What Happens To Franchisees When The Franchisor Is Going Under?

One of the required aspects for a successful franchise model or system is where the franchisor themselves are running a profitable business. However, the possibility of a franchisor going bust is a very real scenario because just like any business, it is susceptible to market changes and dynamic trends. 

However, this is not to bash franchising and say it is a horrible business model. It isn’t. In fact, franchising has proven to be a successful financial option for both franchisor and franchisee because it works. Instead, what should to be highlighted is that a franchisor’s inept reaction to adapt to changing market conditions or poor management will lead to a disastrous aftermath, not just for themselves but especially to franchisees who could find themselves stuck.

Related: Why Do Franchisors Fail?

Scenario 1: Reduced Level Of Franchise Support

The franchisor may look to cut costs to improve the scalability of the franchise by reducing the number of franchise support staff. This means that the remaining employees who are kept will have to deal with increased responsibilities but with the same amount of time to carry out their increased scope. Consequently, the support team may not be able to provide franchisees with the optimal level of support, and in doing so, depreciate the very assets that franchisees pay royalties for.

Scenario 2: Dumping Of Inventory

In order to generate more cash flow, the most straightforward option for the franchisor is to lower prices for their market offerings to increase liquid capital. In more extreme situations, sale prices could even be slashed downwards to cost level. What happens next is the franchise brand’s price positioning will be damaged and all of a sudden, franchisees will find themselves being a part of a system that is selling an inferior product.

Scenario 3: Diminished Consumer Confidence

Once consumers hear of the business experiencing difficulty, they may refrain from making any more purchases and start looking to invest their loyalty somewhere else. Furthermore, consumers might stop making purchases altogether in anticipation of falling prices (in Scenario 2). In either situation, franchisees will see their profit margin take a beating.

Scenario 4: Fracture In The Supply Chain

Most franchisors provide franchisees with some sort of branded product supply that is unique to the business and typically, an external manufacturer is contracted for the production of such. In this case, if production payments are not met, the manufacturer will cease production until outstanding amounts are settled. This leads to a lack of the product line that characterizes the franchise brand. And for franchisees who can only sell in their franchise units these branded unique products, they will be left with nothing to trade with consumers.

Scenario 5: New Ownership Brings About Changes

Sometimes, a third party may see potential in the declining business and make an offer to take over the whole business, including the franchise rights. Naturally, the new owner’s sole focus will be to bring the business back into profitability. However, the business itself and the franchise system are two different entities altogether. Decisions may be made in the best interest of the business, but not necessarily with the franchise system or franchisees in consideration.