FranFinders – What If Your Franchise Fails?

When working with our clients, not every person wants to discuss the “what if” questions when they are beginning their franchise search. Questions like: “What if I run out of money?” “What legal actions could be taken against me if I fail?” And, “what if the franchisor goes out of business?” So how can you guard yourself from a perceived fear to a real concern? Let’s address each “what if” item in more detail and play out the concern if it were likely to happen.

Concern #1”–What if I run out of money? You could run out of money but I recommend that whatever your total investment costs are, have at least 9 months of business and living expenses in reserve. I know that you may hear this advice from the business guru’s but the reality is that most of us don’t have that kind of cash lying around. So you may want to start applying for a business line of credit or have some credit cards in reserve as soon as you open your doors for business. You can go to and start shopping for no fees / zero-percent credit cards and have them ready so that you can guard against this “what if.”

Let’s address the next “what if” concern—What legal actions can be taken against me if I leave the franchise because I am failing as a business owner? In most situations, the franchisor employs field representatives in their major markets and they meet with the franchisees on a regular basis. Remember the franchisor is paid a “royalty fee,” which is a monthly charge that the franchisee pays to the franchisor based on the franchisee’s production. In other words, the franchisor does not make money until the franchisee produces. So there’s this synergistic partnership between the franchisor and franchisee so that both of you make money.

If a franchisee starts to slack in production, most likely, you will be contacted by the franchisor and they will assist you in getting back on the right track, so that you can follow their standardized system to effectively run your business. Therefore in realty, the franchisor really, “has your back.” However, in the worst case scenario, if you need to leave the franchise system, for whatever reason, beware that you could pay liquidated damages. These fees are paid to the franchisor and they are the unpaid royalty that the franchisor is entitled to collect until the end of your contract or some other variation of payment. You can confirm what the liquidated damages clause is by reviewing Item 6 in the Franchise Disclosure Document.

Finally, what if the franchisor goes out of business–what happens to me? Technically, if that happens, you will still have your business and you are not required to sell and you will no longer have to pay any additional fees, including royalty payments to the franchisor. However, your support, marketing and your website presence will be discontinued. The best way to offset this “what if” concern is to review the franchisor’s corporate financials, before the purchase, which include: their Balance and Income Statements for the last 3 years and their cash equivalents. You will also want to investigate the franchisor’s turn rate, in Item 20 of the FDD and finally, contact numerous franchisees to confirm their satisfaction level with the franchisor. There are endless “what if’s” and there is no guarantee for success in any business.

But what is the alternative if you don’t start your own business–working for someone else and never fulfilling what is important to you? There are many “what if’s” in that scenario too. Do your research, have checks and balances in place, plan for the worst, expect the best, take the plunge and you will be invigorated. Thank you for watching this video—Please Share it. Also, I like to read your comments, so please leave a comment and I will be sure to respond.

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