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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