COST BENEFIT ANALYSIS OF A SYSTEM STRUGGLING FRANCHISEES

Surprisingly few franchisors are willing to invest in a struggling franchisee by foregoing royalties or marketing charges or by making any financial contributions towards a struggling dealer’s success. This is one of the most short-sighted policies in the franchise industry. Franchisees usually struggle because of some very fixable problem. Usually the problem is not a fatal defect in the operating system or the public’s refusal to accept the company’s product. Usually there are store-level operational problems, issues of neighborhood marketing or inept local management to blame. Sometimes these are simple problems to fix. Sometimes the fix is not so simple. When a franchisor refuses to make a significant commitment to assist a struggling franchisee, the company is ignoring the long-term value of a turnaround.

At Kern & Hillman, LLC, we help franchisors understand the costs and benefits of investing in struggling franchisees.

A franchisor who offers a royalty holiday or foregoes a certain amount of advertising charges to assist a struggling franchisee, or who pays for addtional advertising efforts in troubled territory can create:

  • Goodwill with the struggling franchisee
  • A strengthened unit that will be around for years to pay royalty and advertising charges at the full rate
  • A reputation as a franchisor that cares about its dealers and responds to their needs
  • The support of an entire franchise system where communications regularly show the franchisees that the company supports them

Franchisors who blindly refuse to acknowledge that a struggling franchisee is – for a time – likely to represent reduced profits and increased costs to the franchisor, runs the risk of creating several bad trends:

  • A visible boarded up unit
  • A lost distribution point and years of royalty and advertising payments
  • A reputation among its own franchisees as being heartless
  • A disgruntled former franchisee
  • A detractor – who may initiate litigation
  • If litigation ensues, a damaging disclosure in Item 3 of its Franchise Disclosure Document
  • Significant waste of time, money and resources on litigation if a plaintiff’s lawyer gets a hold of the failed deal

At the Franchise Law Source we have years of experience in the business of running franchises, not just executing the necessary legal tasks. Let us help you think logically about the investments and commitments necessary to turn struggling franchises around.

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