Franchise relationships can be very enticing. For the franchisor, it allows for an expansion of the business without a lot of capital investment. For the franchisee, it creates a path to starting a business with name recognition and critical systems in place.
However, not all franchise relationships go as planned. The following are some of the common problems with franchises:
Business Model is Not Successful
Many franchisees learn quickly that, although they bought into a franchise, it is not guaranteed that their business will be successful. In fact, it is not a fact that someone offering a franchise opportunity always has a successful business model. In many instances, franchise systems are not good business models; rather, they boast about how certain individuals in their system are successful.
In reality, these individuals are successful because they are quality business leaders with dynamic personalities, great networking abilities, and helpful referral sources and relationships. What many franchisees also learn is that merely the presence of an unsuccessful business model is not probably a means to walk away from the franchise after signing the agreement.
Revenues Sharing is Too High
All franchise agreements require that franchisees pay a portion of their gross revenue (not profits) to the franchisor. This can be as high as 10 percent. While it may not seem like much, that amount of revenue sharing can be the difference between viability and insolvency. On top of that, if a franchisee pays late, then follow the late fees, penalties and interest.
Bad Commercial Lease Agreement
While this is not directly related to the franchise agreement, most franchisees are required to buy/rent space to operate the franchise, which does not come as part of the agreement. As a result, franchisees negotiate their own commercial leases with landlords.
Unfortunately, commercial leases are as unforgiving as franchise agreements. They often require security deposits, tenant improvement costs, and general area expenses. For any new business, it is difficult to keep up with these costs. And since business is usually not steady (it has high and low seasons), it is easy to overcommit to an unaffordable commercial space.
Employee Issues
All businesses rely on good employees and franchises are no different. Employee issues (employee embezzlement, lack of proper skills, employee lawsuits against the business, employee non-compliance with franchise rules, etc.) can sink your fledgling franchise. It is not uncommon that a franchise’s demise stems from employees’ unfavorable actions.
Partnership Issues
Even behind the backdrop, many franchisees go into business with a partner. Partner disputes can often arise over how much money to reinvest in the business, how to properly market the product or service, or even how much time each partner should spend on the franchise business (as people often have more than one business interest).
Lack of Support from Franchisor
Finally, while franchises are supposed to have a turn-key operation with all the kinks figured out, this is not always the case. There could be turnover at the franchisor corporate office that poses limitations, or the franchisor simple does not have the knowledge or awareness to successfully operate a business in your area. Without proper support, most franchises never leave the ground.
Contact Counxel Legal Firm
We regularly assist franchise owners through their franchise growth and disputes with the franchisor. To get the help you need, contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.
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