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A Rescue Plan for Troubled Franchises

The Small Business Administration recently provided Blue MauMau with its newest list of failure rates of small business loans sorted by franchise brands from October 1, 2001 until September 30, 2011.  This is a collection of data from lenders of over 580 franchise brands who fail to pay back general SBA 7(a) and real estate and equipment 504 loans. This was compiled by the Small Business Administration on May 1, 2012.

A proactive franchisor can create a rescue plan in the franchise agreement which outlines solutions for underperforming franchise units.  In the event the franchise agreement is void of solutions such as a mediation process that will seek to identify problems and secure real solutions – the franchisor should actively seek some outside experts for possible solutions.

So common has this scenario become that I have put together a team of franchise professionals to offer solutions to these issues. I call it throwing both franchisor and franchisee a “lifesaver”.

The group I put together, The Franchise Rescue Team, will help in all aspects of resolution. I finally felt forced to do this because it was such a common problem, especially among the older franchisors.    

The Franchise Rescue Team will critically evaluate original site selection, regional sales, operations, marketing, occupancy cost, and other factors. Because one size doesn’t fit all, a franchise rescue plan should be specifically tailored to each franchisor’s individual needs and unique situation.  

Here’s a 4 step approach to help resolve these major issues:

Phase I – Evaluation: An experienced franchise attorney (with the assistance of other professionals) conducts an initial lease evaluation and market analysis, , Profit & Loss Statement (unit level economics), Franchise Agreement or Area Rep Agreement. 

Phase II – Recommendation:  The attorney provides a recommendation report to the franchisor with a proposed budget for the execution phase. 

Phase III – Execution: The franchisor takes the recommended action (e.g., unit closings, lease renegotiations, lender refinancing, franchise agreement and royalty deferment, valuation and packaging of distressed inventory, etc.). 

Phase IV – Exit: The attorney, in coordination with the Franchisor/Franchisee and interested third parties packages the distressed inventory to be closed, sold, transferred, managed by third party, sold to third-party operator, etc. The attorney provides multiple exit options to the franchisor. 

A rescue plan can offer a variety of solutions for troubled franchisees. The plan should promote a joint effort between the franchisee, franchisor and/or Area Developer/Representative. 

Why you want lots of options, the typical timeline of this scenario:

  • zee-zor relationship is strained when unit(s) are under performing.
  • zee has no leverage and almost always must file suit when unit is under performing and continued operation is not sustainable.
  • zor traditionally terminates and litigates without first analyzing why unit failed. Zor should find a third party that provides objective analysis.
  • zee-zor working together with a third party in a cooperative environment are much more likely to succeed in saving unit.
  • zee-zor both need to look outside of the agreement or franchise system for solutions. 
  • zee-zor should have a plan in place to minimize SBA failure.
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About Anthony Calamunci

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Anthony Calamunci of the law firm of Roetzel & Andress practices in a wide range of business matters, with a focus on franchise law and franchise litigation. Mr. Calamunci’s clients include both regional and national franchise companies, one of Ohio’s largest automotive retail companies, and he serves as outside litigation counsel for a national drug store and supermarket chain. The firm has 220 attorneys in 13 offices. To contact Anthony Calamunci:

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Franchise Consultant