Ronald McDonald isn’t looking so happy of late. In the first quarter of 2015, McDonalds worldwide saw a 2.3 percent decrease in sales and a 28 percent drop in operating revenue, continuing a trend of loss that the company had been experiencing for years. The reasons are plainly obvious, a trend towards healthier food, greater education of nutrition and more competition in the marketplace. While we are just speculating, the rumor that the soft serve is 80% pig fat probably doesn’t help, too. The downward trend of McDonalds highlights the crucial nature of knowing your franchisor’s business inside and out, as well as the importance of conducting due diligence before you enter into a Franchise Agreement.
How does this impact Franchisees?
With that decline in business, many franchisees are shutting up shop and walking away from their businesses. One can only imagine that those golden arches don’t come cheap, so the closure of such franchised business signals tough times ahead. It also serves as a timely reminder for current and future franchisees that no franchised business is guaranteed to be a success and that proper due diligence should be undertaken before and during the franchise term.
How can Franchisees avoid this?
If you’re considering acquiring a franchise business or are already a franchisee, there are some practical steps you can take so you don’t also end up like those poor former burger flippers:
- Get a franchise lawyer to review your franchise documents thoroughly – the terms of the franchise agreement constitute a contract and, subject to certain exceptions, are binding. Your franchise lawyer will be able to decipher how the agreement applies to your ability to terminate, consequences of termination, and the power of your franchisor to make changes to the franchise system.
- Talk to other franchisees – usually, the contact details of your fellow franchisees are listed in the disclosure document. Their experience with the franchise business and dealing with the franchisor is invaluable knowledge to assist you in determining whether to proceed.
- Require ongoing disclosure – in accordance with the Franchising Code of Conduct, the franchisor has ongoing obligations of disclosure, and franchisees can request an updated Disclosure Document annually. Take advantage of such a right to stay on top of the franchise network, including in relation to transfers or terminations, and growth (or lack thereof). Such information may be vital in determining when to sell or get out.
- Think about the nature and adaptability of the franchise business – is the business a trend? Is it susceptible to certain market forces or changes to, for example, technology? While not ‘legal’ factors per se, such practical considerations should indeed be considered in determining whether to proceed.
When deciding whether to become a Franchisee, the selection process is crucial. First of all, it makes sense to choose something you enjoy and with which you have a matching skill set. If you want to know about the earning potential as a Franchisee, speak with previous franchisees, and get in touch with a franchise specialist from LegalVision. We can conduct the due diligence on your behalf, but it’s also advisable to seek professional financial advice from an accountant or financial adviser.
Get in touch today on 1300 544 755.