What should you do if your franchise is struggling? Unfortunately, this is a question that many franchisees find themselves asking in 2023. As the economy continues to struggle and inflation remains well above average, owning a successful franchise today is as difficult as ever.
If your franchise is struggling, there are both steps you need to take and mistakes you need to avoid. Here are some tips from franchise attorney and 30-year industry veteran Jeffrey M. Goldstein.
What To Do if Your Franchise is Struggling in 2023
1. Make Sure You Know When Your Franchise Agreement Expires
To help yourself make informed decisions, you will want to make sure you know when your franchise agreement expires. If your expiration date is on the horizon, doing what you can to get to that date (and avoid early termination) could save you from significant costs and legal challenges. This doesn’t necessarily mean that letting your franchise agreement expire is the best option, but if it is an option, it is one that at least merits some consideration.
2. Assess the Severity of Your Situation
Are you dealing with a short-term (but still serious) cash flow deficiency? Or, is it difficult to see your franchise ever becoming profitable? These are two very different situations, and understanding the severity of your situation will be important for making informed decisions. For example, if you need short-term financial relief, taking out a loan may be a reasonable option. But, if your franchise is truly on the path to failure, then going even further into debt is probably ill-advised.
3. Review Your Expenses
Can you cut your franchise’s expenses in order to get back on more solid financial ground? While many expenses are unavoidable (i.e. royalties, advertising fund contributions, mandatory purchases and utilities), franchisees will often be able to cut costs in some areas. If you haven’t done this already, it is worth spending some time going over your company’s books to determine if you can improve your cash flow by eliminating unnecessary costs.
4. Talk to Other Franchisees
Are other franchisees in your area struggling, too? If so, this will be important for you to know as well. It will help you gain a better understanding of your situation, and if your interests and other franchisees’ interests are similarly aligned, you may be able to leverage your collective strength to seek concessions from your franchisor.
5. Discuss Your Options with a Lawyer
As a franchisee, understanding your options can be challenging. If your franchise is struggling, it is strongly in your best interests to consult with a lawyer. Along with helping you carefully evaluate the options discussed above, an experienced franchise lawyer will also be able to help you evaluate options such as:
- Seeking to transfer your franchise or sell it back to your franchisor
- Pursuing a claim against your franchisor under the franchise agreement
- Asserting a state franchise law violation against your franchisor
What Not To Do if Your Franchise is Struggling in 2023
1. Do Not Stop Paying Your Royalties
Even if your franchise is struggling, you need to avoid falling behind on your royalty payments if at all possible. Non-payment of royalties will quickly put you in default under your franchise agreement, and this could lead to prompt termination. If your franchisor terminates your franchise agreement for cause, you face substantial liability—including liability for liquidated damages or “lost future royalties” for the unexpired portion of your franchise term.
2. Do Not Stop Paying Your Advertising Fund Contributions
Along with royalty payments, you need to keep making your advertising fund contributions as well (if possible). Failing to make these weekly or monthly payments can also lead to default and termination.
Of course, while you have post-termination liability under your franchise agreement to think about, you may have other potential liabilities to consider as well. For example, if you have a commercial lease, falling behind on your lease payments could have equally costly consequences. This is a challenging situation, and you need to ensure that you are making the best decisions possible based on the circumstances at hand.
3. Do Not Ignore Your Situation
While you need to keep making your payments (again, if possible), this does not mean that you should continue operating as if nothing is wrong. If your franchise is struggling, you cannot simply ignore your situation. You need to take action to protect yourself, and the longer you wait, the more difficult it could become to achieve a favorable outcome.
4. Do Not Make Reckless or Uninformed Decisions
When dealing with financial strain as a franchisee, it is important not to make reckless or uninformed decisions. For example, while your first instinct might be to take on more financing, this may or may not be a good option—as we discussed above. Doing what is best for your franchise (and yourself) requires an honest assessment of the circumstances at hand, and you need to be making informed decisions based on a clear understanding of the risks you are currently facing.
5. Do Not Try to Handle Your Situation on Your Own
With all of this in mind, if your franchise is struggling, you should not try to handle your situation on your own. An experienced franchise attorney can help make sure you are considering all of your options. If desired, your attorney can also communicate with your franchisor on your behalf to work out a solution, and your attorney can take legal action to protect you if warranted.
Request a Free Consultation with Franchise Attorney Jeffrey M. Goldstein
Is your franchise struggling in 2023? If so, we strongly encourage you to contact us for more information. Franchise attorney Jeffrey M. Goldstein can use his experience to help you understand your options and choose the best path forward. To schedule a free, no-obligation consultation at the Goldstein Law Firm as soon as possible, please call 202-293-3947 or contact us confidentially online now.
