Which Franchise to Buy When Financial Numbers Lead and When They Lie Part 2 in a 3 Part Series

As with every rollercoaster trip in life, to every down there is an upside. So what can today’s prospective franchisee’s take away from these figures?

Along with that question and possibly more importantly, how can they use them to their advantage? I propose that there are three main points to be learned from the figures that the prospective franchisee should view as a positive outcome from the previous decades default rates; there are territory openings, the franchisors have learned some very important lessons which can be applied to the future, and the franchise systems are using the lessons learned to pave the way to future successes.

The Territory Openings

There are openings where previously territories were closed. Okay, it may sound entirely morbid but one person’s failure can be your gain. Many franchise agreements have a clause that states that if you default on a loan, a lease or any other approved vendor agreement; you have also defaulted automatically on your franchise agreement which can result in a termination of your franchise. Therefore, many of the franchisees that defaulted on their SBA loans were terminated and thereby that franchise territory may now be available and up for sale again by the Franchisor.

Occasionally, the Franchisor may have chosen to keep the franchise open to the public and under Franchisor management until the franchise unit can be resold. These units can be a great goldmine when located in your chosen territory. As you will not have to initiate or grow the territory as much since it has already been done for you by the previous defaulted franchisee and the corporate Franchisor.

Thus the fact that some franchisees are closing can be a great upside to you while concurrently being a tragedy to the defaulting franchisee.

Franchise Systems Report Lessons Learned

Franchisees can struggle to repay loans for a myriad of reasons, cites The Journal, including changes in consumer tastes, costly industry regulation or a weak overall economic climate, as well as bad decisions on location or marketing. But some also blame the Franchisors for providing insufficient training or ongoing support; for charging excessive startup fees; or requiring high or excessive operational fees.

Moving forward, be sure to question the Franchisor on what they have learned from the defaults? Perhaps more importantly, ask the Franchisor if they have changed the system and its requirements because of these failures. Many of the Franchisors on the SBA list are taking action.

Quiznos stated in response to making the top of the worst defaulting franchise systems SBA 7(a) loan list that they are in the process of “making long-term changes to our business model to help improve restaurant profits.” iv Cold Stone Creamery – The Journal report states that Cold Stone’s extreme growth “that occurred in the years immediately preceding the downturn” that resulted in the failure rates, are now rumored to have even redrawn their preferable territory locations.

Stephen Smith, the founder and CEO of tanning-salon franchise system, Planet Beach, stated that they have hired an independent research firm to dig into the failure rates. Mr. Smith stated, he has spent the past three years expanding his brand’s business model to include new services like massage therapy and teeth whitening, and has invested hundreds of thousands of dollars in new technology.

The CFO of Huntington Learning Centers Inc., (a tutoring franchise system), Jim Emmerson, says most of the franchisees that ran into trouble had problems caused by the recession. “The crisis impacted our system tremendously,” adding that the company in 2012 lowered its initial fee and size requirements for new buyers and has since made other changes aimed at better helping its franchisee succeed.

Some Franchisors also offer discounts to entice buyers to purchase multiple units at once. This helps Franchisors laser focus their support, training and ad placement efforts on fewer franchise owners, while growing the brand simultaneously.

i Franchise Brands With Higher-Than-Average Default Rates. Last confirmed October 20, 2014. Found online at: http:// online.wsj.com/articles/some-franchise-brands-have-higherthan- average-default-rates-1410392545. ii Overall Federal Reserve Loan Charge offs. Last confirmed October 20, 20914http://www.federalreserve.gov/releases/ chargeoff/chgallsa.htm iii Discussions with Al Wells. Retired GE Aviation employee. March 10, 2012. iv Sarah E. Needleman and Coulter Jones. Franchise Brands With Higher Than-Average Default Rates. Last confirmed October 20, 2014. Found online at: http://online.wsj.com/ articles/some-franchise brands-have-higher-than-averagedefault- rates-1410392545.

Ms. Shelton in a previous life was a franchisor of a large franchise system, and is currently a Senior Partner at Shelton & Power franchise law firm. Shelton & Power Attorneys have 25+years’ of business consulting, franchise and trademark experience. Our knowledge facilitates an understanding of a large variety of businesses, services and technologies. We help businesses protect their brands through Trademark, Copyright, and Business contractual transactions. These services allow us to “Expand their Brand” through Franchising. For existing Franchisors, we provide full outsourced in house counsel.

Shelton & Power additionally works with entrepreneurs buying franchises by assisting with Business Creation, Industry Evaluations, Franchise Disclosure Document Review, Fairness Factors, Opinion Letters and Negotiations. For more information or to schedule
a customized consultation for your business you can write to franchising@sheltonpower.com or call (866) 99-FRANCHISE.

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