Beware Of The Risks Associated With Franchise Business (2024)

There are always two sides to a story. The same holds true for the lucrative franchise companies. Though the potential for growth of revenues seems to be virtually unlimited, there are risks associated with it too. The dangers are varied and unavoidable too. The only option left for franchisors is to be very diligent while choosing a franchisee.

There are chances of going wrong if the entrepreneur loses his patience during the search for a franchisee. In such situations, many important details are overlooked or ignored. Even after recruiting a franchisee, there is a hurry to launch the new unit as soon as possible. If such a decision goes wrong, the situation can catapult into a crisis very fast. Before anyone can take any steps, a lot of business might be lost.

The following are the areas that are most at risk in a franchise business.

Loss of brand equity

A franchise may operate from many locations and is managed by different people in every location. If something goes wrong the news spread very fast on social media and the entire brand loses valuable customers.

Though franchises make sure that the franchisees are trained very well, human errors are bound to occur. Sometimes situations are misrepresented while being circulated in various media. There are clarifications regarding the same but often the damage is already done. In fact, we see many old stories being circulated again and again.

The chance of a business getting a bad name from a stray incident is always present. The real danger lies in serious mishaps. Management should be able to send out messages that reassure the community that the company is very serious about the safety of the customers.

Litigations

A franchisee uses brand name and trademarks that are registered in the name of the franchise and there are many other links between them. If any carelessness on the part of a franchisee in customer care can result in litigations.

Depending on the nature of the case, even the franchisor may be held liable. If proper care is taken by the lawyer while drawing out the agreement, it can be avoided to some extent. In India, there is no single franchise law and in its absence, various business laws are applied. Litigations prove to be costly in many ways. Not only does it imply attorney fees that may have to be borne but also a lot of business opportunities are lost too. Few businesses want to deal with another business that is entangled in legal battles.

Lengthy legal proceedings require a lot of time that could have been otherwise invested in managing the business.

Compliances

There are many regulatory compliance requirements by the Government. Failing to do so can invite a lot of trouble. If a franchisee is careless enough to be found lacking in compliance requirements, even the franchisor will be at a loss. In the larger businesses, there may be a need for liaison with the authorities which may need dedicated time and effort. Employees should be trained in the maintenance of records and validation of permissions required to run the business at regular intervals. These are small things that can be interwoven in the daily or monthly schedule but they can greatly improve the situation. Once there is a gap on this front for a few months, the costs and procedures involved will escalate greatly.

The abrupt closure of an outlet leads to many doubts and questions in the customer’s mind. When customers do not see any valid reasons for the closure, they tend to lose trust. This is not good for the image of the brand at a local level. The business has to be managed by the franchisee and a franchisor is exposed to such probabilities.

Employer liabilities

A person working in a franchise unit is indirectly an employee of the franchise business. Depending on the laws applicable and the agreement between them, the franchisor may or may not have employer liabilities attached to him. There are many liabilities of an employer towards the well-being of his employees. Apart from benefits such as provident fund and gratuity for permanent employees, there are responsibilities towards safety too. All this does not happen automatically. There has to be a plan in place that can be executed in a timely and on a regular basis. When there is an actual verification, all the documents should be ready for inspection.

Franchisees are given adequate training regarding human resource management in order to ensure that all employees get their rightful benefits. In order to reduce the chances, franchisors emphasize that underage employees are not to be recruited at all. Hours of employment, shift, rights of workers, and leave entitlement are covered in the training before starting operations.

Capital investment

A franchise business needs a lot of investment to ensure that the business is ready for franchise model. There are costs of marketing the franchise too. After spending enough time and money on converting the business into a format that can give franchise rights, franchisees are brought on board. This is a very delicate period for the franchisor as he himself is new to operating a franchise business and the franchisees are new too.

A lot of support has to be ensured for each unit. Every effort must be made to ensure that the unit becomes a success. If anything goes wrong at this stage, franchise plans may have to be stalled suddenly. Even if the plan is resumed at a later date, the capital invested in it will be lost forever without any output from it.

Franchisors often raise the money needed to convert into a franchise business through bank loans. In case of failing to repay the loan, the franchisor may lose collateral used for the loan. This is a major concern for the owner. There are ample examples where businesses were running fine until there were efforts to scale up the business. In such a situation, there is a high chance that valuable attributes of the product or service were altered so much to enable mass production that they lost the original flavor and hence lost favor as well. If something like that happens, no amount of changes, training or marketing will bring back the situation to the status quo. Since the investment is made, there is no point in turning back.

Thus, an entrepreneur has to be ready to face all the situations that a business may throw at him. It is the rule of the game that profits are proportional to the risk. Every business has some of the other problems associated with it. Though problems at every level is a part of business, one should be aware of the problems that could arise. Such awareness can prevent them from arising but it cannot be totally mitigated.

A well-designed training program that is one that creates awareness about all the possibilities of various situations. It also provides training regarding the right response in such situations. By ensuring that all the franchisees and their employees undergo such training right in the initial phase of starting a new unit. There should be a provision of manuals regarding the same at all the franchise units. There should also be refresher training for important compliances from time to time so that new rules and regulations can also be addressed.