The hidden costs of a franchise sale

Wednesday, June 6, 2018
Buying or selling: there are hidden costs of a franchise. First, a franchise fee to the franchisor is meant to help cover the costs of the sale. But then legal fees, training, system set ups and start up materials add up. For the franchisee, the start up costs may be the most expensive investment they make outside of their home. Let's look at the hidden costs to consider with every sale. Candidates need to understand fees up front. Do you that the franchisee will need to become a member of local groups like the Rotary, Chamber of Commerce or BNI? Help candidates understand the fees up front. Is it unreasonable for them to complete their office work at the back of their location? Discuss how they intend to create an office or lease one in the short-term. Truthfully, a franchisee will pay a dozen different hidden costs of a franchise. Consider utility set up charges, disposal services, check printing, state-required business registration. But a prospect's due diligence can uncover those “hidden fees."

The real hidden costs of a franchise accrue when below-average owners purchase valuable locations and do not build a successful business.

The decision to sell a franchise to the wrong owner is not a short-term issue. It can take decades to recover. For young franchises, it only takes a few unsuccessful owners to stall system expansion. Allow enough inferior owners into the system and it will collapse.

After the signed deal and a “successful sale,” marginal performers are extremely expensive:

  • The location never reaches full potential. Then competitors gain a foothold. A negative spiral begins. Competition gains market share making it even more difficult for a franchisee in survival mode to succeed.
  • A struggling franchisee may cut corners. Resulting in a tarnished brand and poor public perception of the brand. Recovery can take years.
  • Consumers do not know if two locations belong to two different owners. Or if one is a corporate location. To consumers: the brand is the brand. A bad experience with one will harm every other location. Especially in our era of Social Media. In 2018, consumers form opinions about a brand without interacting with the brand. Just one search on a phone can mean the difference between a purchase or not.
  • When the territory does finally turn over, the brand has lost value in the market. Someone who wants out of their agreement early is typically not making money. And there is very little market for buying unprofitable franchise locations.
  • One or two disgruntled franchisees who attempt to "litigate" their way out of an agreement can destroy franchise capital and resources. As a result, it impacts the entire system. Without ever going to court. Let alone winning their case.
To avoid the hidden costs of unsuccessful franchise owners, smart development teams and franchises separate the candidates who have the skills, aptitude and experiences to succeed from the candidates who just want to succeed. It is a ruthless decision. But when it is made early and correctly, the franchise will thrive. Let’s talk.  Let's detect the hidden costs in your system early enough to make every owner succeed.