The causes of franchisee failure and what happens in terms of Voluntary Administration was a hot topic of conversation at two recent events I attended: The National Franchise Convention and a workshop I attended last week in Sydney, presented by the Franchise Accountants Network.
Causes of Franchisee Failure
Firstly, here are common causes of franchisee failure:
- Poor due diligence – that is not understanding what they are buying and verifying any information provided by the franchisor. It is recommended that every potential franchisee do the free Franchisee Pre-entry program before purchasing a business.
- Ineffective advice before purchasing. All franchisees should be encouraged to get advice from an experienced franchise lawyer and business advisor before purchasing. Franchisors should not go through with the sale unless this advice has been provided to the potential franchisee.
- Borrowing too much to buy the business and paying too high a price.
- Unrealistic expectations – of income, of lifestyle, of support from the franchisor. Overly optimistic.
- Not the right fit for the business.
- Not enough training by the franchisor
- Not willing to adapt to change. A fixed mindset.
- Not following the system
In news this week, there has been another article on franchisee failure, a tragic and sad case of a franchisee losing everything. Reflecting on this article, many of the above points were a contributor to the problems. If you are a potential franchisee, I can’t stress enough that you must take responsibility for your purchase, verify all of the information you are provided and do your own homework.
Do not skimp on getting advice from experienced franchise professionals. A couple of thousands of dollars paid now can potentially save franchisees hundreds of thousands of dollars.
Indications of a Franchisee in Trouble
- Staff morale is declining
- Payments are not being made to the ATO
- Not paying royalties on time
- Proliferation of payment plans
- Financial ratios out the window
- Lifestyle that is unsustainable (for example, luxury cars) or investments in unproductive assets such as high-end offices
- Directors not facing reality and unwilling to accept and address the current situation
There have been recent cases when franchisees have gone into voluntary administration and the franchisor has seemingly been caught unawares.
As a franchisor, you need to fully understand what is happening and how you can manage the situation in a way that reduces brand damage and hopefully be involved in the best possible outcome for all involved.
A franchisee suddenly going into voluntary administration is not something that should happen without the franchisor being aware in the lead up to this unfortunate situation. Franchisors who have strong relationships with their franchisees should be well aware if and when such a crisis arises.
Here are some actions you should think about in preparation for, and if this situation arises.
- Proactively think about, what is the best outcome of this difficult situation for my brand? For example, do you want to keep the physical site; do you want to keep it trading; what do you want to do in terms of stock?
- Gather the facts. What is the Administrator planning on doing?
- How are you going to communicate this situation to the public, suppliers, other franchisees?
It’s always best if you reach out quickly to the Administrator to talk through the issues and for you to communicate what it is you are seeking from the process.
As a franchisor, you will need to think and plan for these things.
- Who is responsible for the overall process of working with the Administrator?
- Who is responsible for media/social media management?
- What operational staff need to be involved?
- If the opportunity arises to take over the business, who will be responsible for operating it?
A very recent case study was discussed of a franchisee going into Voluntary Administration. The franchisee had 7 franchises and had been in the business for around 3 decades. The franchisee had grown tired, taken their eye off the ball and had taken leave from the business for a while and unfortunately the situation declined during this time.
The franchisor took over the business within two days of it going into voluntary administration. The question was asked, why didn’t the franchisor know it was happening and take action before it became splashed across the media doing great levels of reputational harm to the brand? This is an important learning for all franchisors. Be proactive and address issues head on so there is the opportunity to work through a more positive solution for all involved.
If you’d like to read more about this topic, here is another article on Voluntary Administration.