Just like owning any other type of business, owning a franchise entails a variety of risks. When buying a franchise, understanding these risks is important. Effective risk management is critical to franchisees’ success, and prospective franchisees must work with an experienced franchise lawyer to ensure that they are making informed decisions with their long-term interests in mind.
7 Risk Management Strategies for Franchisees
So, how do you effectively manage risk as a franchisee (or as a prospective franchisee)? Here are seven steps you can take to mitigate your risk before and after signing your franchise agreement:
1. Conduct Thorough Due Diligence
Due diligence is a critical component of the franchise buying process. Buying a franchise requires informed decision-making, as some franchise opportunities are significantly riskier than others.
What is the franchise system’s failure rate? Is the system growing or contracting? Does the franchisor have a history of litigating against its franchisees? Is the franchisor in good financial standing? Would current franchisees still be in the system if they could go back and do it all over again? Answering these questions, among many others, is critical for choosing a franchise opportunity that offers a reasonable chance of long-term success.
2. Negotiate Your Franchise Agreement
As a prospective franchisee, you need to negotiate your franchise agreement. Franchise agreements are written to protect the franchisor, and many “standard” franchise agreement terms present unreasonable risks for franchisees. Some examples of the terms you may need to negotiate in order to effectively manage your risk include:
- Your opening deadline and your franchisor’s approval rights
- Your renewal and transfer rights
- Your mandatory purchasing obligations
- The franchisor’s grounds for termination and your right to cure
- Your post-termination obligations
- Your right to take legal action when necessary
- The franchise agreement’s force majeure clause
A franchise lawyer can help you decide which provisions of your franchise agreement to negotiate, and your lawyer can negotiate on your behalf if desired.
3. Consider Your Insurance Needs
Buying liability insurance coverage is a key risk management strategy for all business owners, franchisees included. While this might seem like a “nice to have” when you are working to control your costs during the pre-opening phase, it only takes one incident—which can happen at any time—to threaten your business’s viability as a going concern.
Different types of franchisees will need different types of liability insurance. If you own a mobile franchise, you will want to make sure you have plenty of coverage in the event of an accident. If you own a gym or fitness center, you will need insurance that protects you in the event that a customer gets seriously injured on your premises. If you will be hiring employees, employment practices liability insurance and workers’ compensation insurance could both be essential for protecting your business.
4. Choose Your Employees Wisely
Speaking of employment-related matters, as a franchisee, it is important to choose your employees wisely. Even if you, like many business owners, are struggling to hire in our current economic climate, it is imperative that you not hire solely for the sake of bringing people onboard. Unqualified employees can make mistakes that put your business in jeopardy, and those who have criminal backgrounds or histories of filing complaints against their employers can present liability risks as well.
5. Learn About the Laws that Apply to Your Franchise
Virtually all businesses are subject to a variety of legal risks and requirements, and many businesses are subject to industry-specific legal requirements. To protect yourself against the risk of personal liability, you will want to form a limited liability company (LLC) or other business entity that shields you from any liability arising out of your franchise’s operations. You will also need to manage this entity appropriately, as failure to do so can eliminate the liability protection that forming an entity provides.
From automotive franchises to CBD franchises, many types of businesses present additional legal compliance risks. As a franchisee, you need to know the laws that apply to your franchise, and you need to address them proactively. Not only can non-compliance lead to fines and other penalties, but it can also increase the risks of facing claims and civil lawsuits from customers as well. In most, if not all, states, violating laws that are intended to promote public safety is considered negligence per se, and this reduces the barriers to filing a successful lawsuit.
6. Respond Promptly and Proactively When Issues Arise
If an issue arises in the operation of your franchise, responding promptly and proactively can significantly mitigate the risks involved. This applies to all types of risks, from vehicle collisions to premises-related accidents, and from employee complaints to default notices from your franchisor. All franchisees should have policies and procedures in place that serve as a guide for their response, and they should engage legal counsel promptly if they have any concerns about potential claims, liability or loss of their franchise rights.
7. Know When to Take Legal Action
Just as franchisees need to be prepared to respond to liability risks promptly, they also need to know when it is necessary to take legal action. As a franchisee, you can face risks not only arising out of your operations but arising out of your franchisor’s operations as well. If your franchisor breaches your franchise agreement or does anything else that wrongfully interferes with your ability to build and maintain a successful business, you may need to initiate arbitration or file a lawsuit against your franchisor in order to protect your investment in your franchise.
Request a Free and Confidential Consultation with Franchise Lawyer Jeffrey M. Goldstein
If you are thinking about buying a franchise, or if you have questions or concerns about your liability risks as a franchisee, we encourage you to contact us for more information. To request a free and confidential consultation with franchise lawyer Jeffrey M. Goldstein, please call 202-293-3947 or tell us what we can do to help online today.