franchising aspects Oct, 06 2010

Signs Of Franchisor’s Financial Mess

Franchisor is the backbone of every franchise business. Financial instability of the franchisor jeopardises the functioning of the franchisees also. In order to avoid such problems, franchisees need to be alert against the financial crisis of the franchis

By Ramanjit Kaur
Feature Writer
Signs Of Franchisor’s Financial Mess

Franchisor is not just the brainchild behind any franchise concepts; rather he is the life and blood of the entire franchise network. He instills a sense of direction and provides support to the franchisees to ensure success. Though franchising is said to be the proven business model yet the success is not guaranteed in franchising also. The franchise model can turn out to be a disaster, if the franchisor is not financially sound.

Franchisor’s financial instability

The most common cause for franchisors’ instability is the financial crises resulting due to:

  • Minimal cash in-flow
  • Under-reporting by the franchisees
  • Economical downturn
  • Unrealistic expansion plan

Financial crises at franchisors’ end have direct impact on the franchisees. As Deepak Choudhary, MD- India, Greycells Education Limited, EMDI says, “If a franchisor is facing financial problems and he is not committed to the brand, then the franchisee will suffer.” The article therefore aims at raising an alarm among the franchisees to detect and determine the franchisor’s financial conditions and problems to secure the proper functioning of the franchising business. Therefore, it is of paramount significance for the franchisees to find out the warning signs of the franchisor’s credit crunch and accordingly act in order to avoid any dire consequences in the future.

Warning signs

The number of situations and activities that carried out by the franchisor can be a cause of concern for the franchisees. Here are enlisted the various warning signs that a franchisee must detect and react to:

  • If the franchisor has started reducing his/her staff
  • If the marketing help for the new franchisee has been cut short
  • Delay in the responses from the franchisor’s management team
  • If the communication of the franchisor (via e-mails, tele-conferences, meetings and so on) has been slowed down
  • Lack of timely visits from the field or support team
  • If the vendors are complaining about the hold up of payments from the franchisors

If these signs are emerging, then it is time to approach your franchisor directly and confront the situation. As Pawan Gadia, CEO, Ferns N Petals says, “If the franchisor fails to fulfill his obligations, then it is a clear cut indication that the franchisor is in trouble financially.” If you will keep on speculating about the problems, then this might worsen the situation. So, it is always better to face the situation head-on by directly contacting the franchisor.

Franchisee’s take-on warning signs

Having identified the warning signs, franchisees can take necessary steps to avoid any pitfalls. To know how such situations can be handled by the franchisee, read the below mentioned franchise solutions:

  • A franchisee should request the franchisor for arranging a group meeting. Being a franchisee, your can either do this directly or take the help of the successful franchisees of the network. As Choudhary says, “The franchisees should keep on questioning the franchisor and along with this, they should keep on paying their dues on time.”
  • Before meeting the franchisor, you are advised to gather as much information about the franchisor’s problem as possible in order to support your statement. It is necessary as the franchisor may try to downplay the circumstances to avoid pain among the franchisees.
  • Being a franchisee, you are supposed to be very careful and not over-react or threaten the franchisor under such circumstances.
  • You should politely and smartly ask your franchisor if you can lend a hand to ease out the burden or the problem. As Gadia states, “A franchisee should sit across the table with the franchisor and discuss whether he can contribute money to the franchisor or sell extra stock to help him.”
  • In case the situation gets worse, you are advised to secure a legal attorney or counsel who can guide you and serve as a potential contact point with the franchisor.

Being a franchisee, you have taken the decision to maximize your profits with the help of the franchisor by taking-up the franchise business. Franchisor in case of financial instability may fail to effectively manage and operate the franchise network will also negatively affect the franchisees. So, keep your eyes and ears open to these warning signs and take immediate steps to circumvent problems that can ruin your franchise business.

Related: The On Paper Franchising Checklist

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