Franchisor Ethics and Responsibility

Let me tell a story about a large award-winning international franchisor that have ( as all do) a number of unprofitable outlets which never will be profitable for one reason or the other (i.e.) shifting demographics, location, etc. Most franchisors of this size, after providing operational, monetary and marketing assistance to the ailing franchisees (in this case two consecutive business owners) would make one of two decisions: a) find a tenant to assume the lease and exit the business or b) close the business and walk away dependent on financial reality.

Did they do that? No. With this large franchisor it was a matter of “Who can we sell this franchise to now?” Of course they were thinking of the exit fees paid by the failed franchisee, the initial franchise fee to be paid by the incoming franchisee and all other various and sundry fees that go along with any franchise business. Of course, both of the franchisees are partially to blame – due diligence was not done to an extent that would have set off alarm bells. Sound financial and legal advice was not sought and perhaps in one of the cases, the brother of the franchisee – a fine accountant by any suburban standards – was probably not the wise choice for advice that could result in financial ruin for the owner of the doomed business.

What’s my point? How culpable is the franchisor in this situation? Do they not have a duty of care and responsibility to all of their franchisees to steer them in the right direction; to ensure to the best of their ability that anybody taking up the mantle of their brand has a good chance of success?

Fortunately in my 30 years in the franchise business, I have not seen this happen often. Let’s hope this practice is rare and if not, nearing extinction. I understand that the rules of caveat emptor are at play but at some point unscrupulous and greedy practices affect all of us and should be exposed or brought into the open. While what they are doing is perfectly legal, it is totally unethical.

R. Stevens