The franchise business model is a popular one. It allows entrepreneurs to buy into an already established business, taking over a brand or a territory, while benefiting from the fact that the brand name and its reputation are already established.
However, sometimes, franchise businesses go wrong, just like any other form of business, and this can present opportunities for those looking to turn a failing business around.
What is a franchise business?
Franchise businesses are run by the corporate ‘franchisor’, who usually owns the intellectual property and controls the overall business model. They then sell franchises to franchisees. These are usually entrepreneurs who pay a fee for the franchise and often also provide the franchisor with a percentage of profit.
Franchisees have a varying level of control over how they run their franchise. They are responsible for managing the operational side of the business, but will receive support from the franchisor whenever necessary.
They will usually be held to account for the standards of service and general management, as franchisors are usually keen to ensure the reputation of the franchise brand remains intact, not only for their sake, but for the sakes of the other franchisees too.
Can franchise businesses fall into administration?
Yes, they can. If a franchisor realises that the franchise business they operate is failing, often the first option will be to call in the administrators. Once an insolvency practitioner is in place, they will get to work, trying to recoup as much money from the failing business as possible and this will involve looking for buyers for all or part of the franchise business.
In some scenarios, single or multiple current franchisees may club together to make an offer for the franchise. This happens, particularly if they feel they are running their franchises well-enough, and are generating profit.
They may feel that the problems with the franchise business as a whole were down to mismanagement from the former franchisor and will look to take a different approach, in order to turn the business’s fortunes around.
If there are no existing franchisees that are interested or able to buy the franchise business out, administrators will look more generally for buyers elsewhere.
What to consider before buying a franchise business
The decision to buy a failing franchise business, whether you are an existing franchisee with the business or not, is as risky as any other scenario, where you are buying a business out of administration. It goes without saying that you will need to undertake a process of due diligence, to maximise your chances of being able to turn the business around and identity where it went wrong in the first place.
You also need to seek professional legal advice. This is particularly pertinent when buying a franchise business, as you will need to establish what is included and whether this is conducive to continuing to sell the franchises as it did before.
What to consider before becoming a franchisor
If you are considering buying a franchise business and becoming a franchisor yourself, there are a number of unique challenges and consideration to take into account, before taking the plunge.
- The existing franchisees
If an administrator managed to sell a franchise business out of administration, the current franchises will retain their franchise licenses. This can be a blessing or a curse, depending on the quality of the franchisees. Some will undoubtedly be able to offer you expertise and insight into how a successful franchise should be run, which is great if you are new to the business.
However, there could be problem franchisees in the mix; perhaps the very people who contributed to the demise of the franchise business in the first place. This is where consultations with legal experts become invaluable.
- Selling franchises
Before you take steps towards taking over a troubled franchise business, you’ll need to consider what your approach to selling franchises will be. Finding great franchisees is one of the key aspects of running a successful franchise business, and there are several different approaches to consider.
Many entrepreneurs who are new to the being franchisors start off by selling their franchises personally. This allows them to learn the ins and outs of how the business is operated.
It means they have more control over who can be selected to become a franchisee and can also improve relationships between the franchisor and the franchisees. This approach also helps to keep your operating costs down, as you get started on your turnaround project.
Others opt to outsource the selling of franchises to a franchise sales professional. Although this comes at a cost, franchisors can benefit from the knowledge and experience that the sales professional has.
If the franchise business fell into administration because it struggled to find quality franchisees in the first place, this approach could be the key to making a success of the business, post-deal.
Other challenges involved with running a franchise business include:
• Making sure the brand guidelines are followed
• Ensuring customer service standards are up to scratch
• Having enough capital to invest in getting new franchisees started up before they begin to bring in money
• Establishing/changing systems and processes that should be followed by all franchisees
• Building relationships with franchisees
• Finding the time to keep close contact with franchisees, especially if they are spread across a large geographical region.
In conclusion, there is plenty of scope to buy franchise businesses out of administration. If you are currently a franchisee working for a struggling franchise business and you have the capital available to you, you could be well-placed to take the business over.
Just remember, there’s a fair leap from running a business to running a franchise business. You will no longer be responsible for the operational side of the business itself. Instead, your role as franchisor will be all about supporting franchises, so they can manage their businesses. Then, in theory, you watch the money roll in!
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