It is tough enough to operate a small business in the most robust economic climates. You have to answer to several vendors, as well as Uncle Sam who wants his slice of your gross profits. What happens when you decide to become a franchisee? You answer to an additional member of the economic community that wants a slice of your gross revenue.
Therein lies the fundamental problem that causes franchise debt.
You should never agree to a franchise arrangement that forces you to pay the franchisor a percentage of gross revenue. Franchisees only earn money from net profits, not from gross revenues. If you pay between 5% and 10% of gross revenue for franchisor royalties each year, there is the distinct possibility that your slice of the profit pie will be zero or worse, negative. The gross revenue franchisor arrangement is especially a problem for low margin small businesses, such as restaurants.
To make matters worse, most franchisees borrow heavily to generate gross revenue. Franchisors perform several functions that help franchisees make money. Franchise agreements often include language that promises a franchisor will package the business for you, as well as run advertising campaigns and provide employee training resources. However, this does not mean franchisors should insist on legal terms that force small business franchisees to pay royalties based on gross revenues.
It is not right for a franchisor to take a percentage of gross revenue from your franchise. Even if they paid for an expansion of the property or provided funds for rolling out new products and services, taking a slice of your gross revenue leads to growing debt. At the end of the year, the franchisor wins and you lose.
What happened to
the real franchisor
Be wary of franchisors that want you to sign a large contract full of hidden legal terms that end up controlling your business more than the control you have over operations. We advise clients to avoid franchisors that include language such as non-competes, non-circumvention, and any other phrases that contain wording in reference to your legal commitments.
We help clients break franchise contracts and reestablish new contracts that contain basic protection against franchisor abuse. We even help some clients open small businesses, without the financial backing of a powerful franchisor. Our most requested legal service is to help small business owners reduce or eliminate the debt caused by paying high franchisor royalty fees.
We implement debt forgiveness strategies that avoid going through the mentally draining bankruptcy process. After we help you lower your debt obligations, we then assist you with ending the financially cumbersome franchise relationship.
Contact us today for a free consultation to see how we can help you cut the legal ties with your franchisor, without violating any
facet of contractual law.