediately contact us to discuss it. You have options at that point on how to proceed. If you have claims against the franchisor, for example, you may want to assert them at this time. If not, you may want to see if the franchisor knows of a party to whom the business can be sold. Regardless, before a response can be made, all the available options should be considered.
4. CONSIDER SELLING THE BUSINESS
Often the best answer to a franchise that is not succeeding is for the franchisee to sell the business to a third party who becomes the new franchisee for that territory. This allows the failing franchisee to terminate its obligations under the franchise agreement and under any lease. This is usually the cleanest way for a failing franchisee to leave the business. In this scenario the franchisee typically eliminates all future obligations under the franchise agreement and the lease. Sometimes, the selling franchisee will need to reduce the price to a sufficiently low enough number (below the value of his investment) to sell. It is still advantageous as the franchisee will be able to walk away from the franchise and the lease and all personal guarantees and move forward with his life.
If your franchise is in trouble, it is imperative to contact us early in the process. Consider speaking with the franchisor and landlord and seeing if they would allow reductions in the fees that are paid. If you receive a notice of default, let us know immediately so we can work with you to structure a game plan to work it out. Lastly, if it looks like the business cannot succeed, sell the business and transfer the franchise and the lease to a buyer.
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