If you are thinking about buying a franchise, you probably have at least some idea of what to look for in a franchise opportunity: Brand recognition, system stability, reasonable fees, happy franchisees – these are all key characteristics of a successful franchise system (of course, as a franchisee, your success is never guaranteed).
But, do you also know what not to look for? Are you aware of the types of red flags that would (or, at least, should) send most prospective franchisees in search of a different opportunity? If not, this recent article on Blue MauMau is worth a read.
These are the Hallmarks of a Toxic Franchise System
The article highlights the recent downturn of the Dickey’s BBQ franchise system. According to Blue MauMau:
- “In fiscal year 2017, [the franchisor] opened 88 Dickey’s franchised outlets, but  ceased operations, according to its FDD.”
- “But[,] 2018 made 2017 look good. In the latest year, the brand opened 72 new franchised units, but had 89 terminations and 24 ceased operations, for a net store loss of 41 units.”
- With 562 franchised units at the start of the year, these 2018 figures represent a reduction in size of more than seven percent; and, adding in transfers, the total “churn” (the number of franchisees leaving the system) was an “alarming” 28 percent.
- “Many [franchisees] said they were unprofitable, and should close, but had to weigh the decision of whether they would lose more money staying open or being sued for 5 years of royalties.”
- Despite the high rate of franchisee turnover, the franchisor’s affiliate earned 43 percent more (in excess of $15 million) from selling paper and food products to franchisees in 2017. This averages out to roughly an additional $12,000 per franchise.
- “Franchisees have expressed concern over the lack of transparency of the marketing fund[,] continued rising product costs, and new fees for ‘services’ by the franchisor or one of its affiliates. . . . [C]onstant changing of menu formats, logo and branding designs, and new menu recipes have cost franchisees customer loyalty.”
The article goes on to state that franchisees are reluctant to speak out due to fear of retaliation from their franchisor.
Protecting Yourself and Taking Legal Action as a Franchisee
When buying a franchise, it is crucial to conduct thorough due diligence. The Blue MauMau article relies primarily on information from two sources: (i) the franchisor’s Franchise Disclosure Document (FDD), and (ii) current franchisees. This means that all of the information is readily available to individuals thinking about buying into the franchise system.
But, what if it is too late? What if you already bought a franchise and are now at risk for losing everything? While franchise agreements provide strong protections for franchisors, these protections are not absolute. You may be able to find the leverage necessary to negotiate a walk-away; or, you may have grounds to pursue a claim against your franchisor in arbitration or litigation.
Contact Franchise Litigation Attorney Jeffrey M. Goldstein
Jeffrey M. Goldstein is a franchise litigation attorney who has over three decades of experience exclusively representing franchisees and dealers. To request a free initial consultation about your franchise opportunity or struggling franchise, please call (202) 293-3947 or inquire online today.